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Acc 220
Coursepack
Fall 2005
(all sections)
Handouts &
Practice Exams
TABLE OF CONTENTS
Page #
HANDOUTS/ASSIGNMENTS:
Chapter Objectives ----------------------------------------------------------Comparison of Forms of Business Ownership ---------------------------Transaction analysis steps worksheet -------------------------------------Cash Basis of Accounting – transaction analysis worksheet ----------Deferrals and Accruals notes -----------------------------------------------Accrual Basis of Accounting – transaction analysis worksheet -------Process Costing Problems & Solutions -----------------------------------Chapter 6: Class Notes ------------------------------------------------------Present Value Problems ------------------------------------------------------
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PRACTICE EXAM QUESTIONS:
Selecting a Form of Business Ownership --------------------------------The Role of Accounting in Business --------------------------------------The Cash Basis of Accounting ---------------------------------------------The Accrual Basis of Accounting -----------------------------------------Introduction to Taxation ----------------------------------------------------Managerial Accounting – Ch 1 --------------------------------------------Managerial Accounting – Ch 2 --------------------------------------------Managerial Accounting – Ch 3 --------------------------------------------Managerial Accounting – Ch 4 --------------------------------------------Managerial Accounting – Ch 5 --------------------------------------------Managerial Accounting – Ch 6 --------------------------------------------Managerial Accounting – Ch 7 --------------------------------------------Managerial Accounting – Ch 8 --------------------------------------------Managerial Accounting – Ch 9 --------------------------------------------Managerial Accounting – Ch 10 -------------------------------------------Managerial Accounting – Ch 11 --------------------------------------------
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NC STATE UNIVERSITY - DEPARTMENT OF ACCOUNTING
ACC 220
CHAPTER OBJECTIVES
Text: “Introduction to Financial Accounting and Income Tax for Business Entities”
Chapter 2 -- Selecting a Form of Business Ownership
Students should be able to:
1. Contrast the proprietorship, partnership (general, limited and limited liability) and corporate
forms of business ownership (including S-corporations).
2. Describe the advantages and disadvantages of the sole proprietorship, partnership and corporate
forms of business ownership,
3. Contrast C-corporations and S-corporations, and
4. Describe methods of owning existing businesses.
Chapter 1-- The Role of Accounting in Business
Students should be able to:
1.
2.
3.
4.
5.
Describe the types and forms of businesses, business strategies, value chains and stakeholders,
Describe the three business activities of financing, investing and operating,
Define accounting and its role in business,
Describe and illustrate the basic financial statements and how they interrelate, and
Describe eight basic accounting concepts underlying financial reporting.
Chapter 2-- The Cash Basis of Accounting
Students should be able to:
1.
2.
3.
4.
Describe the basic elements of a financial accounting system,
Describe the cash and accrual bases of accounting,
Use the cash basis of accounting to analyze, record and summarize transactions for a business,
Use the cash basis of accounting to prepare financial statements (income statement, balance sheet
and retained earnings statement) , and
5. Describe the advantages and disadvantages of the cash basis of accounting.
Chapter 3-- The Accrual Basis of Accounting
Students should be able to:
1. Describe the accrual basis of accounting, and
2. Use the accrual basis of accounting to analyze, record, and summarize transactions.
3
Chapter 1-- Introduction to Taxation
Students should be able to:
1. Distinguish between progressive, proportional and regressive tax rates,
2. Identify the various taxes affecting business enterprises including taxes on the production and
sale of goods, employment taxes, death taxes, gift taxes, property taxes, taxes on privileges and
rights, and income taxes,
3. Distinguish between the basic tax formula for individuals and taxable business entities,
4. Calculate the taxable income and income tax for an individual taxpayer,
5. Calculate the taxable income and income tax for a corporate taxpayer,
6. Distinguish between the income taxation of proprietorships, partnerships, corporations and Scorporations,
7. Distinguish between and calculate marginal and average tax rates,
8. Explain the concept of implicit taxes and the impact of taxes on investment decisions,
9. Describe the taxation of capital gains and losses, and
10. Recognize the economic, social, equity and political considerations that underlie the tax law.
Text: Managerial Accounting: A Focus on Decision Making by Jackson and Sawyers
Chapter 1 -- Accounting Information and Managerial Decisions
Students should be able to:
1. Describe the uses and users of accounting information,
2. Contrast financial and managerial accounting and distinguish between the information needs of
external and internal users,
3. Describe the three primary activities of managers and the three primary functional areas of an
organization
4. Explain the role of the managerial accountant
5. Describe and apply the decision-making role of managers,
6. Apply a basic four-step decision-making model,
7. Evaluate the role of relevant factors in decision making,
8. Evaluate the role of risk in decision making, and
9. Evaluate the role of ethics in decision making.
Chapter 2—Product Costing: Manufacturing Processes, Cost Terminology, and Cost Flows
Students should be able to:
1. Describe the production process in a traditional manufacturing environment and a just-in-time
(JIT) environment,
2. Describe the components of manufacturing costs,
3. Contrast manufacturing and nonmanufacturing costs,
4. Describe cost flows in a manufacturing company,
5. Calculate the cost of goods manufactured and cost of goods sold using the cost of goods sold
model, and
6. Contrast product and period costs as they flow to the income statement.
4
Chapter 3 – Job Costing, Process Costing and Operations Costing
Students should be able to:
1. Describe, comprehend, and contrast job costing, operations costing and process costing,
2. Analyze the issues related to the measurement of direct materials, direct labor and overhead costs
in job costing,
3. Describe the necessity for allocating indirect product costs,
4. Analyze the role of cost pools and cost drivers in overhead application
5. Compute a predetermined overhead rate,
6. Apply overhead to work in process (WIP),
7. Evaluate the advantages and disadvantages of using plantwide versus departmental overhead
rates,
8. Calculate the cost of a product using job costing,
9. Compute the amount of over or under applied overhead,
10. Dispose of over or under applied overhead,
11. Describe the use of equivalent units in process costing,
12. Calculate the equivalent units of production using the first-in-first-out (FIFO) method, and
13. Calculate the cost of ending WIP and the cost of goods manufactured using process costing.
Chapter 4—Activity-Based Costing
Students should be able to:
1.
2.
3.
4.
5.
6.
Describe the need for activity-based costing (ABC),
Describe ABC,
Describe the process of instituting ABC,
Compute the cost of a unit of product using ABC,
Compare traditional volume-based costing to ABC costing, and
Evaluate the benefits and limitations of ABC systems
Chapter 5—Cost Behavior and Relevant Costs
Students should be able to:
1.
2.
3.
4.
5.
6.
Describe and identify variable costs, fixed costs, mixed costs,
Describe the relationship between activity level and per unit and total fixed and variable costs,
Interpret the results of a regression analysis of a mixed cost,
Analyze a mixed cost using high-low analysis,
Apply a cost equation to the process of prediction, and
Determine the impact of taxes on costs, revenue and income.
5
Chapter 6 – Cost-Volume-Profit Analysis and Variable Costing
Students should be able to:
1. Construct a contribution margin income statement and compare it to a traditional income
statement,
2. Describe the relationship between activity level and contribution margin, fixed costs, and net
income,
3. Describe and compute contribution margin per unit, contribution margin ratio, and operating
leverage,
4. Use contribution margin and operating leverage in "what-if" analysis,
5. Calculate the breakeven point in both units and dollars,
6. Compute the breakeven point in a multiple product environment,
7. Compute the number of units and sales dollars to reach a target profit (both before and after-tax),
8. Describe the assumptions of cost-volume-profit analysis,
Chapter 7—Short-Term Tactical Decision Making
Students should be able to:
1. Consider both quantitative and qualitative factors in:





Analyzing the pricing of a special order,
Analyzing a decision involving the outsourcing of labor or making or buying a component,
Analyzing a decision dealing with dropping a product,
Analyzing a decision dealing with limited resources, and
Analyzing a decision dealing with selling a product at the split-off point or processing it
further.
Chapter 8 -- Long-Term (Capital Investment) Decisions
Students should be able to:
1. Discuss the importance of focusing on cash flows in capital investment decisions,
2. Understand the typical cash inflows and outflows associated with an investment project and how
they affect capital investment decisions,
3. Evaluate capital investment decisions using net present value (NPV) and internal rate of return
(IRR),
4. Discuss the key assumptions of the NPV and IRR methods,
5. Compute the profitability index and rank investment projects using IRR and the profitability
index,
6. Compute the payback period of an investment and understand the limitations of the method,
7. Compute the after-tax cost and benefits of cash expenses and receipts, and
8. Compute the after-tax NPV and IRR of an investment.
6
Chapter 9 -- The Use of Budgets in Planning and Decision Making
Students should be able to:
1.
2.
3.
4.
5.
6.
7.
Evaluate the principal advantages of budgeting,
Explain how budgets can influence behavior,
Prepare a sales budget,
Prepare a production budget,
Prepare a direct materials budget,
Prepare a cash budget, and
Prepare a flexible budget and understand the advantages of a flexible budget over a static budget.
Chapter 10 – Variance Analysis: A Tool for Cost Control and Performance Evaluation
Students should be able to:
1.
2.
3.
4.
5.
6.
Apply and use standard costing in variance analysis,
Distinguish between ideal standards and practical standards,
Compute and interpret direct material price and quantity variances,
Compute and interpret direct labor rate and efficiency variances,
Compute and interpret variable overhead spending and efficiency variances,
Explain how a manager would determine whether a variance constituted an "exception" that
would require his/her attention, and
Chapter 11 – Decentralization and Performance Evaluation
Students should be able to:
1. Evaluate the benefits and drawbacks of decentralization,
2. Explain the importance of decentralization in a responsibility accounting system,
3. Differentiate between cost centers, revenue centers, profit centers and investment centers and
explain how performance could be measured in each,
4. Compute ROI for an investment center,
5. Break down ROI into its components of margin and turnover,
6. Compute residual income for an investment center, and
7. Identify and discuss the advantages and disadvantages of ROI vs. residual income.
7




COMPARISON OF FORMS OF BUSINESS OWNERSHIP
ADVANTAGES
DISADVANTAGES
All earnings go to the sole prop.
 Sole prop. Incurs all losses
Easy organization
 Unlimited liability
Complete control
 Limited funds
Lower taxes
 Limited skills
Co-owned by two or more
people
General Partnership: all
owners have unlimited
liability
Limited Partnership:
Some owners have ltd
liability
Limited partners usually
do not work in the
business



Additional funding
Losses are shared
More specialization
Has characteristics of
both a partnership and a
corporation
Many rules in order to
qualify
75 or fewer shareholders


Owned by 1 or more
members
Offers limited liability
Flexibility with respect to
tax


Owners have limited liability
More flexible than an S-Corp.



