Dr. M.D. Chase Accounting 310 Examination 3 Garrison/Noreen 10 th Spring 2003

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1 Exam No: Dr. M.D. Chase Accounting 310 Examination 3 Garrison/Noreen 10 th Spring 2003 Business ethics are the cornerstone of a successful free enterprise economy. Personal ethics are the foundation for all personal intercourse. In the University setting, ethical behavior is part of academic honesty. Please read and sign the following statement: This examination represents my sole effort. I have neither given nor received aid in the completion of this examination. Signed: Printed name:

2 Examination 3 Accounting 310 Page 1 of 14 For each of the following multiple choice or true/false questions, select the best answer. In all instances requiring a computation, show computations in good form. Questions 1 and 2 utilize the following data. Complete requirement (a) and answer questions 1-2. The cost formulas for XYZ s manufacturing overhead costs are given below. The costs cover a relevant range of 8,000 to 10,000 machine hours. Overhead Costs Cost Formula Supplies $0.20 per machine hour Indirect Labor $10,000 plus $025 per machine hour Utilities $0.15 per machine hour Maintenance $7,000 plus $0.10 per machine hour Depreciation $8,000 Required: a. Prepare a flexible budget for XYZ for its relevant range of production b. Based on part (a) above answer the following questions: 1. What is XYZ s total variable costs at 9,000 machine hours of production? a. $5,400 b. $5,600 c. $6,100 d. $6, What at total fixed overhead costs at 10,000 machine hours of production? a. $25,000 b. $30,000 c. $31,300 d. $32,000

3 Examination 3 Accounting 310 Page 2 of 14 Question 3-5 are based on the following data: The check clearing office of ABC Bank is responsible for processing all checks that come to the bank for payment. Managers at the bank believe that variable overhead costs are essentially proportional to the number of laborhours worked in the office, so labor hours are used as the activity base for budgeting and for performance reports for variable overhead costs in the department. Data for October appear below: Budgeted labor-hours 865 Actual labor-hours 860 Standard hours allowed for actual checks processed: 880 Cost Formula Actual Costs Variable overhead costs: Office Supplies $0.15 $146 Staff coffee lounge $0.05 $124 Indirect Labor $3.25 $2,790 Required: a. Prepare a variable overhead performance report for October for the check-clearing office that includes both spending and efficiency variances. Use the table below as a guide: Actual Budget Budget Cost Cost for Cost for Cost for Total Spending Efficiency Overhead Costs: Formula 860 LH 860 LH Std Hrs Variance Variance Variance 3. What is the Spending Variance? a. $132 b. $93 c. $3.45 d. $2, What is the Total Variance? a. $132 b. $93 c. $3.45 d. $2, What is the total budget based on standard hours allowed for actual production? a. $2,400 b. $2,967 c. $3,967 d. $3,060

4 Examination 3 Accounting 310 Page 3 of 14 Questions 6-8 are based on the following information MDC Inc. has recently sold a building and has $300,000 in cash on hand. It is considering the two alternatives described below. A B Cost of Equipment Required: $300,000 $0 Working Capital Investment 0 $300,000 Annual Cash flows $ 80,000 $ 60,000 Salvage value of the equip 7ys $ 20,000 $0 Life of project 7 Yrs 7yrs The working capital required for option B will be released for other options at the end of 7 years MDC uses a discount rate of 20% 6. What is the net present value of option A? a. $300,000 b. $288,400 c. -$5,580 d. -$6, What is the net present value of option B? a. $300,000 b. $288,400 c. -$5,580 d. -$6, What is the internal rate of return for option B? a. 20% b. Between 15% and 20% c. Between 10% and 15% d. Between 5% and 10% e. Less than 5% 9. Why are discounted cash flow methods of making capital budgeting decisions superior to other methods? a. Net income includes accruals that ignore the timing of cash flows b. Cash flows occur at the end of the period c. They recognize the fact that cash today is worth more than cash in the future d. They ignore the cost of capital e. All of these 10. As the discount rate increases a. The present value of a given future cash flow also increases. b. The present value of a given future cash flow decreases. c. The cost of capital always increases d. The cost of capital always decreases 11. Which of the following tasks compose the four steps in the planning and control cycle? 1. Measuring Performance 2. Implementing plans 3. Formulating Plans 4. Disciplining employees 5. Evaluating the difference between planned and actual results

