GLEIM COST

The two most appropriate factors for budgeting manufacturing overhead expenses would be

Management judgment and production volume.

Which one of the following variances is most controllable by the production control supervisor?

Materials usage variance.

Costs are allocated to cost objects in many ways and for many reasons. Which one of the following is a purpose of cost allocation?

Measuring income and assets for external reporting.

A standard-cost system may be used in Process Costing Job-Order Costing Activity-Based Costing

Yes Yes Yes

The present value may be calculated for discounted cash Inflows Outflows Annuities

Yes Yes Yes

Fact Pattern: The Moore Corporation is considering the acquisition of a new machine. The machine can be purchased for $90,000; it will cost $6,000 to transport to Moore's plant and $9,000 to install. It is estimated that the machine will last 10 years, and it is expected to have an estimated salvage value of $5,000. Over its 10-year life, the machine is expected to produce 2,000 units per year, each with a selling price of $500 and combined material and labor costs of $450 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value. Moore has a marginal tax rate of 40%. What is the net cash outflow at the beginning of the first year that Moore Corporation should use in a capital budgeting analysis?

$(105,000)

Fact Pattern: Madengrad Company manufactures a single electronic product called Precisionmix. This unit is a batch-density monitoring device attached to large industrial mixing machines used in flour, rubber, petroleum, and chemical manufacturing. Precisionmix sells for $900 per unit. The following variable costs are incurred to produce each Precisionmix device: Direct labor $180 Direct materials 240 Factory overhead 105 Variable production costs $525 Marketing costs 75 Total variable costs $600 Madengrad's income tax rate is 40%, and annual fixed costs are $6,600,000. Except for an operating loss incurred in the year of incorporation, the firm has been profitable over the last 5 years. If Madengrad Company achieves a sales and production volume of 8,000 units, the annual before-tax income (loss) will be

$(4,200,000)

Fact Pattern: M&P Tool has three service departments that support the production area. Outlined below is the estimated overhead by department for the upcoming year: Estimated Number of Service Departments Overhead Employees Receiving $25,000 2 Repair 35,000 2 Tool 10,000 1 Production Departments Assembly 25 Bolting 12 The Repair Department supports the greatest number of departments, followed by the Tool Department. Overhead cost is allocated to departments based upon the number of employees. If M&P uses the direct method of allocation, how much of the Repair Department's overhead will be allocated to the Tool Department?

$0

A company's sales budget for the coming year is as follows. Item Volume in Units Sales Price Sales Revenue 1 200,000 $50 $10,000,000 2 150,000 10 1,500,000 3 300,000 30 9,000,000 Total sales revenue $20,500,000 Items 1 and 3 are different models of the same product. Item 2 is a complement to Item 1. Past experience indicates that the sales volume of Item 2 relative to the sales volume of Item 1 is fairly constant. The company is considering a 10% price increase for the coming year for Item 1, which will cause sales of Item 1 to decline by 20%, while simultaneously causing sales of Item 3 to increase by 5%. If the company institutes the price increase for Item 1, total sales revenue will decrease by

$1,050,000

A company is performing a capital budgeting analysis on a new product it is considering. Annual sales are expected to be 50,000 units in the first year, 100,000 units in the second year, and 125,000 units the year thereafter. Selling price will be $80 in the first year and is expected to decrease by 5% per year. Annual costs are forecasted as follows: Fixed costs $300,000 each year Labor cost per unit $20 in Year 1, increasing 5% per year thereafter Material cost per unit $30 in Year 1, increasing 10% per year thereafter The investment of $2 million will be depreciated on a straight-line basis over 4 years for financial reporting and tax purposes. The company's effective tax rate is 40%. When calculating net present value (NPV), the net cash flow for Year 3 would be

$1,058,750

A manufacturer uses a weighted-average process costing system and has the following costs and activity during October: Materials $40,000 Conversion cost 32,500 Total beginning work-in-process inventory $72,500 Materials $ 700,000 Conversion cost 617,500 Total production costs -- October $1,317,500 Production completed 60,000 units Work-in-process, October 31 20,000 units All materials are introduced at the start of the manufacturing process, and conversion cost is incurred uniformly throughout production. Conversations with plant personnel reveal that, on average, month-end in-process inventory is 25% complete. Assuming no spoilage, how should October manufacturing cost be assigned? Production Completed. Work-in-Process

$1,155,000. $235,000

Fact Pattern: A company is evaluating the possible introduction of a new version of an existing product that will have a 2-year life cycle. At the end of 2 years, this version will be obsolete, with no additional cash flows or salvage value. The initial and sole outlay for the modified product is $6 million, and the company's desired rate of return is 10%. Following are the potential cash flows (assumed to occur at the end of each year) and their probabilities if the product is marketed: IMAGE The following interest factors for the present value of $1 at 10% are relevant: Period 1 .909 2 .826 Assume the company has the real option to abandon the project at the end of Year 1. If the salvage value at that time is $3 million and the desired rate of return remains at 10%, what is the project's net present value?

$1,200,550

A review of the year-end accounting records of a company discloses the following information: Raw materials $ 80,000 Work-in-process 128,000 Finished goods 272,000 Cost of goods sold 1,120,000 The company's underapplied overhead equals $133,000. On the basis of this information, cost of goods sold is most appropriately reported as

$1,218,000

A master budget was prepared based on the following projections: Sales $2,400,000 Decrease in inventories 60,000 Decrease in accounts payable 100,000 Gross margin 40% Estimated cash disbursements for inventories are

$1,480,000

A manufacturing company has two departments, Machining and Assembly, at its Shanghai plant. This year's budget for the plant contained the following information. Machining Assembly Manufacturing overhead $4,000,000 $2,000,000 Direct labor hours 100,000 200,000 Machine hours 40,000 40,000 If the Shanghai plant uses departmental allocation based on machine hours for the Machining Department and direct labor hours for the Assembly Department, what would the rates be when allocating overhead to the individual products? Machining Assembly

$100/hr. $10/hr.

Estimated monthly sales will be as follows: January $100,000 February 150,000 March 180,000 Historical trends indicate that 40% of sales are collected during the month of sale, 50% are collected in the month following the sale, and 10% are collected two months after the sale. The accounts receivable balance as of December 31 totals $80,000 ($72,000 from December's sales and $8,000 from November's sales). The amount of cash expected to be collected during the month of January is

$108,000

Fact Pattern: A.P. Hill Corporation uses a process-costing system. Products are manufactured in a series of three departments. The following data relate to Department Two for the month of February: Beginning work-in-process (70% complete) 10,000 units Goods started in production 80,000 units Ending work-in-process (60% complete) 5,000 units The beginning work-in-process was valued at $66,000, consisting of $20,000 of transferred-in costs, $30,000 of materials costs, and $16,000 of conversion costs. Materials are added at the beginning of the process; conversion costs are added evenly throughout the process. Costs added to production during February were Transferred-in $16,000 Materials used 88,000 Conversion costs 50,000 Assume that the company uses the first-in, first-out (FIFO) method of inventory valuation. Under FIFO, how much materials cost did A.P. Hill transfer out of Department Two during February?

$112,500

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

$12,500 unfavorable.

A company has the following budget formula for annual electricity expense in its shop: Expense = $7,200 + (Units produced × $0.60) If management expects to produce 20,000 units during February, for the purpose of performance evaluation, what amount of expenses should the company expect to incur in February?

$12,600

A conglomerate outsources the cleaning of its theaters. The cleaning vendor's charges are based upon the total hours needed to clean the facilities, and more cleaning time is needed as more people attend the theater. The conglomerate has accumulated the following historical data. Month Cleaning Cost Number of Theater Tickets Sold April $11,000 19,700 May 9,000 17,000 June 15,600 28,000 July 15,000 29,000 The conglomerate anticipates selling 25,000 theater tickets in August. If the conglomerate uses the high-low method of separating costs into their fixed and variable components, the conglomerate's budget for August cleaning costs would be

$13,000

Fact Pattern: The Dickins Corporation is considering the acquisition of a new machine at a cost of $180,000. Transporting the machine to Dickins' plant will cost $12,000. Installing the machine will cost an additional $18,000. It has a 10-year life and is expected to have a salvage value of $10,000. Furthermore, the machine is expected to produce 4,000 units per year with a selling price of $500 and combined direct materials and direct labor costs of $450 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value. Dickins has a marginal tax rate of 40%. What is the net cash flow for the third year that Dickins should use in a capital budgeting analysis?

$136,800

A corporation expects to incur $70,000 of factory overhead and $60,000 of general and administrative costs next year. Direct labor costs at $5 per hour are expected to total $50,000. If factory overhead is to be applied per direct labor hour, how much overhead will be applied to a job incurring 20 hours of direct labor?

$140

An entity estimates its total materials handling costs at two production levels as follows: Cost Gallons $160,000 80,000 $132,000 60,000 What is the estimated total cost for handling 75,000 gallons?

$153,000

Fact Pattern: Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Arrow has established the following standards for the prime costs of one unit of product. Standard Standard Standard Quantity Price Cost Direct materials 8 pounds $1.80 per pound $14.40 Direct labor .25 hour $8.00 per hour 2.00 $16.40 During November, Arrow purchased 160,000 pounds of direct materials at a total cost of $304,000. The total factory wages for November were $42,000, 90% of which were for direct labor. Arrow manufactured 19,000 units of product during November using 142,500 pounds of direct materials and 5,000 direct labor hours. Arrow's direct materials usage (quantity) variance for November is

$17,100 favorable.

