ACC 213 Final Exam Review
A static budget is valid for only one level of activity: T/F
True
The standard cost per unit is computed by multiplying the standard quantity or hours by the standard price or rate: T/F
True
Flexible budgets cannot be used when there is more than one cost driver (i.e. measure of activity): T/F
False
Managers of cost centers are evaluated according to the profits which their departments are able to generate: T/F
False
One difficulty with self-imposed budgets is that they are not subject to any type of review: T/F
False
The direct materials budget is typically prepared before the production budget: T/F
False
Margin of Safety Percentage
(Total Sales - Break-Even Sales) / Total Sales
Dollar Sales to Attain Target Profit
(target profit + fixed expenses) / CM ratio
In computing its predtermined overhead rate, Marple Company inadvertently left its indirect labor costs out of the computation. This oversight will cause:
The Cost of Goods Manufactured to be understated.
Which statement would NOT be a possible reason for a variance between a flexible budget and actual results? A.) Material prices were different than expected. B.) The amount of labor used per unit of output was different than expected. C.) Labor rates were different than expected. D.) The actual volume of activity was different than expected.
The actual volume of activity was different than expected.
Markup
The amount added to cost to determine a price.
Budgetary Slack
The amount by which a manager intentionally "pads" the budget to make it easier to achieve goals
Margin of Safety
The difference between the actual level of output and the break even output
A major disadvantage of planing budgets is:
The fact that variances between actual results and the planning budget usually are measured by comparing actual costs at one activity level to budget costs at a different activity level.
If the direct labor rate variance is $500 favorable, and the direct labor efficiency variance is $300 favorable, which of the following must be true?
The use of labor was efficient.
What document is used to determine the actual amount of direct labor to record on a job cost sheet?
Time Ticket
Break-Even Point (Sales)
Total Fixed Costs / Contribution Margin Ratio
Break-Even Point
Total Fixed Expenses / Contribution Margin per Unit
Companies should use ideal standards to ensure that employees work at 100% efficiency: T/F
False
Madison Company manufactures desks with vinyl tops. The standard material cost for the vinyl used per Model S desk is $27.00 based on 12 square feet of vinyl at a cost of $2.25 per square foot. A production run of 1,000 desks in March resulted in usage of 12,600 square feet of vinyl. Each square foot of vinyl actually costs $2.00. The materials quantity variance resulting from the above production run was:
$1,350
Wilson Corporation, a merchandising company, has sales budgets of $170,000 and $200,000 for July and August respectively. Its expected cost of goods sold percentage is 65% and it desires an ending merchandise inventory that would be 25% of the next month's sales needs. The purchases for July will be:
$115,375
The Fischer Company has obtained the following sales forecast data: Credit Sales: July - $240,000 August - $220,000 September - $180,000 October - $200,000 The regular pattern of collection of credit sales is 20% in the month of the sale, 70% in the month following the month of the sale, and the remainder in the second month following the month of sale. The credit sales for May and June were $235,000 and $245,000 respectively. The budgeted accounts receivable balance on September 30th is:
$166,000
Hamilton Corporation's flexible budget performance report for the last month shows that actual indirect materials cost, a variable cost, was $30,444 and that the spending variance for indirect materials cost was $8,142 favorable. During that month, the company worked 17,700 machine-hours. Budgeted activity for the month had been 18,200 machine-hours. The budgeted cost per machine-hour for indirect materials cost must have been closest to:
$2.18
Franklin Farming's cost formula for its supplies cost is $1,640 per month plus $9 per frame. For the month of August, the company planned for activity of 592 frames, but the actual level of activity was 573 frames. The actual supplies cost for the month was $7,080. The spending variance for supplies cost for August would be closest to:
$283 U
Jefferson Corporation has a standard costing system. The following data are available for June: Actual quantity of direct materials purchased and used (lbs) - 24,000 Standard Price of direct materials per lb. - $6.00 Material Price Variance - $6,000 U Material Quantity Variance - $2,400 U The actual price per pound of direct materials purchased in June was:
$6.25/lb
Unit Sales to Attain Target Profit
(Target Profit + Fixed Expenses) / Unit CM
What would be the order for preparing: (1) A Production Budget (2) A Direct Labor Budget (3) A Sales Budget (4) A Cash Budget
3-1-2-4
The following is the budgeted data for Danube Corporation: Sales in Units: January - $15,000 February - $20,000 March - $18,000 Production in Units: January - $18,000 February - $19,000 March - $16,000 Two pounds of material are required for each finished unit. The inventory of materials at the end of each month should equal 20% of the following month's production needs. Purchases of raw materials for February would be:
36,800 lbs
Traceable Fixed Cost
A fixed cost that is incurred because of the existence of a particular business segment and that would be eliminated if the segment were eliminated.
