Mod. 5-8

A plan that formalizes the overall goals and objectives of a company in financial terms is called a

master budget

Which of the following is normally present in an allocation decision?

All of the choices represent issues that are commonly found in allocation decision. political influence human emotion differences of opinion

Budgeted sales for the month of April are shown in the following table: SalesAprilMayJuneCash Sales$ 500 Sales on Account$ 800 The company expects a 25% increase in sales per month for May and June. Also, the company expects to collect cash from receivables in the month following the month in which the receivables are established. The amount of accounts receivable appearing on the pro forma balance sheet would be

$1,250.00 Sales April May June TotalCash Sales$ 500 625781.25 1,906.25 Sales on Account 800 1,000 1,250.00 3,050.00 Total $ 4,956.25

Budgeted sales for the month of April are shown in the following table: SalesAprilMayJuneCash Sales$ 500 Sales on Account$ 800 The company expects a 25% increase in sales per month for May and June. Also, the company expects to collect cash from receivables in the month following the month in which the receivables are established. The total amount of cash collected in May would be

$1,425.00. Cash collections would include the $625 of cash sales for May plus the $800 cash from the collection of the accounts receivable that were established in April. Therefore, total cash collected in May is $1,425 ($625 + $800).

Harcourt Manufacturing (HM) has the capacity to produce 10,000 fax machines per year. HM currently produces and sells 7,000 units per year. The fax machines normally sell for $100 each. Modem Products has offered to buy 2,000 fax machines from HM for $60 each. Unit-level costs associated with manufacturing the fax machines are $15 each for direct labor and $40 each for direct materials. Product-level and facility-level costs are $50,000 and $65,000, respectively. How much would profit increase (decrease) if HM accepted this special order?

$10,000

Tom's Toolery is operating at 80% of its productive capacity. It is currently paying $20 per unit for a part used in its manufacturing operation. Tom's estimates it could make the part internally for a total cost of $24 per unit, consisting of $18 of unit-level production costs and $6 of facility-level costs that are currently attributed to other products. Tom's usually purchases 50,000 units of the part each year. These units could be manufactured using Tom's excess capacity. What is the effect on cost if the company decides to start making the part?

$100,000 cost decrease Explanation Cost to purchase$ 20 Relevant cost to make* 18 Decrease in cost per unit$ 2 *The facility-level costs are incurred regardless of whether the part is purchased or made. Since these costs cannot be avoided by selecting one alternative over the other, they are not relevant to the decision. 50,000 units × $2 savings = $100,000 total cost decrease.

Information need to prepare the cash budget is drawn from which of the following budgets?

All of the answers describe budgets that contain information need to prepare the cash budget. Sales budget. Inventory purchases budget. Selling and administrative expense budget.

Budgeted sales for the month of April are shown in the following table: Sales April May June Cash Sales$ 500 Sales on Account$ 800 The company expects a 25% increase in sales per month for May and June. The amount of sales revenues that would appear on the company's 2nd quarter pro forma income statement would be

$4,956.25. Budgeted sales are as follows: Sales April May June Total Cash Sales$ 500 625 781.25 1,906.25 Sales on Account 800 1,000 1,250.00 3,050.00 Total $ 4,956.25

Star Company projected unit credit sales for the last four months of the year as shown below: September3,000 October3,200 November4,100 December5,600 The company's past records show collection of credit sales as 60% in the month of sale and the balance in the following month. If inventory units are sold for $25, the total cash collections on receivables in November will be

$93,500. October3,200 units × 0.4 =1,280units November4,100 units × 0.6 =2,460units Total 3,740units× $ 25 = $93,500

Which of the following statements is true regarding potential qualitative issues affecting outsourcing decisions?

All of the answers describe potential qualitative factors associated with outsourcing decisions. Outsourcing reduces a manufacturer's vertical integration. Low balling refers to the practice of offering lower prices initially and then raising prices when the buyer becomes dependent. Outsourcing can cause morale issues for the employees who are not directly affected by the practice.

The Silver Center (TSC) produces cups and platters. TSC purchases silver and other metals that are processed into silver alloy that is used to make platters and cups. TSC incurred $40,000 of materials cost and $44,000 of labor cost to produce the silver alloy. Platters are made first and the residual alloy is remixed into a lower grade silver plated material that is used to make the cups. Remixing costs amount to $2,000. The recent batch contained 4,000 platters and 1,000 cups. TSC sold the platters for $100,000 and the cups for $12,000. If relative market value is used to allocate the joint cost, what is the income earned for cups?

