Exam A review

Dewey, Cheatem and Howe has a chain of law offices. The top partners believe that more motivated lawyers represent their clients more effectively, because the offices that base raises on hours worked also tend to be the offices that win a high proportion of their cases. Fill in boxes A, B, C, and D of the "Libby Boxes" below to depict the firm's beliefs about lawyer quality, and enter one plausible item into box E: (3 points per box)

A. Motivation B. Raises based on hours worked C. More effective representation D. Proportion of cases won E. Office client mix (i.e. type of clientele)

Edupreneur creates web-based animated presentations on any topic for any audience. The presentations are designed-to-order for a clientele of businesses and academic institutions. Presentations vary in many ways—some clients want short presentations with a great deal of video and animation, while others want long presentations with few bells and whistles. This makes it a challenge for Edupreneur to determine the true cost of any particular client contract. They use a variety of cost drivers to allocate overhead. Edupreneur bids for work by competing against two other businesses that provide very similar services; all of the companies base prices on the cost estimates generated by their reporting systems. (3 points each) Edupreneur has created a system that automatically sends emails to managers every day, with projects due within 7 days highlighted in red, and projects due within 14 days highlighted in yellow; this aspect of the reporting system serves a(n) ____________________________ role.

Attention-Directing

Edupreneur creates web-based animated presentations on any topic for any audience. The presentations are designed-to-order for a clientele of businesses and academic institutions. Presentations vary in many ways—some clients want short presentations with a great deal of video and animation, while others want long presentations with few bells and whistles. This makes it a challenge for Edupreneur to determine the true cost of any particular client contract. They use a variety of cost drivers to allocate overhead. Edupreneur bids for work by competing against two other businesses that provide very similar services; all of the companies base prices on the cost estimates generated by their reporting systems. (3 points each) ________________ is a synonym for "overhead application rate", but emphasizes the ability to use overhead rates as a "tax" to reduce the consumption of an input.

Burden Rate

Edupreneur creates web-based animated presentations on any topic for any audience. The presentations are designed-to-order for a clientele of businesses and academic institutions. Presentations vary in many ways—some clients want short presentations with a great deal of video and animation, while others want long presentations with few bells and whistles. This makes it a challenge for Edupreneur to determine the true cost of any particular client contract. They use a variety of cost drivers to allocate overhead. Edupreneur bids for work by competing against two other businesses that provide very similar services; all of the companies base prices on the cost estimates generated by their reporting systems. (3 points each) Edupreneur provides product managers with accurate, timely and readable reports that help them find ways to reduce product costs and increase sales prices and volumes; this aspect of the reporting system serves a(n) _________________________ role.

Decision-Facilitating

Edupreneur creates web-based animated presentations on any topic for any audience. The presentations are designed-to-order for a clientele of businesses and academic institutions. Presentations vary in many ways—some clients want short presentations with a great deal of video and animation, while others want long presentations with few bells and whistles. This makes it a challenge for Edupreneur to determine the true cost of any particular client contract. They use a variety of cost drivers to allocate overhead. Edupreneur bids for work by competing against two other businesses that provide very similar services; all of the companies base prices on the cost estimates generated by their reporting systems. (3 points each) Edupreneur discourages managers from using overtime labor by adding a premium to the cost reported for their products. Thus, if they use overtime labor, the product margins on which they are evaluated are reduced. This aspect of the reporting system serves a(n) ________________________ role.

Decision-Influencing

Edupreneur creates web-based animated presentations on any topic for any audience. The presentations are designed-to-order for a clientele of businesses and academic institutions. Presentations vary in many ways—some clients want short presentations with a great deal of video and animation, while others want long presentations with few bells and whistles. This makes it a challenge for Edupreneur to determine the true cost of any particular client contract. They use a variety of cost drivers to allocate overhead. Edupreneur bids for work by competing against two other businesses that provide very similar services; all of the companies base prices on the cost estimates generated by their reporting systems. (3 points each) _______________ describes a form of adverse selection that causes Edupreneur to gain market share in the products it is under-costing and lose market share in the products it is over-costing.