Cost Drivers
Activities (including the use of labor, capital and material inputs) that determine the relative cost position of the firm in its industry.
Material Price Variance
Actual Quantity (Actual Price - Standard Price)
Marginal Cost
Additional cost for one more unit produced.
Marginal Revenue
Additional revenue from one more unit sold
Flexible Budget
Adjust for changes in cost drivers. Prepared for a range of activity. Reflect fixed cost and variable cost behavior
Manufacturing overhead consists of:
All manufacturing costs, except direct materials and direct labor.
How do you apply overhead cost to jobs using a predetermined overhead rate?
Allocation Base
An effective budgeting system requires:
Both Planning and Control
Company A uses a heavily participative budgeting approach whereas at Company B, top management develops all budgets and imposes them on lower-level personnel. Which of the following statements is false?
Budget padding or slack will likely be a greater problem at Company B.
Spending variances are generated when:
Budgeted costs for actual level of activity are compared with actual costs for the same level.
Activity variances are generated when:
Budgeted costs for the planned level of activity are compared with budgeted costs for the level of activity.
Degree of Operating Leverage
Contribution Margin / Net Income
Contribution Margin Ratio
Contribution Margin / Sales
Consider the following production and cost data for two products, X and Y: Contribution Margin Per Unit: X = $24 Y = $18 Machine-Hours Needed Per Unit: X = 3 Y = 2 The company has 15,000 machine-hours available each period, and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period?
Contribution Per Unit (X) = $24 Machine-Hours Per Unit (X) = 3 Contribution Margin Per Minute (X) (24/3) = $8.00 Rank in Terms of Profitability (X) = 2 Contribution Per Unit (Y) = $18 Machine-Hours Per Unit (Y) = 2 Contribution Margin Per Minute (Y) (18/2) = $9.00 Rank in Terms of Profitability (Y) = 1 Since there is unlimited demand for each product, all of the available capacity should be used to produce Product Y. Production of Y = 15,000 Machine Hours / 2 Machine Hours Per Unit = 7,500 Units Total Contribution Margin = $18 per unit * 7,500 units = $135,000
Cost-Plus Pricing
Cost + Markup
Allocated Activity Cost
Cost Allocation Rate * Actual Quantity of the Allocation Base
Inventory Turnover
Cost of Goods Sold / Average Inventory
Current Ratio
Current Assets / Current Liabilities
A proper journal entry to close overapplied manufacturing overhead to Cost of Goods Sold would be:
DEBIT: Manufacturing Overhead CREDIT: Cost of Goods Sold
Each of the following would be a period cost except: A.) The salary of the company president's secretary. B.) The cost of a general accounting office. C.) Depreciation of a machine used in manufacturing. D.) Sales comissions.
Depreciation of a machine used in manufacturing.
What are the considered to be steps in the preparation of a flexible budget?
Determining the actual selling price per unit.
Cost classifications used in making decisions:
Differential Costs, Sunk Costs, and Opportunity Costs
What are the three basic manufacturing cost categories?
Direct Materials Direct Labor Manufacturing Overhead
Part 151 is used in one of Chaoda Corporation's products. The company makes 18,000 units of this part each year. The company's accounting department reports the following costs of producing the part at this level of activity: Direct Materials - $1.20 Direct Labor - $2.20 Variable Manufacturing Overhead - $3.30 Supervisor's Salary - $1.00 Depreciation of Special Equipment - $2.70 Allocated General Overhead - $8.50 An outside supplier has offered to produce this part and sell it to the company for $15.80 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $26,000 of these allocated general overhead costs would be avoided. If management decides to buy part 151 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income?
Direct Materials (18,000 units * $1.20 per unit) = $21,600 Direct Labor (18,000 units * $2.20 per unit) = $39,600 Variable Overhead (18,000 units * $3.30 per unit) = $59,400 Supervisor's Salary (18,000 * $1.00 per unit) = $18,000 Depreciation of special equipment(not relevant) = 0 Allocated general overhead (avoidable only) = $26,000 Total cost to make = $164,600 Total cost to purchase (18,000 * $15.80 per unit) = $284,400 Total cost to make = $164,600 Higher cost to purchase = $119,800 Net operating income would decline by $119,800 per year if the part were purchased rather than made internally.
The cost of a unit of product under the absorption costing method consists of:
Direct Materials, Direct Labor, and BOTH Variable and Fixed Manufacturing Overhead.
Conversion cost consists of:
Direct labor and manufacturing overhead cost.