5 Examination 3 Accounting 310 Page 4 of 14 a. 1,2,3,4 b. 2,3,4,5 c. 1,2,4,5 d. 1,2,3,5 e. all of the above 12. Which of the following are the major benefits of a JIT system? 1. Less funds tied up in inventory 2. increased line (production) costs 3. decreased space requirements 4. decreased defects 5. decreased production time a. 1,2,3.4 b. 1,3,4,5 c. 1,2,4,5 d. 2,3,4,5 e. All are benefits 13. In decision making, managers use: a. Financial accounting information since it is more precise due to well-established principles and conventions b. Information regarding the organization as a whole rather than segments of the organization in order to capture a broader perspective of the company s operations c. Information that is as precise as humanly possible d. Managerial accounting information e. Whatever information is relevant to the decision, even if that information does not conform to GAAP. 14. The salary paid to the maintenance supervisor is a manufacturing plant is an example of: Product Costs Manufacturing Overhead a. No Yes b. Yes No c. Yes Yes d. No No 15. The following statement about cost behavior can best be by which of the following A cost that is not the same for alternatives and can be either variable or fixed. a. sunk cost b. relevant cost c. differential cost d. opportunity cost e. both b and c 16. When would job-order costing be used in preference to process costing? a. In situations where many different products or services are produced each period b. In situations where each product or job is different form all others c. In situations where a single homogeneous product is produced d. All of the above e. Both a and b

6 Examination 3 Accounting 310 Page 5 of Assume overhead is applied on the basis of 125% of direct labor costs and that the job cost sheet shows that $10,000 in direct materials and $12,000 in direct labor costs have been incurred. If 1,000 units were produced, what is the unit product cost? a. $22 b. $10 c. $12 d. $15 e. $ From the standpoint of cost control, why is the FIFO method superior to the weighted average method? a. Because current period performance can be measured in relation to cost of the current period only. b. Because current period performance can be measured in relation to costs of both the current and prior periods c. Because it allows the effects of the past to be noted in managerial decisions d. FIFO is not superior to the weighted average method. e. Both b and c. 19. What is the Contribution Margin? a. Contribution margin is what the sales price contributes to the profit margin b. Contribution margin is the difference between variable costs and fixed costs c. Contribution margin is the difference between revenues and fixed costs d. Contribution margin is the difference between revenues and variable costs. e. Contribution margin the amount contributed to charity by the company. 20. What is meant by a products CM ratio? a. The ratio of fixed cost to total sales b. The ratio of total variable costs to sales c. The ratio of sales less total fixed costs to total sales d. The ratio of sales less total variable costs to total sales 21. What is meant by operating leverage? a. Operating leverage measures the sensitivity of net operating income to changes in sales b. Operating leverage measures the effect of changes in variable costs on sales. c. Operating leverage measures the effect of a change in fixed costs on sales d. Operating leverage measures the effect of a change in sales on variable costs e. All of these 22. What is meant by the term Incremental analysis? a. Incremental analysis is an analytical approach that focuses on the relationship between fixed costs and sales b. Incremental analysis is an analytical approach that focuses only on those items of revenue, cost, and volume that will change as a result of a decision c. Incremental analysis is an analytical approach that focuses on the relationship between variable costs and sales d. Incremental analysis is an analytical approach that focuses on the relationship between contribution margin and sales e. Both c and d 23. What is meant by the term Break-even point? a. The level of sales where the difference between contribution margin and fixed costs is zero. b. The level of sales where profit is equal to zero c. The level of sales where total sales and total expenses are zero d. Both a and c e. All the above