1,000 Cost to be allocated ÷ Allocation base = Allocation rate ($40,000 + $44,000) ÷ ($100,000 platters + $12,000 cups) = $0.75 per sales dollar Allocation rate × Weight of the base = amount to allocate $0.75 × $100,000 = $75,000 to platters $0.75 × $12,000 units = $9,000 to cups Platters Cups Sales $ 100,000 $ 12,000 Allocated joint cost (75,000) (9,000) Further processing cost 0 (2,000) Income $ 25,000 $ 1,000

Overhead expenses are budgeted at $2,000 per month. Included in the $2,000 are $500 of monthly depreciation expense and $200 of allocated expenses related to the insurance premium that is paid in September. What is the cash outflow for overhead for the month of May?

1,300 Monthly Payment$ 2,000 Total overhead expense Less: Depreciation(500)Noncash expense Less: Insurance(200)Noncash expense Cash Outflow$ 1,300

The following information was drawn from the accounting records of Marlin Manufacturing Company. Direct Material Cost $25,000 $30,000 $35,000 Direct Labor Cost $30,000 $40,000 $50,000 Direct Labor Hours 1,200hours 1,800hours 2,000hours Factory overhead is estimated to be $30,000 and is applied on a basis of direct labor dollars. This overhead cost is not traceable to any particular product. Factory overhead allocated to Product 2 is

10,000 Allocation Base = $30,000 + $40,000 + $50,000 = $120,000 Total Direct Labor Cost Allocation Rate = $30,000 Overhead Cost ÷ $120,000 Total Direct Labor Cost = $0.25 Per Direct Labor Dollar Allocation Amount = $0.25 × $40,000 Direct Labor Dollars in Product 2 = $10,000 to be Allocated to Product 2

The following budget information is available for the HD Sales Company (HDC) for January: Sales$ 320,000 Freight out$ 0.25per unit sold Depreciation on Administrative Equipment$ 10,000 Sales & Administrative Salaries$ 40,000+ 2% of sales Advertising$ 12,000 Depreciation on Manufacturing Equipment$ 15,000 Lease on Sales Building$ 45,000 Miscellaneous Selling Expenses$ 5,000 Based on January sales of 20,000, the amount of HD's expected cash outflow for selling and administrative expenses would be

113,400 Total selling and administrative expenses are as follows: Freight-out (20,000 units × 0.25)$ 5,000 Depreciation on Administrative Equipment 10,000 Sales and Administrative Salaries ($40,000 + (0.02 × $320,000))46,400 Advertising 12,000 Lease 45,000 Miscellaneous 5,000 Total$ 123,400 Since the depreciation on the administrative equipment is an expense that does not require cash, the amount of cash outflow is $113,400 (total $123,400 - $10,000 Depreciation).

The following budget information is available for the HD Sales Company (HDC) for January: Sales$ 320,000 Freight out$ 0.25per unit sold Depreciation on Administrative Equipment$ 10,000 Sales & Administrative Salaries$ 40,000+ 2% of sales Advertising$ 12,000 Depreciation on Manufacturing Equipment$ 15,000 Lease on Sales Building$ 45,000 Miscellaneous Selling Expenses$ 5,000 All operating expenses are paid in cash in the month incurred. If HDC expects to sell 20,000 units of inventory, the total budgeted selling and administrative expenses would be what amount on the January pro forma income statement?

123,400 Freight-out (20,000 units × 0.25)$ 5,000 Depreciation on Administrative Equipment 10,000 Sales and Administrative Salaries ($40,000 + (0.02 × $320,000)) 46,400 Advertising 12,000 Lease 45,000 Miscellaneous 5,000 Total$ 123,400 Depreciation on manufacturing equipment is a product cost and therefore is not included in the selling and administrative expense section of the income statement.

The Science Institute has three departments: Biology, Chemistry, and Physics. The institute's controller wants to estimate the cost of operating each department. He has identified several indirect costs that must be allocated to each department including $42,000 of indirect salaries, $4,000 of office supplies, and $36,000 of office rent. There are 500 students in the biology department, 200 in chemistry and 300 in physics (1,000 total students as the allocation base). The amount of cost that should be allocated to the Chemistry Department is

16,400 Cost to be allocated = $42,000 + $4,000 + $36,000 = $82,000 Allocation base = 500 + 300 + 200 = 1,000 total students Allocation rate = Cost to be allocated ÷ Allocation base = $82,000 ÷ 1,000 = $82 per student Allocation to Chemistry Department = $82 per student × 200 = $16,400

A condensed income statement for Gilbert, Incorporated follows: Gilbert's management is considering whether to eliminate manufacturing product G at the beginning of the next year. The elimination will have no effect on the sales or unit-level costs of products F and H. The change in income that would result from eliminating product G is

20,000 decrease Product G is currently contributing $20,000 to profitability ($180,000 Revenue − $160,000 avoidable cost). The facility-level costs are not avoidable regardless of whether Product G is eliminated. If the Product G is eliminated, company-wide profitability will decrease by $20,000.

