Final Review: Managerial Accounting

Which of the following is the best explanation for why it is necessary to calculate equivalent units of production in a process costing environment?

All of the work to make a unit 100% complete and ready to move to the next stage of production or to finished goods inventory may not have been completed in a single time period.

The process of planning future business actions and expressing them as formal plans is called:

Budgeting.

Which of the following is not necessary for budgets to be effective?

All budgeted amounts must be spent to ensure that budgets aren't reduced for the next period.

Kay Company budgets overhead cost of $3,740,000 for the next year. The company uses direct labor hours as its overhead allocation base. If 85,000 direct labor hours are planned for the next year, how much overhead would be assigned to a product requiring 5 direct labor hours?

$220.00 Explanation: $3,740,000/85,000 direct labor hours = $44.00 per direct labor hour × 5 direct labor hours = $220.00.

Capital budgeting decisions usually involve analysis of:

Long-term investments only.

Managerial accounting is different from financial accounting in that:

Managerial accounting includes many projections and estimates whereas financial accounting has a minimum of predictions.

A budget is best described as:

A formal statement of a company's plans in dollars.

From an ABC perspective, what causes overhead cost to be incurred?

Activities.

A flexible budget performance report compares:

Actual performance and budgeted performance based on actual activity level.

Identify the situation below that will result in a favorable variance.

Actual revenue is higher than budgeted revenue.

A flexible budget may be prepared:

At any time before, during, or after the planning period.

A plan that shows budgeted cash receipts and cash payments during the budget period is called a(n):

Cash budget.

Which of the following would be reported on a variable costing income statement?

Contribution margin

Which of the following products is least likely to be produced in a process operation?

Custom cabinets

A company that uses a job order costing system would make the following entry to record the flow of direct materials into production:

Debit Work in Process Inventory, credit Raw Materials Inventory.

The difference between actual quantity of input used and the standard quantity of input used results in a:

Quantity variance.

Which types of overhead allocation methods result in the use of more than one overhead rate during the same time period?

Departmental overhead rate method and activity-based costing.

Which of the following should not be included in the calculation of annual net cash flow from a particular investment?

Depreciation expense.

Which of the following costs is most likely to be classified as a variable cost?

Direct materials

Continuous improvement:

Rejects the notion of "good enough."

In a process costing system, direct material costs incurred are recorded:

Directly to a Work in Process Inventory account.

If a firm's expected sales are $262,000 and its break-even sales are $196,000, the margin of safety in dollars is:

Explanation $262,000 − $196,000 = $66,000

During its first year of operations, the McCormick Company incurred the following manufacturing costs: Direct materials$ 6per unitDirect labor$ 4per unitVariable overhead$ 5per unitFixed overhead$ 234,000per year The company produced 26,000 units, and sold 18,000 units, leaving 8,000 units in inventory at year-end. What is the value of ending inventory under variable costing?

Explanation $6 + $4 + $5 = $15 per unit × 8,000 units = $120,000.

During its first year of operations, the McCormick Company incurred the following manufacturing costs: Direct materials$ 7per unitDirect labor$ 5per unitVariable overhead$ 6per unitFixed overhead$ 279,000per year The company produced 31,000 units, and sold 20,500 units, leaving 10,500 units in inventory at year-end. What is the value of ending inventory under absorption costing?

Explanation $7 + $5 + $6 + ($279,000/31,000 units) = $27 per unit × 10,500 units = $283,500.

Carmel Corporation is considering the purchase of a machine costing $45,000 with a 4-year useful life and no salvage value. Carmel assumes that the annual net cash flows from the machine will be received uniformly throughout each year. In calculating the accounting rate of return, what is Carmel's average investment?

Explanation ($45,000 + $0)/2 = $22,500

Flagstaff Company has budgeted July production of 6,900 units. Variable factory overhead is $1.3 per unit. Budgeted fixed factory overhead is $14,000, which includes $2,000 of factory equipment depreciation. Compute the total budgeted overhead for July.