Price Elasticity
Effect of price changes on sales volume
Cost Allocation Rate
Estimated Total Cost of Activity / Estimated Total Quantity of the Allocation Base
A favorable spending variance occurs when the actual expense exceeds the expense depicted in the flexible budget: T/F
False
A material price variance is favorable if the actual price exceeds the standard price: T/F
False
Activity-based costing is a costing method that is designed to provide managers with product cost information for external financial reports: T/F
False
The material price variance is computed by multiplying the difference between the actual price and the standard price by the actual quantity of materials used in production: T/F
False
The purpose of a flexible budget is to remove items from performance reports that are not controllable by managers: T/F
False
When more hours of labor time are necessary to complete a job than the standard allows, the labor rate variance is unfavorable: T/F
False
Master Budget Variances
Favorable or Unfavorable Useful for management by exception
Total Cost
Fix Cost + (Variable Cost * Cost Driver)
Cost
Fix Cost + (Variable Cost * Number of Units)
Common Fixed Expenses
Fixed costs that support more than one segment but are not traceable in whole or in part to any one segment. Even if a segment is eliminated, there would be no change in a true common fixed cost. EX: Salary of the CEO of General Motors or advertising.
Flexible Budget Variances
Flexible Budget vs. Actual Results
Activity Level Variances
Flexible budget vs. Master budget
Financial Budget
Focuses on effects of operating and capital budgets on cash.
Operating Budget
Focuses on the income statement and it's schedules
Make-or-Buy Decisions
Identify quantitative and qualitative factors. Focus on relevant costs.
The break-even point in unit sales increases when variable expenses:
Increase and the selling price remains the same.
A customer has requested that Oh Corporation fill a special order for 2,000 units of product K81 for $25.00 per unit. While the product would be modified slightly for the special order, product K81's normal unit product cost is $19.90: Direct Materials: $5.60 Direct Labor: $4.00 Variable Manufacturing Overhead: $2.70 Fixed Manufacturing Overhead: $7.60 Unit Product Cost: $19.90 Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product K81 that would increase the variable costs by $1.20 per unit and that would require an investment of $10,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. If the special order is accepted, the company's overall net operating income would increase (decrease) by what amount?
Incremental revenue (2,000 units * $25.00 per unit) = $50,000 LESS: Incremental Costs: Direct Materials (2000 * 5.60) = 11,200 Direct Labor (2000 * 4.00) = 8,000 Variable Manufacturing OH (2000 * (2.70 + 1.20)) = 7,800 Special Molds = 10,000 Total Incremental Cost = 37,000 Incremental Net Operating Income = 13,000
The wages of factory maintenance personnel would usually be considered to be:
Indirect Labor and Manufacturing Overhead
Two cost classifications used to prepare financial statements
Product Costs: all manufacturing costs; direct materials, direct labor, manufacturing overhead. Period Costs: all selling and administration costs.
Which of the following best describes the production budget? A.) It is calculated based on the sales budget, beginning finished goods inventory and desired ending finished goods inventory. B.) It details the required direct labor of hours. C.) It summarizes the costs of producing units for the budget period. D.) It details the required raw materials purchase.
It is calculated based on the sales budget, beginning finished goods inventory and desired ending finished goods inventory.
If the actual labor rate exceeds the standard labor rate and the actual labor hours exceed the standard number of hours allowed:
Labor rate variance will be unfavorable and labor efficiency variance will be unfavorable.
Influences on pricing in practice:
Legal Requirements Competition Costs Customer Demand Target Costing
Tucker Industries is a major corporation. The following data are for the latest year of operations: Sales = $24,900,000 Net Operating Income = $1,319,700 Average Operating Assets = $6,000,000 The Company's Minimum Required Rate of Return = 12% What is the division's margin? What is the division's turnover? What is the division's return on investment (ROI)? What is the division's residual income?
Margin = 1,319,700 / $24,900,000 = 5.3% Turnover = 24,900,000 / 6,000,000 = 4.2 ROI = 1,319,700 / 6,000,000 = 22.0% Residual Income = 1,319,700 - 6,000,000 * 12% = 1,319,700 - 720,000 = $599,700
Margin of Safety Ratio
Margin of Safety in Dollars / Actual (Expected) Sales
Residual Income
Net Operating Income - (Average Operating Assets x Minimum Required Rate of Return)
ROI
Net Operating Income / Average Operating Assets
Profit Margin
Net Operating Income / Sales
Receivables Turnover
Net Sales / Average Accounts Receivable
Joint Product Costs
Occur when two or more products have relatively significant sales values. Not separately identifiable until split-off point.
The constraint at Sorenson, Inc. is an expensive milling machine. The three products listed below use this constrained resource: Selling Price Per Unit: PK - $404.58 LA - $478.74 NW - $358.44 Variable Cost Per Unit: PK - $308.88 LA - $371.30 NW - $285.36 Time On The Constraint (Minutes): PK - 6.60 LA - 7.90 NW - 5.80 Rank the products in order of their current profitability from the most profitable to the least profitable. In other words, rank the products in the order in which they should be emphasized. Assume that enough constraint time is available to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource?