A company sells products on account and experiences the following collection schedule: In the month of sale 10% In the month after sale 60% In the second month after sale 30% At December 31, the company reports accounts receivable of $211,500. Of that amount, $162,000 is due from December sales and $49,500 from November sales. The company is budgeting $170,000 of sales for January. If so, what amount of cash should be collected in January?

$174,500

Fact Pattern: Regis Company manufactures plugs used in its manufacturing cycle at a cost of $36 per unit that includes $8 of fixed overhead. Regis needs 30,000 of these plugs annually, and Orlan Company has offered to sell these units to Regis at $33 per unit. If Regis decides to purchase the plugs, $60,000 of the annual fixed overhead applied will be eliminated, and the company may be able to rent the facility previously used for manufacturing the plugs. If the plugs are purchased and the facility rented, Regis Company wishes to realize $100,000 in savings annually. To achieve this goal, the minimum annual rent on the facility must be

$190,000

A corporation's current year-end sales totaled $240 million, and its ending cash balance was $20 million. The corporation anticipates its sales for the upcoming year will be $260 million. On average, 10% of a year's sales will be collected during the following year. Assume the corporation has no uncollectible accounts. The corporation also anticipates cash expenses of $240 million and depreciation of $5 million. During the next year, the corporation intends to spend $30 million cash for capital improvements. If the corporation's policy is to have a minimum of $10 million cash available at the beginning of each year, its budgeted cash flow projections indicate that it will need outside financing of

$2 million

At the beginning of the year, a company prepared the following monthly budget for direct materials. Units produced and sold 10,000 15,000 Direct material $15,000 $22,500 At the end of the month, the company's records showed that 12,000 units were produced and sold and $20,000 was spent for direct materials. Each unit of output requires one unit of direct material. The flexible budget variance for direct materials is

$2,000 unfavorable.

Fact Pattern: Lazar Industries produces two products, crates and trunks. Per unit selling prices, costs, and resource utilization for these products are as follows. Crates Trunks Selling price $20 $30 Direct material costs 5 5 Direct labor costs 8 10 Variable overhead costs 3 5 Variable selling costs 1 2 Machine hours per unit 2 4 Production of crates and trunks involves joint processes and use of the same facilities. The total fixed factory overhead cost is $2,000,000, and total fixed selling and administrative costs are $840,000. Production and sales are scheduled for 500,000 crates and 700,000 trunks. Lazar has a normal capacity to produce a total of 2,000,000 units in any combination of crates and trunks, and it maintains no direct materials, work-in-process, or finished goods inventory. Due to plant renovations, Lazar will be limited to 1,000,000 machine hours. What is the maximum amount of contribution margin Lazar can generate during the renovation period?

$2,000,000

Fact Pattern: Berol Company plans to sell 200,000 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 150,000 finished units in inventory on June 30. Each unit of finished product requires 4 pounds of direct materials at a cost of $1.20 per pound. There are 800,000 pounds of direct materials in inventory on June 30. Assume Berol Company plans to produce 600,000 units of finished product in the 3-month period ending September 30, and to have direct materials inventory on hand at the end of the 3-month period equal to 25% of the use in that period. The estimated cost of direct materials purchases for the 3-month period ending September 30 is

$2,640,000

Fact Pattern: Albany Mining Corporation uses a process costing system for its ore extraction operations. The following information pertains to work-in-process inventories and operations for the month of May: Completion % Units Materials Conversion BWIP on May 1 32,000 60% 20% Started in production 200,000 Completed production (184,000) EWIP on May 31 48,000 90% 40% Costs for the month were as follows: BWIP Incurred in May Direct materials $54,560 $ 468,000 Direct labor 20,320 182,880 Factory overhead 15,240 391,160 $90,120 $1,042,040 Using the weighted-average method, Albany Mining's equivalent unit cost of materials for May is

$2.30

A plant has two departments, Machining and Assembly. This year's budget for the plant contained the following information. Machining Assembly Manufacturing overhead $4,000,000 $2,000,000 Direct labor hours 100,000 200,000 Machine hours 410,000 40,000 If the plant uses a plantwide overhead rate based on direct labor hours, what would the rate be?

$20 per hour.

Fact Pattern: Atmel, Inc. manufactures and sells two products. Data with regard to these products are given below. Product A Product B Units produced and sold 30,000 12,000 Machine hours required per unit 2 3 Receiving orders per product line 50 150 Production orders per product line 12 18 Production runs 8 12 Inspections 20 30 Total budgeted machine hours are 100,000. The budgeted overhead costs are shown below. Receiving costs $450,000 Engineering costs 300,000 Machine setup costs 25,000 Inspection costs 200,000 Total budgeted overhead costs $975,000 Using activity-based costing, Atmel's per unit overhead cost allocation of receiving costs for Product A is

$3.75

Fact Pattern: Kelly Company is a retail sporting goods store that uses accrual accounting for its records. Facts regarding Kelly's operations are as follows: Sales are budgeted at $220,000 for December Year 1 and $200,000 for January Year 2. Collections are expected to be 60% in the month of sale and 38% in the month following the sale. Gross margin is 25% of sales. A total of 80% of the merchandise held for resale is purchased in the month prior to the month of sale and 20% is purchased in the month of sale. Payment for merchandise is made in the month following the purchase. Other expected monthly expenses to be paid in cash are $22,600. Annual depreciation is $216,000. Below is Kelly Company's statement of financial position at November 30, Year 1. Assets Cash $ 22,000 Accounts receivable (net of $4,000 allowance for uncollectible accounts) 76,000 Inventory 132,000 Property, plant, and equipment (net of $680,000 accumulated depreciation) 870,000 Total assets $1,100,000 Liabilities and Stockholders' Equity Accounts payable $ 162,000 Common stock 800,000 Retained earnings 138,000 Total liabilities and stockholders' equity $1,100,000 Kelly's budgeted cash collections for December Year 1 are

$208,000

Fixed manufacturing overhead costs totaled $150,000 and variable selling costs totaled $75,000. How should these costs be classified under variable costing?

$225,000 period costs; $0 product costs.

Production costs for July are Direct materials $120,000 Direct labor 108,000 Factory overhead 6,000 What is the amount of costs traceable to specific products?

$228,000

A company uses a job costing system and applies overhead to products on the basis of direct labor cost. Job No. 75, the only job in process on January 1, had the following costs assigned as of that date: direct materials, $40,000; direct labor, $80,000; and factory overhead, $120,000. The following selected costs were incurred during the year: Traceable to jobs: Direct materials $178,000 Direct labor 345,000 Total $523,000 Not traceable to jobs: Factory materials and supplies $ 46,000 Indirect labor 235,000 Plant maintenance 73,000 Depreciation on factory equipment 29,000 Other factory costs 76,000 Total $459,000 The company's profit plan for the year included budgeted direct labor of $320,000 and overhead of $448,000. Assuming no work-in-process on December 31, the company's overhead for the year was

$24,000 overapplied.

Fact Pattern: Calvin, Inc., is considering the purchase of a new state-of-the-art machine to replace its hand-operated machine. Calvin's effective tax rate is 40%, and its cost of capital is 12%. Data regarding the existing and new machines are presented below. Existing New Machine Machine Original cost $50,000 $90,000 Installation costs 0 4,000 Freight and insurance 0 6,000 Expected end salvage value 0 0 Depreciation method straight-line straight-line Expected useful life 10 years 5 years The existing machine has been in service for 7 years and could be sold currently for $25,000. Calvin expects to realize a before-tax annual reduction in labor costs of $30,000 if the new machine is purchased and placed in service. If the new machine is purchased, the incremental cash flows for the fifth year would amount to

$26,000

Fact Pattern: Information pertaining to Noskey Corporation's sales revenue is presented in the following table: November December January Year 1 Year 1 Year 2 (Actual) (Budget) (Budget) Cash sales $ 80,000 $100,000 $ 60,000 Credit sales 240,000 360,000 180,000 Total sales $320,000 $460,000 $240,000 Management estimates that 5% of credit sales are uncollectible. Of the credit sales that are collectible, 60% are collected in the month of sale and the remainder in the month following the sale. Quantity of inventory purchased is equal to next month's cost of sales, and gross profit margin is 30%. All purchases of inventory are on account; 25% are paid in the month of purchase, and the remainder are paid in the month following the purchase. Noskey Corporation's budgeted total cash payments in December Year 1 for inventory purchases are

$283,500

A corporation anticipates the following sales during the last 6 months of the year: July $460,000 August 500,000 September 525,000 October 500,000 November 480,000 December 450,000 20% of the corporation's sales are for cash. The balance is subject to the collection pattern shown below. Percentage of balance collected in the month of sale 40% Percentage of balance collected in the month following sale 30% Percentage of balance collected in the second month following sale 25% Percentage of balance uncollectible 5% What is the planned net accounts receivable balance as of December 31?

$294,000

A company produces one product and budgeted 220,000 units for the month of August with the following budgeted manufacturing costs: Total Costs Cost Per Unit Variable costs $1,408,000 $ 6.40 Batch set-up cost 880,000 4.00 Fixed costs 1,210,000 5.50 Total $3,498,000 $15.90 The variable cost per unit and the total fixed costs are unchanged within a production range of 200,000 to 300,000 units per month. The total for the batch set-up cost in any month depends on the number of production batches that is run. A normal batch consists of 50,000 units unless production requires less volume. In the prior year, the company experienced a mixture of monthly batch sizes of 42,000 units, 45,000 units, and 50,000 units. The company consistently plans production each month in order to minimize the number of batches. For the month of September, the company plans to manufacture 260,000 units. What will be the company's total budgeted production costs for September?