Explanation (6,900 × $1.3) + $14,000 = $22,970

Ratchet Manufacturing's August sales budget calls for sales of 4,500 units. Each month's unit sales are expected to grow by 6%. The product selling price is $30 per unit. The expected total sales dollars for September's sales budget are:

Explanation (August sales units 4,500 × 106%) × $30 = $143,100

A job was budgeted to require 2 hours of labor per unit at $8.00 per hour. The job consisted of 6,800 units and was completed in 10,600 hours at a total labor cost of $111,400. What is the direct labor rate variance?

Explanation AH × AR Given.= $ 111,400 AH × SR 10,600 hours × $8/hour= 84,800 Direct labor rate variance $ 26,600U

A job was budgeted to require 4 hours of labor per unit at $11.00 per hour. The job consisted of 7,000 units and was completed in 24,000 hours at a total labor cost of $312,900. What is the direct labor efficiency variance?

Explanation AH × SR 24,000 hours × $11.00/hour= $ 264,000 SH × SR7,000 units × 4 hours/unit × $11.00/hour =308,000 Direct labor rate variance$ 44,000F

Parallel Enterprises has collected the following data on one of its products. During the period the company produced 25,000 units. The direct materials quantity variance is: Direct materials standard (7 Kilogram @ $1.80/Kilogram)$ 12.60per finished unitActual cost of materials purchased$ 285,000 Actual direct materials purchased and used146,000Kilogram

Explanation AQ × SP = 146,000 × $1.80= $ 262,800 SQ × SP = (7 Kilogram × 25,000) × $1.80= 315,000 Direct materials quantity variance$ 52,200F

A company is planning to purchase a machine that will cost $24,600, will have a six-year life, and will have no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. A projected income statement for each year of the asset's life appears below. What is the accounting rate of return for this machine? Sales $ 109,000Costs: Manufacturing$ 51,600 Depreciation on machine4,100 Selling and administrative expenses49,000(104,700)Income $ 4,300

Explanation Accounting rate of return = $4,300 / [($24,600 + $0)/2] = 34.96%

A company has two products: A1 and B2. It uses activity-based costing and has prepared the following analysis showing budgeted cost and activity for each of its three activities: ActivityBudgeted CostActivity Cost DriverBudgeted ActivityProduct A1Product B2Activity 1$ 55,000Square feet 1,9005,500Activity 2$ 70,000Units repaired2,9405,460Activity 3$ 94,000Orders7,9001,500 Annual production and sales level of Product A1 is 9,180 units, and the annual production and sales level of Product B2 is 23,010 units. What is the approximate overhead cost per unit of Product A1 under activity-based costing?

Explanation Activity 1 allocated to Product A1 line: $55,000 × 1,900/7,400 = $14,122 Activity 2 allocated to Product A1 line: $70,000 × 2,940/8,400 = $24,500 Activity 3 allocated to Product A1 line: $94,000 × 7,900/9,400 = $79,000 Then Add A1+A2+A3=117,622 Total overhead allocated to Product A1 = $117,622 Overhead per unit of Product A1: $117,622/9,180(Product A1) = $12.81

Milltown Company specializes in selling used cars. During the month, the dealership sold 14 cars at an average price of $14,200 each. The budget for the month was to sell 12 cars at an average price of $15,200. Compute the dealership's sales price variance for the month.

Explanation Actual = 14 × $14,200 = $198,800; Flexible = 14 × $15,200 = $212,800 Sales price variance = $14,000 unfavorable

Fortune Company's direct materials budget shows the following cost of materials to be purchased for the coming three months: JanuaryFebruaryMarchMaterial purchases$ 12,640$ 14,750$ 11,570 Payments for purchases are expected to be made 50% in the month of purchase and 50% in the month following purchase. The December Accounts Payable balance is $7,000. The expected January 31 Accounts Payable balance is:

Explanation Amount due for January purchases ($12,640 × 50%) = $6,320

The following relates to a proposed equipment purchase: Initial investment$ 136,400 Salvage value$ 3,600 Estimated useful life4yearsAnnual net cash flows$ 45,700 Annual depreciation expense$ 33,200 The annual average investment amount used to calculate the accounting rate of return is:

Explanation Annual average investment = ($136,400 + $3,600)/2 = $70,000

A company is planning to purchase a machine that will cost $61,632, have a six-year life, and will have no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. A projected income statement for each year of the asset's life appears below. What is the payback period for this machine? Sales $ 216,000Costs: Manufacturing$ 129,600 Depreciation on machine4,000 Selling and administrative expenses72,000(205,600)Income $ 10,400

Explanation Annual cash flows = $4,000 + $10,400 = $14,400; Payback period = $61,632 / $14,400 = 4.28 years

Southland Company is preparing a cash budget for August. The company has $16,100 cash at the beginning of August and anticipates $124,600 in cash receipts and $133,600 in cash payments during August. Southland Company wants to maintain a minimum cash balance of $10,000. The preliminary cash balance at the end of August before any loan activity is:

Explanation Beginning cash balance ($ 16,100) Add cash receipts (124,600) Less cash payments (133,600) Cash balance before financing= $7,100

Western Company is preparing a cash budget for June. The company has $10,200 in cash at the beginning of June and anticipates $31,800 in cash receipts and $38,100 in cash payments during June. Western Company has an agreement with its bank to maintain a minimum cash balance of $10,000. As of May 31, the company has no loans outstanding. To maintain the $10,000 required balance, during June the company must:

Explanation Beginning cash balance$ 10,200 Add cash receipts31,800 Less cash payments(38,100) Cash balance before financing$ 3,900 Desired cash balance10,000 Amount to borrow$ 6,100

Wang Company manufactures and sells a single product that sells for $320 per unit; variable costs are $176 per unit. Annual fixed costs are $927,000. Current sales volume is $4,260,000. Compute the break-even point in dollars.

Explanation Break-even point = $320 − $176 = $144/$320 = 45%; $927,000/0.45 = $2,060,000

Mason Company manufactures and sells shoelaces for $3.80 per pair. Its variable cost per unit is $3.50. Mason's total fixed costs are $12,300. How many pairs must Mason sell to break even?

Explanation Break-even point in units = $12,300/($3.80 − $3.50) = 41,000 pairs

A company provided the following direct materials cost information. Compute the direct materials price variance. Standard costs assigned: Direct materials standard cost (407,000 units @ $3.90/unit)$ 1,587,300Actual costs: Direct materials costs incurred (405,950 units @ $4.00/unit)$ 1,623,800

Explanation Direct materials price variance = 405,950 actual units × ($3.90 standard price − $4.00 actual price) = $40,595 unfavorable

Fletcher Company collected the following data regarding production of one of its products. Compute the standard quantity allowed for the actual output. Direct materials standard (5 pounds @ $3/pound)$ 15per finished unitActual direct materials used182,000poundsActual finished units produced36,000unitsActual cost of direct materials used$ 543,000

Explanation Standard units at standard cost = 36,000 × 5 pounds = 180,000 standard pounds

Carly's Clips charges for their grooming services based on the following: Direct labor rate$ 62per hourMaterials markup30% Using time and materials pricing, what is the total price for a job requiring 3 direct labor hours and $52 of materials?

Explanation Total price = Labor + Materials + Materials markup($62 × 3) + $52 + ($52 × 30%) = $254

The following information is available for a company's cost of sales over the last four months. MonthUnits SoldTotal CostsJanuary530$ 29,800February770$ 35,500March1,450$ 47,500April2,530$ 59,500 Using the high-low method, the estimated total fixed cost is:

Explanation Variable cost per unit = Change in cost/change in units (using highest and lowest level of activity)($59,500 − $29,800)/(2,530 − 530) = $14.85 per unit Fixed cost = Total cost (high or low) − (variable cost per unit × units sold (high or low) $59,500 − ($14.85 × 2,530) = $21,930OR $29,800 − ($14.85 × 530) = $21,930

A company uses activity-based costing to determine the costs of its three products: A, B, and C. The budgeted cost and activity for each of the company's three activities are shown in the following table: ActivityBudgeted CostActivity Cost DriverBudgeted ActivityProduct AProduct BProduct CActivity 1$ 89,000Square feet 7,90010,90021,900Activity 2$ 64,000Units inspected8,90016,9009,900Activity 3$ 120,000Setups4,4002,9003,525 How much overhead will be assigned to Product B using activity-based costing? (Do not round intermediate calculations and round the final answer to 2 decimal places.)