Winner's Curse

QED Company makes Logic Analyzers, each customized to satisfy a customer's order. Direct labor and materials are applied to inventory at their actual cost. Fixed costs are expensed immediately as incurred. Indirect variable costs are applied to each Logic Analyzer based on its actual direct labor dollars times a predetermined overhead rate. Indicate the accurate (partial) descriptions of the accounting system: a. A variable costing system b. A standard costing system c. A C-V-P System d. A simple overhead allocation system e. A two-stage overhead allocation system f. A job-order costing system g. An absorption costing system h. A five-stage overhead allocation system i. A normal costing system

a. A variable costing system d. A simple overhead allocation system f. A job-order costing system i. A normal costing system

A famous episode of the animated television series South Park features "underpants gnomes" who propose the following business plan: 1. Steal Underpants 2. ??? 3. Profit! This simple but flawed business plan is often used to ridicule companies that fail to consider how their main focus of attention (such as building name recognition or a large clientele of nonpaying users) will serve the interests of its investors. Assume that the head gnome attempts to hire employees by paying them for each pair of underwear collected. Gnomes are assigned to different geographical areas. They are paid more per pair of underwear in poor areas because quality underwear is harder to find (usually only 1 or 2 pairs per dresser instead of 10-12 pairs per dresser in rich areas). Based on the statements above, indicate the true statements regarding this plan: a. Because the gnomes have long been stealing underpants for pleasure rather than profit, the compensation plan runs the risk of "crowding out" preexisting intrinsic motivations. b. "???" probably represents a mediating variable. c. Representing this model using "Libby boxes" would entail placing "???" in the box reserved for omitted variables. d. Profit could represent both an underlying construct and its proxy measure. e. The compensation plan is likely to have a beneficial "screening" effect because those who are best at collecting underpants will be most likely to take accept employment. f. The compensation plan creates a "moral hazard" because it is hard to distinguish between those who are working hard and those who have superior information on where to find underpants. g. The primary problem with the business plan lies in the connections between its underlying constructs. h. The different pay rates show that the head gnome has a good understanding of the "controllability principle" in that he pays the gnomes on the basis of what they can control.

a. Because the gnomes have long been stealing underpants for pleasure rather than profit, the compensation plan runs the risk of "crowding out" preexisting intrinsic motivations. b. "???" probably represents a mediating variable d. Profit could represent both an underlying construct and its proxy measure e. The compensation plan is likely to have a beneficial "screening" effect because those who are best at collecting underpants will be most likely to take accept employment. g. The primary problem with the business plan lies in the connections between its underlying constructs h. The different pay rates show that the head gnome has a good understanding of the "controllability principle" in that he pays the gnomes on the basis of what they can control.

Indicate the statements that are typically true for a job-order cost accounting system. a. It is easy to observe the true amount of overhead drivers used by a particular job. b. It is easy to observe the true amount of overhead resources used by a particular job. c. Relative to what is reported under absorption costing, product costs in a variable costing system are more accurate representations of marginal costs. d. Relative to what is reported under absorption costing, total Cost of Goods Sold in a variable costing system is a more accurate representation of the resources consumed to create the goods sold over the period. e. Averaged over many years, reported income is no higher or lower under variable costing than under absorption costing. f. Averaged over many years, reported product costs are no higher or lower under variable costing than under absorption costing. g. While indirect costs may be fixed or variable, fixed costs are always indirect costs.

a. It is easy to observe the true amount of overhead drivers used by a particular job. c. Relative to what is reported under absorption costing, product costs in a variable costing system are more accurate representations of marginal costs. e. Averaged over many years, reported income is no higher or lower under variable costing than under absorption costing. g. While indirect costs may be fixed or variable, fixed costs are always indirect costs.

Manuel is a Certified Management Accountant who oversees reporting for the Southeast division of MegaCorp. Manuel's boss is the President of the Southeast division, and reports directly to MegaCorp's top management. Norman uses a variety of methods to persuade Manuel to implement projections that will lower the reported costs of Norman's favorite product. a. Manuel would be violating his professional code of ethics if he were to knowingly misrepresent the true sales outlook for the coming year to Norman's superiors. b. Manuel would be upholding his professional code of ethics if he were to accept an all-expenses paid golf vacation from Norman, even if he didn't tell his superiors about it, as long as he represented all of the budget projections in good faith. c. There may be times when Manuel's professional code of ethics prohibits him from fulfilling the requests of his boss and his boss's employer, even though they weren't asking him to break any laws.

a. Manuel would be violating his professional code of ethics if he were to knowingly misrepresent the true sales outlook for the coming year to Norman's superiors. c. There may be times when Manuel's professional code of ethics prohibits him from fulfilling the requests of his boss and his boss's employer, even though they weren't asking him to break any laws.