The following information is drawn from Royal Industries' cash budget: Cash Receipts$ 40,000 Beginning Cash Balance$ 10,000 Cash Payments$ 48,000 Desired Ending Cash Cushion$ 5,000 If there is a cash shortage, the company borrows money. If a surplus occurs funds are used to repay loans or to invest in short-term assets. The company had no debt before January 1st. The amount "needed" to borrow or the amount "available" for repayment of debt in January would be

30,000 needed The expected ending cash balance is computed as follows: Beginning Cash Balance$ 10,000 Cash Receipts 40,000 Cash Available 50,000 Cash Payments(48,000) Expected Ending Cash Balance$ 2,000 To achieve the desired ending balance of $5,000 the Company needs to borrow $3,000.

Budgets are used

All of the answers describe ways budgets are used in business organizations. as a tool in performance evaluation. to plan the future activities of a business. to communicate information across an organization.

Royal Industries has budgeted the following information for January: Cash Receipts$ 40,000 Beginning Cash Balance$ 10,000 Cash Payments$ 48,000 Desired Ending Cash Cushion$ 5,000 If there is a cash shortage, the company borrows money. If a surplus occurs funds are used to repay loans or to invest in short-term assets. All borrowing, repayments, and interest payments occur on the last day of the month. The interest rate is 1% per month. The company had no debt before January 1st. The amount of interest paid in February would be

30.00 The expected ending cash balance is computed as follows: Beginning Cash Balance$ 10,000 Cash Receipts40,000 Cash Available50,000 Cash Payments(48,000) Expected Ending Cash Balance$ 2,000 To achieve the desired ending balance of $5,000 the Company needs to borrow $3,000. The $3,000 would be borrowed on the last day of January and would remain outstanding for the month of February. Therefore, the Company would incur $30 ($3,000 × 0.01) of interest during February.

The Silver Center (TSC) produces cups and platters. TSC purchases silver and other metals that are processed into silver alloy that is used to make platters and cups. TSC incurred $40,000 of materials cost and $44,000 of labor cost to produce the silver alloy. Platters are made first and the residual alloy is remixed into a lower grade silver plated material that is used to make the cups. Remixing costs amount to $2,000. The recent batch contained 4,000 platters and 1,000 cups. TSC sold the platters for $100,000 and the cups for $12,000. If number of units is used to allocate the joint cost, what is the income earned for platters?

32,800 Cost to be allocated ÷ Allocation base = Allocation rate ($40,000 + $44,000) ÷ (4,000 platters + 1,000 cups) = $16.80 per unit Allocation rate × Weight of the base = amount to allocate $16.80 × 4,000 units = $67,200 to platters $16.80 × 1,000 units = $16,800 to cups Sales $ 100,000 $ 12,000 Allocated joint cost (67,200) (16,800) Further processing cost 0 (2,000) Income$ 32,800$ (6,800)

Based on the segment income statement below, Chips, Incorporated is considering eliminating its Barbecue Division line. Revenue from Barbecue Division sales$ 500,000 Salaries for Barbecue Division workers(100,000) Direct material(300,000) Sunk costs (equipment depreciation)(75,000) Allocated company-wide facility-sustaining costs(50,000) Net loss$ (25,000) If the Division is eliminated, what is the total amount of avoidable cost?

400,000 If the Division is eliminated Chips, Incorporated could avoid paying for the salaries and direct materials incurred to make the barbecue chips. The sunk cost and the facility-level cost cannot be avoided regardless of whether the Division is eliminated. Total avoidable cost is $400,000 ($100,000 salaries + $300,000 materials).

Metro, Incorporated sells backpacks. The Company's accountant is preparing the purchases budget for the first quarter operations. Metro maintains ending inventory at 20% of the following month's expected cost of goods sold. Expected cost of goods sold for April is $70,000. All purchases are made on account with 25% of accounts paid in the month of purchase and the remaining 75% paid in the month following the month of purchase. Sales January February March Budgeted cost of goods sold$ 40,000 $ 50,000 $ 60,000 Plus: Desired ending inventory 10,000 Inventory needed= 50,000 Less: Beginning inventory: (8,000) Required purchases $ 42,000 Based on this information the amount of accounts payable appearing on the March 31 pro forma balance sheet is

46,500 Jan: 40,000+ 10,000= 50,000 - 8000 = 42,000 Feb: 50,000+ 12,000= 62,000- 10,000= 52,000 March: 60,000+ 14,000= 74,000 - 12,000= 62,000 Based on the payment schedule described in the problem, 25% of accounts payable generated in March is paid in March with the remaining 75% to be paid in April. It is the remaining 75% ($62,000 × 0.75 = $46,500) that will be shown as accounts payable on the March 31 pro forma balance sheet.