7 Examination 3 Accounting 310 Page 6 of What is meant by the term Margin of Safety? a. The margin of safety is the excess of sales over the contribution margin. b. The margin of safety is the excess of sales over the total fixed costs. c. The margin of safety is the excess of sales over the variable costs d. The margin of safety is the excess of sales over the break-even sales volume 25. What is the basic difference between absorption costing and variable costing? a. The basic difference between the two costing methods is the treatment of total manufacturing overhead. b. The basic difference between the two costing methods is the treatment of variable manufacturing overhead. c. The basic difference between the two costing methods is the treatment of fixed manufacturing overhead. d. The basic difference between the two costing methods is the treatment of variable costs. e. The basic difference between the two costing methods is the treatment of contribution margin. 26. Selling and administrative costs are treated as: a. Period costs under variable costing b. Product costs under variable costing c. Period costs under absorption costing d. Product costs under absorption costing e. Both a and c 27. CSULB had $5,000,000 in sales and reported a $300,000 loss in its annual report. According to a CVP analysis prepared for management, $5,000,000 in sales is the break-even point. What was the change in inventory during the reporting period? a. Increase b. Decrease c. Remained unchanged d. Cannot be determined e. No clue 28. Under absorption costing, how is it possible to increase net operating income without increasing sales? a. It is not possible b. Increase the level of production c. Decrease the level of production d. Both b and c 29. In what fundamental ways does activity-based costing differ from traditional costing methods? a. In activity-based costing, nonmanufacturing as well as manufacturing costs may be assigned to products. b. In activity-based costing, some manufacturing costs may be excluded from product costs. c. In activity-based costing, a number of product activity cost pools each of which may measure a unique activity are utilized. d. In activity-based costing, activity rates differ from typical predetermined overhead application rates in that they should be based on activity at capacity rather than on budgeted level of activity. e. All of the above 30. Why are overhead rates in activity-based costing based on the level of activity at capacity rather than the budgeted level of activity? a. Overhead application based on budgeted levels of activity charge products for costs of unused fixed costs. b. Overhead application based on total capacity charge products for costs of variable costs not utilized.

8 Examination 3 Accounting 310 Page 7 of 14 c. Overhead application based on budgeted levels of activity charge products for costs of breakeven. d. Overhead application based on budgeted levels of activity charge products for costs of unused capacity. e. Both b and c. 31. What types of costs should not be assigned to products in an activity-based costing system? a. Fixed costs b. Variable costs c. Indirect costs d. Costs of idle capacity 32. What is meant by the term responsibility accounting? a. The accounting department is responsible for reporting only relevant costs to the manager. b. The accounting department is responsible for reporting only future differential costs to the manager. c. The manager is held responsible for only those aspects of cost and revenue for which she/he can exert significant control. d. The manager is responsible for managing the revenues and costs for her/his department. e. The manager is responsible for controlling only relevant costs. 33. What is a master budget? a. A detailed schedule showing the expected revenues and costs for coming periods. b. A budget that managers prepare and supervisors review in order to resolve differences in a mutually agreeable manner. c. A detailed plan showing the number of units that must be produced during a period in order to meet both sales and inventory needs. d. A summary of a company s plans in which specific targets are set for sales, production distribution, and financing activities and that generally culminates in a cash budget, income statement and balance sheet. e. Development of objectives and goals by supervisory personnel and top management. 34. What is a self-imposed budget? a. A detailed schedule showing the expected revenues and costs for coming periods. b. A budget that managers prepare and supervisors review in order to resolve differences in a mutually agreeable manner. c. A detailed plan showing the number of units that must be produced during a period in order to meet both sales and inventory needs. d. A summary of a company s plans in which specific targets are set for sales, production distribution, and financing activities and that generally culminates in a cash budget, income statement and balance sheet. e. Development of objectives and goals by supervisory personnel and top management. 35. How does zero-based budgeting differ from traditional budgeting? a. Because all costs must be justified each period, it is time consuming and labor intensive. b. Managers must start at zero levels each year and justify all costs c. Budget data are generated on an incremental basis. d. Both b and c e. Both a and b. 36. What is a quantity standard? a. How much input should be used for unit of output b. The number of units used in production if there is no waste and/or inefficiency c. The cost of units used in production d. The budgeted cost if there is no waste and/or inefficiency e. The variance between price and quantity

