Cost Accounting Test 3

Which of the following is not an advantage of after-tax income as a performance measure?

It is financial income computed differently from the income of the firm.

Which of the following is not a step needed to maximize the profits from joint products?

Determining how to allocate joint costs to the final products

In developing a master budget for a manufacturing company, which one of the following items should be done first?

Development of a sales budget

Which of the following statements is true regarding ethical issues accompanying budgeting? Conflicts of interest do not arise when employees are asked for input to help establish a budget. Easy target incentives are eliminated through budgeting. The conflicts of biased budgeting can be avoided in a decentralized firm. If budget targets are difficult to meet, employees could turn to fraudulent financial reporting.

If budget targets are difficult to meet, employees could turn to fraudulent financial reporting.

Oklahoma Telephone Company has been forced by competition to put much more emphasis on planning and controlling its costs. Accordingly, the company's controller has suggested initiating a formal budgeting process. Which of the following steps will not help the company gain maximum acceptance by employees of the proposed budgeting system? (CMA adapted)

Implementing the change quickly

Which of the following best describes the objective of joint cost allocation?

Inventory Valuation

Which of the following is not a benefit of participative budgeting? It reduces or eliminates the need for tracking actual cost activity. It enhances employee motivation and acceptance of goals. It provides information that employees know but managers do not. It serves as training or development for managers.

It reduces or eliminates the need for tracking actual cost activity.

In determining the dollar amount to use for divisional assets in the return on investment (ROI) calculation, companies will generally use either net book value or gross cost of the assets. Which of the following is not an argument for the use of net book value rather than gross book value? It is consistent with how assets are reported on the balance sheet. It eliminates the depreciation method as a factor in ROI calculations. It encourages the replacement of old, worn-out equipment. It will result in a decrease of ROI each year.

It will result in a decrease of ROI each year.

Which one of the following items would most likely not be incorporated into the calculation of a division's investment base when using the residual income approach for performance measurement and evaluation? Land being held by the corporation for the potential additional of a new division Division inventories when division management exercises control over the inventory levels Division accounts payable when division management exercises control over the amount of short-term credit utilized Division accounts receivable when division management exercises control over credit policy and credit terms

Land being held by the corporation for the potential additional of a new division

Which of the following represents the correct order in which the indicated budget documents for a manufacturing company would be prepared?

Marketing and administrative expense budget, budgeted income statement, cash budget, budgeted balance sheet

The measure (ratio) that reflects the performance of a manager regarding sales and cost of goods sold, but not other operating costs and income taxes, is called the:

gross margin ratio.

For the purposes of allocating joint costs to joint products, the sales price at the point of sale, reduced by the cost to complete after split-off, is assumed to be equal to the: (CPA adapted)

net realizable value at split-off.

The method of accounting for joint product costs that will produce the same gross margin percentage for all products is the:

net realizable value method

After-tax income divided by sales is the:

profit margin ratio.

Return on investment (ROI) can be decomposed into the asset turnover and the:

profit margin ratio.

Because this allocation method recognizes that service departments often provide each other with interdepartmental service, it is theoretically considered to be the most accurate method for allocating service department costs to production departments. This method is: (CMA adapted)

reciprocal method.

Residual income is a performance evaluation that is used in conjunction with, or instead of, return on investment (ROI). In many cases, residual income is preferred to ROI because: (CIA adapted)

residual income concentrates on maximizing absolute dollars of income rather than a percentage return, as with ROI.

In general, the first budget prepared is the:

sales budget.

Criteria for selecting allocation bases for service department allocations should not include:

sales dollars generated during the period

Imagination Corporation uses residual income to evaluate the performance of its divisions. Imagination's cost of capital is 11%. In April, the Commercial Products Division had divisional assets of $103,000 and after-tax income of $9,700. What was the Commercial Products Division's residual income in April?

$(1,630) [ Residual income = After-tax income − (Cost of capital × Divisional assets) Residual income = $9,700 − (11% × $103,000) = $9,700 − $11,330 = $(1,630) ]

The Maryville Construction Company occupies 86,300 square feet for construction of mobile homes. There are two manufacturing departments, finishing and assembly, and four service departments labeled S1, S2, S3, and S4. Information relevant to Maryville is as follows: Allocation Department - Area used - S1 - S2 - S3 - S4 - Finishing - Assembly S1 - 17,930 --- 0.20 - 0.10 --- 0.10 - 0.10 S2 - 3,885 --- --- 0.20 - 0.20 --- 0.60 S3 - 8,600 - 0.10 - 0.10 --- 0.40 - 0.10 - 0.30 S4 - 3,885 - 0.30 - 0.20 - 0.30 --- 0.10 - 0.10 Finishing - 23,400 --- --- --- --- --- --- Assembly - 28,600 --- --- --- --- --- --- Rent paid for the area used is $721,000. How much rent would be charged to S4 using the direct method of allocation?

$0 [ Under the direct method of allocation, service departments are not allocated any costs. ]

The Arkansas Company makes and sells a product called Product K. Each unit of Product K sells for $28 and has a unit variable cost of $22. The company has the following budgeted data for November: - Sales of $1,172,200, all in cash. - A cash balance on November 1 of $28,000. - Cash disbursements (other than interest) during November of $1,180,000. - A minimum cash balance on November 30 of $30,000. If necessary, the company will borrow cash from a bank. The borrowing will be in multiples of $1,000 and will bear interest at 2% per month. All borrowing will take place at the beginning of the month. The November interest will be paid in cash during November. The amount of cash needed to be borrowed on November 1 to cover all cash disbursements and to obtain the desired November 30 cash balance is:

$10,000 [ Cash balance, beginning: $28,000 Add cash receipts from sales: 1,172,200 Total cash available: 1,200,200 Less cash disbursements: (1,180,000) Excess (deficiency) of cash available over disbursements: 20,200 Financing ($30,000 − $20,200 + interest) rounded up to nearest multiple of $1,000: 10,000 Interest ($10,000 × 2%): 200 Cash balance, ending: $30,000 ]

Tenet Engineering, Incorporated operates two user divisions as separate cost objects. To determine the costs of each division, the company allocates common costs to the divisions. During the past month, the following common costs were incurred: Computer services (85% fixed): $355,000 Building occupancy: 645,000 Personnel costs: 172,000 Total common costs: $1,172,000 The following information is available concerning various activity measures and service usages by each of the divisions: Division A Division B Area occupied (square feet): 20,000 40,000 Payroll: $472,000 $272,000 Computer time (hours): 220 240 Computer storage (megabytes): 7,650 0 Equipment value: $215,000 $265,000 Operating profit (pre-allocations): $642,500 $582,500 Using the most appropriate allocation basis, what is the personnel cost allocated to Division A?