Explanation Cost A B C $89,000/(7,900 + 10,900 + 21,900) = $2.19 $64,000/(8,900 + 16,900 + 9,900) = $1.79 $120,000/(4,400 + 2,900 + 3,525) = $11.09 (10,900 × $2.19) + (16,900 × $1.79) + (2,900 × $11.09) = $86,280.11

Which of the following is not a product cost under variable costing?

Fixed overhead.

A company's required rate of return is called the:

Hurdle rate.

A limitation of the internal rate of return method is that it:

Ignores changing risks over the life of a project.

Soar Incorporated is considering eliminating its mountain bike division, which reported a loss for the recent year of $3,400 as shown below. Segment Income (Loss)Sales$ 1,060,000Variable costs864,000Contribution margin196,000Fixed costs199,400Income (loss)$ (3,400) If the mountain bike division is dropped, all $864,000 of its variable costs are avoidable, and $59,820 of its fixed costs are avoidable. The impact on income for eliminating this business segment would be:

Income (loss)$ (3,400)$ (139,580)=$ (136,180) ***

Sooky has a spotter truck with a book value of $59,000 and a remaining useful life of five years. At the end of the five years the spotter truck will have a zero-salvage value. iSooky can purchase a new spotter truck for $139,000 and receive $32,900 in return for trading in its old spotter truck. The old spotter truck has variable manufacturing costs of $94,000 per year. The new spotter truck will reduce variable manufacturing costs by $26,900 per year over the five-year life of the new spotter truck. The total increase or decrease in income by replacing the current spotter truck with the new truck is:

Income (loss)$ (470,000)-$ (441,600) How to calculate (441,600): =$ 28,400 ***

Bluebird Manufacturing has received a special one-time order for 17,000 bird feeders at $5.00 per unit. Bluebird currently produces and sells 75,000 units at $9.00 each. This level represents 80% of its capacity. Production costs for these units are $5.50 per unit, which includes $4.25 of variable costs and $3.25 of fixed costs. If the special offer is accepted, there will be no incremental fixed cost. If Bluebird accepts this additional business, the effect on income will be:

Income$ 0.75 [$ 12,750] ***

Managerial accounting information:

Involves gathering information about costs for planning and control decisions.

The contribution margin ratio:

Is the percent of each sales dollar that remains after deducting the unit variable cost.

An opportunity cost:

Is the potential benefit lost by taking a specific action instead of alternative actions.

Which of the following statements is true regarding absorption costing?

It assigns all manufacturing costs to products.

The two basic types of cost accounting systems are:

Job order costing and process costing.

Bricktan Incorporated makes three products, Basic, Classic, and Deluxe. The maximum Bricktan can sell is 718,000 units of Basic, 444,000 units of Classic, and 121,500 units of Deluxe. Bricktan has limited production capacity of 936,000 machine hours. Machine hours per unit are as follows: Basic, 1 hour; Classic, 1.25 hours; and Deluxe 2.5 hours. Contribution margin per unit is $15 for Basic, $25 for Classic, and $55 for Deluxe. What is the most profitable sales mix for Bricktan Incorporated?

Maximum number of units that could be produced 936,000, 748,800, 374,400 ***

Budgets that are revised by adding a new quarterly budget to replace the quarter that just elapsed are called:

Rolling budgets.

The following present value factors are provided for use in this problem. PeriodsPresent Value of $1 at 8%Present Value of an Annuity of $1 at 8%10.92590.925920.85731.783330.79382.577140.73503.3121 Cliff Company wants to purchase an asset for $68,000, but needs to earn a return of 8%. The expected year-end net cash flows are $27,000 in each of the first three years, and $31,000 in the fourth year. What is the machine's net present value (round to the nearest whole dollar)?

