Part 1

 

1. Fragrance, Inc., has two divisions: the Cologne Division and the Bottle Division. The Bottle Division produces containers that can be used by the Cologne Division.  The Bottle Division’s variable manufacturing cost is $2, shipping cost to external customers is $0.10, and the external sales price is $3.  No shipping costs are incurred on sales to the Cologne Division and the Cologne Division can purchase similar containers in the external market for $2.50, which includes shipping costs.

 

The maximum amount the Cologne Division would be willing to pay for each bottle transferred would be:

2. $2.90.
3. $2.00.
4. $2.50.
5. $2.10.

3. Division A sells soybean paste internally to Division B, which, in turn, produces soybean burgers that sell for $5 per pound. Division A incurs costs of $0.75 per pound, while Division B incurs additional variable costs of $2.50 per pound.

 

What is Division B’s contribution margin per pound, assuming the transfer price of the soybean paste is set at $1.25 per pound?

1. $0.500
2. $0.875
3. $1.250
4. $1.625

 

4. The following information pertains to Smith Company:

Average operating assets       $250,000

Net income                                 50,000

Sales                                         500,000

Required rate of return         12 percent

 

The residual income is:

1. $50,000.
2. $30,000.
3. $20,000.
4. $60,000.

 

5. The following information is for West Corporation:

 

Direct

Material

Standard price per unit of input                       $20

Actual price per unit of input                           $18

Standard inputs allowed per unit of output      2 pounds

Actual units of input bought and used             7,750 pounds

 

Actual units of output                                       3,750 units

 

What is the total direct material variance?

1. $10,500 unfavorable
2. $10,500 favorable
3. $20,500 favorable
4. $20,500 unfavorable

 

6. Pepper Industries has three product lines, A, B, and C. The following information is available:

A                 B                C

Sales                             $60,000      $90,000     $24,000

Variable costs                36,000        48,000        15,000

Contribution margin    $24,000      $42,000       $9,000

Fixed costs:

Avoidable                    9,000        18,000          6,000

Unavoidable                6,000          9,000          5,400

Operating income         $9,000      $15,000      $(2,400)

 

Pepper Industries is thinking of dropping product line C because it is reporting a loss. Assuming Pepper drops line C and does not replace it, the operating income will

400. increase by $2,400.
401. increase by $3,000.
402. decrease by $3,000.
403. decrease by $5,400.

 

7. Which of the following is not a reason to study a simpler model such as the payback method?
8. Changes in business practice occur slowly; many businesses still use the simpler models.
9. Simpler models are easier to use.
10. Simpler models might provide some useful information to supplement the discounted-cash-flows analysis.
11. Simpler models are conceptually superior to discounted-cash-flows analysis.

 

13. Which of the following changes would increase return on investment?
14. an increase in expenses and a decrease in sales at the same time
15. an increase in assets
16. a decrease in sales revenue
17. a decrease in expenses

 

14. The higher the minimum desired rate of return,
15. the higher the net present value of a project
16. the higher the initial investment
17. the lower the annual cash savings
18. the lower the net present value of a project

15. The following information is available for the Cantrill Company:

 

Sales                                    $1,000,000

Average operating assets         312,500

ROI                                       10 percent

 

What is the turnover ratio?

3. 3.2000
4. 0.1000
5. 0.3125
6. none of the above

 

17. Junior Corporation has a joint process which produces three products, X, Y and Z. Each product may be sold at split-off or processed further and then sold. Joint processing costs for a year amount to $100,000. Other relevant data are as follows:

 

Sales Value     Costs after        Sales Value

Product     at Split-off      Split-off          at Completion

 

X          $128,000          $16,000            $160,000

 

Y            50,000             26,000                76,000

 

Z            25,600             20,000                40,000

 

To maximize profits, which products should Junior process further?

1. Product Z only
2. Product X and Z
3. Product X only
4. Products X, Y and Z

19. The following information pertains to Lincoln Company:

 

Direct

Labor

Standard price per unit of input                             $10

Actual price per unit of input                                 $11

Standard inputs allowed per unit of output        2 hours

Actual units of input                                         4,750 hours

 

Actual units of output                                        2,500 units

 

What is the direct labor efficiency variance?