$109,118 [ [$172,000 × ($472,000 ÷ $744,000)] = $109,118 ]

The marketing and administrative expense budget of Frazier Corporation is based on budgeted unit sales, which are 6,600 units for June. The variable marketing and administrative expense is $1.20 per unit. The budgeted fixed marketing and administrative expense is $127,380 per month, which includes depreciation of $7,150 per month. The remainder of the fixed marketing and administrative expense represents current cash flows. The cash disbursements for marketing and administrative expenses on the June marketing and administrative expense budget should be:

$128,150. [ June Budgeted unit sales: 6,600 Variable marketing and administrative expense per unit: $1.20 Variable marketing and administrative expense: $7,920 Fixed marketing and administrative expense: 127,380 Total marketing and administrative expense: 135,300 Less depreciation: (7,150) Cash disbursements for marketing and administrative expenses: $128,150 ]

Steven Parker owns and operates Steven's Septic Service and Legal Advice. Steven's two revenue generating (production) operations are supported by two service departments: Clerical and Janitorial. Costs in the service departments are allocated in the following order using the designated allocation bases: Clerical: Variable cost: expected number of work orders processed Fixed cost: long-run average number of work orders processed Janitorial: Variable cost: labor hours Fixed cost: square footage of space occupied Average and expected activity levels for next month (June) are as follows: Number of Work Orders Expected Average Labor Hours Square Footage Septic Service: 45 80 710 1,950 Legal advice: 30 25 990 2,350 Clerical: 20 20 550 1,750 Janitorial: 5 15 350 1,150 Expected costs in the service departments for June are as follows: Clerical Janitorial Variable costs: $14,000 $5,700 Fixed costs: $9,900 $950 Under the step method of allocation, how much Clerical Service cost should be allocated to the Septic Service operation for June? (Assume Clerical costs are allocated before Janitorial costs.).

$14,475 [ [(45 ÷ 80) × $14,000] + [(80 ÷ 120) × $9,900] = $14,475 ]

The Kansas Company is preparing a cash budget for the month of July. The following information on accounts receivable collections is available from Kansas' past collection experience: Percent of current month's sales collected this month: 15% Percent of prior month's sales collected this month: 72% Percent of sales two months prior to current month collected this month: 6% Percent of sales three months prior to current month collected this month: 3% The remaining 4% are not collected and are written off as bad debts. Credit sales to date are as follows: July (estimated): $164,000 June: $149,000 May: $134,000 April: $159,000 What are the estimated collections in July?

$144,690 [ ($164,000 × 0.15) + ($149,000 × 0.72) + ($134,000 × 0.06) + ($159,000 × 0.03) = $144,690 ]

Cordner Corporation has two production departments, P1 and P2, and two service departments, S1 and S2. Direct costs for each department and the proportion of service costs used by the various departments for the month of July are as follows: Proportion of Services Used by: Department - Direct costs - S1 - S2 - P1 - P2 S1 - $144,000 - 0.70 - 0.10 - 0.20 S2 - $159,000 - 0.20 - 0.30 - 0.50 P1 - $184,000 P2 - $147,000 Under the step method of cost allocation, the amount of costs allocated from S2 to P2 would be:

$162,375 [ S1's $144,000 is allocated 70% to S2 or $100,800. S2's total is $159,000 + $100,800 = $259,800. S2's $259,800 is allocated 62.5% to P2 or $162,375. ]

The Pizza Merchandise Company has budgeted $52,000 in sales for the month of December. The company's cost of goods sold is 25% of sales. If the company has budgeted to purchase $30,000 in merchandise during December, then the budgeted change in inventory levels over the month of December is:

$17,000 increase [ Beginning Inventory $0 + Purchases $30,000 − COGS (25% × $52,000) = $17,000 Ending Inventory ]

Tenet Engineering, Incorporated operates two user divisions as separate cost objects. To determine the costs of each division, the company allocates common costs to the divisions. During the past month, the following common costs were incurred: Computer services (85% fixed): $334,000 Building occupancy: 698,000 Personnel costs: 188,000 Total common costs: $1,220,000 The following information is available concerning various activity measures and service usages by each of the divisions: Division A Division B Area occupied (square feet): 20,400 40,800 Payroll: $425,000 $225,000 Computer time (hours): 290 310 Computer storage (megabytes): 7,650 0 Equipment value: $280,000 $330,000 Operating profit (pre-allocations): $685,000 $625,000 If common computer service costs are allocated using computer time as the allocation basis, what is the computer cost allocated to Division B?

$172,567 [ [$334,000 × (310 ÷ 600)] = $172,567 ]

The following information is available for Kiss Company: After-tax income: $7,200 Operating assets: $40,800 Stockholders' equity: $27,000 Cost of capital: 12% What is Kiss Company's residual income?

$2,304 [ RI = After-tax income − (Cost of capital × Divisional assets) = ($7,200 - (0.12 × $40,800) = $2,304 ]

The following information has been gathered for the Door Division: Return on investment (ROI): 10% Sales: $128,500 Divisional assets: $77,000 Cost of Capital: 15% Profit margin ratio: 11.0% What is the Door Division's residual income?