Cash receipts for January are expected to total $171,000. Cash disbursements for January are expected to be $158,000. The company's minimum desired cash balance is $10,000. It started the period with $35,000. What is the expected cash balance at the end of January?

48,000 Beginning Cash Balance$ 35,000 Cash Receipts 171,000 Cash Available 206,000 Cash Payments(158,000) Ending Cash Balance$ 48,000

Metro, Incorporated sells backpacks. The Company's accountant is preparing the purchases budget for the first quarter operations. Metro maintains ending inventory at 20% of the following month's expected cost of goods sold. Expected cost of goods sold for April is $70,000. Sales January February March Budgeted cost of goods sold$ 40,000 $ 50,000 $ 60,000 Plus: Desired ending inventory 10,000 Inventory needed= 50,000 Less: Beginning inventory: (8,000) Required purchases $ 42,000 Based on this information the total amount of expected purchases for February is

52,000 Jan: 40,000+ 10,000= 50,000 - 8000 = 42,000 Feb: 50,000+ 12,000= 62,000- 10,000= 52,000 March: 60,000+ 14,000= 74,000 - 12,000= 62,000

A sales budget has been prepared for April. Management wants the amount of ending inventory each month to be equal to 10% of that month's cost of goods sold. Cost of goods sold for April is projected at $60,000. Ending inventory at the end of March is expected to be $12,000. Based on this information, what would the amount of purchases be for April?

54,000 Cost of Goods Sold: 60,000 Ending Inventory: 6,000 Inventory Needed: 66,000 Beginning Inventory: (12,000) Required Purchases= 54,000

Saylind Molding paid $280,000 in rent for the year. The company's three departments are Headrests, Armrests, and Floor Mats. The accountant has identified two possible cost drivers: the number of employees in each department, and the square footage of space occupied by each department. The number of employees working in each department includes 60 in the Headrests Department, 30 in the Armrests Department and 110 in Floor Mats Department. The departments occupy 5,000, 6,300, and 2,700 square feet, for Headrests, Armrests, and Floor Mats respectively. How much of the rent cost should be allocated to the products made in the Floor Mats department?

54,000 The most appropriate cost driver in this case is the number of square feet occupied by each department. In other words, rental fees are normally based on the size of the space rather than the number of people who work in the department. Therefore, the size of the space (square footage) drives the rental fee. $280,000 ÷ 14,000 square feet = $20 per square foot $20 × 2,700 square feet = $54,000

Metro, Incorporated sells backpacks. The Company's accountant is preparing the purchases budget for the first quarter operations. Metro maintains ending inventory at 20% of the following month's expected cost of goods sold. Expected cost of goods sold for April is $70,000. All purchases are made on account with 25% of accounts paid in the month of purchase and the remaining 75% paid in the month following the month of purchase. Sales January February March Budgeted cost of goods sold$ 40,000 $ 50,000 $ 60,000 Plus: Desired ending inventory 10,000 Inventory needed= 50,000 Less: Beginning inventory: (8,000) Required purchases $ 42,000 Based on this information the total cash paid in March to settle accounts payable is

54,500 Jan: 40,000+ 10,000= 50,000 - 8000 = 42,000 Feb: 50,000+ 12,000= 62,000- 10,000= 52,000 March: 60,000+ 14,000= 74,000 - 12,000= 62,000 Based on the payment schedule described in the problem, the cash paid in March is equal to 75% percent of February's purchases ($52,000 × 0.75 = $39,000) plus 25% of March ($62,000 × 0.25 = $15,500). Total cash paid in March is $54,500 ($39,000 + $15,500).

Logan Corporation has 30 employees, 10 in "A-line," and 20 in "B-line." Logan incurred $180,000 in fringe benefits costs last year. How much in fringe benefit costs should be allocated to "A-line"?

60,000 Cost to be allocated ÷ Allocation Base = Allocation rate × Weight of base = Amount to Allocate $180,000 fringe benefits cost ÷ 30 employees = $6,000 per employee × 10 employees = $60,000

Jason Company is considering replacing equipment which originally cost $600,000. New equipment costs $500,000 and the old equipment can be sold for $400,000. What is the sunk cost in this situation?

600,000 The original cost of the old equipment is the result of a historical event that cannot be changed by current or future action. In other words, you cannot change the past. Therefore the original cost of old equipment is a sunk cost that is not relevant to current or future decisions.

