Accounting 211 Exam 2
A plan that formalizes the overall goals and objectives of a company in financial terms is called a
master budget.
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 Headrest Department, 30 in the Armrest 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 sq. feet = $20 per sq. foot$ 20 × 2,700 sq. feet = $54,000
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:
$0 Beg. 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. 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.
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. 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 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 The pro forma balance sheet will show accounts receivable equal to all sales that have been made on account that have not yet been collected. June sales on account will be collected in July, therefore $1,250.00 will be the accounts receivable balance on June 30.
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 expenseLess: Depreciation (500). Noncash expenseLess: Insurance (200)Noncash expense Cash Outflow$1,300
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. 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. 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 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).
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 Cost to purchase$20 Relevant cost to make* 18 Decrease in cost per unit$2 2*50,000= 100,000
Sales. $320,000 Freight out. $.25per unit sold Depreciation on Admin. Equipment$10,000 Sales & Admin. Salaries. $40,000+2% of sales Advertising $12,000 Depreciation on Manuf. Equip. $15,000 Lease on Sales Building. $45,000 Miscellaneous Selling Expenses. $5,000 Based on January sales of 20,000, the amount of HDC's expected cash outflow for selling and administrative expenses would be
$113,400. 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. $.25per unit sold Depreciation on Admin. Equipment$10,000 Sales & Admin. Salaries. $40,000+2% of sales Advertising $12,000 Depreciation on Manuf. Equip. $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 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.
Products F G H TotalSales (total)$200,000 $180,000 $320,000 = $700,000 Total Unit-level Costs (120,000) (160,000) (200,000) =(480,000) Contribution Margin 80,000 20,000 120,000 =220,000 Company-wide Facility-Level Costs (25,000) (30,000) (40,000) =(95,000) Income (Loss)$ 55,000 $ (10,000) $80,000 $125,000 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 amounted "needed" to borrow or the amount "available" for repayment of debt in January would be
$3,000 needed. Beg. 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.
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. Beg. 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. 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.
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
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, Inc. 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, Inc. 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. Sales. January February March Budgeted cost of goods sold$40,000 $50,000 $60,000 Plus: Desired ending inventory 10,000 12,000 14,000 Inventory needed 50,000 62,000 74,000 Less: Beginning inventory (8,000) (10,000) (12,000) Required purchases. $42,000 *52,000* 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 Beg. Cash Balance$35,000 Cash Receipts 171,000 Cash Available 206,000 Cash Payments (158,000) Ending Cash Balance$48,000
Metro, Inc. 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. Sales. January February March Budgeted cost of goods sold$40,000 $50,000 $60,000 Plus: Desired ending inventory 10,000 12,000 14,000 Inventory needed 50,000 62,000 74,000 Less: Beginning inventory (8,000) (10,000) (12,000) Required purchases. $42,000 *52,000* 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
Metro, Inc. 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. Sales. January February March Budgeted cost of goods sold$40,000 $50,000 $60,000 Plus: Desired ending inventory 10,000 12,000 14,000 Inventory needed 50,000 62,000 74,000 Less: Beginning inventory (8,000) (10,000) (12,000) Required purchases. $42,000 *52,000* 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).
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 3,740 units× $25 = $93,500
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 cost 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 Sales $12,000 Allocated joint cost (9,000) Further processing cost (2000) $1,000
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
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 Revenue (2,000× $60)$120,000 Unit-Level Costs (2,000 × ($15 + $40)) (110,000) Contribution to Profit$10,000 The product and facility costs are not relevant because they will be incurred regardless of whether the special offer is accepted. Since these costs do not differ between the alternatives (accept or reject the offer), they are not relevant to the decision.
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
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 cost 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
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.
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$25,000 Labor 30,000 Overhead ($30,000 Labor Dollars × $0.25 allocation Rate) 7,500 Total Cost of Product 1 $62,500
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
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. Accordingly, the departments (not the students) are the cost objects. The number of students is the best available cost driver. The size of the student body drives the need for administrative staff (indirect salaries), the use of supplies, and the size of the rental space needed. Accordingly, the number of students (not the indirect cost) is the allocation base.
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 cost 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 cost amount to $84,000 ($40,000 materials cost + $44,000 processing cost). The $2,000 remixing cost occurs after the split-off point and therefore is not a joint cost.
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
The process of dividing a total cost into parts, and assigning the parts among relevant cost objects is called
Allocation
Of the following statements, which is NOT true concerning indirect costs? Indirect costs may also be called overhead costs. An indirect cost is a cost that cannot easily be traced to a cost object. A cost that could be directly traced may still be treated as an indirect cost. An indirect cost may be fixed but cannot be variable.