$2,585 [ Profit margin ratio = After-tax income ÷ Sales; 0.110 = After-tax income ÷ $128,500; After-tax income = $14,135 Residual income = After-tax income − (Cost of capital × Divisional assets) = $14,135 − (0.15 × $77,000) = $2,585 ]

Bonanza Corporation manufactures products X and Y from a joint process that also yields a by-product, Z. Revenue from sales of Z is treated as a reduction of joint costs. Additional information is as follows: PRODUCTS X - Y - Z - TOTAL Units produced: 32,000 - 32,000 - 16,000 - 80,000 Joint costs: ? - ? - ? - $322,000 Sales value at split-off: $480,000 - $240,000 - $16,000 - $736,000 Joint costs were allocated using the net realizable value method at the split-off point. The joint costs allocated to product X were:

$204,000. [ ($480,000 ÷ $720,000) × ($322,000 − $16,000) = $204,000 ]

Budgeted sales in Washburn Company over the next four months are given below: September - October - November - December Budgeted sales: $260,000 - $320,000 - $340,000 - $280,000 25% of the company's sales are for cash and 75% are on account. Collections for sales on account follow a stable pattern as follows: 50% of a month's credit sales are collected in the month of sale, 30% are collected in the month following sale, and 15% are collected in the second month following sale. The remainder is uncollectible. Given these data, cash collections for December should be:

$287,500 [ December cash sales ($280,000 × 25%): $70,000 December credit sales collected in December ($280,000 × 75% × 50%): 105,000 November credit sales collected in December ($340,000 × 75% × 30%): 76,500 October credit sales collected in December ($320,000 × 75% × 15%): 36,000 Total cash collections in December: $287,500

Riff, Incorporated is working on its cash budget for June. The budgeted beginning cash balance is $34,000. Budgeted cash receipts total $206,000 and budgeted cash disbursements total $205,000. The desired ending cash balance is $76,000. The excess (deficiency) of cash available over disbursements for June will be:

$35,000 [ Cash balance, beginning: $34,000 Add cash receipts from sales: 206,000 Total cash available: 240,000 Less cash disbursements: (205,000) Excess (deficiency) of cash available over disbursements: 35,000

Kevin Montgomery Retail seeks your assistance to develop cash and other budget information for May, June, and July. At April 30, the company had cash of $14,000, accounts receivable of $471,000, inventories of $480,250, and accounts payable of $167,055. The budget is to be based on the following assumptions: SALES: Each month's sales are billed on the last day of the month. Customers are allowed a 3% discount if payment is made within 10 days after the billing date. Receivables are recorded in the accounts at their gross amounts (not net of discounts). 55% of the billings are collected within the discount period; 30% are collected by the end of the month; 9% are collected by the end of the second month; and 6% turn out to be uncollectible. PURCHASES: The marketing, general, and administrative expenses and 60% of all purchases of merchandise are paid in the month purchased, with the remainder of merchandise purchases paid in the following month. The number of units in each month's ending inventory is equal to 125% of the next month's sales (units). The cost of each unit of inventory is $24. Marketing, general, and administrative expenses, of which $37,000 is depreciation, are equal to 1

$352,200 [ [15,300 + (1.25 × 14,800) − (1.25 × 15,300)] × $24 = $352,200. ]

Kevin Montgomery Retail seeks your assistance to develop cash and other budget information for May, June, and July. At April 30, the company had cash of $8,500, accounts receivable of $449,000, inventories of $458,250, and accounts payable of $145,055. The budget is to be based on the following assumptions: SALES: Each month's sales are billed on the last day of the month. Customers are allowed a 3% discount if payment is made within 10 days after the billing date. Receivables are recorded in the accounts at their gross amounts (not net of discounts). 55% of the billings are collected within the discount period; 30% are collected by the end of the month; 9% are collected by the end of the second month; and 6% turn out to be uncollectible. PURCHASES: The marketing, general, and administrative expenses and 60% of all purchases of merchandise are paid in the month purchased, with the remainder of merchandise purchases paid in the following month. The number of units in each month's ending inventory is equal to 125% of the next month's sales (units). The cost of each unit of inventory is $27. Marketing, general, and administrative expenses, of which $15,000 is depreciation, are equal to 15

$360,450 [ [12,600 + (1.25 × 13,200) − (1.25 × 12,600)] × $27 = $360,450 ]

Which of the following is not a benefit of cost allocation?

Additional bookkeeping costs incurred to provide cost allocation information.

Rex Company's sales last year totaled $163,000 and its return on investment (ROI) was 15%. If the company's asset turnover was 5, then its after-tax income for the year must have been:

$4,890 [ ROI ÷ Asset Turnover = Profit margin ratio = 15% ÷ 5 = 3% Profit margin ratio × Sales = After-tax income = 3% × $163,000 = $4,890 ]

Kevin Montgomery Retail seeks your assistance to develop cash and other budget information for May, June, and July. At April 30, the company had cash of $10,000, accounts receivable of $455,000, inventories of $464,250, and accounts payable of $151,055. The budget is to be based on the following assumptions: SALES: Each month's sales are billed on the last day of the month. Customers are allowed a 3% discount if payment is made within 10 days after the billing date. Receivables are recorded in the accounts at their gross amounts (not net of discounts). 55% of the billings are collected within the discount period; 30% are collected by the end of the month; 9% are collected by the end of the second month; and 6% turn out to be uncollectible. PURCHASES: The marketing, general, and administrative expenses and 60% of all purchases of merchandise are paid in the month purchased, with the remainder of merchandise purchases paid in the following month. The number of units in each month's ending inventory is equal to 125% of the next month's sales (units). The cost of each unit of inventory is $26. Marketing, general, and administrative expenses, of which $21,000 is depreciation, are equal to 1

$403,700 [ June Purchases: [13,200 + (1.25 × 13,800) − (1.25 × 13,200)] × $26 = $362,700 May Purchases: [13,700 + (1.25 × 13,200) − (1.25 × 13,700)] × $26 = $339,950 ($362,700 × 0.60) + ($339,950 × 0.40) + ($474,000 × 0.15) − $21,000 = $403,700 ]

Acutron is a large securities dealer. Last year, the company made 220,000 trades with an average commission of $220. Because of the general economic climate, Acutron expects trade volume to decline by 20%. Fortunately, the average commission per trade is likely to increase by 10% because trades are expected to be large in the coming year. What are the estimated commission's revenues for Acutron in the coming year?