The following information was drawn from the accounting records of Marlin Manufacturing Company. Direct Material Cost $25,000 $30,000 $35,000 Direct Labor Cost $30,000 $40,000 $50,000 Direct Labor Hours 1,200hours 1,800hours 2,000hours Factory overhead is estimated to be $30,000 and is applied on a basis of direct labor dollars. This overhead cost is not traceable to any particular product. The total cost of Product 1 is

62, 500 Allocation Base = $30,000 + $40,000 + $50,000 = $120,000 Total Direct Labor Cost Allocation Rate = $30,000 Overhead Cost ÷ $120,000 Total Direct Labor Cost = $0.25 Per Direct Labor Dollar Materials$ 25,000Labor30,000Overhead ($30,000 Labor Dollars × $0.25 allocation Rate)7,500Total Cost of Product 1$ 62,500

The Silver Center (TSC) produces cups and platters. TSC purchases silver and other metals that are processed into silver alloy that is used to make platters and cups. TSC incurred $40,000 of materials cost and $44,000 of labor cost to produce the silver alloy. Platters are made first and the residual alloy is remixed into a lower grade silver plated material that is used to make the cups. Remixing costs amount to $2,000. The recent batch contained 4,000 platters and 1,000 cups. TSC sold the platters for $100,000 and the cups for $12,000. Based on this information the total amount of joint cost is

84,000 Joint costs are the costs incurred before the split-off point. In this case, these costs amount to $84,000 ($40,000 materials cost + $44,000 processing cost). The $2,000 remixing costs occurs after the split-off point and therefore is not a joint cost. Indeed, it is a cost of further processing that is incurred solely for the purpose of making the cups.

The beginning inventory is expected to be 2,000 cases. Expected sales are 10,000 cases, and the company wishes to begin the next period with an inventory of 1,000 cases. The number of cases the company must purchase during the month is

9,000 cases. Expected sales: 10,000 Ending Inventory: 1,000 Inventory Needed: 11,000 Beginning Inventory: (2,000) Required Purchases= 9,000

To identify the best cost driver for a particular allocation consideration should be given to

All of the choices identify factor that affect the selection of the allocation base. the strength of a cause and effect relationship. the availability of information. the capacity to control the allocation base.

The allocation process requires answers to which of the following questions?

Allocation requires answers to all three questions. What is the amount of the cost to be allocated? Where is the cost going to be allocated? How will the allocation be made?

Of the following statements, which is NOT true concerning indirect costs?

An indirect cost may be fixed but cannot be variable.

U-RIDE, Incorporated currently produces the electric engines that are used in golf carts made and sold by the Company. Electco has offered to sell the electric engines to U-RIDE at a price of $200 each. Current production information follows: Unit-level material and labor$ 175 Facility-level depreciation of manufacturing equipment$ 5,000/month Product-level engine production supervisor's salary$ 2,000/month Annual facility-level utilities$ 15,000 U-RIDE is currently operating profitably producing and selling 2,000 engines a year using 90% of its manufacturing capacity. Which of the following is true?

Buying the units would increase U-RIDE's cost by $13 per unit. Relevant Cost to Make: *Unit-level material cost$ 175 Product-level Cost [($2,000 × 12 months) ÷ 2,000 engines]12 Total$ 187 *The depreciation is a sunk cost that is not relevant. The facility-level utility cost will be incurred regardless of whether the motors are made or outsourced and are therefore, not relevant. If URIDE outsources the engines the company will incur additional cost of $13 per unit ($200 to buy - $187 to make).

Which of the following formulas is used to determine the amount of inventory that must be purchased in order to satisfy a company's budgeted sales?

Ending inventory + Cost of goods sold = Amount of inventory needed − Beginning Inventory

Harcourt Manufacturing (HM) has the capacity to produce 10,000 fax machines per year. HM currently produces and sells 7,000 units per year. HM currently leases its excess capacity for a rental fee of $12,000. The fax machines normally sell for $100 each. Modem Products has offered to buy 2,000 fax machines from HM for $60 each. Unit-level costs associated with manufacturing the fax machines are $15 each for direct labor and $40 each for direct materials. Product-level and facility-level costs are $50,000 and $65,000, respectively. Based on this information (ignore qualitative characteristics)

HM should reject the offer because accepting it will reduce profitability by $2,000. Accepting the special offer will decrease profitability as shown below: Revenue (2,000 × $60)$ 120,000 Unit-Level Costs (2,000 × ($15 + $40))(110,000) Opportunity cost (rental fee)(12,000) Reduction in Profit$ (2,000)