Control is shared
Profits are shared
Uncertainty as to the tax
consequences in some states due to
“newness” of this type of form

Members can choose. Usually
taxed as a sole proprietorship if one
member, and as a partnership if 2+
members.
Approx. 20% of all
businesses are this type
Accounts for almost 90%
of all business revenue
Privately-held vs.
publicly-held



Limited liability
Access to funds
Transfer of ownership


High organizational expense
Financial disclosure if a public
company
SEC requirements for public
companies
Agency problems
Double taxation

Business files its own tax return
(Form 1120) and pays taxes on its
income.
If remaining profits are distributed
as a dividend to shareholders, then
the shareholder pays taxes on the
dividend on their indiv. tax return
TYPE
Sole
Proprietorship
GEN’L INFORMATION
 Owned by a single owner
 Approx. 70% of all
business are this, but
generates only 10% of the
revenue
Partnership




S-Corporation



Limited
Liability
Company
(LLC)

C-Corporation








Control is shared
Unlimited liability (or for general
partner if a LP)
Profits are shared



Owners have limited liability
Owners are taxed as if it were a
partnership



Control is shared
Profits are shared
Strict eligibility requirements






TAXES
Business pays taxes at the sole
proprietor level (Schedule C on
Form 1040)
Business files its own tax return
(form 1065) in order to report
income, but no taxes paid with this
return. Each partner is given a form
reporting their share of the
business’ profits
Each partner reports his/her share
on their own personal tax return and
pays taxes accordingly
Business files its own tax return
(form 1120S) in order to report
income, but no taxes paid with this
return. Each shareholder is given a
form reporting their share of the
business’ profits
Each shareholder reports his/her
share on their own personal tax
return and pays taxes accordingly
8
Transaction Analysis Steps
1. Enter beginning account balances (if applicable).
2. Enter new transactions. Show how each transaction affects the accounting equation (A = L + OE). Be specific – show which asset,
liability, or owner’s equity account is being affected. If Retained Earnings (“RE”) is affected, detail the specific reason RE is affected
(revenue, expense, or dividend).
3. Once all transactions have been entered, calculate new account balances.
4. Verify that the account balances “balance” the accounting equation.
ASSETS
LIABILITIES
OWNER’S EQUITY
REVENUES
EXPENSES
DIVIDENDS
Acct Name →
Beginning Bal.
Balances
Note: The various account balances (versus individual transactions) go on their respective financial statement. With retained earnings being
the exception, each account balance will be used only once.
9
ABC Company (a service organization) had the following transactions occur during its first month of operations:
Jan 1 --Jan 3 --Jan 4 --Jan 10 -Jan 11 -Jan 20 --
The ABC Company is formed when the owners contribute a total of $10,000 cash.
The company purchases machinery costing $3,000.
The company borrows $4,000 from the bank by signing a note payable.
The company performed services for customers and received $1,000 cash.
The company incurred expenses of $300 paid in cash.
The company paid its owners a dividend of $100.
Required:
1. Enter each of the above transactions in the following worksheet. Use + and – signs to indicate whether the balance sheet account is going up or down.
Remember to be specific regarding which account is affected. For numbers entered in the revenue, expense, or dividend columns, use their absolute
value (no + or – signs).
2. At the bottom of the worksheet, compute account balances.
3. On a separate page, prepare the first three financial statements – Income Statement, Statement of Retained Earnings, and Balance Sheet.
ASSETS
LIABILITIES
OWNER’S
EQUITY
REVENUES
EXPENSES
DIVIDENDS
Balances
10
Deferrals and Accruals
When cash is received at the same time as revenue is earned, or when cash is paid at the same
time an expense is incurred, the transaction to be recorded is simply:
↑Cash and ↑RE (as revenue is increasing)
or
↓Cash and ↓RE (as expenses are increasing)
In accrual-based accounting, while the above two situations can still occur, there are two
additional types of situations that can occur as well. These are called deferrals and accruals.
DEFERRAL:
A deferral is created when either one of these transactions occurs:
 Cash is received before revenue is earned, or
 Cash is paid before an expense is incurred
A. Deferred Revenue: At the time of the deferral, a recordable transaction occurs.
↑Cash and ↑Unearned Revenue (a liability)
Assuming that the company eventually earns the revenue, an adjustment (also
known as an “adjusting journal entry”) will be recorded at the end of the period
recognizing the revenue now earned.
↓Unearned Revenue and ↑RE (as revenue is increasing)
Once this adjustment has been made, the balances on the financial statements are
correctly stated and the revenue recognition principle has been adhered to.
B. Deferred Expense: At the time of the deferral, a recordable transaction occurs.
↓Cash and ↑Prepaid Expense (an asset)
Assuming the company eventually incurs the expense, an adjustment will be
recorded at the end of the period recognizing the expense.
↓Prepaid Expense and ↓RE (as expenses are increasing)
Once this adjustment has been made, the balances on the financial statement are
correctly stated and the matching principle has been adhered to.
11
ACCRUAL:
An accrual is created when either one of these transactions occurs:
 Cash will be received after the revenue is earned, or
 Cash will be paid after the expense is incurred
Either at the time of the event leading to the accrual or, at the latest, the end of the
accounting period, a recordable transaction occurs. If it is being recorded at the end of the
accounting period, it is called an adjustment (also known as an “adjusting journal entry”).
A. Accrued Revenue:
↑AR and ↑RE (as revenue is increasing)
B. Accrued Expense:
↑_____ Payable and ↓RE (as expenses are increasing)
(ex. AP, SP, IP)
Some time after the adjustment is made, there will be a subsequent receipt of cash from
the customer (↑Cash and ↓AR) or a subsequent payment to the creditor (↓Cash and ↓AP).
Once these adjustments have been made, the financial statement balances are correctly
stated and the revenue recognition and matching principles will have been adhered to.
12
Helen Ingersoll owns and operates an interior design studio called Ingersoll Interiors. The company began operations on January 1, 2003 and is organized as a
corporation. After the first month of operations, the company’s accounts had the following beginning balances.
ASSETS
Transaction
Cash
Jan 30 Bal
A
B
C
D
E
F
G
H
I
J
Feb. 28 Bal
3,750
A/R
Prepd
Insur.
Inventory
OWNER’S
EQUITY
LIABILITIES
Equip.
(net of
acc. dep)
Land
12,000
Unearned Notes
Revenue Payable
8,000
Accounts
Payable
Capital
Stock
Retained
Earnings
6,750
1,000
Detail
of RE
effect
The following events occurred in February:
A.
On February 1, Ingersoll purchased $5,000 of inventory on account
B.
On February 1, Ingersoll paid $1,200 for an insurance policy for the next 24 months.
C.
On February 1, Ingersoll purchased depreciable office equipment for $6,000 on account. The equipment is depreciable over 5 years.
D.
On February 4, Ingersoll performed services for a client and billed the client for $8,000.
E.
On February 11, Ingersoll paid $2,500 of the amount she owed with respect to the purchase of inventory (see transaction A)
F.
On February 18, Ingersoll collected $4,000 cash from the client billed in transaction D.
G.
On February 19, Ingersoll performed services for a client and received cash of $1,000 as payment in full for the work performed.
H.
On February 20, Ingersoll received $1,000 as a downpayment from a client for work to be performed over the next year.
I.
On February 28, Ingersoll recognized depreciation for the month (see transaction C).
J.
On February 28, Ingersoll recognized insurance expense for the month (see transaction B).
Requirements:
1.
Complete the transaction analysis worksheet above
2.
Prepare the income statement and statement of retained earnings for the month of Feb as well as the balance sheet at Feb. 28
13
PROCESS COSTING PROBLEMS
(FIFO Method)
STEP #1:
From the information given, compute the following three items:



# of units in beginning inventory
# of units started and completed in the current period
# of units in ending inventory
For the beginning and ending inventories, you will need to note how complete they are.
STEP #2:
Using the three items from step #1, compute the total number of equivalent units for the current
period.
STEP #3
Compute the cost per equivalent unit. Do this by taking the current period’s costs ÷ total EU’s
(from Step #2).
STEP #4:
Calculate the cost of ending inventory by taking the number of EU’s in ending inventory (from
Step #1) and multiplying it by the cost per EU (from step #3).
STEP #5:
Solve for the CGM. Do this by taking the Beginning Costs + Current period’s costs – ending WIP
cost.
PRACTICE PROBLEM #1:
Linus Inc. manufactures a product that goes through three departments. Information relating to
activity in the first department is as follows:
# units
Work-in-process – Beginning (20% complete)
Started in current period
Work-in-process – Ending (60% complete)
50,000 units
200,000 units
30,000 units
Costs (DM and
CC)
$40,000
$340,000
STEP #1:
STEP #2:
STEP #3:
STEP #4:
STEP #5
14
PRACTICE PROBLEM #2:
Abby Corp. manufactures a product that goes through one processing department. Information
relating to activity in this department is as follows:
# units
Work-in-process – Beginning (80% complete)
Started in current period
Work-in-process – Ending (20% complete)
3,000
35,000
10,000
Costs (DM and
CC)
$10,000
225,000
STEP #1:
STEP #2:
STEP #3:
STEP #4:
STEP #5:
15
PRACTICE PROBLEM #3:
Wolfpack Inc. manufactures a product that goes through various departments. Information
relating to activity in one of the departments is as follows:
# units
Work-in-process – Beginning (90% complete)
Started in current period
Work-in-process – Ending (90% complete)
200,000
800,000
90,000
Costs (DM and
CC)
$300,000
1,000,000
STEP #1:
STEP #2:
STEP #3:
STEP #4:
STEP #5:
16
PRACTICE PROBLEM #4:
Williams & Company manufactures a single product and uses process costing. The following
information was recorded in one of the processing departments for the month of August:
Production Data:
Units in Process, August 1: 80% complete for DM and CC
Units started into production in August
Units in Process: August 31: 70% complete for DM and CC
Cost Data:
Beg WIP (DM and CC)
Costs added in August
60,000 units
510,000 units
30,000 units
$40,000
900,000
QUESTION: What was the cost of goods transferred out (CGM) during August?
17
SOLUTION TO PROCESS COSTING PROBLEMS
PRACTICE PROBLEM #1:
Step #1:
Beginning units
+ units started
- Ending units
Units completed
Step #2:
50,000 units X 80% =
170,000 X 100% =
30,000 X 60% =
Total Equivalent Units
Step #3
Current Period Costs
÷ Total EU’s
Cost per EU
50,000
200,000
(30,000)
220,000
→ of which 50,000 were from the beginning units, and
→170,000 were started and completed in current period
40,000 eu’s
170,000 eu’s
18,000 eu’s
228,000 eu’s
$340,000
÷ 228,000 eu’s
$1.49
Step #4
18,000 EU’s in ending inventory X $1.49 per EU =
Step #5
Beginning WIP costs
+ Current Period Costs
Total Avail. Costs
- Ending WIP Costs (step #3)
CGM
Per EU
$26,820
Cost of Ending Inventory
$40,000
340,000
380,000
(26,820)
$353,180
PRACTICE PROBLEM #2:
Step #1:
Beginning units
+ units started
- Ending units
Units completed
Step #2:
3,000 units X 20% =
25,000 X 100% =
10,000 X 20% =
Total Equivalent Units
Step #3
Current Period Costs
÷ Total EU’s
Cost per EU
3,000
35,000
(10,000)
28,000
→ of which 3,000 were from the beginning units, and
→25,000 were started and completed in current period
600 eu’s
25,000 eu’s
2,000 eu’s
27,600 eu’s
$225,000
÷ 27,600 eu’s
$8.15
Step #4
2,000 EU’s in ending inventory X $8.15 per EU =
Step #5
Beginning WIP costs
+ Current Period Costs
Total Avail. Costs
- Ending WIP Costs (step #3)
CGM
Per EU
$16,300
Cost of Ending Inventory
$10,000
225,000
235,000
(16,300)
$218,700
18
PRACTICE PROBLEM #3:
Step #1:
Beginning units
+ units started
- Ending units
Units completed
Step #2:
200,000 units X 10% =
710,000 X 100% =
90,000 X 90% =
Total Equivalent Units
Step #3
Current Period Costs
÷ Total EU’s
Cost per EU
200,000
800,000
(90,000)
910,000
→ of which 200,000 were from the beginning units, and
→710,000 were started and completed in current period
20,000 eu’s
710,000 eu’s
81,000 eu’s
811,000 eu’s
$1,000,000
÷ 811,000 eu’s
$1.23
Step #4
81,000 EU’s in ending inventory X $1.23 per EU =
Step #5
Beginning WIP costs
+ Current Period Costs
Total Avail. Costs
- Ending WIP Costs (step #3)
CGM
Per EU
$99,630
Cost of Ending Inventory
$300,000
1,000,000
1,300,000
(99,630)
$1,200,370
PRACTICE PROBLEM #4:
Step #1:
Beginning units
+ units started
- Ending units
Units completed
Step #2:
60,000 units X 20% =
480,000 X 100% =
30,000 X 70% =
Total Equivalent Units
Step #3
Current Period Costs
÷ Total EU’s
Cost per EU
60,000
510,000
(30,000)
540,000
→ of which 60,000 were from the beginning units, and
→480,000 were started and completed in current period
12,000 eu’s
480,000 eu’s
21,000 eu’s
513,000 eu’s
$900,000
÷ 513,000 eu’s
$1.75
Step #4
21,000 EU’s in ending inventory X $1.75 per EU =
Step #5
Beginning WIP costs
+ Current Period Costs
Total Avail. Costs
- Ending WIP Costs (step #3)
CGM
Per EU
$36,750
Cost of Ending Inventory
$40,000
900,000
940,000
(36,750)
$903,250
19
Chapter 6
(Class Notes)
TRADITIONAL INCOME STATEMENT VS. CONTRIBUTION MARGIN FORMAT
The ABC Company has the following information available:
Variable selling & admin. costs -----------Direct materials ------------------------------Variable manufacturing overhead ---------Direct Labor -----------------------------------
$10.00 per unit
$15.00 per unit
$8.50 per unit
$2.00 per unit
Fixed selling & administrative costs ------Fixed manufacturing overhead -------------
$60,000
$35,000
Assume that the company produced and sold 50,000 units at a sales price of $70 per unit.
Part I: Prepare a traditional format income statement.
Part II: Prepare a contribution margin format (a.k.a. variable costing) income statement.
20
Answer the following questions using your contribution margin format income statement:
1. What is the contribution margin per unit? What does this number mean?
2. What is the contribution margin ratio? What does this ratio mean?
3. What does the contribution margin need to be in order for the company to break-even?
4. How many units need to be sold in order for the company to break-even?
5. All else being equal, if the variable costs per unit increase, what happens to the break-even point?
6. All else being equal, if the variable costs per unit decrease, what happens to the break-even point?
7. All else being equal, if fixed costs increase, what happens to the break-even point?
8. All else being equal, if fixed costs decrease, what happens to the break-even point?
9. If the company wishes to have net income of $2,000,000, what does the contribution margin need to be?
10. Continuing with #10, how many units would need to be sold?
11. If the company believes they can only sell 55,000 units, what should be the price per unit in order to have net
income of $2,000,000?
21
Chapter 8
(Class Notes)
PRESENT VALUE PROBLEMS
1. You invested in a savings account at the beginning of the year that pays 12% compounded monthly. If you
expect to withdraw $11,000 at the end of the year, how much did you originally deposit?
Solution:
You must solve for the present value (PV) where the future value (FV) = $11,000, the interest rate per
compounding period (r) = .01 (12% annual rate / 12 compounding periods per year), and the number of
compounding periods per year (n) = 12.
Using the present value formula,
PV = FV X DF12, .01
PV = $11,000 x .889 = $9,757
Mathematically, PV = $11,000/ (1+.01)12 = $9,757
2. Barron deposits $2,000 in a mutual fund and 5 years later has $3,221 in the investment account. At what rate
of interest (assuming annual compounding) did the investment appreciate?
Solution:
You must solve for the interest rate (r) where PV = $2,000, FV = $3,221 and n = 5.
Using the present value formula,
PV = FV x DF5, r%?
$2,000 = $3,221 x DF5, r%?
DF5, r% = .6209
Looking across the present value of an annuity table (see page 276 in your book) for an “n” of 5, you will
find .6209 in the 10% column.
22
PRESENT VALUE OF ANNUITY PROBLEMS
1. A grateful alumnus of the NCSU Accounting Department wants to establish an award of $2,000 to be given
to the top accounting student each year for the next thirty years. How much must the endowment for the
award be if the fund will earn 9% compounded annually and the first award will be given one year from now?
Solution:
You must solve for the present value of an annuity (PVA) where the interest rate (r) = 9%, the number of
compounding periods (n) = 30 and the amount of the periodic annuity or rent (R) is $2,000.
Using the PVA formula,
PVA = R x DFA30, .09
PVA = $2,000 x 10.274 = $20,548
2. For an investment of $100,000, your CPA promises that you will get back $29,831 a year for the next five
years (beginning one year after the initial investment). What rate of interest does the investment provide?
Solution:
You must solve for the interest rate (r) where the PVA = $100,000, n = 5 and R = $29,831.
Using the present value of an annuity formula,
PVA = R x DFA5, r%?
$100,000 = $29,831 x DFA5, r%?
DFA5, r%? = 3.3522
Looking across the present value of an annuity table for an “n” of 5, you will find 3.3522 in the 15%
column.
23
Selecting a Form of Business Ownership
(from Supplement)
1. The owners of a(n) _________________ are subject to limited liability as in a corporation, but are taxed
as if the firm was a partnership.
A. Sole proprietorship
B. S-Corporation
C. C-Corporation
D. General partnership
E. None of the above
2. Compared to sole proprietorships and partnerships, a major advantage of corporations is that they:
A. are easier to form.
B. have greater access to funds.
C. receive more favorable tax treatment.
D. avoid agency problems.
3. “Double taxation” is a disadvantage to which type of organization?
A. Sole proprietorship
B. General partnership
C. Limited partnership
D. S-Corporation
E. C-Corporation
4. Which type of organization is required to follow generally accepted accounting principles (GAAP)?
A. Sole proprietorship
B. General partnership
C. S-Corporation
D. Publicly-held corporation
E. Privately-held corporation
5. The XYZ Corporation has total earnings of $20 million and decides to pay its stockholders a dividend of
$8 million. If the corporate tax rate is 30% and the personal tax rate on individual stockholders is 25%,
the total amount of taxes paid on XYZ’s earnings would be:
A. $11 million
B. $8 million
C. $6 million
D. $5 million
E. $3 million
6. A major advantage of franchise arrangements is that they:
A. Are very inexpensive to set up.
B. Allow the franchises to keep all of the profit.
C. Give the franchisee total control over how the business is run.
D. Are not subject to state or federal income taxes.
E. Offer the franchises a proven management style.
SOLUTIONS: 1. B
2. B
3. E
4. D
5. B
6. E
24
The Role of Accounting in Business
(from Supplement)
PROBLEM I:
The following information is available for the ABC Company.
Beginning of year:
Assets
Liabilities
Owner’s Equity
$500,000
300,000
?
End of year:
Assets
Liabilities
Owner’s Equity
700,000
?
450,000
During the year, the following occurred:
Additional issue of capital stock
Revenues
Expenses
Dividends
15,000
600,000
?
50,000
REQUIRED: Solve for the three question marks above. Put your answers in the blanks below:
Beginning of year Owner’s Equity = ________________
End of year Liabilities
= ________________
Expenses during the year
= ________________
MULTIPLE CHOICE:
1. Which financial statement is normally prepared first?
A.
B.
C.
D.
Statement of retained earnings
Balance sheet
Statement of cash flows
Income statement
2. Which accounting concept is being applied in the following statement:
“Material litigation involving the corporation is described in a footnote.”
A.
B.
C.
D.
E.
Cost Concept
Objectivity Concept
Adequate Disclosure Concept
Going Concern Concept
Matching Concept
25
3. Which accounting concept is being applied in the following statement:
“Equipment currently valued at $20,000 is reported at its original purchase price of $30,000.”
A.
B.
C.
D.
E.
Cost Concept
Objectivity Concept
Adequate Disclosure Concept
Going Concern Concept
Matching Concept
4. Which accounting concept is being applied in the following statement:
“If this concept was ignored, the confidence of users in the financial statements could not be maintained.”
A.
B.
C.
D.
E.
Cost Concept
Objectivity Concept
Adequate Disclosure Concept
Going Concern Concept
Matching Concept
----------------------------------------------------------------------------------------------------------------------SOLUTIONS:
PROBLEM I:
1.
2.
3.
4.
Beg OE = $200,000
End Liab = $250,000
Expenses = $315,000
D
C
A
B
26
The Cash Basis of Accounting
(from Supplement)
PROBLEM I:
After recording all of it’s transactions for the first month of operations, the Tarheel Corporation had the following
account balances (listed in alphabetical order):
Cash
Contributed Capital
Dividends
Equipment
Land
Miscellaneous expense
Notes Payable
Rent expense
Salaries expense
Sales Revenue
39,000
10,000
1,000
75,000
18,000
52,000
8,000
15,000
8,000
190,000
HINT: Before answering the following questions, label which financial statement each of the above accounts
would go on. There is only one place for each of the above. Also note that since this is a brand new company,
the beginning retained earnings balance is zero.
A. What is net income? CIRCLE ANSWER.
B. What are total assets? CIRCLE ANSWER.
C. What are total liabilities? CIRCLE ANSWER.
D. What is the ending retained earnings balance? CIRCLE ANSWER.
E. What is total owner’s equity? CIRCLE ANSWER.
MULTIPLE CHOICE
27
1. During 2005, Thomas Inc. earned fees of $150,000, of which $100,000 was collected in cash. The
company also incurred $65,000 in expenses, of which $35,000 was paid.
If Thomas Inc. uses the cash basis of accounting, what was net income for 2005?
A.
B.
C.
D.
$100,000
$65,000
$85,000
$280,000
2. During 2005, Jagger Inc. earned revenue totaling $1,000,000, of which $700,000 was collected in cash in
2003. The company also incurred $200,000 in expenses, of which $100,000 was paid in 2005.
If Jagger uses the cash basis of accounting, net income for 2005 would be:
A.
B.
C.
D.
E.
$600,000
$500,000
$800,000
$900,000
$700,000
3. Stager Co. uses the cash basis of accounting. Which of the following transactions by Stager would cause
stockholder’s equity to immediately increase?
A.
B.
C.
D.
E.
Purchase of store equipment
Borrowing money from a bank
Payment of dividends
Cash sale to customer
Payment of store rent
4. Rivers Inc. uses the cash basis of accounting. The company began business in September of 2004 and had the
following transactions occur in its first month of operations:
Sept 1
Sept 3
Sept 4
Sept 5
Sept 7
Sept 20
Sept 25
The company was started by the owners investing $5,000 cash in the business.
Borrowed $10,000 from the bank.
Purchased equipment costing $3,000.
Received cash from fees earned totaling $2,000.
Paid advertising, $100.
Paid salaries, $800.
Paid dividends, $100.
After doing transaction analysis on the above information, what would be the cash balance at the end of September?
A. $16,000
B. $13,000
C. $10,000
D. $3,000
E. $17,900
28
5. After doing transaction analysis on the information, what would be the ending retained earnings balance
at the end of September?
A.
B.
C.
D.
E.
$1,100
$18,000
$5,900
$6,000
$1,000
-----------------------------------------------------------------------------------------------------------SOLUTIONS:
PROBLEM I:
A.
B.
C.
D.
E.
$115,000
$132,000
$8,000
$114,000
$124,000
MULTIPLE CHOICE:
1.
2.
3.
4.
5.
B
A
D
B
E
29
The Accrual Basis of Accounting
(from Supplement)
PROBLEM I:
Wolfpack, Inc. sells inventory. The company uses the accrual basis of accounting. Below are transactions that Wolfpack incurred during its first month
of operations:
A.
B.
C.
D.
E.
F.
G.
Wolfpack, Inc. was created when the owners deposited $25,000 in the cash account.
The company purchased inventory for $7,000 cash.
The company paid for one-year’s worth of insurance totaling 1,200.
The company collected $500 from a customer for services to be provided in the future.
The company sold inventory which cost $200 for $600 cash.
The company paid salaries totaling $1,000.
The company paid a dividend of $500 to the owners.
REQUIRED: Enter each of the above transactions into the worksheet below. You do not need to do end of month adjustments. Remember to do the
following:




Write the column headings for the accounts affected in the above transactions. All of the columns in the worksheet may not
necessarily be used.
Put the amount and whether it is increasing or decreasing in the correct column
If your transaction affects retained earnings, also show which particular component of retained earnings is affected.
After recorded all the above transactions, total up your column headings.
=
+
A.
B.
C.
D.
E.
F.
G.
30
1. “Prepaid Insurance” is an example of which type of account?
A.
B.
C.
D.
E.
Asset
Liability
Stockholder’s Equity
Revenue
Expense
2. As prepaid insurance expires over time, which of the following statements is true? (Assume the company
uses accrual-basis accounting)
A.
B.
C.
D.
E.
Assets will increase
Liabilities will decrease
Revenues will increase
Retained earnings will decrease
Contributed capital will decrease
3. On 1/1/2003, a company (accrual-basis) collected $6,000 from a customer to be earned over the next six
month. At the end of the first month, to properly reflect revenues, which account should be increased?
A.
B.
C.
D.
E.
Cash
Unearned Revenue
Retained Earnings
Accounts Receivable
Accounts Payable
4. True or False: All public corporations must use the cash basis of accounting.
5. A company sold inventory costing $2,000 for $5,000 cash. What is the overall net effect on the
accounting equation?
Assets
Increase
Increase
Decrease
Decrease
No effect
A.
B.
C.
D.
E.
Liabilities
Increase
No effect
No effect
Decrease
Decrease
Owner’s Equity
No effect
Increase
Decrease
No effect
Increase
6. Which of the following transactions would cause an increase in owner’s equity?
A.
B.
C.
D.
E.
The company pays dividends.
The company purchases a machine by signing a note payable.
The company issued stock to new stockholders.
The company paid off an account payable.
The company receives cash for services to be provided in the future.
31
7. Which of the following accounts is an asset?
A.
B.
C.
D.
E.
Prepaid Insurance
Unearned Revenue
Capital Stock
Retained Earnings
Sales Revenue
8. During 2005, Jagger Inc. earned revenue totaling $1,000,000, of which $700,000 was collected in cash in
2005. The company also incurred $200,000 in expenses, of which $100,000 was paid in 2005.
If Jagger uses the accrual basis of accounting, net income for 2005 would be:
A.
B.
C.
D.
E.
$600,000
$500,000
$800,000
$900,000
$700,000
9. As “Unearned Revenue” is earned over time, which of the following statements is TRUE? (assume
accrual basis accounting)
A.
B.
C.
D.
E.
Assets will increase
Assets will decrease
Liabilities will increase
Liabilities will decrease
Owner’s Equity will decrease
32
10. During 2005, Thomas Inc. earned fees of $150,000, of which $100,000 was collected in cash. The
company also incurred $65,000 in expenses, of which $35,000 was paid.
If Thomas Inc. uses the accrual basis of accounting, what is net income for 2005?
A.
B.
C.
D.
E.
$100,000
$65,000
$85,000
$150,000
$280,000
SOLUTIONS:
PROBLEM I:
Cash
A.
B.
C.
D.
E.
+ 25,000
- 7,000
- 1,200
+ 500
+ 600
Invento
ry
Prepaid = Unearned +
Ins
Revenue
CC
- 1,000
- 500
16,400
Rev
+ 600
- 200
- 1,000
- 500
-1,100
600
Exp
Divid
+ 25,000
+ 7,000
+ 1,200
+ 500
- 200
F.
G.
Bal
RE
6,800
1,200
500
25,000
200
1,000
600
1,200
500
500
MULTIPLE CHOICE:
1. A
2. D
3. C
4. FALSE
5. B
6. C
7. A
8. C
9. D
10. C
33
Introduction to Taxation
(from supplement)
PROBLEM I:
Caroline is a single individual. In 2004, she has gross income of $60,000. Her total itemized deductions are
$15,000, her standard deduction is $4,850. She can claim one personal exemption equal to $3,100.
A. Using the tax tables provided at the back of the supplement, what is her tax liability for 2004?
B. If Caroline has already had $8,000 withheld from her paycheck, does she need to send in additional
money to the IRS, or is she owed a refund?
PROBLEM II:
Thayer Enterprises ( a corporation) reports total income of $100,000. The corporation’s taxable income is
$80,000.
B. What is the company’s marginal tax rate?
C. What is the company’s average tax rate?
D. What is the company’s effective tax rate?
PROBLEM III:
You would like to buy a $1,000 bond. Your marginal tax rate is 15%. You have narrowed it down to two
choices: Buy a 5% taxable bond or a 4% municipal bond.
Based on your circumstances, which bond would be the better financial choice and why? Clearly show your
calculations and explain your answer.
34
MULTIPLE CHOICE:
1. Which of the following would be an example of a progressive tax?
A.
B.
C.
D.
E.
Federal Income Tax
Sales Taxes
FICA tax
Excise tax on gasoline
All of the above
2. True or False: The FICA tax is always a proportional tax.
3. True or False: Typically, only people who rent their homes qualify for the itemized tax deduction.
4. You would like to buy a $10,000 bond. Your marginal tax rate is 30%. You have narrowed it down to
two choices: A 6% taxable bond or a 5% municipal bond.
Taking into account taxes, which of the following statements is TRUE?
A. You would be $100 better off by buying the municipal bond.
B. You would be $30 better off by buying the taxable bond.
C. You would be $320 better off by buying the municipal bond.
D. You would be $80 better off by buying the municipal bond.
E. You would be $100 better off by buying the taxable bond.
----------------------------------------------------------------------------------------------------------SOLUTIONS:
PROBLEM I:
A. $7,212.50
B. $787.50 refund due
PROBLEM II:
A. 34%
B. 19.31%
C. 15.45%
PROBLEM III: You would be better of by $2.50 if you buy the taxable bond.
MULTIPLE CHOICE:
1. A
2. FALSE
3. TRUE
4. D
35
Ch 1: Accounting Information and Managerial Decisions
1. In the past 10-20 years, the role of the managerial accountant has:
A.
B.
C.
D.
E.
not changed much.
been almost entirely eliminated.
adapted to changes in the environment of business.
replaced the role of the financial accountant.
taken on the role of a tax accountant.
2. Operational planning:
A.
B.
C.
D.
is the same as strategic planning.
addresses long-terms goals and objectives.
involves the development of short-term objectives and goals.
all of the above
3. When comparing financial and managerial accounting, which of the following statements is true?
A.
B.
C.
D.
E.
Financial accounting is more flexible than managerial accounting.
Managerial accounting is more forward looking, often emphasizing the future rather than the past.
Financial accounting is more timely, often sacrificing accuracy in the process.
Managerial accounting reports are required to follow generally accepted accounting principles.
Financial accounting often emphasizes segments of an organization rather than the company as a
whole.
4. Sunk costs:
A.
B.
C.
D.
have already been incurred.
can not be avoided
are not relevant.
all of the above.
SOLUTIONS:
1.
2.
3.
4.
C
C
B
D
36
Ch 2: Product Costing: Manufacturing Processes, Cost Terminology, and Cost Flows
PROBLEM I:
Wolfpack Inc. had the following information available for the month of September:
Raw materials inventory
Work-in-process inventory
Finished goods inventory
During the month of September:
Raw materials purchased
Direct Labor
Overhead
Beginning
$3,000
35,000
12,000
Ending
$1,000
40,000
10,000
$20,000
10,000
7,000
A. How much raw material was used in September? CIRCLE ANSWER.
B. What was cost of goods manufactured in September? CIRCLE ANSWER.
C. What was cost of goods sold in September? CIRCLE ANSWER.
37
MULTIPLE CHOICE:
Use the following information to answer the next 10 questions.
A company uses job-order costing. Use the following key to indicate the best cost classification for each of
the following costs:
A = Direct materials (Product cost)
B = Direct labor (Product cost)
C = Manufacturing Overhead (Product cost)
D = Period Cost
1. Factory utilities
2. Advertising
3. Machine operator salaries
4. Administrative building rent
5. Indirect materials used in the factory
6. Direct materials used in the factory
7. Supplies used in the administrative building
8. Shipping charges
9. Factory maintenance worker salaries
10. Insurance on factory equipment
11. The account called “Work-in-Process” would be found on which financial statement?
A.
B.
C.
D.
E.
Income Statement
Statement of Retained Earnings
Balance Sheet
All of the above
None of the above
12. The account called “Cost of Goods Sold” would be found on which financial statement?
A.
B.
C.
D.
E.
Income Statement
Statement of Retained Earnings
Balance Sheet
All of the above
None of the above
38
13. During 2005, the Happy Face Co. manufactured a product that had a product cost of $20 per unit. Total
non-manufacturing costs for 2005 were $50,000. If 50,000 units were produced in 2005, of which 40,000
units were sold for $50 each, what would be net income?
A.
B.
C.
D.
E.
$1,200,000
$1,450,000
$1,650,000
$1,949,950
$1,150,000
14. It is imperative that companies using a just-in-time (JIT) system:
A.
B.
C.
D.
E.
be willing to accept a higher level of defects.
have the ability to manufacture products quickly and efficiently.
keep a lot of raw materials on hand.
have employees who refuse to work overtime.
all of the above
15. Wolfpack Inc. had the following information available for the month of August:
Raw materials inventory --------------Work-in-process inventory -----------Finished goods inventory --------------
Beginning
$10,000
80,000
20,000
During the month of August:
Raw material purchased --------------Direct labor incurred -----------------Overhead incurred --------------------
Ending
$20,000
70,000
25,000
$70,000
200,000
50,000
What would be cost of goods sold for August?
A.
B.
C.
D.
E.
$255,000
$320,000
$380,000
$340,000
$315,000
39
SOLUTIONS:
PROBLEM I:
A. $22,000
B. $34,000
C. $36,000
MULTIPLE CHOICE:
1. C
2. D
3. B
4. D
5. C
6. A
7. D
8. D
9. C
10. C
11. C
12. A
13. E
14. B
15. E
40
Ch 3: Job Costing, Process Costing, and Operations Costing
PROBLEM I:
NYC Inc. is a legal firm. The company allocated overhead based on direct labor hours. At the beginning of
2002, the company estimated total overhead will be $100,000 based on an estimated 20,000 direct labor hours
worked.
At the end of the year, actual overhead costs totaled $115,000 and actual direct labor hours worked were 22,000.
A. What was the predetermined overhead rate? CIRCLE ANSWER.
B. Assume that during the year, a particular job took 115 direct labor hours to complete. How much
overhead should be assigned to that job? CIRCLE ANSWER.
C. At the end of the year, by how much was total overhead under or over-applied? Also, indicate whether it
was over or under-applied. CIRCLE ANSWER.
41
PROBLEM II:
Watkins Inc. manufactures a product that goes through two departments. The company applies the FIFO method
to process costing. Information relating to activity in the first department is as follows:
Work-in-process – Beginning (30% complete)
Started in current period
Work-in-process – Ending (80% complete)
# units
10,000 units
200,000 units
25,000 units
Costs (DM and CC)
$20,000
$400,000
A. What are the total equivalent units for the period? CIRCLE ANSWER.
B. What is the cost per equivalent unit for the period? Round to nearest penny. CIRCLE ANSWER.
C. What is the cost of ending work-in-process inventory at the end of the period? CIRCLE ANSWER.
D. What is the cost of goods manufactured for the period? CIRCLE ANSWER.
42
MULTIPLE CHOICE
1. “Conversion Costs” are made up of which types of costs?
A.
B.
C.
D.
E.
Direct materials only
Direct labor only
Direct materials and overhead
Direct labor and overhead
Direct materials, direct labor, and overhead
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT TWO QUESTIONS:
Gaddy Inc. manufactures a product that goes through three departments. The company applies the FIFO
method to process costing. Information relating to activity in the first department is as follows:
# units
Work-in-process – Beginning (40% complete)
Started in current period
Work-in-process – Ending (30% complete)
5,000 units
100,000 units
8,000 units
Costs (DM and
CC)
$30,000
$400,000
2. What are the total equivalent units for the period?
A.
B.
C.
D.
E.
97,400 eu’s
102,400 eu’s
100,600 eu’s
96,400 eu’s
113,000 eu’s
3. Assume that the total equivalent units for the period were 100,000 eu’s, what would be the cost per
equivalent unit?
A.
B.
C.
D.
E.
$25
$.25
$4
$.23
$4.30
43
4. The ABC Company under-applied overhead in 2004 by $4,000. At the end of 2004, they had the
following account balances before the end of year adjustment to dispense of this under-applied overhead:
Ending direct materials --------------------Ending work-in-process -------------------Ending finished goods ---------------------Cost of goods sold -------------------------Sales revenue -------------------------------Selling and administrative expenses -----
$ 6,000
0
0
28,000
60,000
12,000
After correctly adjusting for the under-applied overhead of $4,000, which of the following statements is
true regarding the balances that should be shown on either the balance sheet or income statement for
2004?
A. Direct materials should have a balance of $10,000.
B. Selling and administrative expenses should have a balance of $8,000.
C. Sales revenue should have a balance of $64,000.
D. Cost of goods sold should have a balance of $32,000.
E. Cost of goods sold should have a balance of $24,000.
5. In a traditional manufacturing environment, applied overhead is first accumulated in the ___________
account.
A. cost of goods sold account
B. direct materials account
C. finished goods account
D. work-in-process account
E. sales revenue account
6. In its initial year of operation, Maple Inc. started 4,000 units of a particular product. At the end of the
period, 800 of these units were only 25% complete. How many equivalent units were produced in the
period?
A. 3,000
B. 4,200
C. 3,800
D. 3,200
E. 3,400
7. When using process costing, which of the following statements is true regarding the FIFO method?
A. It assumes that all units in beginning and ending inventory are the same percentage complete.
B. It assumes that of the units completed in the current period, the first ones completed were beginning
inventory units.
C. It assumes that of the units completed in the current period, the first ones completed were ending
inventory units.
D. It assumes that of the units completed in the current period, one-half were from the beginning
inventory and the other half were from units started in the current period.
E. It assumes that all the units completed in the current period were started in the current period.