$3,930,000

Fact Pattern: Polk Retailers is developing cash and other budget information for July, August, and September. At June 30, Polk had cash of $6,600, accounts receivable of $524,000, inventories of $371,280, and accounts payable of $159,666. 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 2% discount if payment is made within 10 days after the billing date. Receivables are booked gross. 65% of the billings are collected within the discount period, 20% are collected by the end of the month, 10% are collected by the end of the second month, and 5% prove uncollectible. Purchases 60% of all purchases of materials and selling, general, and administrative expenses are paid in the month purchased and the remainder in the following month. Each month's ending inventory in units is equal to 120% of the next month's units of sales. The cost of each unit of inventory is $25. Selling, general, and administrative expenses, of which $3,000 is depreciation, are equal to 20% of the current month's sales. Actual and projected sales are as follows: Dollars Units May $424,000 10,600 June 436,000 10,900 July 428,000 10,700 August 408,000 10,200 September 432,000 10,800 October 440,000 11,000 Polk's budgeted cash disbursements during August are

$345,000

Fact Pattern: A company has sales of one of its products of $400,000 per year and a contribution margin ratio of 20%. Its margin of safety is $40,000. What is the company's breakeven point?

$360,000

Fact Pattern: Scarborough Corporation manufactures and sells two products, Thingone and Thingtwo. Scarborough's budget department gathered the following data to project sales and budget requirements: Projected Sales Product Units Price Thingone 60,000 $ 70 Thingtwo 40,000 100 Projected Inventories -- in units Expected Desired Product January 1 December 31 Thingone 20,000 25,000 Thingtwo 8,000 9,000 To produce one unit of Thingone and Thingtwo, the following raw materials are used: Raw Material Unit Thingone Thingtwo A lb. 4 5 B lb. 2 3 C each 0 1 Projected data for the year with respect to raw materials are as follows: Anticipated Expected Desired Raw Purchase Inventories Inventories Material Price 1/1 12/31 A $8 32,000 lb. 36,000 lb. B 5 29,000 lb. 32,000 lb. C 3 6,000 each 7,000 each Projected direct labor requirements and rates are as follows: Thingone -- 2 hours per unit at $3 per hour Thingtwo -- 3 hours per unit at $4 per hour Overhead is applied at the rate of $2 per direct labor hour. What is Scarborough's direct labor budget in dollars? Thingone Thingtwo

$390,000. $492,000

Fact Pattern: Kimbeth Manufacturing uses a process cost system to manufacture Dust Density Sensors for the mining industry. The following information pertains to operations for the month of May. Units Beginning work-in-process inventory, May 1 16,000 Started in production during May 100,000 Completed production during May 92,000 Ending work-in-process inventory, May 31 24,000 The beginning inventory was 60% complete for materials and 20% complete for conversion costs. The ending inventory was 90% complete for materials and 40% complete for conversion costs. Costs pertaining to the month of May are as follows: • Beginning inventory costs are materials, $54,560; direct labor, $20,320; and overhead, $15,240. • Costs incurred during May are materials used, $468,000; direct labor, $182,880; and overhead, $391,160. Using the FIFO method, Kimbeth's equivalent unit cost of materials for May is

$4.50

A company is expanding its manufacturing plant, which requires an investment of $4 million in new equipment and plant modifications. The company's sales are expected to increase by $3 million per year as a result of the expansion. Cash investment in current assets averages 30% of sales; accounts payable and other current liabilities are 10% of sales. What is the estimated total investment for this expansion?

$4.6 million.

A gift shop maintains a 35% gross profit percentage on sales and carries an ending inventory balance each month sufficient to support 30% of the next month's expected sales. Anticipated sales for the fourth quarter are as follows: October $42,000 November 58,000 December 74,000 What amount of goods should the gift shop plan to purchase during the month of November?

$40,820

Fact Pattern: Polk Retailers is developing cash and other budget information for July, August, and September. At June 30, Polk had cash of $6,600, accounts receivable of $524,000, inventories of $371,280, and accounts payable of $159,666. 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 2% discount if payment is made within 10 days after the billing date. Receivables are booked gross. 65% of the billings are collected within the discount period, 20% are collected by the end of the month, 10% are collected by the end of the second month, and 5% prove uncollectible. Purchases 60% of all purchases of materials and selling, general, and administrative expenses are paid in the month purchased and the remainder in the following month. Each month's ending inventory in units is equal to 120% of the next month's units of sales. The cost of each unit of inventory is $25. Selling, general, and administrative expenses, of which $3,000 is depreciation, are equal to 20% of the current month's sales. Actual and projected sales are as follows: Dollars Units May $424,000 10,600 June 436,000 10,900 July 428,000 10,700 August 408,000 10,200 September 432,000 10,800 October 440,000 11,000 Polk's budgeted cash collections during July are

$407,332

A company has developed the following sales projections for the calendar year. May $100,000 June 120,000 July 140,000 August 160,000 September 150,000 October 130,000 Normal cash collection experience has been that 50% of sales are collected during the month of sale and 45% in the month following sale. The remaining 5% of sales is never collected. The company's budgeted cash collections for the third calendar quarter are

$414,000

A firm uses a process-costing system and inspects its goods at the end of manufacturing. The inspection as of June 30 revealed the following information for the month of June: Good units completed 16,000 Normal spoilage (units) 300 Abnormal spoilage (units) 100 Unit costs were: materials, $3.50 and conversion costs, $6.00. The number of units that the firm would transfer to its finished goods inventory and the related cost of these units are Units Transferred Cost

16,000 $154,850

A controller developed the following direct-costing income statement for Year 1: Per Unit Sales (150,000 units at $30) $ 4,500,000 $30 Variable costs: Direct materials $1,050,000 $ 7 Direct labor 1,500,000 10 Mfg. overhead 300,000 2 Selling & mktg. 300,000 2 (3,150,000) (21) Contribution margin $ 1,350,000 $ 9 Fixed costs: Mfg. overhead $ 600,000 $ 4 Selling & mktg. 300,000 2 (900,000) (6) Operating income $ 450,000 $ 3 The controller based the next year's budget on the assumption that fixed costs, unit sales, and the sales price would remain as they were in Year 1, but with operating income being reduced to $300,000. By July of Year 2, the controller was able to predict that unit sales would increase over Year 1 levels by 10%. Based on the Year 2 budget and the new information, the predicted Year 2 operating income would be

$420,000

Fact Pattern: The managers of Rochester Manufacturing are discussing ways to allocate the cost of service departments, such as Quality Control and Maintenance, to the production departments. To aid them in this discussion, the controller has provided the following information: Quality Control Maintenance Machining Assembly Total Budgeted overhead costs before allocation $350,000 $200,000 $400,000 $300,000 $1,250,000 Budgeted machine hours -- -- 50,000 -- 50,000 Budgeted direct labor hours -- -- -- 25,000 25,000 Budgeted hours of service: Quality Control -- 7,000 21,000 7,000 35,000 Maintenance 10,000 -- 18,000 12,000 40,000 If Rochester uses the reciprocal method of allocating service costs, the total amount of quality control costs (rounded to the nearest dollar) to be allocated to the other departments would be

$421,053

Fact Pattern: Data available for the current year are presented below. Whole Company Division 1 Division 2 Variable manufacturing cost of goods sold $ 400,000 $220,000 $180,000 Unallocated costs (e.g., president's salary) 100,000 Fixed costs controllable by division managers (e.g., advertising, engineering supervision costs) 90,000 50,000 40,000 Net revenue 1,000,000 600,000 400,000 Variable selling and administrative costs 130,000 70,000 60,000 Fixed costs controllable by others (e.g., depreciation, insurance) 120,000 70,000 50,000 Based upon the information presented above, the contribution margin for the company was

$470,000

Fact Pattern: Kim is thinking of organizing a fundraiser to support a local charity. She has planned to rent a banquet hall and provide the guests with food, entertainment, and various party favors. She has decided to charge $500 a person. After researching around town, Kim has discovered the following costs: Fixed Costs Rental fee of banquet hall $150,000 Advertising 50,000 Entertainment 4,000 Variable Costs Per Guest Food $12 Other miscellaneous costs 8 What is Kim's contribution margin?

$480

Data regarding Mill Company's direct materials costs is as follows: Actual unit cost $2.00 Standard unit cost 2.20 Actual quantity purchased and used 28,000 units Standard units of materials per unit of finished goods 3 units Actual output of finished goods 9,000 units What is the direct materials price variance?

$5,600 favorable.

Fact Pattern: Total production costs of prior periods for a company are listed as follows. Assume that the same cost behavior patterns can be extended linearly over the range of 3,000 to 35,000 units and that the cost driver for each cost is the number of units produced. Production in Units per Month 3,000 9,000 16,000 35,000 Cost X $23,700 $ 52,680 $ 86,490 $178,260 Cost Y 47,280 141,840 252,160 551,600 What is the average cost per unit at a production level of 8,000 units for cost X?