Royal Industries has budgeted the following information for January: Cash Receipts$ 40,000 Beginning Cash Balance$ 10,000 Cash Payments$ 48,000 Desired Ending Cash Cushion$ 5,000 If there is a cash shortage, the company borrows money. If a surplus occurs funds are used to repay loans or to invest in short-term assets. All borrowing, repayments, and interest payments occur on the last day of the month. The interest rate is 1% per month. The company had no debt before January 1. The amount of interest expense incurred for January is:

None of these answers are correct The expected ending cash balance is computed as follows: Beginning Cash Balance$ 10,000 Cash Receipts40,000 Cash Available50,000 Cash Payments(48,000) Expected Ending Cash Balance$ 2,000 To achieve the desired ending balance of $5,000 the Company needs to borrow $3,000. However, the $3,000 would be borrowed on the last day of the month. Therefore the Company had zero debt during the month of January and the amount of interest expense for January would also be zero.

Which of the following is not normally included in a master budget?

Performance Budget

Women's Medical Center (WMC) divides its business into two departments including pediatrics (PD) and gynecology (GY). WMC has $90,000 of raise money that will be used to increase employee salaries. The Center has identified the following cost drivers that could be used to allocate the raise money to the two departments. Physicians' salaries$ 400,000$ 500,000 Number of patients 600 400 Nurses' salaries$ 120,000$ 110,000 Based on this information the supervisor of the gynecology department would be expected to advocate the use of which of the following allocation bases?

Physicians' salaries.

Which of the following describes the normal sequence followed in preparing a master budget?

Sales budget → Inventory purchases budget → Selling and administrative expense budget → Cash budget

Which of the following items would not be relevant to an asset replacement decision?

The book value of the asset being replaced. The book value is the original cost of the asset minus accumulated depreciation. These are historical facts that cannot be changed by present or future events. In other words, the book value of the old asset is a sunk cost that is not relevant to the decision.

U-RIDE, Incorporated currently produces the electric engines that are used in golf carts made and sold by the Company. Electco has offered to sell the electric engines to U-RIDE at a price of $200 each. Current production information follows: Unit-level material and labor$ 175 Facility-level depreciation of manufacturing equipment$ 5,000/month Product-level engine production supervisor's salary$ 2,000/month Annual facility-level utilities$ 15,000 Buying the engines will free up manufacturing capacity that could be used to make a new economy line golf cart that would produce an additional $36,000 profit per year. U-RIDE is currently operating profitably producing and selling 2,000 engines annually. Based on this information, which of the following is true?

The cost of buying the engines is $5 per unit less than the relevant cost of making the units. Relevant Cost to Make: *Unit-level material cost$ 175 Product-level Cost [($2,000 × 12 months) ÷ 2,000 engines]12 Opportunity Cost ($36,000 ÷ 2,000 engines)18 Total$ 205 *The depreciation is a sunk cost that is not relevant. The facility-level utility cost will be incurred regardless of whether the motors are made or outsourced and are therefore, not relevant. If U-RIDE continues to make the engines, the Company loses the opportunity to develop the new line of economy carts and therefore incurs a $36,000 annual opportunity cost. Under these circumstances it is $5 cheaper to buy the engines than it is to make them ($200 purchase price versus $205 relevant cost to make).

Which of the following is least likely to be classified as a unit-level cost?

The cost of plant security.

Which of the following is a facility-level cost?

The cost of the salary for the company president.

Harcourt Manufacturing (HM) has the capacity to produce 10,000 fax machines per year. HM currently produces and sells 7,000 units per year. The fax machines normally sell for $100 each. Modem Products has offered to buy 2,000 fax machines from HM for $60 each. Unit-level costs associated with manufacturing the fax machines are $15 each for direct labor and $40 each for direct materials. Product-level and facility-sustaining costs are $50,000 and $65,000, respectively. Should HM accept the special order?

Yes, but only if qualitative factors are favorable. Accepting the special offer will increase profitability as shown below: Revenue (2,000 × $60)$ 120,000 Unit-Level Costs (2,000 × ($15 + $40)) (110,000) Contribution to Profit$ 10,000 However, qualitative characteristics may be even more important than quantitative ones. If HM's regular customers learn the company sold machines to another buyer at $60 per unit, they may demand reduced prices on future purchases or may be so offended that they withdraw their business entirely. To be accepted a special order decision must provide both favorable quantitative and qualitative results.

