hay

1. 1
Practice Final Examfor AC225 Managerial Accounting
Answerswill be releasedonFRIDAY.
NOTE: These questionswill giveyoupractice onansweringquestionsinthe formatof the final exam,
whichhas 60 to 70 multiple choice questions. Youshouldnot dependonreviewingthese specific
questionsalone toreviewall of the topicsonthe Final ExamReview alsopostedinD2L.
Chapter1
1. Managerial AccountingandFinancial Accountingdifferinthe followingway:
A. Financial Accountingemphasizesforecasts of future performance.
B. Financial Accounting summarizesinformationfor the company as a whole.
C. Financial Accountingisprivate informationforcompanymanagers
D. Financial Accountingemphasizestimelinessoverprecision.
Discussion: Managerialaccounting emphasizesproviding information aboutsegmentsand
productswithin a company,ratherthan thecompany asa whole. Financialaccounting creates
financialstatementsthatmustpresentall componentsundercommon control.
2. Commonusersof managerial accountingreportsincludethe following:
A. Operationsmanagerandloanofficer
B. Chief financial officerandpublicshareholder
C. Publicshareholderandloanofficer
D. Chieffinancial officerand operationsmanager
Discussion: Managerialaccounting isused by company insiders. Loan officersworkfora bank.
Shareholdersaretheexternal ownersof a business.
3. The managementfunctionof controllingiscarriedoutthroughthe use of
A. A performance report that compares budgetedto actual results.
B. A reconciliationof the beginningandendingretainedearningsbalances.
C. A schedule of cashcollectionsandcashpayments
D. A forecastof nextperiod’sproduction.
Discussion: Thecontrolfunction is evaluating theresults of company actions. Only A involves
bothmeasuring resultsand comparison to determinewhethertheresults are favorableor
unfavorable.
4. Managementaccountingisusedby
A. Human resource employeeswhoneedtoplanhiring
B. Marketingemployeeswhomake decisionsonprofitachievable throughanadvertisingcampaign
C. Accountingemployeeswhomake budgetrecommendations.
D. All of the above.
5. The CMA certificationrequires
A. A rigorousprofessional examonly
B. Experience inFinancial managementonly.
C. A rigorous professional examand experience in financial managementonly.

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D. An accountingdegree andarigorousprofessionalexamandexperience infinancial
management.
Discussion: Individualswithany collegemajorcan becomeCertified ManagementAccountants.
6. Guidelinesforethical behaviorformanagementaccountantsrequire
A. Managementaccountants maintain professional competence.
B. Managementaccountantsdisclose confidentialinformationtocompetitors.
C. Managementaccountantseliminate all potential limitations before communicating
recommendations.
D. Managementaccountantsignore conflictsof interest.
Discussion: Competenceisoneethical valuein theInstituteof ManagementAccountantsethical
standards. Managementaccountantsmaintain confidentiality unless disclosureisrequired by law. Full
disclosureof limitationsis required,butno one can eliminate all limitationson recommendations.
Managementaccountantsdiscloseconflictsof interest.
7. Institute of ManagementAccountantssupportsethical practicesby
A. Staffingan ethicshotline for its members
B. Representingitsmembersinlegal cases
C. Investigatingcorporate ethical lapses
D. Requiringmemberstoreportunethical conducttotheirsupervisors.
Discussion: TheInstituteof ManagementAccountantshas an ethicalhotlineto providean objective
consultation to members.
Chapter2
1. The wagesof factory maintenance personnel wouldusuallybe consideredtobe a
A. Directlabor cost
B. Manufacturing overheadcost
C. Administrative cost
D. Sellingcost
Discussion: Maintenanceisan indirect laborcost,which is a partof manufacturingoverhead.
2. Conversioncostsinclude
A. Manufacturing overheadcosts
B. Directmaterial costs
C. Salescommissioncosts
D. Advertisingcosts
Discussion: Conversion costsincludetheproductcostsof direct laborand manufacturing overhead.
3. Whichof the followingcostsisan example of aperiodratherthana product cost?
A. Depreciationonproductionequipment
B. Salariesof salespersons
C. Wagesof productionmachine operators