9 Examination 3 Accounting 310 Page 8 of What is the difference between a standard and a budget? a. Standards are usually expressed in terms of total dollars b. Standards are usually expressed on a per unit basis. c. Standards are the difference between what was planned and what was achieved. d. Standards are based on perfection and budgets are based on more realistic goals e. Standards and budgets are the same. 38. How is the direct material price variance computed? a. DM$V is the difference between actual cost of goods purchased and the standard costs of the DM that should have been used in production. b. DM$V is the difference between actual cost of goods purchased and the standard costs of the DM purchased. c. DM$V is the difference between standard cost of goods purchased and the standard costs of the DM that should have been used in production. d. DM$V is the difference between actual cost of goods purchased and the actual costs of the DM that should have been used in production. 39. What is meant by the term management by exception? a. Managers focus on operating activities/results only when actual results differ from standards established in advance of the production cycle. b. Managers focus only on total variances, ignoring price and quantity variances c. Managers focus on exception in standards e.g. they examine only those instances in which price and/or quantity of inputs varies from standards. d. Managers focus on exceptions in manufacturing overhead costs. e. Both c and d. 40. If a company has a manufacturing cycle efficiency (MCE) of less than 1, what does it mean? a. An MCE < 1 means the production process included non-value-added time. b. An MCE < 1 means the throughput time is greater than the delivery cycle time. c. An MCE < 1 means the throughput time is less than the delivery cycle time. d. An MCE < 1 means the wait time is greater than the delivery cycle time. e. An MCE < 1 means the wait time is less than the delivery cycle time. For questions 41 thru 43 consider the following facts: Use the following account balances to present the Schedule of Cost of Goods Manufactured and a Schedule of Cost of Goods Sold: Property Tax... $ 3,000 Nonmanufacturing administrative expenses.. $ 43,000 Marketing expenses... 37,000 Direct material inventory (12/31/x1)... 11,000 Finished goods inventory (12/31/x1)... 27,000 Direct material inventory (12/31/x2)... 8,000 Finished goods inventory (12/31/x2)... 34,000 Direct material purchased... 84,000 Factory utilities... 17,000 Factory repairs and maintenance... 16,000 Work in Process Inventory (12/31/x1)... 20,000 Direct labor... 34,000 Work in Process Inventory (12/31/x2) 26,000 Indirect labor... 23,000 Depreciation: Factory Building... 9,000 Indirect material used... 11,000 Depreciation: Factory Equipment... 11,000 Miscellaneous factory overhead... 4,000 In the space below, complete the cost of goods manufactured and the statement of cost of goods sold.

10 Examination 3 Accounting 310 Page 9 of 14 Statement of cost of goods manufactured: Statement of Cost of goods sold. 41. What is the cost of goods manufactured? a. $209,000 b. $202,000 c. $235,000 d. $236,000 e. none of these 42. What is the cost of goods available for sale? a. $209,000 b. $202,000 c. $235,000 d. $236,000 e. none of these 43. What is the cost of goods sold? a. $209,000 b. $202,000 c. $235,000 d. $236,000 e. none of these

11 Examination 3 Accounting 310 Page 10 of 14 Use the following data to answer questions You must show complete computations to get full credit for these questions. CSULB s most recent income statement is shown below: Total Per Unit Sales (30,000 units) $150,000 $5 Less: Variable costs 90,000 3 Contribution margin 60,000 $2 Less: Fixed Costs 50,000 Net operating income $ 10, If net sales volume increases by 15%, what will net operating income be? a. $15,000 b. $17,500 c. 19,000 d. 21,500 e. 23, If the selling price decreases by 50 cents per unit and the sales volume increases by 20%, what will the total contribution margin be? a. $69,000 b. $71,250 c. $50,000 d. $54,000 e. $64, If the selling price increases by 50 cents per unit, fixed expenses increase by $10,000 and the sales volume decreases by 5%, what will the contribution margin be? a. $69,000 b. $71,250 c. $50,000 d. $54,000 e. $64,800