$5.98

Fact Pattern: Kator Co. is a manufacturer of industrial components. One of their products that is used as a subcomponent in auto manufacturing is KB-96. This product has the following financial structure per unit: Selling price $150 Direct materials $ 20 Direct labor 15 Variable manufacturing overhead 12 Fixed manufacturing overhead 30 Shipping and handling 3 Fixed selling and administrative 10 Total costs $ 90 Kator Co. has received a special, one-time order for 1,000 KB-96 parts. Assuming Kator has excess capacity, the minimum price that is acceptable for this one-time special order is in excess of

$50

A cosmetics manufacturer has used a traditional cost accounting system to apply quality control costs uniformly to all products at a rate of 14.5% of direct labor cost. Monthly direct labor cost for makeup is $27,500. In an attempt to distribute quality control costs more equitably, the manufacturer is considering activity-based costing. The monthly data shown in the chart below have been gathered for makeup. Quantity of Activity Cost Driver Cost Rates Makeup Incoming material inspection Type of material $11.50 per type 12 types In-process inspection Number of units $0.14 per unit 17,500 units Product certification Per order $77 per order 25 orders The monthly quality control cost assigned to makeup using activity-based costing (ABC) is

$525.50 higher than the cost using the traditional system.

The following direct labor information relates to the manufacture of televisions. Number of workers 60 Number of product hours per week, per worker 40 Hours required to make 1 unit 3 Weekly wages per worker $600 Employee benefits treated as direct labor costs 20% of wages What is the standard direct labor cost per unit?

$54

Fact Pattern: Believing that its traditional cost system may be providing misleading information, Farragut Manufacturing is considering an activity-based costing (ABC) approach. It now employs a traditional cost system and has been applying its manufacturing overhead on the basis of machine hours. Farragut plans on using 50,000 direct labor hours and 30,000 machine hours in the coming year. The following data show the manufacturing overhead that is budgeted. Budgeted Budgeted Activity Cost Driver Activity Cost Material handling No. of parts handled 6,000,000 $ 720,000 Setup costs No. of setups 750 315,000 Machining costs Machine hours 30,000 540,000 Quality control No. of batches 500 225,000 Total manufacturing overhead cost: $1,800,000 Cost, sales, and production data for one of Farragut's products for the coming year are as follows: Prime costs: Direct material cost per unit $4.40 Direct labor cost per unit .05 DLH @ $15.00/DLH .75 Total prime cost $5.15 Sales and production data: Expected sales 20,000 units Batch size 5,000 units Setups 2 per batch Total parts per finished unit 5 parts Machine hours required 80 MH per batch If Farragut employs an activity-based costing system, the cost per unit for the product described for the coming year would be

$6.30

A company breaks even at an annual sales volume of 75,000 units. Actual annual sales volume was 100,000 units, and the company reported operating income of $200,000. The annual fixed costs are

$600,000

Fact Pattern: The data below are available for Xerbert Co.: Xerbert Co. Budget and Actual Income Statements For the Year Ending December 31 (000s omitted) Budget Actual Xenox Xeon Total Xenox Xeon Total Unit sales 150 100 250 130 130 260 Net dollar sales $900 $1,000 $1,900 $780 $1,235 $2,015 Variable expenses (450) (750) (1,200) (390) (975) (1,365) Contribution margin $450 $ 250 $ 700 $390 $ 260 $ 650 Fixed expenses: Manufacturing $ 153 $ 140 Marketing 95 90 Other fixed expenses 200 190 Total fixed expenses $ 448 $ 420 Income before taxes $ 252 $ 230 The variance of actual contribution margin from budgeted contribution margin attributable to sales price is

$65,000 unfavorable.

Fact Pattern: Goggle-Eyed Old Snapping Turtle, a sporting goods manufacturer, buys wood as a direct material for baseball bats. The Forming Department processes the baseball bats, and the bats are then transferred to the Finishing Department where a sealant is applied. The Forming Department began manufacturing 10,000 "Casey Sluggers" during the month of May. There was no beginning inventory. Costs for the Forming Department for the month of May were as follows: Direct materials $33,000 Conversion costs 17,000 Total $50,000 A total of 8,000 bats were completed and transferred to the Finishing Department; the remaining 2,000 bats were still in the forming process at the end of the month. All of the Forming Department's direct materials were placed in process, but, on average, only 25% of the conversion cost was applied to the ending work-in-process inventory. The cost of the work-in-process inventory in Snapping Turtle's Forming Department at the end of May is

$7,600

A corporation's master budget calls for the production of 5,000 units of product monthly. The master budget includes indirect labor of $144,000 annually; the corporation considers indirect labor to be a variable cost. During the month of April, 4,500 units of product were produced, and indirect labor costs of $10,100 were incurred. A performance report utilizing flexible budgeting would report a budget variance for indirect labor of

$700 favorable.

Fact Pattern: Barnes Corporation manufactures skateboards and is in the process of preparing next year's budget. The pro forma income statement for the current year is presented below. Sales $1,500,000 Cost of sales: Direct materials $250,000 Direct labor 150,000 Variable overhead 75,000 Fixed overhead 100,000 (575,000) Gross profit $ 925,000 Selling and G&A: Variable $200,000 Fixed 250,000 (450,000) Operating income $ 475,000 For the coming year, the management of Barnes Corporation anticipates a 10% increase in sales, a 12% increase in variable costs, and a $45,000 increase in fixed expenses. The breakeven point for next year will be

$729,027

A manufacturer produces unique tapestries and bedding for hotel chains and uses a job order costing system. During the current month, the manufacturer purchased $50,000 of direct materials and incurred $22,000 in direct labor. Overhead is applied on the basis of direct labor hours at a rate of 60%. Overapplied or underapplied overhead is closed to cost of goods sold at the end of the period. The actual overhead incurred this month was $10,000. Balances in the manufacturer's inventory accounts are presented below. Beginning of month End of month Direct materials $2,000 $3,500 Work-in-process 5,000 9,000 Finished goods 2,500 1,700 What is the cost of goods manufactured this month?

$79,700

A start-up company wants to use cost-based pricing for its only product, a unique new video game. The company expects to sell 10,000 units in the upcoming year. Variable costs will be $65 per unit and annual fixed operating costs (including depreciation) amount to $80,000. The company's balance sheet is as follows: Assets Current assets $100,000 Plant & equipment 425,000 Liabilities & Equity Accounts payable $ 25,000 Debt 200,000 Equity 300,000 If the company wants to earn a 20% return on equity, at what price should it sell the new product?

$79.00

For the month of June, a company expects to sell 12,500 cases of small cherries at $25 per case and 33,000 cases of large cherries at $32 per case. Sales personnel receive a 6% commission on each case of small cherries and an 8% commission on each case of large cherries. To receive a commission on a product, the sales personnel team must meet the individual product revenue quota. The sales quotas for small cherries and large cherries are $500,000 and $1 million, respectively. What are the sales commissions budgeted for June?

$84,480

A company has sales of $500,000, variable costs of $300,000, and operating income of $150,000. If the company increased the sales price per unit by 10%, reduced fixed costs by 20%, and left variable cost per unit unchanged, what would be the new breakeven point in sales dollars?

$88,000

Fact Pattern: Calamity Cauliflower Corporation is considering undertaking a capital project. The company would have to commit $24,000 of working capital in addition to an immediate outlay of $160,000 for new equipment. The project is expected to generate $100,000 of annual income for 10 years. At the end of that time, the new equipment, which will be depreciated on a straight-line basis, is expected to have a salvage value of $10,000. The existing equipment that would be sold to make room for the project has a historical cost of $220,000 and accumulated depreciation of $208,000. It has an estimated remaining useful life of 2 years and the remaining carrying amount is being depreciated on a straight-line basis. A scrap dealer has agreed to buy it for $8,000. The company's effective tax rate is 40%. The total after-tax cash inflow relevant to Calamity Cauliflower's disposal of the old equipment is

$9,600

A company uses a normal costing system and a predetermined overhead rate to allocate its overhead costs. The manufacturing process requires the use of machining equipment, which is a primary driver of overhead. The actual factory overhead amount is $450 for Department A, Job 120 as of the end of the year. Production costs are shown below. Estimated annual overhead for all departments $220,000 Expected annual machine hours for all departments 20,000 Actual machine hours for Department A, Job 120 32 Actual labor hours for Department A, Job 120 21 The overhead cost for Department A, Job 120 is

$98 underapplied.

Fact Pattern: Paradise Company budgets on an annual basis for its fiscal year. The following beginning and ending inventory levels (in units) are planned for the fiscal year of July 1 through June 30: July 1 June 30 Direct material* 40,000 50,000 Work-in-process 10,000 20,000 Finished goods 80,000 50,000 * Two units of direct material are needed to produce each unit of finished product. If 500,000 complete units were to be manufactured during the fiscal year by Paradise Company, the number of units of raw materials to be purchased is

1,010,000 units.

Fact Pattern: The budget data for the Bidwell Company appear below. Sales (100,000 units) $1,000,000 Costs: Fixed Variable Direct materials $ 0 $300,000 Direct labor 0 200,000 Manufacturing overhead 100,000 150,000 Selling and administrative costs 110,000 50,000 Total costs $210,000 $700,000 910,000 Budgeted operating income $ 90,000 If the Bidwell Company is subject to an effective income tax rate of 40%, the number of units Bidwell must sell to earn an after-tax profit of $90,000 is

120,000 units.

A firm is analyzing the market potential for its specialty turbines. The firm developed pricing and cost structures for its specialty turbines over various relevant ranges. The pricing and cost data for each relevant range are presented below. Units produced and sold 1 - 5 6 - 10 11 - 15 16 - 20 Total fixed costs $200,000 $400,000 $600,000 $800,000 Unit variable cost 50,000 50,000 45,000 45,000 Unit selling price 100,000 100,000 100,000 100,000 Which one of the following production/sales levels would produce the highest operating income?

14 units.