44
8. Hammond Inc. has the following information available for 2004:
Work-in-process - beginning (25% complete)
Started in current period
Work-in-process – ending ( 30% complete)
40,000 units
60,000 units
10,000 units
Using the FIFO method of process costing, how many units were both started and completed in
2004?
A.
B.
C.
D.
E.
70,000 units
60,000 units
110,000 units
40,000 units
50,000 units
SOLUTIONS:
PROBLEM I:
A. $5 per direct labor hour
B. $575
C. $5,000 underapplied
PROBLEM II:
A. Step #1: Compute number of EU’s started and completed in current period:
Beginning units
Add: started in current period
Less: Ending units
Finished
10,000 units
200,000
(25,000)
185,000 (10,000 from beg and 175,000 started
and completed in current period)
Step #2: Compute total EU’s for the period.
Beginning EU’s (10,000 X 70%)
Started and Completed in current period
Ending EU’s (25,000 X 80%)
Total EU’s
7,000 EU
175,000
20,000
202,000
B. Cost per EU: $400,000/202,000 = $1.98 per EU
C. Cost of Ending WIP: 20,000 EU’s in ending WIP X $1.98 per EU = $39,600
45
D.
Beginning WIP
Add: Current Costs
Less: Ending WIP
CGM
$20,000
400,000
(39,600)
$380,400
MULTIPLE CHOICE:
1.
2.
3.
4.
5.
6.
7.
8.
D
A
C
D
D
E
B
E
46
Ch 4: Activity-Based Costing
PROBLEM I:
The following overhead information is available for the Columbus Corporation for the year ended June 30, 2002:
Activity
Purchasing
Receiving
Machine Setups
Allocation Base
Number of purchase orders
Number of shipments received
Number of setups
Overhead Cost
$300,000
100,000
500,000
The activities were as follows:
Purchase orders -----------Shipments received ------Machine setups ------------
30,000
20,000
2,500
A. What is the overhead rate for purchasing?
B. What is the overhead rate for receiving?
C. What is the overhead rate for machine setups?
MULTIPLE CHOICE:
1. Which of the following statements comparing traditional and activity-based costing (ABC) systems is
TRUE?
A.
B.
C.
D.
E.
ABC and traditional costing systems often produce similar product-cost information.
ABC systems are generally more accurate than traditional costing systems.
Traditional costing systems are generally more accurate than ABC systems.
ABC systems are usually less expensive to implement than traditional costing systems.
ABC systems usually result in a plant-wide overhead application rate.
SOLUTIONS:
PROBLEM I:
A. $10 per purchase order
B. $5 per shipment received
C. $200 per setup
Multiple Choice:
1. B
47
Ch 5: Cost Behavior and Relevant Costs
PROBLEM I:
Carter Company plans to double its advertising budget next year, which will increase its fixed costs by 20%.
Variable costs per unit will remain the same. The current year costs are as follows:
- Variable costs per unit
- Fixed costs
$10
$8,000
If next year’s production is 30,000 units, estimated total costs would be: CIRCLE ANSWER.
PROBLEM II:
The administrator of Wake Hospital would like a cost formula to help predict overhead costs for the number of
patients admitted during a month. The following data for the past five months has been collected. The activity
base is number of patients admitted.
Month
May -------------June -------------July --------------August ----------September -------
# of patients
admitted
1,800
1,900
1,700
1,600
1,500
Overhead
Costs
$14,700
15,200
13,700
14,000
14,300
A. Using the high-low method, what is the variable cost per patient? Round to nearest penny. CIRCLE
ANSWER.
B. Using the high-low method, what are the fixed costs per month? CIRCLE ANSWER.
C. Using the high-low method, write the equation to predict total overhead costs for the month. CIRCLE
ANSWER. (Answer should be in the format of Y = a + bx)
D. If management expects 2,000 patients to be admitted in October, what are the total expected overhead
costs for the month? CIRCLE ANSWER.
48
MULTIPLE CHOICE:
1. You are given the following cost and volume information for a product:
Volume
Total Cost
1 unit
$25
5 units
125
10 units
250
What type of cost is given?
A. Variable cost
B. Fixed cost
C. Step cost
D. Mixed cost
E. Can not be determined
2. Yang Mfg. makes a product called Yin. The company incurs three cost types (Type I, II, and III) in the
production of Yin. The relevant range of operations is between 2,500 units and 10,000 units of Yin per
month. Per unit costs at two activity levels for each cost type are presented below.
5,000 units
7,500 units
Type I Type II
$4.00 $9.00
$4.00 $6.00
Type III
$4.00
$3.00
Refer to the above information. Identify the cost behavior of each type.
A.
B.
C.
D.
E.
Type I
Fixed
Fixed
Variable
Variable
Mixed
Type II
Variable
Mixed
Mixed
Fixed
Variable
Type III
Mixed
Variable
Fixed
Mixed
Fixed
3. Within the relevant range, which of the following statements is true with respect to fixed costs?
A. Fixed costs per unit increase as the activity level increases.
B. Fixed costs per unit remain constant as the activity level changes.
C. Fixed costs per unit decreases as the activity level increases.
D. Fixed costs in total dollar amount will decrease as the activity level decreases.
4. A mixed cost is one which:
A. Arises from annual decisions by management to spend in certain areas such as research.
B. Contains both variable and fixed cost elements.
C. Varies in direct proportion to changes in a particular activity.
D. Remains constant in total dollar amount within the relevant range.
49
5. The Ritter Company plans on making a tax-deductible contribution of $2,000 to a local charity. If the
company’s tax rate is 30%, what would be the after-tax cost?
A. $2,000
B. $1,400
C. $600
D. $2,600
E. $3,400
SOLUTIONS:
PROBLEM I: $309,600
PROBLEM II:
A.
B.
C.
D.
$2.25
$10,925
Y=10,925 + 2.25x
$15,425
MULTIPLE CHOICE:
1. A
2. D
3. C
4. B
5. B
50
Ch 6: Cost-Volume-Profit Analysis and Variable Costing
PROBLEM I
Use the following information to answers questions “A” through “E” below:
The ABC Company sells one product. The following information is available for this product:
Sales price
Variable Costs:
Variable product costs
Variable period costs
Fixed Costs:
Fixed product costs
Fixed period costs
$60 per unit
12 per unit
6 per unit
$60,000
$140,000
A. What would be the contribution margin per unit in terms of dollars?
B. What would be the contribution margin ratio expressed as a percentage?
C. What is the break-even point in terms of units? Round to nearest whole unit.
D. Fill in the blank: “For each additional dollar in sales, net income will go up by $ _____.”
E. Assume that total sales are currently totaling $900,000. If sales go up by 10%, what will be the increase
in net income?
51
PROBLEM II:
Jasper, Inc. produces one type of machine with the following costs and revenues for the year:
Total revenues
Total fixed costs
Total variable costs
Total units produced and sold
$5,000,000
$1,600,000
$2,000,000
100,000 units
A. What is the selling price per unit?
B. What is the break-even point in terms of sales dollars? Round to nearest whole dollar.
C. What is the company’s operating leverage? Round to nearest hundredth.
D. How many units must be sold in order to earn an operating profit of $1,500,000 (ignore income taxes)?
Round to nearest whole unit.
E. If the company is in a 40% tax bracket, what would sales have to be for an after-tax net income of
$1,000,000?
52
PROBLEM III:
Wolfpack Inc. plans to sell 15,000 special Peach Bowl t-shirts with fixed costs of $20,000 and variable expenses
at 60 percent of sales.
QUESTION: In order to have net income of $100,000, the sales price of each t-shirt must be set at what?
Ignore taxes.
PROBLEM IV: (worth 4 points)
Compton Company produces two products, A and B. 60% of sales are of product A, while 40%
are of product B.
Other information is as follows:
Sales price per unit
Variable costs per unit
Product A
$200
120
Product B
$160
100
In addition, the company incurs $50,000 in fixed costs per year.
QUESTION: In order to earn a profit of $200,000, how many units of Product A need to be sold? Round to
nearest whole unit. Ignore income taxes.
53
MULTIPLE CHOICE:
1. Which of the following would normally be classified as a “variable cost”?
A.
B.
C.
D.
E.
Direct materials
Direct labor
Variable overhead
Both “B” and “C”
“A”, “B”, and “C”
2. Company A has a lower operating leverage ratio than Company B. Which of the following statements is
TRUE?
A. Company A’s net income is lower than Company B’s net income.
B. Given the same percentage increase in sales, Company A’s net income would increase less than
Company B’s.
C. Company A’s sales revenue must be less than Company B’s.
D. Company A has few assets than Company B.
E. All of the above are true.
3. Sales of gizmos are down, and management has planned to increase salespersons’ commissions on the
sales of this product by 10%. If sales revenue goes up by more than 10% as a result of this change, which
of the following statements is TRUE (all else being equal)?
A.
B.
C.
D.
Contribution margin will increase
Variable costs will decrease
Fixed costs will increase
Net income will decrease
4. Decision makers should consider:
A.
B.
C.
D.
quantitative factors
qualitative factors
both quantitative and qualitative factors
none of the above
54
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT FOUR QUESTIONS:
The ABC Company sells one product. The following information is available for this product:
Sales price
$100 per unit
Variable costs:
Variable product costs
Variable period costs
Fixed costs:
Fixed product costs
Fixed period costs
$20 per unit
$10 per unit
$50,000
$30,000
5. Fill in the blank: “For each additional unit sold, net income will go up by $ ______.”
A.
B.
C.
D.
E.
$70
$.70
$100
$30
$79,970
6. Fill in the blank: “For each additional dollar in sales, net income will go up by $______.”
A.
B.
C.
D.
E.
$70
$.70
$100
$30
$79,970
7. What is the break-even point in terms of units? Round to nearest whole unit.
A.
B.
C.
D.
E.
114,286 units
70 units
80,000 units
1,143 units
800 units
8. Assume that sales are currently totaling $500,000. If sales go up by 20%, what will be the increase in net
income (ignore taxes)?
A.
B.
C.
D.
E.
$350,000
$100,000
$520,000
$600,000
$70,000
55
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT THREE QUESTIONS:
Casper, Inc. produced one type of product with the following costs and revenues for the year:
Total revenues
Total variable costs
Total fixed costs
Total # of units produced and sold
$600,000
$300,000
$150,000
20,000 units
9. What is the company’s operating leverage? Round to nearest hundredth.
A. .5
B. 2.0
C. 4.0
D. 30.0
E. .25
10. How many units must be sold in order to earn a profit of $800,000? Ignore income taxes and round to
nearest whole unit.
A.
B.
C.
D.
E.
63,334 units
10,000 units
1,900,000 units
53,333 units
93,333 units
11. If the company is in a 40% tax bracket, what would sales have to be to generate an after-tax net income of
$900,000? Round to nearest whole dollar.
A.
B.
C.
D.
E.
$3,300,000
$2,250,000
$4,800,000
$1,020,000
$5,800,000
12. Tarheel Corp plans to sell 10,000 special t-shirts with fixed costs of $30,000 and variable expenses at
70% of sales. In order to generate net income of $100,000, the sales price of each t-shirt must be set at
what? Ignore taxes.
A.
B.
C.
D.
E.
$18,57
$23.33
$43.33
$13.00
$30.33
56
13. Marshall Inc. produces three products, A, B, and C. 50% of sales are of product A, 30% are of product B,
and 20% are of Product C.
Other information is as follows:
Sales price per unit
Variable costs per unit
Product A
$100
60
Product B
$80
50
Product C
$70
40
**In addition, the company incurs $40,000 in fixed costs per year.
In order to earn a profit of $200,000, how many units of Product A need to be sold? Round to nearest
whole unit. Ignore income taxes.
A.
B.
C.
D.
E.
3,429 units
2,728 units
3,600 units
1,200 units
2,857 units
14. Which of the following is least likely to be a variable cost?
A.
B.
C.
D.
Rent
Direct material
Direct labor
Factory supplies
57
SOLUTIONS:
PROBLEM I:
A.
B.
C.
D.
E.
$42
70%
4,762 units
70 cents
$63,000
A.
B.
C.
D.
E.
$50
$2,666,667
2.14
103,333 units
$5,444,445
PROBLEM II:
PROBLEM III: $20 per unit
PROBLEM IV: 2,083 units of product A
MULTIPLE CHOICE:
1. E
2. B
3. A
4. C
5. A
6. B
7. D
8. E
9. B
10. A
11. A
12. C
13. A
14. A
58
Ch 7: Short-Term Tactical Decision Making
PROBLEM I:
Pleasant Creations has the following three product lines:
Sales
Variable Costs
CM
Fixed Costs
Net Income
Product A
$130,000
38,000
92,000
85,000
$7,000
Product B
$130,000
50,000
80,000
90,000
($10,000)
Product C
$250,000
60,000
190,000
100,000
$90,000
Total
$510,000
148,000
362,000
275,000
$87,000
The company is considering the discontinuation of Product B. If they do discontinue Product B, one-half of
Product B’s fixed costs would go away.
QUESTION: By how much would net income increase or decrease if Product B were discontinued? Indicate
whether an increase or decrease.
PROBLEM II:
Bakery Creations has a particular pastry it makes that can be sold immediately after baking or decorated and then
sold for a higher price. The following information is available regarding the sales prices and costs if it is sold
immediately after baking or processed further:
Initial sales price -------------------- $2.00
Initial cost ---------------------------.50
Sales Price after decorating -------- 2.30
Cost of decorating -----------------.40
Regardless of whether the pastries are decorated or not, the bakery can sell as many as 75 pastries per day.
QUESTION: If Bakery Creations does process the pastries further, what would be the increase or decrease in
contribution margin? Indicate in your answer whether it is an increase or decrease.
59
PROBLEM III:
Soft Mattress Inc. produces both a queen and a king size bed. Selected data related to each product is as follows:
Sales price per unit --------------Variable costs per unit -----------
Queen
$800
300
King
$1,200
450
Stuffing hours required ----------
1
2
**In addition, fixed costs total $300,000 per year.
The company employs three employees who are trained to stuff the mattresses. There are a total of 7,000 stuffing
hours available per year.
The company believes that it could sell a maximum of 3,000 queen-size and 4,000 king-size mattresses per year.
QUESTION: If the company maximizes profits, but stuffing hours are a constraint, what is the maximum
amount of net income for the year (ignore income taxes)?
PROBLEM IV:
The Southwest Desk Company needs 20,000 doorknobs annually to complete their desk drawers. Currently, the
company makes the doorknobs internally with the following costs:




Direct materials
Direct labor
Variable overhead
Fixed overhead
$.90 per unit
.20 per unit
.25 per unit
.10 per unit
Southwest is considering purchasing the doorknobs externally from a supplier. The supplier would charge $1.20
per doorknob. If Southwest purchases the doorknobs from the supplier, 50% of the fixed overhead costs would
go away.
QUESTION: If Southwest purchases the doorknobs from the supplier, what will be the increase or decrease in
net income (ignore income taxes)? Indicate whether it is an increase or decrease.
60
PROBLEM V:
Championship T-Shirts Ltd. has the following cost information at the expected production level of 30,000 shirts:




Direct Materials
Direct Labor
Variable overhead
Fixed overhead
$4 per shirt
$4 per shirt
$2 per shirt
$1 per shirt
The company has the capacity to produce as many as 25,000 shirts. Normally, the company sells each shirt for
$18.00.
A local charity has contacted the company requesting 400 t-shirts. The charity would like Championship to
monogram each shirt. The cost to monogram each t-shirt would be $3.00 per shirt.
The charity wishes to pay $12 per shirt.
QUESTION: If Championship accepts this special order, and sells the shirts to the charity for $12.00 each, by
how much would the company’s net income increase or decrease? Indicate whether it is an increase or decrease.
QUESTION: What would be a qualitative reason for Championship to make the t-shirts? (one sentence)
MULTIPLE CHOICE:
1. When are fixed costs relevant to a make or buy decision?
A.
B.
C.
D.
Fixed costs are never relevant to a make or buy decision.
Fixed costs are always relevant to a make or buy decision.
Fixed costs are relevant when they differ among alternatives.
Fixed costs are relevant when they do not differ among alternatives.
61
2. The Optimum Computer Company produces and sells computers. Each of the computers that it makes
needs a keyboard. Currently, the company is making 10,000 keyboards internally with the following
costs:




Direct materials
Direct labor
Variable overhead
Fixed overhead
$10 per unit
$4 per unit
$2 per unit
$1 per unit
The company is considering purchasing the keyboards externally from a supplier. The supplier would
charge $20 per keyboard. If the company purchases the keyboard from a supplier, 70% of the fixed costs
would go away.
Assuming the company does decide to purchase the keyboards externally, what would be the increase or
decrease in net income (ignore taxes)?
A.
B.
C.
D.
E.
net income would increase $33,000
net income would decrease $33,000
net income would increase $30,000
net income would decrease $30,000
net income would increase $37,000
3. Extra Balance Company manufactures hockey sticks. The company’s capacity is 5,000 sticks per month;
however, it is currently only selling 4,000 sticks per month. The company normally asks a selling price of
$130 per stick. A local team has asked Extra Balance to sell it 500 sticks for $100 per stick.
When they produce 4,000 sticks, Extra Balance records the variable cost of each stick to be $40 and the
fixed costs of each stick to be $10. If Extra Balance were to accept this special order, what would be
effect on net income?
A
B.
C.
D.
E.
net income would increase $45,000
net income would increase $30,000
net income would increase $25,000
net income would decrease $15,000
net income would decrease $45,000
62
4. Treehouses, Inc. produces two types of custom-crafted treehouses – the “Standard” and the “Deluxe”.
Selected data related to each product is as follows:
Sales price per unit ------Variable costs per unit ---
Standard
$2,000
500
Deluxe
$3,000
1,000
Assembly hours required
6
10
The company employs four employees who are trained to assemble these treehouses. There are a total of
8,000 assembly hours available per year.
The company believes it could sell a maximum of 700 standard and 500 deluxe treehouses per year.
If the company maximizes profits, but assembly hours are a constraint, what is the maximum contribution
margin for the year? (ignore income taxes)
A.
B.
C.
D.
E.
$2,316,000
$1,150,000
$1,810,000
$2,050,000
$251,000
SOLUTIONS:
PROBLEM I: Overall decrease in net income of $35,000
PROBLEM II: Overall contribution margin would decrease $7.50
PROBLEM III: maximum net income would be $2,700,000
PROBLEM IV: $4,000 increase in net income
PROBLEM V:
A. $400 overall decrease in net income
B. Gesture of goodwill, future sales contact
MULTIPLE CHOICE:
1.
2.
3.
4.
C
B
B
C
63
Ch 8: Long-Term (Capital Investment) Decisions
1. You purchased a certificate of deposit at the beginning of the year which pays 4% compounded semiannually. If you expect to withdraw $8,000 at the end of two years, how much did you originally deposit?
Round to nearest whole dollar.
A. $7,390
B. $7,541
C. $7,360
D. $4,322
E. $5,880
2. On 1/1/2005, Sullivan Inc. purchased a machine costing $40,000 by making a down-payment of $8,000
and financing (borrowing) the rest at 10% compounded annually. The loan will be paid off in equal
payments over the next ten years, with the first payment beginning on 12/31/2005. What will be the
amount of each of the annual payments? Round to nearest whole dollar.
A.
B.
C.
D.
E.
$24,578
$6,510
$12,336
$83,009
$5,208
3. Crazy Inc. purchased a machine for $9,533 on 1/1/2005. The machine will generate annual cash inflows
of $2,000 for the next six years. Assuming these cash inflows occur at the end of each year, what rate of
return did the company earn on this machine?
A.
B.
C.
D.
E.
7%
21%
26%
5%
4%
4. Candice will be buying a car costing $30,000 by borrowing the money at 12% interest compounded
quarterly. She will be paying off her loan by making equal quarterly payments of $2,016.47. How many
quarterly payments will she need to make in order to pay back the loan?
A.
B.
C.
D.
E.
23
15
14
20
17
64
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT TWO QUESTIONS:
On 1/1/2005, RET Inc. purchased an asset at a cost of $300,000. Annual operating cash flows are expected to be
$80,000 for five years. The salvage value at the end of the asset’s life is expected to be $5,000. The cost of
capital is 12%.
5. What is the net present value (ignore taxes)? Round to nearest whole dollar.
A.
B.
C.
D.
E.
$56,400
($8,779)
$6,408
$105,000
($251,771)
6. What is the payback period of this investment?
A.
B.
C.
D.
E.
.75 years
5 years
1.33 years
3.53 years
3.75 years
7. The Unique Gardner Company is considering the purchase of a customized delivery van costing
approximately $40,000. Using a discount rate of 15%, you estimate the present value of future cost
savings at $50,000. To yield the 15% return, the actual cost of the van should not exceed the $40,000
estimate by more than:
A.
B.
C.
D.
E.
$10,000
$50,000
$7,500
$6,000
$13,500
8. A company is considering investing in an asset which cost $17,000. The cash flows are expected to be as
follows:
- $5,000 in year 1
- $4,000 in year 2 and 3
- $2,000 in years 4 through 7
Approximately how long is the payback period?
A.
B.
C.
D.
E.
5 years
4 years
1.5 years
7 years
3 years
65
9. Shaeffer Inc. invested $70,000 in a new machine. The machine will generate cash flows at year-end of
$50,000, $40,000, and $30,000 for the next three years, respectively. The company uses a 15% cost of
capital. What is the net present value (ignore income taxes)?
A.
B.
C.
D.
E.
$107,004
$203,984
$23,449
$19,207
$50,000
10. The Tiger Golf Club is considering an investment into golf carts that requires $60,000 and promises to
return $108,637 in four years. The company’s internal rate of return is: (ignore taxes)
A.
B.
C.
D.
E.
14%
12%
16%
1.81%
.55%
11. Waller, Inc. purchased an asset at a cost of $102,000. Annual operating cash flows are expected to be
$30,000 each year for six years. At the end of the asset’s life, there will be a $10,000 residual (salvage)
value. The income tax rate is 30%, and the company uses straight-line depreciation with no half-year
convention. Taking into account income tax effects, what is the net present value if the cost of capital is
12%? Round to nearest whole dollar.
A.
B.
C.
D.
E.
$26,408
$8,853
$57,779
$36,811
$10,373
12. Which of the following statements is TRUE regarding depreciation expense?
A.
B.
C.
D.
E.
It generates an after-tax cash outflow.
It generates a before-tax cash outflow.
It generates an after-tax cash inflow.
It generates a before-tax cash inflow.
It will always cause the net present value of an asset to be positive.
66
13. The ABC Company only invests in assets which generate a return of 20%. The company is considering
the purchase of an asset costing $100,000, whose net present value is ($5,000). Based on these facts,
which of the following statements is TRUE?
A.
B.
C.
D.
E.
The present value of the cash inflows is greater than the present value of the cash outflows.
The actual return the asset generates is more than 20%.
The actual return the asset generates is equal to 20%.
The actual return the asset generates is negative.
The actual return the asset generates is less than 20%.
--------------------------------------------------------------------------------------------------------SOLUTIONS:
1. A
2. E
3. A
4. D
5. B
6. E
7. A
8. A
9. C
10. C
11. B
12. C
13. E
67
Ch 9: The Use of Budgets in Planning and Decision Making
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT TWO QUESTIONS:
Portman Inc. produces and sells a specialty product. The production department prepared the following second
quarter sales forecast:
April ----May ----June -----
20,000 units
24,000 units
30,000 units
Inventory at March 31 was budgeted at 2,000 units. Sales for July are expected to be 35,000 units. The desired
quantity of finished-goods inventory at the end of each month is to be equal to 10% of the next month’s budgeted
unit sales.
Each completed unit of finished product required 5 ounces of material. The cost per ounce is $1.25 per ounce.
The company has determined that it needs 20% of next month’s raw material needs on hand at the end of each
month.
1. What is the total projected production for the second quarter?
A.
B.
C.
D.
E.
81,400 units
73,400 units
75,500 units
74,000 units
72,500 units
2. How much should the company plan on spending on direct material for the month of May?
A.
B.
C.
D.
E.
$161,125
$153,750
$166,375
$142,063
$128,900
68
3. Brown Inc. sells high-end bicycles. The price of each bicycle is $600. All sales are on account. Brown
collects 40% of a month’s sales in the month of sale, 50% in the month following sale, and 10% in the
second month following sale. Budgeted sales (in units) for the first six months of 2006 are as follows:
January --------February ------March ---------April -----------May -----------June ------------
3,000 units
4,000 units
6,000 units
8,000 units
9,000 units
9,000 units
How much cash will be collected in the month of April?
A.
B.
C.
D.
E.
$10,800,000
$3,060,000
$4,800,000
$8,040,000
none of the above
4. One advantage of the budgeting process is that it:
A. reduces communication throughout the organization.
B. forces management to focus on the past and not be distracted by daily crisis in the organization.
C. can help management identify and deal with potential bottlenecks before they become major
problems.
D. can decrease the coordination of organizational activities.
E. all of the above
5. Mulligan Inc. has the following purchases budget for the last half of 2005:
July -----------------August --------------September ----------October ------------November ----------December -----------
$200,000
190,000
150,000
210,000
230,000
200,000
Historically, the company pays one-third at the time of purchase and the remainder in the month
following purchase. What are the expected cash disbursements for October?
A.
B.
C.
D.
E.
$150,000
$210,000
$170,000
$223,333
$70,000
69
6. The usual starting point in the budget process is:
A.
B.
C.
D.
E.
the direct materials purchases budget.
the sales budget.
the production budget.
the cash receipts budget.
the cash disbursements budget.
-----------------------------------------------------------------------------------------------------------------SOLUTIONS:
1.
2.
3.
4.
5.
6.
C
A
E (3,960,000)
C
C
B
70
Ch 10: Variance Analysis- A Tool for Cost Control and Performance Evaluation
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT TWO QUESTIONS:
Gibson Inc. produces hand-crafted office desks. The direct materials and direct labor standard costs for one desk
are as follows:


Direct Material: 5 sheets of lumber at $10 per piece
Direct Labor: 16 hours at $15 per hour
In July, 400 sheets of lumber were purchased for $12 per piece. Of that number, 350 pieces of material were
used to produce 65 desks.
Labor costs for July were $14,000 for 1,000 hours.
1. What would be the direct materials price variance?
A.
B.
C.
D.
E.
$1,300 U
$1,300 F
$1,550 U
$800 U
$800 F
2. What would be the direct materials usage variance?
A.
B.
C.
D.
E.
$750 U
$750 F
$250 U
$250 F
none of the above
3. What would be the direct labor rate variance?
A.
B.
C.
D.
E.
$1,000 F
$1,000 U
$1,600 F
$1,600 U
$600 F
4. What would be the direct labor efficiency variance?
A.
B.
C.
D.
E.
$1,000 F
$1,000 U
$1,600 F
$1,600 U
$600 F
71
5. The advantage of a flexible budget over a static budget is that, in a flexible budget, actual costs are
compared to the costs that should be incurred for the:
A.
B.
C.
D.
Planned level of activity
Actual level of activity
Average level of activity of competitors
Optimum level of activity
6. As a hobby, Denise makes and sells clay pottery bowls for sale at local art festivals. Her budget for the
production and sale of 100 sculptures is as follows:
Sales Revenue
Variable Costs
Fixed Costs
Net Income
@ 100 sculptures
$7,000
1,500
2,000
$3,500
Due to an increased interest in handmade pottery, Denise was able to actually make and sell 180
sculptures. If she prepares a flexible budget for 180 sculptures, what would be net income?
A.
B.
C.
D.
E.
$6,300
$9,100
$3,500
$9,900
$7,900
---------------------------------------------------------------------------------------------------------------SOLUTIONS:
1.
2.
3.
4.
5.
6.
D
C
A
E
B
E
72
Ch 11: Decentralization and Performance Evaluation
1. Which of the following statements about segment costs is FALSE?
A. A good test for deciding whether to allocate indirect fixed costs is to determine whether the cost
would be reduced or eliminated if the segment were eliminated.
B. Segment costs should include all costs attributable to that segment but only those costs that are
actually caused by the segment.
C. In general, all common costs should be allocated to segments.
D. Common costs are indirect costs that are incurred to benefit more than one segment and cannot be
directly traced to a particular segment.
2. Grayson Toy Company had sales of $550,000 and net operating income of $275,000. Beginning of the
year operating assets were valued at $125,000 and end of the year operating assets were valued at
$175,000. Grayson’s return on investment (ROI) was:
A.
B.
C.
D.
E.
91.7%
157%
183.3%
220%
54.55%
3. A certain division of company has $5,000,000 in sales, operating profit of $400,000, and investment of
$1,500,000. Assuming a 12% cost of capital, what is the division’s residual income?
A.
B.
C.
D.
E.
$220,000
$4,820,000
$420,000
$200,000
none of the above
73
4. Lovely, Inc. has two types of product lines – skin care and hair care. The following is a segmented
income statement for the most recent year:
Sales revenue ----------------Variable expenses ------------Contribution margin ---------Traceable fixed costs --------Segment margin --------------Common fixed costs ---------Net Income -------------------
Total
$2,000,000
1,245,000
$755,000
200,000
$555,000
200,000
$355,000
Skin Care
$1,100,000
660,000
$440,000
140,000
$300,000
Hair Care
$900,000
585,000
$315,000
60,000
$255,000
Lovely, Inc. plans on having an aggressive advertising campaign, but the company can only afford to
advertise for one of it’s products. The cost of the advertising will be $40,000. Marketing studies have
indicated that such a campaign would increase sales of the Skin Care division by $300,000 and increase
sales of the Hair Care division by $400,000.
Which of the following statements is TRUE about the division they should select for the campaign, and
the overall effect on net income of the campaign?
A.
B.
C.
D.
E.
They should select the Skin Division because the incremental effect on net income will be $120,000.
They should select the Skin Division because the incremental effect on net income will be $20,000.
They should select the Hair Division because the incremental effect on net income will be $100,000.
They should select the Hair Division because the incremental effect on net income will be $140,000.
It does not matter which division they select. Incremental net income will go up by the same amount
for each division.
----------------------------------------------------------------------------------------------------------SOLUTIONS:
1.
2.
3.
4.
C
C
A
C
74