1. $2,750 favorable
2. $2,750 unfavorable
3. $2,500 favorable
4. $2,500 unfavorable

 

20. Below is a potential investment alternative:

 

 

Initial capital investment                        $270,000

Estimated useful life                                    3 yrs.

Estimated terminal salvage value                  -0-

Estimated annual savings in cash

operating costs                                       $120,000

Minimum desired rate of return             12 percent

 

Assume straight-line depreciation in all computations, and ignore income taxes.

 

The simple rate of return based on initial investment is

11. 11.11 percent.
12. 44.44 percent.
13. 33.33 percent.
14. 22.22 percent.

 

21. _______________ are costs that continue even if an operation is halted.
22. Avoidable costs
23. Opportunity costs
24. Unavoidable costs
25. Variable costs

 

25. Below is a potential investment project:

Initial capital investment                $180,000

Estimated useful life                             3 yrs.

Estimated terminal salvage value         -0-

Estimated annual savings in cash

operating costs                               $ 75,000

Minimum desired rate of return    10 percent

 

Assume straight-line depreciation in all computations and ignore income taxes.

 

The net present value of the project is:

518. $6,518.
519. $(123,652).
520. $75,000.
521. $186,518.

 

26. Wadell Company has the following information about a potential investment:

 

Number of years                                       5

Amount of annual cash inflow                 $12,000

Required initial investment                      ?

Simple rate of return                                 5 percent

Minimum desired rate of return                10 percent

Net present value                                       ($2,508)

 

What is the required initial investment?

1. $48,000
2. $45,492
3. $9,600
4. $2,400

 

27. If the direct-labor price variance is $500 favorable, and the direct-labor usage variance is $300 unfavorable, which of the following must be true?
28. The total direct-labor variance is $200 favorable.
29. Actual total wages paid were $500 more than expected.
30. The use of labor was extremely efficient.
31. The total master-budget variance is $200 favorable.

28. The Wright Company has a standard costing system. The following data are available for September:

 

 

The actual price per pound of direct materials purchased in September is:

1. A) $1.85.
2. B) $2.00.
3. C) $2.10.
4. D) $2.15.

 

29. Garner Corporation produces two products Hats and Caps. The following information is available for these two products:

Hats          Caps

Selling price per unit            $21.00        $15.00

Variable cost per unit             18.00          9.00

Total fixed costs                                                  $15,000

Total production capacity                                     10,000 units

 

If a maximum of 6,000 units of each product can be sold, it would be best to:

3. discontinue Hats as it results in a net loss of $3.00 per unit, and continue producing Caps.
4. produce only 4,000 units of Hats and 6,000 units of Caps to maximize profits.
5. produce 5,000 units of Hats and 5,000 units of Caps.
6. discontinue the production of both Hats and Caps.

31. Gordon Company records reveal the following:

Division X

Market price of finished component to outsiders      $25

Variable costs per component                                    $17

Contribution margin per component                           $8

Total contribution for 20,000 components        $160,000

 

Division Y

Sales price of finished product                      $35

Variable costs:

Division X (1 component @ $17)          $17

Division Y

Assembly                        $9

Packaging                        4

Contribution margin per unit                      $5

 

Total contribution for 20,000 units           $100,000

 

The variable costs of Division Y will be incurred whether it buys from Division X or from an outside supplier.

If Division X is working at full capacity, the lowest transfer price it would be willing to accept from Division Y would be

17. $17.
18. $25.
19. $8.
20. $22.

 

32. A static budget:
33. A) should be compared to actual costs to assess how well costs were controlled.
34. B) should be compared to a flexible budget to assess how well costs were controlled.
35. C) is valid for only one level of activity.
36. D) represents the best way to set spending targets for managers.

33. Thames Company is considering replacing a machine that is presently used in the production of its product. The following data are available:

 

Replacement

Old Machine      Machine

 

Original cost                                 $180,000        $140,000

Useful life in years                             10                     5

Current age in years                             5                     0

Book value                                    $100,000              —

Disposal value now                        $32,000               —

Disposal value in 5 years                      0                    0

Annual cash operating costs           $28,000         $16,000

 

Which of the data provided in the table is a sunk cost?