Krauss Company purchased a construction crane three years ago for $180,000. The crane has a current book value of $100,000 and operating expenses excluding depreciation of $12,000 per year. The current market value of this crane is $85,000. If the old crane is kept five more years, its salvage value would be $10,000. A new crane would cost $70,000, have a useful life of five years, and would require $13,000 per year in operating expenses excluding depreciation. The new crane has a salvage value of $20,000 after five years. Based on this information, Krauss should

acquire the new crane because it has the lower relevant cost. As shown in the following table the relevant cost of acquiring and operating the new crane is lower than the cost of retaining and operating the old crane. Therefore Krauss should acquire the new crane. Old Crane Opportunity Cost of holding old Crane ($85,000 Market − $10,000 Salvage)$ 75,000 Operating Expenses ($12,000 × 5)60,000 Total cost$ 135,000 New Crane Cost of the new Crane ($70,000 − $20,000)$ 50,000 Operating Expenses ($13,000 × 5)65,000 Total cost$ 115,000

A company should accept a special order if

additional revenue is greater than relevant costs.

The process of assigning costs to two or more cost objects requires

all of the above. cost tracing. cost allocation. cost/benefit analysis.

The process of dividing a total cost into parts, and assigning the parts among relevant cost objects is called

allocation

A segment elimination decision involves a comparison between revenue that will be lost through the elimination and the

avoidable cost of operating the segment.

The general, selling and administrative expense budget is normally prepared

before the cash budget

joint cost occur

before the split-off point.

To be relevant, information must

both of the answers are characteristics of relevant information. differ among the alternatives. affect present or future conditions.

Which of the following items would not appear in a selling and administrative expense budget?

cost of goods sold

Based on the segment income statement below, Chips, Incorporated is considering eliminating its Barbecue Division line. If Barbecue Division were eliminated, profitability would

decrease $100,000. As shown below, the Barbecue Division is currently contributing $100,000 to the profitability of the company. Revenue from Barbecue Division sales$ 500,000 Avoidable Cost: Salaries for Barbecue Division workers(100,000) Direct material(300,000) Contribution to profit$ 100,000 If the division is eliminated, Chips will lose this contribution to profit and the company wide profitability will decrease by $100,000.

Costs that can be traced to objects in a cost-effective manner are called

direct costs.

Pro forma statements are based on

estimates and predictions.

Allocation is a mathematical procedure that cannot be manipulated by the parties involved in making the allocation. This statement is

false

Direct costs and variable costs are synonymous terms. This statement is

false

Since a company must know how much inventory is on hand before it can determine how many items must be purchased, the inventory purchases budget is normally the starting point in the process of preparing a master budget. This statement is

false

strategic planning focuses on

long-range decisions

When resolving disputes over allocations, senior management should focus on

mission of the organization.

Which of the following is the most logical cost driver for allocating the telephone bill among four departments?

number of telephones

Hector, Incorporated currently makes and sells approximately 5,000 shovels per year. Hector has an offer to buy the shovels it currently makes at a price that is below its cost of making them. Based on this information Hector is faced with a(n)

outsourcing decision

Hamilton Company is considering replacing old equipment with new equipment. Both pieces of equipment are expected to have a remaining useful life of 4 years. The total cost of operating each piece of equipment over its four year life is summarized below. Based on this information, Hamilton should

retain the existing equipment because it has lower relevant cost. Old Equipment Current market value$ 60,000 Current expected salvage value (5,000) Other operating expenses 80,000 Total cost$ 135,000 New Equipment Purchase price$ 70,000 Expected salvage value(12,000) Other operating expenses 84,000 Total cost$ 142,000

Interrelated sales transactions (sales of one product affects the sales of another product) is a qualitative characteristic most commonly examined in a

segment elimination decision.

The Lamp Company (TLC) currently makes and sells approximately 5,000 lamps per year. TLC recently received an offer from a new customer to purchase 500 lamps. TLC has the capacity to make the additional lamps but is reluctant to accept the offer because the price offered is significantly below the normal selling price. Based on this information TLC if faced with a(n)

special order decision.

Which of the following are not relevant to decision making?

sunk cost

Steel City Company (SCC) paid $120,000 to purchase land that it planned to use as a future building site. A short time later the Company was approached with an opportunity to purchase a better property. The new property cost $125,000. After considering the alternative SCC decided to reject the offer because the Company would be required to sell the original site for $119,000 thereby incurring a $1,000 loss on the disposal of the land ($120,000 − $119,000).Based on this information

the $119,000 current market value of original site is relevant to the decision.