$42,592,000 [ [(220,000 × 0.80) × ($220 × 1.10)] = $42,592,000 ]

Which of the following will not result in an increase in the residual income, assuming other factors remain constant? An increase in sales An increase in cost of capital A decrease in expenses A decrease in divisional assets

An increase in cost of capital

Tenet Engineering, Incorporated operates two user divisions as separate cost objects. To determine the costs of each division, the company allocates common costs to the divisions. During the past month, the following common costs were incurred: Computer services (85% fixed): $279,000 Building occupancy: 656,000 Personnel costs: 182,000 Total common costs: $1,117,000 The following information is available concerning various activity measures and service usages by each of the divisions: Division A Division B Area occupied (square feet): 29,600 59,200 Payroll: $421,000 $221,000 Computer time (hours): 210 230 Computer storage (megabytes): 5,750 0 Equipment value: $269,000 $319,000 Operating profit (pre-allocations): $557,500 $497,500 If all common costs are allocated using operating profit as the allocation basis, what is the total cost allocated to Division B?

$526,737 [ $1,117,000 × ($497,500 ÷ $1,055,000) = $526,737 ]

The Mallak Company produced three joint products at a joint cost of $130,000. Two of these products were processed further. Production and sales were: Product - Weight - Sales - Additional Processing Costs P - 315,000 pounds - $271,250 - $215,000 Q - 115,000 pounds - 45,000 - 0 R - 115,000 pounds - 208,750 - 115,000 Assume Q is a by-product and Mallak uses the cost reduction method of accounting for by-product cost. If estimated net realizable value is used, how much of the joint costs would be allocated to product R?

$53,125 [ [($208,750 − $115,000) ÷ ($93,750 + $56,250)] × ($130,000 − $45,000) = $53,125 ]

A company is preparing its cash budget for the coming month. All sales are on account. Given the following: Beginning Balances - Budget Amounts Cash: $134,000 --- Accounts Receivable: 194,000 --- Sales: --- $870,000 Cash disbursements: --- 920,000 Depreciation: --- 32,000 Ending accounts receivable balance: --- 224,000 What is the expected cash balance of the company at the end of the coming month? (CIA adapted)

$54,000 [ $134,000 + ($194,000 + $870,000 − $224,000) − $920,000 = $54,000 ]

The Mallak Company produced three joint products at a joint cost of $127,600. Two of these products were processed further. Production and sales were: Product - Weight - Sales - Additional Processing Costs P - 327,000 pounds - $261,600 - $196,200 Q - 120,000 pounds - 36,000 - 0 R - 120,000 pounds - 210,000 - 120,000 If the estimated net realizable value method is used and product Q is accounted for as a main product, how much of the joint costs would be allocated to product R?

$60,000 [ [($210,000 − $120,000) ÷ ($90,000 + $36,000 + $65,400)] × $127,600 = $60,000 ]

The Dry Wall Division reports the following operating data for the past two years: Year 1 - Year 2 Profit margin ratio: 10% - ? Asset turnover: 3.1 - 4 Divisional assets: ? - $153,000 After-tax income: $43,000 - ? Stockholders' equity: $83,000 - $128,000 Sales: ? - ? The return on investment at the Dry Wall Division was exactly the same in Year 1 and Year 2. Sales in Year 2 amounted to:

$612,000. [ Year 1: ROI = Profit margin ratio × Asset turnover; ROI = 10% × 3.1 = 31% (same for Year 2) After-tax income = ROI × Divisional assets = 31% × $153,000 = $47,430 Sales = After-tax income ÷ Profit margin ratio; Sales = $47,430 ÷ 7.75% = $612,000 ]

The Variable Speed Company manufactures a line of high-quality tools. The company sold 1,130,000 hammers at a price of $5.30 per unit last year. The company estimates that this volume represents a 25% share of the current hammers market. The market is expected to increase by 5%. Marketing specialists have determined that, as a result of a new advertising campaign and packaging, the company will increase its share of this larger market to 30%. Due to changes in prices, the new price for the hammer will be $5.60 per unit. This new price is expected to be in line with the competition and have no effect on the volume estimates. What are the estimated sales revenues in the coming year?

$7,973,280 [ 1,130,000 ÷ 0.25 = 4,520,000; 4,520,000 × 1.05 = 4,746,000 new market size; 4,746,000 × 0.30 = 1,423,800 sales (units); 1,423,800 × $5.60 = $7,973,280 sales revenues. ]

The Model Company is to begin operations in April. It has budgeted April sales of $68,000, May sales of $72,000, June sales of $78,000, July sales of $80,000, and August sales of $76,000. Note that 10% of each month's sales is expected to represent cash sales; 75% of the balance is expected to be collected in the month following the sale, 17% the second month, 6% the third month, and the balance is expected to be uncollectible. The Model Company is considering charging 1 1/2% on any balance that is not collected in the month following the month of sale. This charge would also change the collection percentages to 15% cash sales, 80% of the balance collected in the month following the sale, 16% the second month, and 3% the third month. This stricter credit policy will reduce the estimated sales budgets by 7% each month. Under this stricter credit policy, what is the amount of cash to be collected in July?

$71,367 [ $80,000 × 0.93 = $74,400; $78,000 × 0.93 = $72,540; $72,000 × 0.93 = $66,960; $68,000 × 0.93 = $63,240; ($74,400 × 0.15) + ($72,540 × 0.85 × 0.80) + ($66,960 × 0.85 × 0.16 × 1.015) + ($63,240 × 0.85 × 0.03 × 1.015) = $71,367 ]

The Beatrice Manufacturing Company increased its merchandise inventory by $28,000 over the year. The company also granted its customers more liberal credit terms which increased the accounts receivable by $54,000. Sales were $1,030,000 and the accounts payable decreased by $49,500. The gross profit on sales is 45%. Marketing and administrative expenses were $167,000; this included depreciation expense of $26,000. What were the cash disbursements for the year?