1. the disposal value of the old machine
2. the original cost of the old machine
3. the annual cash operating costs of the old machine
4. the annual cash operating costs of the replacement machine

 

35. Gil Corporation is considering the purchase of an asset for $300,000. The asset will have a 10-year life, no terminal salvage value, and straight-line depreciation will be used for tax purposes.

 

It is expected that the product manufactured by the equipment can be sold for $150,000 and that there will be annual production costs, exclusive of depreciation, equal to $90,000. The tax rate applicable to the company is 30 percent.

 

What is the annual net after-tax effect of depreciation?

1. $9,000 inflow
2. $21,000 inflow
3. $21,000 outflow
4. $9,000 outflow

 

38. Which of the following is not a problem with decentralization?
39. Managers may make decisions that are not in the organization’s best interests.
40. Managers tend to duplicate services that might be less expensive if centralized.
41. Costs of accumulating and processing information are frequently reduced.
42. Managers may waste time dickering with other segment managers about transfer prices.

Use the following to answer questions 41, 42, 43, and 44

 

The Phelps Company uses a flexible budget to plan and control manufacturing overhead costs. Overhead costs are applied to products on the basis of direct labor-hours. The standard cost card shows that 5 direct labor-hours are required per unit of product. Phelps Company had the following budgeted and actual data for March:

 

 

41. The variable overhead spending variance for March is:
42. A) $ 7,000 unfavorable.
43. B) $ 9,000 unfavorable.
44. C) $13,000 unfavorable.
45. D) $11,000 unfavorable.

 

42. The variable overhead efficiency variance for March is:
43. A) $8,000 unfavorable.
44. B) $4,000 favorable.
45. C) $8,000 unfavorable.
46. D) $4,000 unfavorable.

 

43. The fixed overhead budget variance for March is:
44. A) $2,000 favorable.
45. B) $ 500 favorable.
46. C) $2,000 unfavorable.
47. D) $2,500 favorable.

 

44. The fixed overhead volume variance for March is:
45. A) $1,000 favorable.
46. B) $5,000 favorable.
47. C) $2,500 unfavorable.
48. D) $5,000 unfavorable.

Part 2

 

1. Which of the following correctly lists all the information needed to calculate a labor rate variance?
2. Standard labor rate and actual hours worked.
3. Actual hours worked and actual units produced.
4. Standard labor rate, actual labor rate, and actual units produced.
5. Actual labor rate and actual hours worked.
6. Actual labor rate, standard labor rate, and actual hours worked.

 

2. Which of the following situations cannot occur together during the same accounting period?
3. Unfavorable labor rate variance and favorable labor efficiency variance.
4. Unfavorable labor efficiency variance and favorable materials quantity variance.
5. Favorable labor rate variance and unfavorable total labor variance.
6. Favorable labor efficiency variance and favorable materials quantity variance.
7. None of the above, as all of these situations are possible.

 

3. Badger Bakeries anticipated making 28,000 fancy cakes during a recent period, requiring 14,000 hours of process time. Each hour of process time was expected to cost the firm $11.  Actual activity for the period was higher than anticipated: 30,400 cakes and 15,200 hours.  If each hour of process time actually cost Badger $12, what process-time cost variances would be disclosed on a performance report that incorporated both static budgets and flexible budgets?

	Static	Flexible
A.	$28,400U	$28,400U
B.	$28,400U	$15,200U
C.	$15,200U	$28,400U
D.	$15,200U	$15,200U
E.	None of the above

 

4. A fixed-overhead volume variance would normally arise when:
5. actual hours of activity coincide with actual units of production.
6. budgeted fixed overhead is overapplied to production.
7. there is a fixed-overhead budget variance.
8. actual fixed overhead exceeds budgeted fixed overhead.
9. there is a variable-overhead efficiency variance.

5. Bushnell, Inc., has a standard variable overhead rate of $4 per machine hour, with each completed unit expected to take three machine hours to produce. A review of the company’s accounting records found the following:

 

Actual variable overhead: $210,000

Variable-overhead efficiency variance: $18,000U

Variable-overhead spending variance: $30,000F

 

How many units did Bushnell actually produce during the period?

500. 13,500.
501. 16,500.
502. 18,500.
503. 21,500.
504. Some other amount.

