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41. The budgeted amount of raw materials to be purchased is determined by _____. a. adding the desired ending inventory of raw materials to the raw materials needed to meet the production schedule b. subtracting the beginning inventory of raw materials from the raw materials needed to meet the production schedule c. adding the desired ending inventory of raw materials to the raw materials needed to meet the production schedule and subtracting the beginning inventory of raw materials d. adding the beginning inventory of raw materials to the raw materials needed to meet the production schedule and subtracting the desired ending inventory of raw materials Total requirement = ending inventory + raw material needed for production. From this we subtract what we have in the beginning inventory to get the required purchase. The formula is Purchases = Ending Inventory + Material needed for Production – Beginning Inventory 42. Johansen Company uses a predetermined overhead rate based on direct labor hours to apply manufacturing overhead to jobs. The company has provided the following estimated costs for the next year: Direct materials ...................................... $ 6,000 Direct labor ............................................ 20,000 Rent on factory building ........................ 15,000 Sales salaries .......................................... 25,000 Depreciation on factory equipment........ 8,000 Indirect labor .......................................... 12,000 Production supervisor’s salary ............... 15,000 Johansen estimates that 20,000 direct labor hours will be worked during the year. The predetermined overhead rate per hour will be _____. a. $2.50 b. $3.50 c. $3.75 d. $5.05 Total manufacturing overhead is Rent on factory building ........................ 15,000 Depreciation on factory equipment........ 8,000 Indirect labor .......................................... 12,000 Production supervisor’s salary ............... 15,000 Total 50,000 Predetermined overhead rate = Estimated Overhead /Estimated direct labor hours = 50,000/20,000 = $2.5/DLH 43. Under the FIFO method, unit costs would _____. a. result from costs in the beginning inventory being added in with current period costs (this is done in weighted average method) b. contain some element of cost from the prior period c. not contain some elements of cost from the prior period d. not include costs incurred to complete beginning inventory In FIFO method only the costs incurred in the current period are used to calculate the unit costs. 44. A company paid off a $10,000 long-term note by issuing common stock to the creditor. This transaction would be reflected on the company's statement of cash flows as: a. an addition of $10,000 and a deduction of $10,000 under investing activities b. an addition of $10,000 and a deduction of $10,000 under financing activities c. a direct exchange transaction in a separate schedule accompanying the statement of cash flows d. an addition of $10,000 under financing activities This is a non cash transaction (there is an exchange and no cash changes hand) and would not appear in the body of the statement of cash flows. It is shown separately in a schedule of non cash transactions. 45. Afrissa Clothing Corporation uses a process costing system to collect costs related to the production of its sequin dresses. Two direct materials are needed for these dresses: cloth and sequins. Cloth is added at the beginning of the production process. The cloth is cut out and sewn into dresses. The sequins are then sewn on the dresses. Which of the following statements is correct with respect to the calculation of equivalent units of production for cloth and sequins? a. cloth and sequins should be grouped together as one material b. cloth and sequins should be handled as two separate materials and two separate equivalent unit calculations c. cloth should be considered the only material and sequins should be considered part of conversion cost d. both cloth and sequins should be considered part of conversion cost Conversion cost is direct labor and overhead and so cloth and sequins cannot be a part of conversion cost. Since cloth and sequins are added at different points in time, the degree of completion will be different for these two and so we need to keep a separate record these two. 46. Manor Company plans to discontinue a department that has a contribution margin of $24,000 and $48,000 in fixed costs. Of the fixed costs, $21,000 cannot be eliminated. The effect of this discontinuance on Manor's net operating income would be a(an) _____. a. decrease of $3,000 b. increase of $3,000 c. decrease of $24,000 d. increase of $24,000 The avoidable costs is 48,000-21,000=27,000. The contribution margin lost is $24,000. The net effect is an increase of $3,000 (inflow reduces by 3,000 and outflow by 27,000). This is correct 47. A static budget _____. a. should be compared to actual costs to assess how well costs were controlled b. should be compared to a flexible budget to assess how well costs were controlled c. is valid for only one level of activity d. represents the best way to set spending targets for managers A static budget is made only for one level of activity. A flexible budget should be compared to actual costs since the flexible budget adjusts the costs for the actual level of activity. 48. In activity-based costing, the total activity in an activity cost pool can be computed by _____. a. dividing the total overhead cost in the activity cost pool by the activity cost pool's activity rate b. multiplying the total overhead cost in the activity cost pool by the activity cost pool's activity rate c. dividing the activity cost pool's activity rate by the direct labor-hours required to make a product d. multiplying the activity cost pool's activity rate by the direct labor-hours required to make a product This is correct Activity rate = Total Cost/Total Activity Total activity = total cost/activity rate 49. Expense A is a fixed cost; expense B is a variable cost. During the current year the activity level has increased, but is still within the relevant range. In terms of cost per unit of activity, we would expect that _____. a. expense A has remained unchanged b. expense B has decreased c. expense A has decreased d. expense B has increased We are to look at cost per unit of activity. Since Expense A is a fixed cost, it would decrease on a per unit of activity when the total activity increases. 50. Shocker Company's sales budget shows quarterly sales for the next year as follows: Unit sales Quarter 1 ..... 10,000 units Quarter 2 ..... 8,000 units Quarter 3 ..... 12,000 units Quarter 4 ..... 14,000 units Company policy is to have a finished goods inventory at the end of each quarter equal to 20% of the next quarter's sales. Budgeted production for the second quarter of the next year would be _____. a. 7,200 units b. 8,000 units c. 8,800 units d. 8,400 units This is correct The ending inventory for Qtr 1 = 8,000X20%=1,600 (this is the beginning for Qtr 2). The ending for Qtr 2 = 12,000X20%=2,400. Production = Ending Inventory + Sales – Beginning Inventory = 2,400 + 8,000-1,600 = 8,800 units