$785,000 [ COGS: $1,030,000 × (1 − 0.45) = $566,500; inventory purchases = COGS + increase in inventory = $566,500 + $28,000 = $594,500; cash paid on payables = purchases + decrease in payables = $594,500 + $49,500 = $644,000; cash disbursements = cash paid on payables + cash paid for expenses = $644,000 + ($167,000 − $26,000) = $785,000 ]

Atkinson, Incorporated, manufactures products A, B, and C from a common process. Joint costs were $151,044. Additional information is as follows: Product: Units Produced - Sales Value at Split-Off A: 9,720 - $62,320 B: 5,800 - 50,750 C: 2,900 - 34,800 Total: 18,420 - $147,870 If Processed Further Product - Sales Value - Additional Costs A: $86,620 - $6,480 B: 65,250 - 8,700 C: 43,500 - 11,600 Total: $195,370 - $26,780 Assuming that joint production costs are allocated using the physical quantities method (units produced), what were the costs allocated to Product A?

$79,704 [ (9,720 ÷ 18,420) × $151,044 = $79,704 ]

The manufacturing overhead budget at Rost Corporation is based on budgeted direct labor-hours. The direct labor budget indicates that 3,900 direct labor-hours will be required in September. The variable overhead rate is $8.10 per direct labor-hour. The company's budgeted fixed manufacturing overhead is $54,120 per month, which includes depreciation of $4,740. All other fixed manufacturing overhead costs represent current cash flows. The September cash disbursements for manufacturing overhead on the manufacturing overhead budget should be:

$80,970 [ September Budgeted direct labor-hours: 3,900 Variable manufacturing overhead rate: $8.1 Variable manufacturing overhead: $31,590 Fixed manufacturing overhead: 54,120 Total manufacturing overhead: 85,710 Less depreciation: (4,740) Cash disbursement for manufacturing overhead: $80,970 ]

The following information pertains to Artemis Company for the year ended December 31: (CPA adapted) Sales: $888,000 Income: $111,000 Capital investment: $777,000 Which of the following equations should be used to compute Artemis' return on investment (ROI)?

(1/8) × (8/7) = ROI [ ROI = (After-tax income ÷ Sales) × (Sales ÷ Assets) = ($111,000 ÷ $888,000) × ($888,000 ÷ $777,000) = (1/8) × (8/7) ]

The following information was presented by Outdoors Manufacturing Company for an asset purchased at the beginning of the previous year. Original cost of the asset: $38,000 Useful life of the asset: 10 years Cash flow annual operating profit: $7,700 Salvage value: $0 What is the return on investment (ROI) assuming Outdoors uses (a) the straight-line method for depreciation and (b) beginning-of-year net book values to compute ROI?

11.4% [ Previous year depreciation: ($38,000 − $0) ÷ 10 = $3,800 ($7,700 − $3,800) ÷ ($38,000 − $3,800) = 11.4% ]

Kevin Montgomery Retail seeks your assistance to develop cash and other budget information for May, June, and July. At April 30, the company had cash of $10,500, accounts receivable of $457,000, inventories of $466,250, and accounts payable of $153,055. The budget is to be based on the following assumptions: SALES: Each month's sales are billed on the last day of the month. Customers are allowed a 3% discount if payment is made within 10 days after the billing date. Receivables are recorded in the accounts at their gross amounts (not net of discounts). 55% of the billings are collected within the discount period; 30% are collected by the end of the month; 9% are collected by the end of the second month; and 6% turn out to be uncollectible. PURCHASES: The marketing, general, and administrative expenses and 60% of all purchases of merchandise are paid in the month purchased, with the remainder of merchandise purchases paid in the following month. The number of units in each month's ending inventory is equal to 125% of the next month's units of sales. The cost of each unit of inventory is $26. Marketing, general, and administrative expenses, of which $23,000 is depreciation, are equal to

14,250 [ 14,000 + (14,200 × 1.25) − (14,000 × 1.25) = 14,250 ]

The Colson Company has budgeted sales for the year as follows: Quarter: 1 - 2 - 3 - 4 Sales in units: 12,300 - 14,300 - 18,200 - 16,300 The ending inventory of finished goods for each quarter should equal 20% of the next quarter's budgeted sales in units. The finished goods inventory at the start of the year is 3,300 units. Scheduled production for the second quarter is:

15,080 units. [ 14,300 + (18,200 × 0.20) − (14,300 × 0.20) = 15,080 units ]

The Jones Company purchased assets costing $217,000 which will be depreciated over 5 years using straight-line depreciation and no salvage value. Jones also purchased land and other assets, which are not depreciable, at a cost of $217,000. It is estimated that in 5 years, the value of these assets will be unchanged. Assume that annual cash profits are $131,000 and, for return on investment (ROI) calculations, the company uses end-of-year asset values. If sales each year average $954,800, what will be the asset turnover using gross book value?

2.2 [ $954,800 ÷ ($217,000 + $217,000) = 2.2 ]

The following information is available for Sweet Dreams Company: Sales: $130,000 Operating expenses: $121,000 Divisional assets: $40,000 Stockholders' equity: $32,500 Cost of capital: 13% What is Sweet Dreams Company's return on investment (ROI)?

22.5% [ ROI = ($130,000 − $121,000) ÷ $40,000 = $9,000 ÷ $40,000 = 22.5% ]

Krier Industries has just completed its sales forecasts and its marketing department estimates that the company will sell 40,200 units during the upcoming year. In the past, management has maintained inventories of finished goods at approximately 3 months' sales. However, the estimated inventory at the start of the year of the budget period is only 6,700 units. Sales occur evenly throughout the year. What is the estimated production level (units) for the first month of the upcoming budget year?