Fact Pattern: Mountain Corporation manufactures cabinets but outsources the handles. Eight handles are needed for a cabinet, with assembly requiring 30 minutes of direct labor per unit. Ending finished goods inventory is planned to consist of 50% of projected unit sales for the next month, and ending handles inventory is planned to be 80% of the requirement for the next month's projected unit output of finished goods. Mountain's projected unit sales: October 4,600 November 5,000 December 4,200 January 6,000 Mountain's ending inventories in units at September 30: Finished goods 3,800 Handles 16,000 Given that a full-time employee works 160 hours per month, no overtime is allowed, and part-time employees may be used, how many full-time equivalent employees does Mountain need to assemble the output of finished units in November?

14.375

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

2,340 tables.

Mason Enterprises has prepared the following budget for the month of July: Selling Price Variable Cost Unit Per Unit Per Unit Sales Product A $10.00 $4.00 15,000 Product B 15.00 8.00 20,000 Product C 18.00 9.00 5,000 Assuming that total fixed costs will be $150,000 and the mix remains constant, the breakeven point (rounded to the next higher whole unit) will be

21,819 units.

A firm is considering opening a new restaurant. The expected purchase price is $270,000; expected annual revenues are $150,000; and expected annual costs are $90,000, including $22,500 of depreciation. The investment has a payback period of approximately

3.3 years.

A manufacturer is considering dropping a product line. It currently produces a multi-purpose woodworking clamp in a simple manufacturing process that uses special equipment. Variable costs amount to $6.00 per unit. Fixed overhead costs, exclusive of depreciation, have been allocated to this product at a rate of $3.50 a unit and will continue whether or not production ceases. Depreciation on the special equipment amounts to $20,000 a year. Fixed costs are $18,000. The clamp has a selling price of $10 a unit. Ignoring tax effects, the minimum number of units that would have to be sold in the current year to break even on a cash flow basis is

4,500 units.

A company is analyzing a $200,000 equipment investment to produce a new product for the next 5 years. A study of expected annual after-tax cash flows from the project produced the following data: Annual After-Tax Cash Flow Probability $45,000 .10 50,000 .20 55,000 .30 60,000 .20 65,000 .10 70,000 .10 If the company utilizes a 14% hurdle rate, the probability of achieving a positive net present value is

40%

Fact Pattern: Superflite expects April sales of its deluxe model airplane, the C-14, to be 402,000 units at $11 each. Each C-14 requires three purchased components shown below. Number Needed Purchase Cost for Each C-14 Unit A-9 $0.50 1 B-6 0.25 2 D-28 1.00 3 Manufacturing direct labor and variable overhead per unit of C-14 totals $3.00. Fixed manufacturing overhead is $1.00 per unit at a production level of 500,000 units. Superflite plans the following beginning and ending inventories for the month of April and uses standard absorption costing for valuing inventory. Part No. Units at April 1 Units at April 30 C-14 12,000 10,000 A-9 21,000 9,000 B-6 32,000 10,000 D-28 14,000 6,000 Superflite's C-14 production budget for April should be based on the manufacture of

400,000 units.

Fact Pattern: Paradise Company budgets on an annual basis for its fiscal year. The following beginning and ending inventory levels (in units) are planned for the fiscal year of July 1 through June 30: July 1 June 30 Direct material* 40,000 50,000 Work-in-process 10,000 20,000 Finished goods 80,000 50,000 * Two units of direct material are needed to produce each unit of finished product. If Paradise Company plans to sell 480,000 units during the fiscal year, the number of units it will have to manufacture during the year is

450,000 units.

Fact Pattern: Levittown Company employs a process cost system for its manufacturing operations. All direct materials are added at the beginning of the process and conversion costs are added proportionately. Levittown's production quantity schedule for November is reproduced in the next column. Work-in-process November 1 (60% complete as to conversion costs) 1,000 Units started during November 5,000 Total units to account for 6,000 Units completed and transferred out from beginning inventory 1,000 Units started and completed during November 3,000 Work-in-process on November 30 (20% complete as to conversion costs) 2,000 Total units accounted for 6,000 Using the FIFO method, Levittown's equivalent units for direct materials for November are

5,000 units.

Fact Pattern: Daffy Tunes manufactures a toy rabbit with moving parts and a built-in voice box. Projected sales in units for the next 5 months are as follows: Projected Month Sales in Units January 30,000 February 36,000 March 33,000 April 40,000 May 29,000 Each rabbit requires basic materials that Daffy purchases from a single supplier at $3.50 per rabbit. Voice boxes are purchased from another supplier at $1.00 each. Assembly labor cost is $2.00 per rabbit, and variable overhead cost is $.50 per rabbit. Fixed manufacturing overhead applicable to rabbit production is $12,000 per month. Daffy's policy is to manufacture 1.5 times the coming month's projected sales every other month, starting with January (i.e., odd-numbered months) for February sales, and to manufacture 0.5 times the coming month's projected sales in alternate months (i.e., even-numbered months). This allows Daffy to allocate limited manufacturing resources to other products as needed during the even-numbered months. Daffy Tunes' unit production budget for toy rabbits for January is

54,000 units.

Fact Pattern: Streeter Company produces plastic microwave turntables. Sales for the next year are expected to be 65,000 units in the first quarter, 72,000 units in the second quarter, 84,000 units in the third quarter, and 66,000 units in the fourth quarter. Streeter usually maintains a finished goods inventory at the end of each quarter equal to one half of the units expected to be sold in the next quarter. How many units should Streeter produce in the second quarter?

78,000

A firm uses a weighted-average process-costing system. Material B is added at two different points in the production of shirms, 40% is added when the units are 20% completed, and the remaining 60% of Material B is added when the units are 80% completed. At the end of the quarter, there are 22,000 shirms in process, all of which are 50% completed. With respect to Material B, the ending shirms in process represent how many equivalent units?

8,800

A sales budget shows quarterly sales for the next year as follows: Quarter Units 1 10,000 2 8,000 3 12,000 4 14,000 Company policy is to have a finished goods inventory at the end of each quarter equal to 20% of the next quarter's sales. Budgeted production for the second quarter of the next year would be

8,800 units.

Fact Pattern: The budget data for the Bidwell Company appear below. Sales (100,000 units) $1,000,000 Costs: Fixed Variable Direct materials $ 0 $300,000 Direct labor 0 200,000 Manufacturing overhead 100,000 150,000 Selling and administrative costs 110,000 50,000 Total costs $210,000 $700,000 910,000 Budgeted operating income $ 90,000 If fixed costs increased $31,500 with no other cost or revenue factors changing, the breakeven sales in units is

80,500 units.

A company is considering a project that calls for an initial cash outlay of $50,000. The expected net cash inflows from the project are $7,791 for each of 10 years. What is the IRR of the project?

9%

Fact Pattern: Rex Company is considering an investment in a new plant, which will entail an immediate capital expenditure of $4,000,000. The plant is to be depreciated on a straight-line basis over 10 years to zero salvage value. Operating income (before depreciation and taxes) is expected to be $800,000 per year over the 10-year life of the plant. The opportunity cost of capital is 14%. Assume that there are no taxes. What is the discounted payback period for the investment?

9.2 years.

A firm manufactures only one product and is preparing its budget for next year based on the following information: Selling price per unit $ 100 Variable costs per unit 75 Fixed costs 250,000 Effective tax rate 35% If the firm wants to achieve a net income of $1.3 million next year, its sales must be

90,000 units.

In an organization that plans by using comprehensive budgeting, the master budget is

A compilation of all the separate operational and financial budget schedules of the organization.

A manufacturer is considering two independent projects, each requiring a cash outlay of $500,000 and having an expected life of 10 years. The forecasted annual net cash inflows for each project and the probability distributions for these cash inflows are as follows: Project R Project S Probabilities Cash Inflows Probabilities Cash Inflows 0.10 $ 75,000 0.25 $ 70,000 0.80 95,000 0.50 110,000 0.10 115,000 0.25 150,000 The manufacturer has decided that the project with the greatest relative risk should meet a hurdle rate of 16% and the project with less risk should meet a hurdle rate of 12%. Given these parameters, which of the following actions should be recommended for the manufacturer to undertake?

Accept both projects.

An advantage of incremental budgeting when compared with zero-based budgeting is that incremental budgeting

Accepts the existing base as being satisfactory.

Flexible budgets

Accommodate changes in activity levels.

Which of the following statements about activity-based costing (ABC) is false?

Activity-based costing is more likely to result in major differences from traditional costing systems if the firm manufactures only one product rather than multiple products.

Ineffective budget control systems are characterized by

All of the answers are correct.

Fact Pattern: Jennilyn Jasper, whose annual salary as a flight instructor is $40,000, has just inherited $100,000 after taxes. She is considering quitting her job and opening a day-care center. Certificates of deposit at the local bank are currently paying 6%. Jennilyn estimates that she will have to pay $120,000 in salaries to employees per year, $20,000 to rent a building, $9,000 each for furniture and supplies, $80,000 for insurance, and $7,000 for utilities. If Jennilyn's projections are accurate and she earns $250,000 in revenue from the business, she will have incurred

An accounting profit but not an economic profit.

An enterprise sells three chemicals: petrol, septine, and tridol. Petrol is the company's most profitable product; tridol is the least profitable. Which one of the following events will definitely decrease the firm's overall breakeven point for the upcoming accounting period?

An increase in anticipated sales of petrol relative to sales of septine and tridol.

In order to avoid pitfalls in relevant-cost analysis, management should focus on

Anticipated revenues and costs that differ for each alternative.