 

6. Luke, Inc., has a standard variable overhead rate of $5 per machine hour, with each completed unit expected to take three machine hours to produce. A review of the company’s accounting records found the following:

 

Actual production: 19,500 units

Variable-overhead efficiency variance: $9,000U

Variable-overhead spending variance: $21,000F

 

What was Luke’s actual variable overhead during the period?

500. $262,500.
501. $280,500.
502. $304,500.
503. $322,500.
504. Some other amount.

 

7. Atlanta Enterprises incurred $828,000 of fixed overhead during the period. During that same period, the company applied $845,000 of fixed overhead to production and reported an unfavorable budget variance of $41,000.  How much was Atlanta’s budgeted fixed overhead?
8. $787,000.
9. $804,000.
10. $869,000.
11. $886,000.
12. Not enough information to judge.

8. Copper Top, which has excess capacity, received a special order for 3,000 units at a price of $14 per unit. Currently, production and sales are budgeted for 10,000 units without considering the special order. Budget information for the current year follows.

 

Sales	$170,000
Less: Cost of goods sold	130,000
Gross margin	$  40,000

 

Cost of goods sold includes $30,000 of fixed manufacturing cost. If the special order is accepted, the company’s income will:

1. increase by $3,000.
2. increase by $12,000.
3. decrease by $3,000.
4. decrease by $12,000.
5. change by some other amount.

 

9. Schmidt Corporation produces a part that is used in the manufacture of one of its products. The costs associated with the production of 10,000 units of this part are as follows:

 

Direct materials                                                                                    $45,000

Direct labor                         65,000

Variable factory overhead  30,000

Fixed factory overhead      70,000

Total costs                $210,000

 

Of the fixed factory overhead costs, $30,000 is avoidable.

 

Phil Company has offered to sell 10,000 units of the same part to Schmidt Corporation for $18 per unit.  Assuming there is no other use for the facilities, Schmidt should

1. make the part as this would save $3 per unit.
2. buy the part as this would save $3 per unit.
3. buy the part as this would save the company $30,000.
4. make the part as this would save $1 per unit.
5. cannot be determined.

 

10. Johnson Company makes two products: Carpet Kleen and Floor Deodorizer. Operating information from the previous year follows.

 

		Carpet Kleen	Floor Deodorizer
Units produced and sold		5,000	4,000
Machine hours used		5,000	2,000
Sales price per unit		$7	$10
Variable cost per unit		$4	$8

 

Fixed costs of $20,000 per year are presently allocated equally between both products. If the product mix were to change, total fixed costs would remain the same.

 

Assuming there is unlimited demand for both products and Johnson has 10,000 machine hours available, how many units of each product should be produced and sold?

	Carpet Kleen		Floor Deodorizer
A.	0 units		0 units
B.	0 units		20,000 units
C.	5,000 units		10,000 units
D.	8,000 units		4,000 units
E.	10,000 units		0 units

 

11. When income taxes are considered in capital budgeting, the cash flows related to a company’s advertising expense would be correctly figured by taking the cash paid for advertising and:
12. adding the result of multiplying (advertising expense x tax rate).
13. adding the tax rate.
14. adding the result of multiplying [advertising expense x (1 – tax rate)].
15. subtracting the result of multiplying (advertising expense x tax rate).
16. subtracting the result of multiplying [advertising expense x (1 – tax rate)].

12. Julius Company is considering the purchase of a new machine for $100,000. The machine generates annual revenues of $62,500 and annual expenses of $37,500, which includes $7,500 of depreciation. What is the payback period in years on the machine approximated to one decimal point?
13. 1.6.
14. 3.1.
15. 4.0.
16. 1.7.
17. some other amount.

 

13. St. Andrews ranks investments by using the profitability index (PI). The following data relate to Project X and Project Y:

 

	Project X	Project Y
Initial investment	$400,000	$1,300,000
Present value of inflows	600,000	1,800,000

 

Which project would be more attractive as judged by its ranking, and why?

1. Project X because the PI is 0.50.
2. Project Y because the PI is 0.38.
3. Project X because the PI is 0.67.
4. Project Y because the PI is 0.72.
5. Both projects would be equally attractive in terms of ranking, as indicated by a positive PI.