6,700 [ 40,200 ÷ 12 = 3,350 sales per month; 3,350 + (3 × 3,350) − 6,700 = 6,700 ]

Vermicelli Company plans to sell 210,000 units of finished product in July and anticipates a growth rate in sales of 5% per month. The desired monthly ending inventory in units of finished product is 80% of the next month's estimated sales. There are 160,000 finished units in inventory on June 30. Vermicelli Company's production requirement in units of finished product for the three-month period ending September 30 is: (CMA adapted)

696,506 units. [ July - August - September - Quarter Budgeted unit sales: 210,000 - (1)220,500 - (2)231,525 - 662,025 Add desired ending finished goods inventory: (3)176,400 - (4)185,220 - (5)194,481 - 194,481 Total needs: 386,400 - 405,720 - 426,006 - 856,506 Less beginning finished goods inventory: (160,000) - (176,400) - (185,220) - (160,000) Required production in units: 226,400 - 229,320 - 240,786 - 696,506 1Unit sales of 210,000 × 105% = 220,500 2Unit sales of 220,500 × 105% = 231,525 3Unit sales of 220,500 × 80% = 176,400 4Unit sales of 231,525 × 80% = 185,220 5Unit sales of (231,525 × 105%) × 80% = 194,481

The Gallop Company has an asset turnover of 3.0 times, using assets of $63,000. The company also has a return on investment (ROI) of 25%. What was Gallop's profit margin ratio?

8.3% [ ROI = Profit margin ratio × Asset turnover; 25% = Profit margin ratio × 3; Profit margin ratio = 25% ÷ 3 = 8.3% ]

Sales and average operating assets for Wyeth Company and Genesis Company are given below: Sales - Average Divisional Assets Wyeth Company: $20,025 - $8,010 Genesis Company: $50,050 - $10,010 What is the margin that each company will have to earn in order to generate a return on investment of 22.5%?

9% and 4.5% [ Wyeth: Asset Turnover = Sales ÷ Divisional assets = $20,025 ÷ $8,010 = 2.5 ROI = Profit margin ratio × Asset turnover; 22.5 = Profit margin ratio × 2.5; Profit margin ratio = 22.5 ÷ 2.5 = 0.09 Genesis: Asset Turnover = Sales ÷ Divisional assets = $50,050 ÷ $10,010 = 5.0 ROI = Profit margin ratio × Asset turnover; 22.5 = Profit margin ratio × 5.0; Profit margin ratio = 22.5 ÷ 5.0 = 0.05 ]

Which of the following budgets is not required in a service organization? Cash Sales Labor Cost of goods sold

Cost of goods sold

Delite Confectionary Company produces various types of candies. Several candies could be sold at the split-off point or processed further and sold in a different form after further processing. The candies are produced in a joint processing operation with $640,000 of joint processing costs monthly, which are allocated based on pounds produced. Information concerning this process for a recent month appears below: Candy type: Number of pounds - Price per pound at split-off - Further processing costs - Price after processing further Sweet Meats: 64,000 - $9 - $89,000 - $11.00 Chocolate Delight: 114,000 - $11 - $44,000 - $11.50 Minty Wonders: 39,000 - $6 - $34,000 - $6.80 Based on the information presented, which of the products should be processed further?

Both Sweet Meats and Chocolate Delight [ Sweet Meats: ($11 − $9) = $2 × 64,000 pounds = $128,000 − costs of $89,000 = $39,000 profit Chocolate Delight ($11.50 − $11.00) = $0.50 × 114,000 pounds = $57,000 − costs of $44,000 = $13,000 profit Minty Wonders ($6.80 − $6.00) = $0.80 × 39,000 pounds = $31,200 − costs of $34,000 = $2,800 loss ]

Which one of the following budgets would be the last one prepared in the master budget preparation process?

Cash budget

Which of the following items would not be an example of an economic value added (EVA) adjustment to eliminate accounting distortions? Research & development costs Advertising expenditures Patent amortization Common stock

Common Stock

Which of the following statements regarding the use of historical costs and current costs to compute return on investment (ROI) is false? Historical costs are based on the original costs to acquire a long-term asset. For a specific multiple-period project, the return on investment (ROI) computed using current costs will generally be less than the ROI computed using historical costs. Current costs are always the superior measure of ROI. Current costs represent the costs to replace the long-term asset.

Current costs are always the superior measure of ROI.

Which of the following service departments could logically use space occupied (square footage) to allocate its costs to user departments?

Custodial Services

Which of the following would be an appropriate cost allocation base for allocating the cost of the company cafeteria?

Number of meals served

One division of the Marvin Educational Enterprises has depreciable assets costing $4,190,000. The cash flows from these assets for the past three years have been: Year - Cash flows 1 - $1,485,000 2 - $1,476,000 3 - $1,639,000 The current (i.e., replacement) costs of these assets were expected to increase 20% each year. Marvin used the straight-line depreciation method and the estimated useful life is 10-years with no salvage value. For return on investment (ROI) calculations, Marvin uses end-of-year balances.What is the residual income for each year, assuming the cost of capital is 14% and Marvin uses historical costs and gross book values to compute residual income? Year 1 - Year 2 - Year 3 A: $479,400 - $470,400 - $633,400 B: $167,600 - $167,600 - $167,600 C: $297,000 - $295,200 - $327,800 D: $297,000 - $470,400 - $229,460

Option A [ Depreciation: ($4,190,000 − $0) ÷ 10 = $419,000 per year Year 1: ($1,485,000 − $419,000) − ($4,190,000 × 0.14) = $479,400 Year 2: ($1,476,000 − $419,000) − ($4,190,000 × 0.14) = $470,400 Year 3: ($1,639,000 − $419,000) − ($4,190,000 × 0.14) = $633,400 ]

Net realizable value at the split-off point is used to allocate: Costs After Split-off Point Incurred Joint Costs A. No No B. No Yes C. Yes No D. Yes Yes

Option B

One division of the Marvin Educational Enterprises has depreciable assets costing $4,900,000. The cash flows from these assets for the past three years have been: Year - Cash flows 1 - $1,911,000 2 - $2,156,000 3 - $2,205,000 The current (i.e., replacement) costs of these assets were expected to increase 25% each year. Marvin used the straight-line depreciation method and the estimated useful life is 10-years with no salvage value. For return on investment (ROI) calculations, Marvin uses end-of-year balances. What is the ROI using historical cost and net book value? Year 1 - Year 2 - Year 3 A: 54.4% - 67.5% - 78.6% B: 32.2% - 42.5% - 50.0% C: 43.3% - 55.0% - 64.3% D: 39.0% - 44.0% - 45.0%