A corporation is considering three new product lines but can only invest in one of the three. The expected annual revenue and costs for each product line are shown below. All three product lines are assumed to operate for the same length of time. A B C Units 10,000 12,000 15,000 Price/unit $10 $10 $8 Variable cost/unit $4 $5 $6 Fixed costs $25,000 $22,000 $15,000 Recommend which product line the corporation should select to implement.

B only.

Fact Pattern: Regis Company manufactures plugs used in its manufacturing cycle at a cost of $36 per unit that includes $8 of fixed overhead. Regis needs 30,000 of these plugs annually, and Orlan Company has offered to sell these units to Regis at $33 per unit. If Regis decides to purchase the plugs, $60,000 of the annual fixed overhead applied will be eliminated, and the company may be able to rent the facility previously used for manufacturing the plugs. If Regis Company purchases the plugs but does not rent the unused facility, the company would

Lose $3.00 per unit.

Fact Pattern: Historically, Pine Hill Wood Products has had no significant bad debt experience with its customers. Cash sales have accounted for 10% of total sales, and payments for credit sales have been received as follows: 40% of credit sales in the month of the sale 30% of credit sales in the first subsequent month 25% of credit sales in the second subsequent month 5% of credit sales in the third subsequent month The forecast for both cash and credit sales is as follows: Month Sales January $95,000 February 65,000 March 70,000 April 80,000 May 85,000 Due to deteriorating economic conditions, Pine Hill Wood Products has now decided that its cash forecast should include a bad debt adjustment of 2% of credit sales, beginning with sales for the month of April. The 5% collection in the fourth month should be reduced to reflect the bad debt. Because of this policy change, the total expected cash inflow in April related to sales made in April will

Be unchanged.

All of the following would appear on a projected schedule of cost of goods manufactured except for

Beginning finished goods inventory.

Which one of the following best describes direct labor?

Both a product cost and a prime cost.

A company manufactures classroom desk chairs and tables. In the present market, the company can sell as many units of product as it can manufacture, but it is constrained by its availability of machine-hour capacity. Sales price and cost information for each unit of product are shown below. Desk Chairs Tables Sales price $75 $180 Variable costs 60 155 Contribution margin $15 $ 25 Producing a desk chair requires 1 1/2 machine hours; producing a table requires 2 1/2 machine hours. Which product, if any, is most profitable given the machine-hour constraints?

Both products are equally profitable.

In which of the following variances is the standard unit cost used in the calculations?

Both the direct materials usage variance and the direct materials price variance.

Which budget is prepared after the creation of the cash budget?

Budgeted balance sheet.

Which one of the following schedules would be the last item to be prepared in the normal budget preparation process?

Cash budget.

The purpose of project budgeting is to identify, evaluate, and select beneficial projects that require

Commitments of large sums of funds, and the appropriate time frame is over the project's life cycle.

The pro forma statement of employee benefit costs, a budget schedule that is prepared as part of an organization's annual profit plan, would include costs related to

Company-paid benefits and company-paid payroll taxes.

The master budget

Contains the operating budget.

A firm has prepared budgets for the next 5 months: May, June, July, August, and September. As soon as May results are reported, the firm will add October to their budget plans. What type of budget system is the firm using?

Continuous budgeting.

Due to a change in market conditions, a company finds that it can sell as many of each of its three main products as it can produce. Which one of the following is most important in determining which of the three products to produce and market?

Contribution margin per hour of production time available.

A company produces ready-to-bake pie crusts. In deciding whether to process this product further into complete ready-to-bake pies by adding filling, relevant dollar amounts to consider would include all of the following except the

Cost to manufacture the crusts.

When allocating costs from one department to another, a dual-rate cost-allocation method may be used. The dual-rate cost-allocation method is most useful when

Costs are separated into variable-cost and fixed-cost subpools.

The allocation of general overhead costs to operating departments can be least justified in determining

Costs for making management's decisions.

Conversion cost pricing

Could be used when the customer furnishes the material used in manufacturing a product.

Which one of the following items should be done first when developing a comprehensive budget for a manufacturing company?

Development of a sales budget.

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

Development of a sales plan.

Which one of the following is in a company's cash budget?

Disposal of land.

A retail furniture company currently sells products in four categories: recliners, sofas, dining sets, and patio. Due to recent poor performance, the company is considering eliminating the patio furniture line. Recliners Sofas Dining Patio Sales $500,000 $700,000 $900,000 $400,000 Variable expenses 200,000 375,000 405,000 330,000 Allocated fixed expenses 200,000 280,000 360,000 160,000 Operating income $100,000 $ 45,000 $135,000 $(90,000) If patio furniture is eliminated, 80% of the fixed costs assigned to the product line could be avoided. The company does experience cross-sales opportunities and estimates eliminating the patio furniture will lead to a 5% decrease in unit sales of each of the other three product lines. The company should

Eliminate the patio furniture line, which will increase the company's operating income by $2,000.

Assuming two overhead accounts are used, what is the entry to close them and to charge underapplied overhead to cost of goods sold?

Factory O/H applied XX Cost of goods sold XX Factory O/H control. XX

A manufacturing process normally produces defective units equal to 1% of production. Defective units are subsequently reworked and sold. The cost of reworking these defective units should be charged to

Factory overhead control.

Which one of the following budgeting methodologies would be most appropriate for a firm facing a significant level of uncertainty in unit sales volumes for next year?

Flexible budgeting.

A capital-intensive manufacturer of large construction equipment has a manufacturing process that relies heavily on specialized machinery. This machinery is run by a relatively small number of highly skilled laborers. In determining its predetermined overhead rate, what allocation base should the company use?

Machine hours.

Fact Pattern: Huron Industries has recently developed two new products, a cleaning unit for video discs and a disc duplicator for reproducing movies taken with a video camera. However, Huron has only enough plant capacity to introduce one of these products during the current year. The company controller has gathered the following data to assist management in deciding which product should be selected for production. Huron's fixed overhead includes rent and utilities, equipment depreciation, and supervisory salaries. Selling and administrative expenses are not allocated to products. Disc Cleaning Duplicator Unit Raw materials $ 44.00 $ 36.00 Machining at $12 per hr. 18.00 15.00 Assembly at $10 per hr. 30.00 10.00 Variable overhead at $8 per hr. 36.00 18.00 Fixed overhead at $4 per hr. 18.00 9.00 Total cost $ 146.00 $ 88.00 Suggested selling price $ 169.95 $ 99.98 Actual research and development costs $240,000 $175,000 Proposed advertising and promotion costs $500,000 $350,000 The difference between the $99.98 suggested selling price for Huron's video disc cleaning unit and its total unit cost of $88.00 represents the unit's

Gross profit.

In developing the budget for the next year, which one of the following approaches would produce the greatest amount of positive motivation and goal congruence?

Have the divisional and senior management jointly develop goals and the divisional manager develop the implementation plan.

Which of the following is irrelevant in projecting the cash flows of the final year of a capital project?

Historical cost of equipment disposed of in the project's first year.

Which of the following statements apply to the continuous budget methodology? I. The current financial forecast reflects the most recent monthly results and any material changes to the company's outlook or economy. II. Forecasts are updated every few months, reassessing the company's outlook several times a year. III. The decision-making process to develop the budget takes place during the fourth quarter of the prior year being budgeted.

I and II only.

Traditional budgeting methods look at historical data and current resources and then project forward. Activity-based budgeting is different in that I. It looks at desired outcomes and works back from there to determine resources needed. II. It uses current levels of activity to determine future levels without regard to resources currently available. III. Being under budget in one year would not necessarily indicate that an operating unit would have its budget cut the following year. IV. The focus is on planning department by department based on resources available.

I and III only.

Which one of the combinations listed correctly depicts the chronological order of preparation for the following budgets? I Cost of goods sold budget II Production budget III Purchases budget IV. Administrative budget

II, III, I, IV.

Which one of the combinations listed correctly depicts the chronological order of preparation for the following budgets? I. Cost of goods sold budget II. Production budget III. Purchases budget IV. Administrative budget

II, III, I, IV.

Normal costing systems are said to offer a user several distinct benefits when compared with actual costing systems. Which one of the following is not a benefit associated with normal costing systems?

Improved accuracy of job and product costing.

A company's approach to an insourcing vs. outsourcing decision

Involves an analysis of avoidable costs.

A continuous (rolling) budget

Is a plan that is revised monthly or quarterly, dropping one period and adding another.

A continuous profit plan

Is a plan that is revised monthly or quarterly.

A joint process is a manufacturing operation yielding two or more identifiable products from the resources employed in the process. The two characteristics that identify a product generated from this type of process as a joint product are that it

Is identifiable as an individual product only upon reaching the split-off point, and it has relatively significant sales value when compared with the other products.

Which one of the following best describes the capital budget?

It assesses the long-term needs of the company for plant and equipment purchases.

A manufacturer makes picture frames that require one sheet of glass each. Each sheet of glass comes from one larger sheet that is cut into four pieces. Normally, the company is able to produce 400 frames using 110 large sheets of glass, as there is typically some breakage during the process. To improve its operation, the company has set its standard for glass material usage at 100 sheets of large glass to manufacture 400 frames. Which one of the following statements best describes the type of standard the company has set?

It is a theoretical standard because it assumes that all equipment is in order and employees work as expected.

There are various budgets within the master budget cycle. One of these budgets is the production budget. Which one of the following best describes the production budget?

It is calculated from the desired ending inventory and the sales forecast.