The Hondasaki Motorcycle Company has a normal two-stage absorption job-order costing system. They close over- or under-applied overhead directly into Cost of Goods Sold, and use expected production as their activity base. Assume that their projections for total fixed costs and variable costs per unit are accurate. Taking on an additional job that remains in inventory at the end of the period will: a. Reduce adjusted cost of goods sold b. Increase adjusted cost of goods sold c. Have no effect on adjusted cost of goods sold d. Impossible to predict without additional information

a. Reduce adjusted cost of goods sold

The Hondasaki Motorcycle Company has a normal two-stage absorption job-order costing system. They close over- or under-applied overhead directly into Cost of Goods Sold, and use expected production as their activity base. Assume that their projections for total fixed costs and variable costs per unit are accurate. Increasing the projection of units to be produced will: a. Reduce the reported product cost of each unit b. Increase the reported product cost of each unit c. Have no effect on the reported cost of each unit d. Impossible to predict without additional information

a. Reduce the reported product cost of each unit

James Thomas Company charges manufacturing overhead to products by using a predetermined application rate, computed on the basis of machine hours. The following data pertain to the current year: Budgeted manufacturing overhead $1,500,000 Actual manufacturing overhead $1,490,000 Budgeted machine hours 75,000 Actual machine hours 73,000 Total amount over- (under-) applied to overhead at year end: a. $30,000 over-applied. b. $30,000 under-applied. c. $10,000 under-applied. d. $10,000 over-applied. e. $49,733 under-applied. f. some other amount.

b. $30,000 under-applied.

At a volume of 40,000 units, Smithy reported sales revenues of $800,000, profit of $180,000, and a contribution margin of $12.50 per unit. The company's fixed costs totaled: a. $300,000. b. $320,000. c. $120,000. d. $620,000. e. An amount other than those above.

b. $320,000.

Be Audit You Can Be is a law firm that defends clients from the IRS. They have a new accounting system that reports the cost of client contracts using a normal absorption job-order costing system. Their total overhead is projected to be $2,000,000 for the coming year, of which 40% is allocated on the basis of staff direct labor hours (DLH) and 60% is allocated on the basis of partner direct labor hours (DLH). Be Audit You Can Be projects 8,000 staff DLH and 4,800 partner DLH for the year. The company's previous accounting system allocated overhead on the basis of total DLH. Circle the letter indicating the reported overhead allocated to a job that requires 400 staff hours and 100 partner hours. a. $76,666 b. $65,000 c. $110,000 d. $141,666 e. None of the above

b. $65,000

The Hondasaki Motorcycle Company has a normal two-stage absorption job-order costing system. They close over- or under-applied overhead directly into Cost of Goods Sold, and use expected production as their activity base. Assume that their projections for total fixed costs and variable costs per unit are accurate. Taking on an additional job that is sold before the end of the period will: a. Reduce adjusted cost of goods sold b. Increase adjusted cost of goods sold c. Have no effect on adjusted cost of goods sold d. Impossible to predict without additional information

b. Increase adjusted cost of goods sold

Howard Bannister Company has computed the following unit costs for the year just ended: Direct material used $32 Direct labor 21 Fixed selling and administrative cost 17 Variable overhead 29 Fixed manufacturing overhead 40 Sales commission 19 Which of the following choices correctly depicts the per-unit cost of inventory under variable costing and absorption costing? Variable Costing Absorption Costing a. $72 $101 b. $53 $82 c. $82 $122 d. $82 $141 e. Some other combination of figures not listed above

c. $82 $122

The Hondasaki Motorcycle Company has a normal two-stage absorption job-order costing system. They close over- or under-applied overhead directly into Cost of Goods Sold, and use expected production as their activity base. Assume that their projections for total fixed costs and variable costs per unit are accurate. Taking on an additional job that is sold before the end of the period will: a. Increase adjusted cost of goods sold by more than the additional resulting variable costs b. Increase adjusted cost of goods sold by less than the additional resulting variable costs c. Increase adjusted cost of goods sold by just as much as the additional resulting variable costs d. Impossible to predict without additional information

c. Increase adjusted cost of goods sold by just as much as the additional resulting variable costs