Option B [ Depreciation: ($4,900,000 − $0) ÷ 10 = $490,000 per year Year 1: ($1,911,000 − $490,000) ÷ ($4,900,000 − $490,000) = 32.2% Year 2: ($2,156,000 − $490,000) ÷ ($4,900,000 − $980,000) = 42.5% Year 3: ($2,205,000 − $490,000) ÷ ($4,900,000 − $1,470,000) = 50.0% ]

Advanced Computer Solutions, Incorporated has two main services: (1) time on a timeshared computer system and (2) proprietary computer programs. The operation department (Op) provides computer time and the programming department (P) writes programs. The percentage of each service used by each department for a typical period is: Supplied User: Op P Op: --- 35% P: 25% --- Sold to customers: 75% 65% In a typical period, the operation department (Op) spends $6,200 and the programming department (P) spends $4,200. Under the step method (Op first), what is the cost of the computer time and the computer programs for sale? Time Programs A. $6,200 $4,200 B. $4,650 $5,750 C. $1,550 $8,850 D. $4,030 $6,370

Option B [ Time = 0.75 × $6,200 = $4,650; Programs = $4,200 + (0.25 × $6,200) = $5,750 ]

A management purpose for allocating joint costs of a processing center to the various products produced is to:

establish inventory values for unsold units.

Service department costs are:

eventually applied by the user departments to the units produced.

One division of the Marvin Educational Enterprises has depreciable assets costing $4,300,000. The cash flows from these assets for the past three years have been: Year - Cash flows 1 - $1,419,000 2 - $1,634,000 3 - $1,806,000 The current (i.e., replacement) costs of these assets were expected to increase 20% each year. Marvin used the straight-line depreciation method and the estimated useful life is 10-years with no salvage value. For return on investment (ROI) calculations, Marvin uses end-of-year balances. What is the ROI using current costs and gross book value? Year 1 - Year 2 - Year 3 A: 27.5% - 26.4% - 24.3% B: 30.3% - 26.3% - 23.8% C: 21.0% - 23.6% - 24.7% D: 17.5% - 16.4% - 14.3%

Option D [ Depreciation: ($4,300,000 − $0) ÷ 10 = $430,000 per year Year 1: [$1,419,000 − ($430,000 × 1.20)] ÷ [($4,300,000 × 1.20)] = 17.5% Year 2: [$1,634,000 − ($430,000 × 1.20 × 1.20)] ÷ [($4,300,000 × 1.20 × 1.20)] = 16.4% Year 3: [$1,806,000 − ($430,000 × 1.20 × 1.20 × 1.20)] ÷ [($4,300,000 × 1.20 × 1.20 × 1.20)] = 14.3% ]

The following is a system of simultaneous linear equations to allocate costs using the reciprocal method. Matrix algebra is not required. The following costs were incurred in three operating departments and three service departments in Westmoreland Company. Department: Direct Costs - Label Subassemblies: $569,000 - P1 Final assembly: 794,000 - P2 Marketing: 304,000 - P3 Building occupancy: 104,000 - S1 Research and development: 139,000- S2 Supervision: 64,000 - S3 Use of services by other departments is as follows. User Departments Service Cost Center: Sub-assemblies - Final Assembly - Marketing - Building Occupancy - R&D - Supervision Building occupancy: 0.30 - 0.25 - 0.15 --- 0.10 - 0.20 R&D: 0.50 - 0.50 --- --- --- --- Supervision: 0.30 - 0.20 - 0.20 - 0.10 - 0.20 --- The equation for department P1 (subassemblies) is:

P1 = $569,000 + 0.30S1 + 0.50S2 + 0.30S3 [ The direct cost for subassemblies is $569,000 and it uses 30% of Building Occupancy, 50% of R&D, and 30% of Supervision. ]

The following is a system of simultaneous linear equations to allocate costs using the reciprocal method. Matrix algebra is not required. The following costs were incurred in three operating departments and three service departments in Westmoreland Company. Department: Direct Costs - Label Subassemblies: $551,000 - P1 Final assembly: 776,000 - P2 Marketing: 286,000 - P3 Building occupancy: 86,000 - S1 Research and development: 121,000 - S2 Supervision: 46,000 - S3 Use of services by other departments is as follows. User Departments Service Cost Center: Sub-assemblies - Final Assembly - Marketing - Building Occupancy - R&D - Supervision Building occupancy: 0.30 - 0.20 - 0.25 --- 0.15 - 0.10 R&D: 0.50 - 0.50 --- --- --- --- Supervision: 0.30 - 0.20 - 0.20 - 0.20 - 0.10 --- The equation for department P2 (final assembly) is:

P2 = $776,000 + 0.20S1 + 0.50S2 + 0.20S3 [ The direct cost for final assembly is $776,000 and it uses 20% of Building Occupancy, 50% of R&D, and 20% of Supervision. ]

Which of the following items would not require an adjustment to capital employed when using economic value added (EVA)? Research & development costs Advertising expenditures Preferred stock Accounts Payable

Preferred Stock

Which of the following terms is not an alternative for a master budget? Budget plan Static budget Profit plan Planning budget

Profit plan

Which of the following statements does not represent a limitation of using return on investment (ROI) for measuring and evaluating performance? ROI uses accounting income which is based on historical information. ROI cannot be used to compare divisions of different sizes. ROI has the potential to create goal congruence problems. ROI fails to align some costs incurred in one period with the benefits received in another period.

ROI cannot be used to compare divisions of different sizes.

Which of the following statements is false? If a division's return on investment (ROI) exceeds its cost of capital, then its residual income is positive. If a division's cost of capital equals its return on investment (ROI), then its residual income is zero. Residual income as a performance measure eliminates the suboptimization problem. One advantage of residual income is that it is not a ratio.

Residual income as a performance measure eliminates the suboptimization problem

Which measure is calculated as after-tax income divided by divisional assets?