A specialty instrument manufacturer is in the process of establishing a cost system. The company produces machines that are unique and distinctive. These machines are produced when purchase requests are received from customers. Although some common parts and sub-assemblies are to be held in inventory, no finished goods inventory is maintained since each purchase request is for a customized specialty instrument. The type of cost accumulation system that would be best suited for this type of environment would be

Job-order costing.

Zero-based budgeting forces managers to

Justify all expenditures at the beginning of every budget period.

The controller of a store has asked a staff accountant to prepare detailed reports that summarize the firm's cash flows for the upcoming accounting period and cash position at the end of the period. Accordingly, the controller has requested preparation of a cash budget, a pro forma statement of cash flows, a detailed listing of cash collections from customers, and a detailed listing of cash payments for merchandise purchases. Which one of the following correctly identifies the first and last document to be prepared by the accountant? First Document Last Document

Listing of cash collections Pro forma statement of cash flows

The cash receipts budget includes

Loan proceeds.

Fact Pattern: A company wants to determine its marketing costs for budgeting purposes. Activity measures and costs incurred for 4 months of the current year are presented in the table below. Advertising is considered to be a discretionary cost. Salespersons are paid monthly salaries plus commissions. The sales force was increased from 20 to 21 individuals during the month of May. March April May June Activity measures: Sales orders 2,000 1,800 2,400 2,300 Units sold 55,000 60,000 70,000 65,000 Dollar sales $1,150,000 $1,200,000 $1,330,000 $1,275,000 Marketing costs: Advertising $ 190,000 $ 200,000 $ 190,000 $ 190,000 Sales salaries 20,000 20,000 21,000 21,000 Commissions 23,000 24,000 26,600 25,500 Shipping costs 93,000 100,000 114,000 107,000 Total costs $ 326,000 $ 344,000 $ 351,600 $ 343,500 Which of the following most appropriately describes the classification and behavior of shipping costs? Classification Behavior

Mixed cost $16,000 per month plus $1.40 per unit sold

One disadvantage of using the internal rate of return (IRR) method to calculate profitability of a project is that

Multiple positive and negative cash flows over the life of the project will yield multiple IRRs

An investment decision is acceptable if the

Net present value is greater than or equal to $0.

A firm is considering discontinuing a certain product line if it does not have a margin of safety higher than 15%. The breakeven sales are $76,800, and the margin of safety is $13,200. Based on this information, the controller has recommended that the firm keep this product line. Did the controller make the appropriate decision?

No, because the margin of safety ratio of 14.7% is not better than 15%.

A retail company has three segments with total operating income of $500,000. Selected financial information for Segment 1 is presented below: Segment 1 Unit sales 28,000 Sales revenue $700,000 Cost of sales 420,000 Administrative expenses 144,000 Commissions 14,000 Rent 140,000 Salaries 32,000 Administrative expenses are allocated to the three segments equally. Commissions are paid to the salespersons in each segment based on 2% of gross sales. The company rents the entire building and allocates the rent to the three segments based on the square footage occupied by each. Salaries represent payments to the employees in the segment. The controller has expressed concern about the operating loss for Segment 1 and has suggested that it be closed. If the segment is closed, none of the employees would be retained. Should the company drop Segment 1?

No, because total operating income would decrease by $234,000.

A corporation is considering the purchase of a new machine for $800,000. The machine is capable of producing 1.6 million units of product over its useful life. The manufacturer's engineering specifications state that the machine-related cost of producing each unit of product should be $.50. The corporation's total anticipated demand over the asset's useful life is 1.2 million units. The average cost of materials and labor for each unit is $.40. In considering whether to buy the new machine, would you recommend that the corporation use the manufacturer's engineering specification of machine-related unit production cost?

No, the machine-related cost of producing each unit is $.67.

A company budgeted sales of $220,000 for June, $200,000 for July, $280,000 for August, $264,000 for September, $244,000 for October, and $300,000 for November. Approximately 75% of sales are on credit; the remainder are cash sales. Collection experience indicates that 60% of the budgeted credit sales will be collected the month after the sale, 36% the second month, and 4% will be uncollectible. Which month has the highest budgeted cash receipts?

November.

A company budgeted $148,000 sales on account for June, $120,000 for July, $211,000 for August, $198,000 for September, and $164,000 for October. Collection experience indicates that 60% of the budgeted sales will be collected the month after the sale, 36% will be collected the second month, and 4% will be uncollectible. Which month should have the largest amount of cash receipts from accounts receivable budgeted?

October.

Which one of the following alternatives correctly classifies the business application to the appropriate costing system? Job Costing System Process Costing System

Print shop Beverage manufacturer

Fact Pattern: Siberian Ski Company recently expanded its manufacturing capacity to allow it to produce up to 15,000 pairs of cross-country skis of the mountaineering model or the touring model. The sales department assures management that it can sell between 9,000 pairs and 13,000 pairs (units) of either product this year. Because the models are very similar, Siberian Ski will produce only one of the two models. The information below was compiled by the accounting department. Model Mountaineering Touring Selling price per unit $88.00 $80.00 Variable costs per unit 52.80 52.80 Fixed costs will total $369,600 if the mountaineering model is produced but will be only $316,800 if the touring model is produced. Siberian Ski is subject to a 40% income tax rate. If the Siberian Ski Company Sales Department could guarantee the annual sale of 12,000 pairs of either model, Siberian Ski would

Produce 12,000 pairs of mountaineering skis because they are more profitable.

The technique that reflects the time value of money and is calculated by dividing the present value of the future net after-tax cash inflows that have been discounted at the desired cost of capital by the initial cash outlay for the investment is called the

Profitability index method.

Fact Pattern: Mercken Industries is contemplating four projects, Project P, Project Q, Project R, and Project S. The capital costs and estimated after-tax net cash flows of each independent project are listed below. Mercken's desired after-tax opportunity cost is 12%, and the company has a capital budget for the year of $450,000. Idle funds cannot be reinvested at greater than 12%. Project P Project Q Project R Project S Initial cost $200,000 $235,000 $190,000 $210,000 Annual cash flows Year 1 $ 93,000 $ 90,000 $ 45,000 $ 40,000 Year 2 93,000 85,000 55,000 50,000 Year 3 93,000 75,000 65,000 60,000 Year 4 0 55,000 70,000 65,000 Year 5 0 50,000 75,000 75,000 Net present value $ 23,370 $ 29,827 $ 27,333 $ (7,854) Internal rate of return 18.7% 17.6% 17.2% 10.6% Excess present value index 1.12 1.13 1.14 0.96 If Mercken is able to accept only one project, the company would choose

Project Q because it has the highest net present value.

A corporation's Marketing Department recently accepted a rush order for a nonstock item from a valued customer. The Marketing Department filed the necessary paperwork with the Production Department, which complained greatly about the lack of time to do the job the right way. Nevertheless, the Production Department accepted the manufacturing commitment and filed the required paperwork with the Purchasing Department for the needed raw materials. A purchasing clerk temporarily misplaced the paperwork. By the time the paperwork was found, it was too late to order from the company's regular supplier. A new supplier was located, and that vendor quoted a very attractive price. The materials arrived and were rushed into production, bypassing the normal inspection processes (as directed by the Production Department supervisor) to make up for lost time. Unfortunately, the goods were of low quality and created considerable difficulty for the assembly-line personnel. Which of the following best indicates the responsibility for the materials usage variance in this situation?

Purchasing, Marketing, and Production.

A primary reason for a company to change from traditional costing to activity-based costing (ABC) is that ABC

Reduces product undercosting or overcosting.

A major difference between economic profit and accounting profit is that economic profit

Reduces profits by associated cost of capital.

Fact Pattern: Verla Industries is trying to decide which one of the following two options to pursue. Either option will take effect on January 1st of the next year. Option One -- Acquire a New Finishing Machine The cost of the machine is $1,000,000, and it will have a useful life of 5 years. Net pre-tax cash flows arising from savings in labor costs will amount to $100,000 per year for 5 years. Depreciation expense will be calculated using the straight-line method for both financial and tax reporting purposes. As an incentive to purchase, Verla will receive a trade-in allowance of $50,000 on its current fully depreciated finishing machine. Option Two -- Outsource the Finishing Work Verla can outsource the work to LM, Inc., at a cost of $200,000 per year for 5 years. If it outsources, Verla will scrap its current fully depreciated finishing machine. Verla's effective income tax rate is 40%. The weighted-average cost of capital is 10%. When comparing the two options, the $50,000 trade-in allowance would be considered

Relevant because it is a decrease in cash outflow.

A company's breakeven point in sales dollars may be affected by equal percentage increases in both selling price and variable cost per unit (assume all other factors are constant within the relevant range). The equal percentage changes in selling price and variable cost per unit will cause the breakeven point in sales dollars to

Remain unchanged.

A furniture company manufactures several steel products. It has three production departments: Fabricating, Assembly, and Finishing. The service departments include Maintenance, Material Handling, and Designing. Currently, the company does not allocate service department costs to the production departments. The new cost accountant believes that service department rates should be developed and charged to the production departments for services requested. If the company adopts this new policy, the production department managers would be least likely to

Request an excessive amount of service.

In the quest to develop a more achievable budget for the coming year, the chief executive officer has elected to develop the company's budget by using a decentralized bottom-up budget approach. A production manager's involvement in the budget process this year will probably

Require development of a production budget after receiving the division's projected sales forecast

The foundation of a profit plan is the

Sales forecast.