Net present value $ 24,367 ***

The following present value factors are provided for use in this problem. PeriodsPresent Value of $1 at 8%Present Value of an Annuity of $1 at 8%10.92590.925920.85731.783330.79382.577140.73503.3121 Xavier Company wants to purchase an asset for $38,000 with a four-year life and a $1,100 salvage value. Xavier requires an 8% return on investment. The expected year-end net cash flows are $13,000 in each of the four years. What is the machine's net present value (round to the nearest whole dollar)?

Net present value $ 5,866***

When evaluating a special order, management should:

Only accept the order if the special-order price exceeds total variable product costs.

Which of the following is the correct interpretation of a degree of operating leverage of 5?

Operating leverage of 5 means that if sales increase by 5%, there will be a 25% increase in the firm's income.

Which methods of evaluating a capital investment project use cash flows as a measurement basis?

Payback period, internal rate of return, and net present value.

A manufacturer reports the following. Compute contribution margin. Sales$ 1,206,000Variable cost of goods sold406,000Fixed overhead326,000Variable selling and administrative costs146,000Fixed selling and administrative costs106,000

Sales ($ 1,206,000) -Variable cost of goods sold (406,000) - Variable selling and administrative expense (146,000)= Contribution margin$ 654,000

What decision rule should be followed when deciding if a business segment should be eliminated?

Segments with revenues that are less than avoidable expenses should be considered for elimination.

The rate established before the start of a period that uses estimated overhead costs and an estimated activity base such as estimated direct labor, and that is used to apply estimated overhead to jobs, is the:

Predetermined overhead rate.

The difference between actual price per unit of input and the standard price per unit of input results in a:

Price variance.

Marshall Corporation incurred costs for materials and labor needed to manufacture its products. These costs are examples of:

Product costs.

Maxim has already spent $29,300 to manufacture a hamster food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand that can be sold for $92,240. Alternatively, Maxim can process it further into a different product, Premium Green, at an additional cost of $6,175. If Maxim processes further, the Premium Green can be sold for $100,450. The incremental income to process further is:

Sell or Process Analysis Sell As / Is Process Further Revenue $ 92,240 $ 100,450 Costs 0 6,175 Income $ 92,240 $ 94,275 Decision: Incremental income to process further$ 2,035

In cost-volume-profit analysis, the contribution margin per unit is:

Selling price per unit less variable costs per unit.

The overhead cost variance is:

The difference between the actual overhead incurred during a period and the standard overhead applied.

Which of the following is an advantage of using the plantwide overhead rate method?

The necessary information is readily available.

Assume markup percentage equals desired profit divided by total costs. What is the correct calculation to determine the dollar amount of the markup per unit?

Total cost per unit times markup percentage per unit.

To determine a product selling price based on the total cost method, management should include:

Total product and selling, general, and administrative costs plus a markup.

The costs of direct materials, direct labor, and overhead for partially completed products are known as:

Work in process inventory.

Which of the following statements is true?

Variable costing treats fixed overhead as a period cost.

A manufacturer reports the following costs to produce 25,000 units in its first year of operations: direct materials, $25 per unit, direct labor, $21 per unit, variable overhead, $250,000, and fixed overhead, $325,000. The total product cost per unit under variable costing is:

Variable overhead ($250,000/25,000 units)= 10 Variable overhead (10) + Direct Materials ($25) + Direct Labor ($21) = $56

Using absorption costing, which of the following manufacturing costs are assigned to products?

Variable overhead, direct materials, direct labor, and fixed overhead.

Income __________ when there is zero beginning inventory and all inventory units produced are sold.

Will be the same under both variable and absorption costing

When direct labor costs are recorded:

Work in Process Inventory is debited and Factory Wages Payable is credited.

The overhead cost applied to a job during a period is recorded with a credit to Factory Overhead and a debit to:

Work in Process Inventory.

Which of the following is not part of the flow of events in variance analysis:

Working to ensure that all variances are favorable.