Return on investment

Which of the following types of accounts would not be included on a budgeted balance sheet?

Revenues

The following is a system of simultaneous linear equations to allocate costs using the reciprocal method. Matrix algebra is not required. The following costs were incurred in three operating departments and three service departments in Westmoreland Company. Department - Direct Costs - Label Subassemblies - $569,000 - P1 Final assembly - 794,000 - P2 Marketing - 304,000 - P3 Building occupancy - 104,000 - S1 Research & development - 139,000 - S2 Supervision - 64,000 - S3 Use of services by other departments is as follows. User Departments Service Cost Center: Sub-assemblies - Final Assembly - Marketing - Building Occupancy - R&D - Supervision Building occupancy: 0.30 - 0.25 - 0.15 --- 0.10 - 0.20 R&D: 0.50 - 0.50 --- --- --- --- Supervision: 0.30 - 0.20 - 0.20 - 0.10 - 0.20 --- The equation for department S2 (research and development) is:

S2 = $139,000 + 0.10S1 + 0.20S3. [ R&D has direct costs of $139,000 and uses 10% of Building Occupancy and 20% of Supervision. ]

The following is a system of simultaneous linear equations to allocate costs using the reciprocal method. Matrix algebra is not required. The following costs were incurred in three operating departments and three service departments in Westmoreland Company. Department: Direct Costs - Label Subassemblies: $552,000 - P1 Final assembly: 777,000 - P2 Marketing: 287,000 - P3 Building occupancy: 87,000 - S1 Research & development: 122,000 - S2 Supervision: 47,000 - S3 Use of services by other departments is as follows. User Departments Service Cost Center: Sub-assemblies - Final Assembly - Marketing - Building Occupancy - R&D - Supervision Building occupancy: 0.30 - 0.25 - 0.15 --- 0.20 - 0.10 R&D: 0.50 - 0.50 --- --- --- --- Supervision: 0.20 - 0.30 - 0.10 - 0.20 - 0.20 --- The equation for department S3 (supervision) is:

S3 = $47,000 + 0.10S1 [ Supervision has $47,000 in direct costs and 10% of Building Occupancy. ]

In joint product costing and analysis, which one of the following costs is relevant when deciding the point at which a product should be sold in order to maximize profits? (CMA adapted)

Separable costs after the split-off point

The Maxim Corporation reported the following operating results for its three divisions: South, West, and East. South Division - West Division - East Division Sales: $450,000 - $1,770,000 - $2,070,000 After-tax income: $24,975 - $58,410 - $110,745 Divisional assets: $270,000 - $695,000 - $870,000 Which division has the highest profit margin?

South [ South: $24,975 ÷ $450,000 = 5.55% West: $58,410 ÷ $1,770,000 = 3.30% East: $110,745 ÷ $2,070,000 = 5.35% ]

Which of the following statements is not correct? The sales budget is the starting point in preparing the master budget. The sales budget is constructed by multiplying the expected sales in units by the sales price. Using methods such as trend analysis and the Delphi technique can help reduce subjectivity in forecasting sales. The cash budget must be prepared prior to the sales budget because managers want to know the expected cash collections on sales made to customers in prior periods before projecting sales for the current period.

The cash budget must be prepared prior to the sales budget because managers want to know the expected cash collections on sales made to customers in prior periods before projecting sales for the current period.

Which of the following statements is false? The estimated net realizable value for a product is its estimated selling price after processing the product beyond the split-off point. In general, it is better to use a product's market value at the split-off point than its estimated net realizable value. The estimated net realizable value at the split-off point is calculated by taking the sales value after further processing and deducting the additional processing costs. It is better to use the net realizable value method for allocating joint costs than the estimated net realizable value method.

The estimated net realizable value for a product is its estimated selling price after processing the product beyond the split-off point.

Economic value added (EVA) assumes that which of the following GAAP expenses would not result in an adjustment to either the income or the capital employed?

Use of process costing rather than job costing

Service department costs are allocated to user departments, in part, because:

User departments use the functions of service departments

The Maxim Corporation reported the following operating results for its three divisions: South, West, and East. South Division - West Division - East Division Sales: $381,000 - $1,710,000 - $2,010,000 After-tax income: $21,000 - $51,030 - $102,060 Divisional assets: $200,000 - $630,000 - $810,000 Which division has the smallest return on investment (ROI)?

West [ South: $21,000 ÷ $200,000 = 10.5% West: $51,030 ÷ $630,000 = 8.1% East: $102,060 ÷ $810,000 = 12.6% ]

The asset turnover is a measure (ratio) of an investment center's ability to:

generate sales.

Delite Confectionary Company produces various types of candies. Several candies could be sold at the split-off point or processed further and sold in a different form after further processing. The candies are produced in a joint processing operation with $580,000 of joint processing costs monthly, which are allocated based on pounds produced. Information concerning this process for a recent month appears below: Candy type: Number of pounds - Price per pound at split-off - Further processing costs - Price after processing further Sweet Meats: 58,000 - $6 - $83,000 - $8.00 Chocolate Delight: 108,000 - $8 - $20,000 - $8.50 Minty Wonders: 33,000 - $3 - $28,000 - $3.70 The net advantage (disadvantage) of processing Sweet Meats further is:

a $33,000 advantage to process further [ Sweet Meats: ($8 − $6) = $2 × 58,000 pounds = $116,000 − costs of $83,000 = $33,000 profit. ]

Sensitivity analysis can best be used in the budgeting process to:

answer "what-if" questions regarding key projections.

Establishing organization goals as a management function is more important:

at top management levels.

Allocated joint costs are useful for:

determining inventory cost for accounting purposes

Using beginning balances for the investment base in computing return on investment (ROI) might encourage managers to acquire assets:

early in the year and dispose of assets late in the year.

Using ending balances for the investment base in computing return on investment (ROI) might encourage managers to acquire assets:

early in the year and dispose of assets late in the year.

Residual income is similar to the _________ notion of profit as being the amount left over after all costs, including the cost of the capital employed in the division, are subtracted.

economist's