An indirect cost may be fixed but cannot be variable. Indirect costs can be fixed or variable
U-RIDE, Inc. 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 equip.$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? U-RIDE should make the engines for cost savings of $25 per unit. Buying the units would increase U-RIDE's cost by $13 per unit. U-RIDE has avoidable costs of greater than $200 per unit and should therefore buy the engines. Buying the units would increase profitability by $38 per unit.
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).
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 Barbecue Division were eliminated, profitability would
Decrease 100,000 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
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
Allocation is a mathematical procedure that cannot be manipulated by the parties involved in making the allocation. T/F
False Allocation is based on debatable opinions such as selecting the most appropriate allocation base. Therefore most allocation decisions are impacted by emotional and political influences. The math is not the issue. It is the determination of which data to use in the allocation that makes the process subject to manipulation.
Direct costs and variable costs are synonymous terms. T/F
False Direct costs can be either fixed or variable costs.
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. T/F
False The sales budget is normally the starting point in the development of the master budget. A company must know how many units it will sell before knowing how many units must be purchased.
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) accept or reject and #
HM should reject the offer because accepting it will reduce profitability by $2,000. Revenue (2,000 x $60)$120,000 Unit-Level Costs (2,000 × ($15 + $40)) (110,000) Opportunity cost (rental fee) (12,000) Reduction in Profit$(2,000)
When resolving disputes over allocations, senior management should focus on
Mission of the organization While subordinates may be unduly influenced by self-interest and may use political influence and emotion to manipulate the allocation to their benefit, senior management must focus on the mission of the organization rather than the self-interest of individual employees.
Which of the following statements is true regarding potential qualitative issues affecting 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.
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. PD GY 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. It is natural to assume that each supervisor would strive to maximize the amount of the raise money allocated to their respective departments. Since the gynecology department has a disproportionately higher amount of physicians salaries, that based would result in a greater amount of the raise money being allocated to that department.
Which describes the normal sequence followed in preparing a master budget?
Sales budget → Inventory purchases budget → Selling and administrative expense budget → Cash budget
Information need to prepare the cash budget is drawn from which of the budgets?
Sales budget. Inventory purchases budget. Selling and administrative expense budget.
Which of the following are not relevant to decision making? replacement cost incremental cost opportunity cost sunk cost
Sunk Cost Sunk costs are based on historical events that cannot be changed by current or future events. In other words, you cannot change the past. In other words, the past is the same regardless of which alternatives are selected in a current decision. Since sunk costs do not differ between the alternatives and do not affect present or future conditions they are not relevant for decision making purposes.
Which of the following items would not be relevant to an asset replacement decision? The market value of the new asset. The salvage value of the asset being replaced. The book value of the asset being replaced. The cost of operating the new asset.
The book value of the asset being replaced 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, Inc. 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 equip.$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 $36,000 is not relevant because it is an estimate. Buying the units would increase U-RIDE's cost by $13 per unit. U-RIDE has avoidable costs of less than $200 per unit and should therefore buy engines. The cost of buying the engines is $5 per unit less than the relevant cost of making the units.
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 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? Multiple Choice The cost of direct materials. The cost of plant security. The cost of inspecting items produced. The cost of direct labor.
The cost of providing security the plant facility does not change when increases or decreases in the number of units made occur.
Which of the following is a facility-level cost? The cost of direct materials. The cost of the salary for the company president. The cost of designing a new product. The cost of setting up the production line to make a batch of products.
The cost of the salary for the company president. The cost of direct materials is a unit-level cost. The cost of designing a product is a product-level cost. Generally, set-up costs are batch-level costs. They are incurred each time a new batch is produced. They may include the cost of setting up the production machines, training employees, paperwork and ordering cost to provide materials for the batch.
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. The number of square feet appears to have the strongest cause and effect relationship with the rental cost. Normally properties rent on the basis of square footage. All other things being equal, larger properties demand higher rent. Also, the amount of square footage is information that is available. Finally, managers may be able to control the size of their operation by transferring space to other departments or in some cases renegotiating rental agreements.
A cost that is relevant to one decision may be irrelevant to a different decision. T/F
True
Indirect costs are frequently called overhead costs. T/F
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. T/F
True Many costs that can be traced directly are treated as indirect cost because directly tracing the cost is not worth the effort necessary to do the tracing.