PK, LA, NW Willing to pay up to $12.60 per minute to obtain more of the constrained resources since this is the value to the company o fusing this constrained resource to make more of product NW. By assumption, enough of teh other two products will already have been produced to fully satisfy demand.
Shaw Corp. manufactures three products from a common input in a joint processing operation. Joint processing exists up to the split-off point total $200,000 per year. The company allocates these costs to the joint products on the basis of their total sales value at the split-off point. Each product may be sold at the split-off point or processed further. The additional processing costs and sales value after further processing for each product (on an annual basis) are: Product J: Sales value at split-off - $180,000 Further Processing Costs - $60,000 Sales Value After Further Processing - $230,000 Product K: Sales value at split-off - $135,000 Further Processing Costs - $105,000 Sales Value After Further Processing - $160,000 Product L: Sales value at split-off - $95,000 Further Processing Costs - $85,000 Sales Value After Further Processing - $160,000 The "Further Processing Costs" consist of variable and avoidable fixed costs. Which product(s) should be sold at the split-off point? Which product(s) should be processed further?
Product K should be sold after further processing beyond the split-off point. Products J and L should be sold at the split-off point without any further processing.
Cost-Plus Pricing Definition
Product or service price is determined by adding a markup to a cost base.
Which department should usually be held responsible for an unfavorable materials price variance?
Purchasing
Net Income
Sales - Variable Cost - Fixed Cost
Turnover Rate
Sales / Average Operating Assets
Contribution Margin per Unit
Sales Price Per Unit / Variable Cost Per Unit
Torch Inc. has some material that originally cost $68,400. The material has a scrap value of $30,100. However, if the scrap material is reworked at a cost of $1,400, it could be sold for $30,800. What would be the incremental effect on the company's overall profit of reworking and selling the material rather than selling it as scrap?
Sales value of reworked material: $30,800 (LESS) Cost to rework material: $1,400 Net sales value: $29,400 Current scrap value: $30,100 Net Disadvantage: ($700)
Which of the following activities would be classified as a batch-level activity? A.) Setting up equipment. B.) Designing a new product. C.) Training employees. D.) Milling a part required for the final product.
Setting up equipment.
Which of the following should NOT be included as part of manufacturing overhead at a company that makes office furniture? A.) Sheet steel in a file cabinet made by the company. B.) Manufacturing equipment depreciation. C.) Idle time for direct labor. D.) Taxes on a factory building.
Sheet steel in a file cabinet made by the company.
Master Budget
Summarizes all sub-units
Costs classified as batch-level costs should depend on the number of batches processed rather than on the number of units produced, the number of units sold, or other measures of volume: T/F
True
Customer-level activities relate to specific customers and are not tied to any specific products: T/F
True
Directly comparing static planning budget costs to actual costs only makes sense if all costs are fixed: T/F
True
Flexible budgets may be utilized when there is more than one cost driver: T/F
True
Focusing solely on standards may impede an organization's efforts toward continuous improvement could be a problem encountered when using standard costs: T/F
True
Generally speaking, it is the responsibility of the production department to see that material usage is kept in line with the standards: T/F
True
In activity-based costing, there are a number of activity cost pools, each of which is allocated to products and other costing objects using its own unique measure of activity: T/F
True
In general, the purchasing agent is responsible for the materials price variance: T/F
True
One befit of budgeting is that it coordinates the activities of the entire organization: T/F
True
Selling and admin costs are never treated as product costs regardless of the costing method: T/F
True
There should only be one common fixed expense number for an entire company: T/F
True
Under absorption costing and variable costing, variable and fixed selling and admin expenses are always treated as period costs and are reported on the income statement as incurred: T/F
True
Variances are favorable if they result in a relative increase in profitability: T/F
True
Various elements of the master budget ultimately rely on sales forecasts: T/F
True
The purpose of a flexible budget is to:
Update the static planning budget to reflect the actual level of activity for the period.
A direct materials price variance is unlikely to be caused by:
Using materials efficiently in the production process.
Cost classifications used to predict cost behavior
Variable Costs, Fixed Costs, Mixed Costs
When do you accept a special sales order?
When additional revenues exceed additional costs.
In a job-order costing system, direct labor cost is ordinarily debit to:
Work in Process
Predetermined Overhead Rate:
estimated total manufacturing overhead cost / estimated total amount of the allocation base
Absorption Costing
treats all manufacturing costs as product costs, regardless of whether they are variable or fixed.