The Silver Center (TSC) produces cups and platters. TSC purchases silver and other metals that are processed into silver alloy that is used to make platters and cups. TSC incurred $40,000 of materials cost and $44,000 of labor cost to produce the silver alloy. Platters are made first and the residual alloy is remixed into a lower grade silver plated material that is used to make the cups. Remixing costs amount to $2,000. The recent batch contained 4,000 platters and 1,000 cups. TSC sold the platters for $100,000 and the cups for $12,000. Assume number of units is used as the base to allocate the joint cost. Based on this information

the Company's total income will decrease by $10,000 if it stops making and selling cups. Cost to be allocated ÷ Allocation base = Allocation rate ($40,000 + $44,000) ÷ (4,000 platters + 1,000 cups) = $16.80 per unit Allocation rate × Weight of the base = amount to allocate $16.80 × 4,000 units = $67,200 to platters $16.80 × 1,000 units = $16,800 to cups Platters Cups Sales $ 100,000 $ 12,000 Allocated joint cost (67,200) (16,800) Further processing cost 0 (2,000) Income $ 32,800$ (6,800) If the Company stops making and selling cups, it will lose the $12,000 of revenue. However, it will not have to pay the $2,000 cost to further process the alloy in order to make the cups. As a result the Company's net income will decrease by $10,000 if it stops making and selling cups. As proof, the total joint cost will be incurred even if the Company stops making and selling cups. If the company stops making cups, its income statement would be as follows. Platters Sales$ 100,000 Allocated joint cost(84,000) Income$ 16,000 Total income with cups $32,800 − $6,800 = $26,000 Total income without cups = $16,000 Net decrease in income $26,000 − $16,000 = $10,000 decrease

The Science Institute has three departments: Biology, Chemistry, and Physics. The institute's controller wants to estimate the cost of operating each department. He has identified several indirect costs that must be allocated to each department including $42,000 of indirect salaries, $4,000 of office supplies, and $36,000 of office rent. There are 500 students in the biology department, 200 in chemistry and 300 in physics. The director of the Institute wants to know how much of the indirect cost to allocate to each department. Based on this information

the amount of the cost to be allocated is $82,000. In this case the "cost to be allocated" is the total of the indirect costs. Specifically, $42,000 + $4,000 + $36,000 = $82,000. The object of concern is the cost of operating each department.

Tucker Company is considering replacing a machine. The machine had originally cost $12,000. It has accumulated depreciation of $4,000. The current market value of the machine is $7,000. Based on this information alone

the market value of the machine is relevant to a replacement decision. The original cost, book value and the loss are all based on past transactions that cannot be changed by current or future action. They represent sunk costs that are not relevant to a replacement decision.

Morehead Manufacturing Company (MMC) makes a screen that is used to manufacture a toy cell phone. All of the screens made by MMC are identical and sold for the same price per unit. Employees of Morehead Manufacturing Company (MMC) made 1,700 screens in January and 1,100 screens in February. Morehead expects to make 18,000 screens during the year. The company incurs $54,000 per year of insurance cost to attain coverage for its manufacturing employees. The company's manufacturing facility contains 24,000 square feet of space. Which of the following is the most appropriate allocation base assuming management is trying to determine the cost of the products made in January?

the number of units Cost to be allocated ÷ Allocation base = Allocation Rate Allocation rate = $54,000 ÷ 18,000 screens = $3 per screen January allocation = 1,700 screens × 3 = $5,100 February allocation = 1,100 screens × 3 = $3,300

Saylind Molding paid $280,000 in rent for the year. The company's three departments are Headrests, Armrests, and Floor Mats. The number of employees working in each department includes 60 in the Headrest Department, 30 in the Armrest Department and 110 in Floor Mats Department. The Headrest Department occupies 5,000 square feet of space; the Armrest Department occupies 6,300 square feet and the Floor Mats Department occupies 2,700 square feet. What is the most appropriate cost driver (allocation base) for allocating the $280,000 rental cost to each of the departments.

the square footage of space

Women's Medical Center (WMC) divides its business into two departments including pediatrics (PD) and gynecology (GY). WMC expects to incur $50,000 of indirect (overhead) cost and has identified the following cost drivers that could be used to allocate the overhead costs to the two departments. Physicians' salaries$ 400,000$ 500,000 Number of patients600400 Nurses' salaries$ 120,000$ 110,000 Assuming the evaluation of job performance is affected by the supervisors' ability to minimize the cost of operating their respective departments,

the supervisor of the gynecology department would advocate using number of patients as the allocation base.

A cost that is relevant to one decision may be irrelevant to a different decision. This statement is

true

As a result of the cost/benefit concept, a cost that could be traced directly to a cost object may still be treated as an indirect cost. This statement is

true

Indirect costs are frequently called overhead costs. This statement is

true

When there is no cause and effect relationship between a cost driver and the cost to be allocated accountants may be forced to make an arbitrary allocation such as assigning an equal amount of cost to each unit of product. This statement is

true

Which of the following would be classified as an indirect cost when assigning costs to a particular department of a large retail sales store?

utility costs