A company is determining the cost behavior of several items in order to budget for the upcoming year. Past trends have indicated the following dollars were spent at three different levels of output: Unit Levels 10,000 12,000 15,000 Cost A $25,000 $29,000 $35,000 Cost B 10,000 15,000 15,000 Cost C 15,000 18,000 22,500 In establishing a budget for 14,000 units, the company should treat Costs A, B, and C, respectively, as

Semivariable, fixed, and variable.

While an operating budget is a key element in planning and control, it is not likely to

Set out long-range, strategic concepts.

All of the following statements concerning standard costs are correct except that

Standard costs are usually stated in total, while budgeted costs are usually stated on a per-unit basis.

A difference between standard costs used for cost control and the budgeted costs of the same manufacturing effort can exist because

Standard costs represent what costs should be, whereas budgeted costs are expected actual costs.

A firm has intracompany service transfers from Division Core, a cost center, to Division Pro, a profit center. Under stable economic conditions, which of the following transfer prices is likely to be most conducive to evaluating whether both divisions have met their responsibilities?

Standard variable cost.

There are several methods for allocating service department costs to the production departments. The method that recognizes service provided by one service department to another but does not recognize reciprocal interdepartmental service is the

Step-down method.

Fact Pattern: Gleason Co. has two products, a frozen dessert and ready-to-bake breakfast rolls, ready for introduction. However, plant capacity is limited, and only one product can be introduced at present. Therefore, Gleason has conducted a market study at a cost of $26,000, to determine which product will be more profitable. The results of the study follow. Sales of Desserts at $1.80/unit Sales of Rolls at $1.20/unit Volume Probability Volume Probability 250,000 .30 200,000 .20 300,000 .40 250,000 .50 350,000 .20 300,000 .20 400,000 .10 350,000 .10 The costs associated with the two products have been estimated by Gleason's cost accounting department and are as follows: Dessert Rolls Ingredients per unit $ .40 $ .25 Direct labor per unit .35 .30 Variable overhead per unit .40 .20 Production tooling* 48,000 25,000 Advertising 30,000 20,000 *Gleason treats production tooling as a current operating expense rather than capitalizing it as a fixed asset. The cost incurred by Gleason for the market study is a(n)

Sunk cost.

One approach for developing standard costs incorporates communication, bargaining, and interaction among product line managers; the immediate supervisors for whom the standards are being developed; and the accountants and engineers before the standards are accepted by top management. This approach would best be characterized as a(n)

Team development approach.

A company produces a component that is popular in many refrigeration systems. Data on three of the five different models of this component are as follows: Model A B C Units of production 5,000 6,000 3,000 Manufacturing costs: Variable direct costs $10 $24 $20 Variable overhead 5 10 15 Fixed overhead 11 20 17 Total manufacturing costs $26 $54 $52 Cost if purchased $21 $42 $39 The company applies variable overhead on the basis of machine hours at the rate of $2.50 per hour. Models A and B are manufactured in the Freezer Department, which has a capacity of 28,000 machine processing hours. Which one of the following options should be recommended to the company's management?

The Freezer Department's manufacturing plan should include 5,000 units of Model A and 4,500 units of Model B.

Fact Pattern: A proposed investment is not expected to have any salvage value at the end of its 5-year life. Because of realistic depreciation practices, the net carrying amount and the salvage value are equal at the end of each year. For present value purposes, cash flows are assumed to occur at the end of each year. The company uses a 12% after-tax target rate of return. Year Purchase Cost and Carrying Amount Annual Net After-Tax Cash Flows Annual Net Income 0 $500,000 $ 0 $ 0 1 336,000 240,000 70,000 2 200,000 216,000 78,000 3 100,000 192,000 86,000 4 36,000 168,000 94,000 5 0 144,000 102,000 Discount Factors for a 12% Rate of Return Present Value of $1 at Present Value of an Annuity of Year the End of Each Period $1 at the End of Each Period 1 .89 .89 2 .80 1.69 3 .71 2.40 4 .64 3.04 5 .57 3.61 6 .51 4.12 Which statement about the internal rate of return of the investment is true?

The IRR is over 12%.

A company has a beginning cash balance of $10,000 and expects $40,000 in cash receipts for each of the next 2 months. Typically, disbursements total about $20,000 per month. The company's payables policy has been to pay the bills upon receipt to maintain good vendor relationships and take advantage of any discounts. In month 1, the company also expects a one-time $40,000 bill for a patent application. Based on this information, select the statement below that reflects the most appropriate action that the company should take relative to the company's cash position during the 2-month period.

The company should arrange a short-term line of credit large enough to cover the projected $10,000 shortfall during the first month.

A company has discovered that the cost of processing customer invoices is strictly variable within the relevant range. Which one of the following statements concerning the cost of processing customer invoices is incorrect?

The cost per unit for processing customer invoices will decline as the volume of customer invoices increases.

A company needs special gears. The machinery to make the gears can be rented for $100,000 for 1 year, but the company can buy the gears and avoid the rental cost. Because the demand for the gears may be high (0.6 probability) or low (0.4 probability) and contribution margins vary, the company prepared the following decision tree: IMAGE Which of the following statements is true?

The expected value of buying is $70,000.

Generally, individual departmental rates rather than a plantwide rate for applying manufacturing overhead are used if

The manufactured products differ in the resources consumed from the individual departments in the plant.

The definition of economic cost is

The sum of all explicit and implicit costs of the business firm.

The term "prime costs" refers to

The sum of raw material costs and direct labor costs.

A company has found that its total electricity cost has both a fixed component and a variable component within the relevant range. The variable component seems to vary directly with the number of units produced. Which one of the following statements concerning electricity cost is incorrect?

The total electricity cost per unit of production will increase as production volume increases.

An assembly plant accumulates its variable and fixed manufacturing overhead costs in a single cost pool, which is then applied to work in process using a single application base. The assembly plant management wants to estimate the magnitude of the total manufacturing overhead costs for different volume levels of the application activity base using a flexible budget formula. If there is an increase in the application activity base that is within the relevant range of activity for the assembly plant, which one of the following relationships regarding variable and fixed costs is true?

The variable cost per unit and the total fixed costs remain constant.

Which one of the following items would most likely cause the planning and budgeting system to fail? The lack of

Top management support.

Positive operating income is shown on a cost-volume-profit chart when the

Total sales revenue line exceeds the total expense line.

Which of the following pricing policies involves the selling company setting freight charges to customers at the actual average freight cost?

Uniform delivered pricing.

The change in period-to-period operating income when using variable costing can be explained by the change in the

Unit sales level multiplied by a constant unit contribution margin.

The most important criterion in accurate cost allocations is

Using homogeneous cost pools.

An entity provides the following summary of its total budgeted production costs at three production levels: Volume in Units 1,000 1,500 2,000 Cost A $1,420 $2,130 $2,840 Cost B 1,550 2,200 2,900 Cost C 1,000 1,000 1,000 Cost D 1,630 2,445 3,260 The cost behavior of each of the Costs A through D, respectively, is

Variable, semivariable, fixed, and variable.

Multiple or departmental overhead rates are considered preferable to a single or plantwide overhead rate when

Various products are manufactured that do not pass through the same departments or use the same manufacturing techniques.

The allocation of costs to particular cost objects allows a firm to analyze all of the following except

Why the sales of a particular product have increased.

During the production of its single product, a company discovers that an unusual overnight power failure ruined an entire day's in-process production. How should the cost of these spoiled units be charged?

Written off as a loss.

A company currently sells 46,000 units of its product annually at a sales price of $38 per unit. Variable costs per unit total $21 and the total fixed costs each year are $749,000. Fixed costs include the annual salary of three sales staff, which is $55,000 each. Management is considering changing the sales staff's compensation. Under this proposal, sales staff salaries would decrease to $25,000, but sales staff would also receive a commission of $2 per unit for each unit sold. Management estimates this option will increase sales 10%. Should management change to the commission-based plan, and why?

Yes, because it will increase operating income by $67,000.

An entity has just developed a new product with a manufacturing cost of $30. The Marketing Director has identified three marketing approaches for this new product. Approach X Set a selling price of $36 and have the firm's sales staff sell the product at a 10% commission with no advertising program. Estimated annual sales would be 10,000 units. Approach Y Set a selling price of $38, have the firm's sales staff sell the product at a 10% commission, and back them up with a $30,000 advertising program. Estimated annual sales would be 12,000 units. Approach Z Rely on wholesalers to handle the product. The entity would sell the new product to the wholesalers at $32 per unit and incur no selling expenses. Estimated annual sales would be 14,000 units. Rank the three alternatives in order of net profit, from highest net profit to lowest.

Z, X, Y.

A budgeting approach that requires a manager to justify the entire budget for each budget period is known as

Zero-based budgeting.

A home building company offers its customers the choice of 1 of 12 home designs on lots located in several developing areas. During its 15-year existence, the company created its annual budget by adjusting the prior year's actual results for changes in inflation as well as in projected volume. During this time, the company's profit margins have been among the lowest of all of the local home builders. Ownership of the company recently changed. New management believes there has been significant unnecessary spending in many areas of the company, although they do not know exactly where or to what extent overspending occurred. To improve profitability, the type of budgeting system the company's new management should implement is

Zero-based budgeting.

The board of directors is concerned that the budget committee has fallen into the practice of applying a flat 3% growth to the prior year performance, placing too much emphasis on the past and not focusing on the future opportunities and related activities required to achieve them. The board would like the committee to take a different approach: Evaluate the activities needed to meet the strategic goals of the company and allocate resources accordingly, requiring management to justify each function and associated costs. Which budget methodology is the board recommending?

Zero-based budgeting.