Be Audit You Can Be is a law firm that defends clients from the IRS. They have a new accounting system that reports the cost of client contracts using a normal absorption job-order costing system. Their total overhead is projected to be $2,000,000 for the coming year, of which 40% is allocated on the basis of staff direct labor hours (DLH) and 60% is allocated on the basis of partner direct labor hours (DLH). Be Audit You Can Be projects 8,000 staff DLH and 4,800 partner DLH for the year. The company's previous accounting system allocated overhead on the basis of total DLH. Circle the letter indicating how changing the accounting system as described changed the reported cost of a job with 100 staff hours and 60 partner hours: a. The reported cost of the job rose due to the change in the accounting system b. The reported cost of the job fell due to the change in the accounting system c. The reported cost of the job did not change due to the change in the accounting system d. There is insufficient information to determine how the change in the accounting system changed the reported cost of the job

c. The reported cost of the job did not change due to the change in the accounting system

A net debit balance in the Manufacturing Overhead account at the end of the period represents: a. actual manufacturing overhead costs incurred throughout the accounting period. b. overhead applied to Work-in-Process Inventory. c. underapplied overhead. d. predetermined overhead. e. overapplied overhead.

c. underapplied overhead.

When credit entries are made to the Manufacturing Overhead account (before the adjusting entry at the end of the period), the corresponding debit entries are made to: a. cost of goods sold. b. payables, raw materials, and cash. c. manufacturing overhead expense. d. work-in-process inventory. e. sales revenue.

d. work-in-process inventory.

You are analyzing Breaker Corporation and Surge Corporation and have concluded that Surge has a higher operating leverage factor than Breaker. Which one of the following choices correctly depicts (1) the relative use of fixed costs (as opposed to variable costs) for the two companies and (2) the percentage change in income caused by a change in sales? Relative Use of Fixed Costs as Opposed to Variable Costs Percentage Change in Income Caused by a Change in Sales a. Greater for Breaker Greater for Breaker b. Greater for Breaker Lower for Breaker c. Greater for Breaker Equal for both d. Lower for Breaker Greater for Breaker e. Lower for Breaker Lower for Breaker

e. Lower for Breaker Lower for Breaker

Be Audit You Can Be is a law firm that defends clients from the IRS. They have a new accounting system that reports the cost of client contracts using a normal absorption job-order costing system. Their total overhead is projected to be $2,000,000 for the coming year, of which 40% is allocated on the basis of staff direct labor hours (DLH) and 60% is allocated on the basis of partner direct labor hours (DLH). Be Audit You Can Be projects 8,000 staff DLH and 4,800 partner DLH for the year. The company's previous accounting system allocated overhead on the basis of total DLH. The change to the accounting system is an improvement because it reveals a [hidden driver | hidden difference].

hidden difference

Brunhilda is the controller of a company that makes brooms to order, using customer-specified spells and magic materials (e.g. newt eyes, frog toes, bat wool, etc.). She is in the process of redesigning the company's accounting system. Brunhilda is concerned that the company is heading into a death spiral because product managers (who are evaluated on the basis of project margins) are demanding higher and higher prices from customers as demand for brooms declines. Brunhilda can't just wave a wand and redesign the system. She needs to think about it. The use of practical production volume as an activity base over which to allocate overhead will make it [ more | less ] likely that the company will enter a death spiral.

less

Brunhilda is the controller of a company that makes brooms to order, using customer-specified spells and magic materials (e.g. newt eyes, frog toes, bat wool, etc.). She is in the process of redesigning the company's accounting system. Brunhilda is concerned that the company is heading into a death spiral because product managers (who are evaluated on the basis of project margins) are demanding higher and higher prices from customers as demand for brooms declines. Brunhilda can't just wave a wand and redesign the system. She needs to think about it. The use of variable costing will make it [ more | less ] likely that the company will enter a death spiral.

less

Brunhilda is the controller of a company that makes brooms to order, using customer-specified spells and magic materials (e.g. newt eyes, frog toes, bat wool, etc.). She is in the process of redesigning the company's accounting system. Brunhilda is concerned that the company is heading into a death spiral because product managers (who are evaluated on the basis of project margins) are demanding higher and higher prices from customers as demand for brooms declines. Brunhilda can't just wave a wand and redesign the system. She needs to think about it. The use of cost-plus pricing will make it [ more | less ] likely that the company will enter a death spiral.

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