12 Examination 3 Accounting 310 Page 11 of 14 Use the following information to answer questions You must show complete computations to get full credit for these questions. CSULB manufactures a single product. The following costs were incurred during the company s first year of operations: Variable costs per unit: Production Direct Materials $18 Direct Labor 7 Variable MOH 2 Variable Selling & Admin 5 Fixed costs per year: Fixed MOH $160,000 Fixed Selling & Admin 110,000 During the year, CSULB produced 20,000 units and sold 16,000 units at a selling price of $50 per unit. Assume the company uses the Absorption costing method. Present the Absorption costing income statement in the space below. 47. What is the total manufacturing overhead cost per unit? a. $27 b. $32 c. $25 d. $35 e. $ What is the Gross margin? a. $700,000 b. $140,000 c. $150,000 d. $240,000 e. $250,000

13 Examination 3 Accounting 310 Page 12 of What is net operating income under the absorption costing model? a. $18,000 b. $20,000 c. $60,000 d. $50,000 e. $110,000 Assume that CSULB uses the variable costing method. In the space below present the variable costing income statement 50. What is the unit product cost under variable costing? a. $27 b. $32 c. $25 d. $35 e. $ What is net operating income under variable costing? a. $18,000 b. $20,000 c. $60,000 d. $50,000 e. $110,000

14 Examination 3 Accounting 310 Page 13 of 14 Use the following information to answer questions You must show complete computations to get full credit for these questions. Dallas, Inc. produces a single product. Variable Manufacturing Overhead is applied on the basis of direct labor hours. The standard costs for one unit of production are as follows: DM: (6 $.50/ ounce) $ 3 DL: (1.8 $10/hour) 18 VMO: (1.8 $5/hour) 9 Standard variable cost per unit $30 During June, 2,000 units were produced. The costs associated with June s operations were as follows: DM purchase: 18,000 $.60/ounce $10,800 DM used in production: 14,000 ounces DL: 4, /hour 39,000 VMO costs incurred 20,800 In the space below compute the following variances: Materials Variances: (Price and quantity) Labor Variances: (Rate and efficiency) Variable Manufacturing Overhead Variances: (Spending and efficiency) 52. What is the DM$V (Direct material Price Variance)? a. $1,800 U b. $1,800 F c. $600 U d. $600 F e. $1,000 U 53. What is the DL Efficiency (quantity) Variance? a. $1,000 U b. $1,000 F c. $4,000 U d. $4,000 F e. $3,000 U 54. What is the total DL Variance? a. $1,000 U b. $1,000 F c. $4,000 U d. $4,000 F e. $3,000 U

15 Examination 3 Accounting 310 Page 14 of What is the Variable Manufacturing Spending (price) variance? a. $800 U b. $800 F c. $2,000 U d. $2,000 F e. $3,000 U

16 Examination 3 Accounting 310 Page 15 of 14 Solutions: 1. D Ex A Ex B Ex E Ex B Ex D Ex E Ex A Ex C Q B Q D Q B Q E chpt 14. C Chpt/HO 15. E Chpt/HO 16. E Q E Q A Q D Q D Q A Q B Chpt 6 definitions and p E Chpt 6 definitions 24. D. Chpt 6 definitions 25. C. Q E. Q B Q B. Q E. Q D. Q D. Q C. Q D. Chpt 9 definitions 34. B. Chpt 9 definitions 35. E. Q A Q B. Q B Chapter Example 39. A Q A Q A HO D HO B HO C Ex D Ex B Ex A Ex D Ex D Ex A Ex A Ex A Chpt 10 Review Prob 53. C Chpt 10 RP 54. E Chpt 10 RP 55. A Chpt 10 RP