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. T/F
True Suppose a company pays $12,000 per year for a fire insurance premium to cover its manufacturing plant and wants to assign that cost to the products it makes. There is no cause and effect relationship between the number of units of product made and sold and the insurance cost
Which of the following would be classified as an indirect cost when assigning costs to a particular department of a large retail sales store? sales commissions cost of goods sold utility costs depreciation on cash registers
Utility Cost Determining the cost of the amount of electricity consumed by each department would require power meters to be installed in each department. The cost of doing this would not likely be justified by the benefit attained. Therefore utility costs are usually treated as indirect costs.
The allocation process requires answers to which of the following 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?
What is the amount of the cost to be allocated? Where is the cost going to be allocated? How will the allocation be made? To accomplish allocation, you have to know what is to be allocated (indirect costs), where it is going to be allocated (the cost objects) and how it will be allocated (cost drivers or allocation base). Allocation is not possible without answers to all three questions.
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. 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
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 accept/reject
acquire the new crane because it has the lower relevant cost. 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.
A segment elimination decision involves a comparison between revenue that will be lost through the elimination and the
avoidable cost of operating the segment. Only the costs that can be avoided or saved by the decision to eliminate are relevant to the revenue versus cost comparison.
The general, selling and administrative expense budget is normally prepared
before the cash budget.
Joint costs occur
before the split off point The point in the production process at which products become separate and identifiable is the split-off point. Since the costs that are incurred before the split-off point are associated with several products they are called joint costs
Which of the following items would not appear in a selling and administrative expense budget? Salary expense. Cost of goods sold. Cash payments for utility expense. Depreciation expense.
cost of goods sold Cost of goods sold is a product cost that is included in the inventory purchases budget.
The process of assigning costs to two or more cost objects requires
cost tracing. cost allocation. cost/benefit analysis.
Strategic planning focuses on
long-range decisions.
To be relevant, information must
differ among the alternatives. affect present or future conditions.
Pro forma statements are based on
estimates and predictions.
Which of the following is the most logical cost driver for allocating the telephone bill among four departments? square footage of floor space direct labor hours number of telephones sales volume measured in dollars
number of telephones There is normally a strong cause and effect relationship between the number of phones and the cost shown on the phone bill. The more phones in use the higher the cost of phone service. Further, the number of phones is readily available. Phones are easy to count. Finally, the number of phones is usually a controllable item.
Hector, Inc. 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.
Which of the following is not normally included in a master budget? performance budget. purchases budget. cash budget. sales budget.
performance budget. The master budget consists of the 1) Capital Budget, 2) Operating Budget 3) Pro forma Financial Statements. The purchases budget, sales budget, and cash budget are all included as they are part of the operating budget.
Which of the following is normally present in an allocation decision?
political influence human emotion differences of opinion
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. Old Equipment Original cost$95,000 Original expected salvage value 15,000 Current market value 60,000 Current expected salvage value 5,000 Depreciation expenses (13,750 x 4) 55,000 Other operating expenses (20,000 x 4) 80,000 New Equipment Purchase price$70,000Original expected salvage value 15,000 Expected salvage value 12,000 Depreciation Expenses ($14,500 x 4) Other Operating Expenses ($21,000 x 4) 84,000 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. Segment elimination decisions frequently include an analysis of interrelated sales transactions. For example, eliminating children's clothing could affect the sales of women's clothing. Women who previously bought something for themselves while shopping for their children may no longer visit the store.
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.
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 what is relevant to the descion
the $119,00 current market value of original site is relevant to the decision. The $1,000 loss ($120,000 - $119,000) and the $5,000 dollar difference between the cost of the original site and the cost of the replacement property are not relevant because these items are based on the historical cost of original site which is a sunk cost. The current market value of the old property ($119,000) and the cost of the replacement property ($125,000) are both relevant to the decision because they impact the current or future condition of the Company.
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 cost amounts 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 (increase or decrease) and #
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
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 original cost of the asset is relevant to a replacement decision. the Company should not replace the machine because doing so would require the recognition of a $1,000 loss on the disposal of the machine. the market value of the machine is relevant to a replacement decision. the book value of the machine is relevant to a replacement decision.
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.
To identify the best cost driver for a particular allocation consideration should be given to
the strength of a cause and effect relationship. the availability of information. the capacity to control the allocation base.
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. PD GY Physicians' salaries$400,000 $500,000 Number of patients 600 400 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. Since the supervisors are judged on their ability to control cost, they are motivated to select the allocation base that minimizes the amount of cost allocated to their departments. Given that the gynecology department has fewer patients than the pediatrics department, using number of patients as the allocation base would result in a smaller amount of the total overhead cost being allocated to gynecology.
Budgets are used
to communicate information across an organization. to plan the future activities of a business. as a tool in performance evaluation.