3. 3
D. Insurance on productionequipment
Discussion: A, C,and D are product costs;salarieswithinselling&administrative costsare periodcosts.
4. Last month10,000 unitsof a productwere manufactured,andthe total costper unitwas$60. Atthis
level of production the variablecostis$30 per unitandthe fixedcostis$30 per unit. If 10,500 unitsare
manufacturedthe nextmonth,andthe costsremainwithinthe same relevantrange,
A. Total variable costwill remainunchanged.
B. Fixedcostswill increaseintotal
C. Variable costperunitwill increase
D. Total cost perunit will decrease
Discussion: Numericallythe unchangingfixedcostis$30 * 10,000 = $300,000. The cost for 10,500 units
= 10,500 units* $30 variable cost+ fixedcostof $300,000 = $315,000 + $300,000 = $615,000. The total
cost perunitis $615,000 / 10,500 units= $58.57. Alternatively,whenproductionincreases,fixedcosts
PER UNIT decrease because the same fixedcostisspreadovermore units,sototal cost per unitwill
decrease.
5. The followingcostswere incurredinSeptember:
Directmaterials $39,000
Directlabor 23,000
39000+23000=62000
Manufacturingoverhead 17,000
Sellingexpenses 14,000
Administrative expenses 27,000
Prime costsduringthe monthtotaled
A. $79,000
B. $120,000
C. $62,000
D. $40,000
Discussion: Prime costsae directlaborand directmaterial costs.

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6. ABCCorporationsellsitsproductfor $195.70 perunit. In 2015 the companyhad total salesinunits
of 6,000. The total costs were the following:
Variable cost of sales $457,800
Fixed cost of sales 100,000
Variable selling & administrative costs 108,500
Fixed selling & administrative costs 512,400
What isthe bestestimate of the total contributionmargin?
A. $4,600
B. $507,800
C. $607,900
D. $616,400
Discussion: TotalContribution Margin =Total Sales – Total VariableCosts;
Total Sales= sells produciton perunit* totalsales
195.70 * 6000 = 1174200. h
Total VariableCosts= Variable costof sales + Variable selling&administrative costs
457,800 + 108,500 = 566,300.
Contribution Margin = sales – variable costs
1171200-566300 = 607,900
7. Supplycostsat ABC Corporation'schainof gymsare listedbelow:
Managementbelievesthatsupplycostisa mixedcostthat dependsonclient-visits.Usingthe high-low
methodtoestimate the variable andfixedcomponentsof thiscost,those estimateswouldbe closest
to:
A. $2.44 perclient-visit;$28,623 per month
B. $1.33 perclient-visit;$12,768 per month
C. $0.79 perclient-visit;$19,321 per month
D. $0.75 per client-visit;$19,826 per month
Discussion:
Client Visit Supply Cost
High: June 12,088 visits $28,892
Low: August 11,193 visits $28,221
Difference 895 visits $671
Variablecost per client visit = 671/895 = $.75per client visit
Fixed Costfor suppliesper month= 28,892-12,088 *.75 = 19826

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8. Buckeye Companyhasprovidedthe followingdataformaintenance cost:
2014 2015
Machine hours 12,500 15,000
Maintenance cost $27,000 $31,000
The bestestimate of the cost formulaformaintenance wouldbe:
A. $21,625 peryearplus$0.625 permachine hour
B. $7,000 per yearplus$0.625 per machine hour
C. $7,000 per year plus $1.60 permachine hour
D. $27,000 peryearplus$1.60 per machine hour
Discussion: Differencein Machinehours :15,000-12,500= 2,500;
Difference in Maintenance: 31,000-27,000= $4,000;
Maintenancecostpermachine hour= $4,000 / 2,500 = 1.60 per machinehour;
Fixed Costof maintenance=27000 – 1.60*12,500=7,000
Use the followinginformationforquestions9and10.
Chaffee Corporationstaffsahelpline toanswerquestionsfromcustomers.The costsof operatingthe
helplineare variable withrespecttothe numberof callsina month.At a volume of 33,000 callsina
month,the costs of operatingthe helpline total $742,500.
9. To the nearestwhole dollar,whatshouldbe the total costof operatingthe helplinecostsata volume
of 34,800 callsina month?(Assume thatthiscall volume iswithinthe relevantrange.)
A. $742,500
B. $783,000
C. $704,095
D. $762,750
Discussion: Fromthe initial data,the costpercall is$742,500/33,000 = $22.48;
Therefore the costat 34,800 callswouldbe $22.48*34,800=78472
10. To the nearestwhole cent,whatshouldbe the average costof operatingthe helpline percall ata
volume of 36,100 calls ina month?(Assume thatthiscall volume iswithinthe relevantrange.)
A. $21.54
B. $20.57
C. $21.34
D. $22.50
Discussion: See above.
Chapter3
1. In computingitspredeterminedoverheadrate,Marple Companyinadvertentlyleftitsindirectlabor
costs outof the computation.Thisoversightwill cause:
A. ManufacturingOverheadtobe overapplied.
B. The Cost of GoodsManufacturedto be understated.
C. The debitsto the ManufacturingOverheadaccounttobe understated.
D. The endingbalance inWorkin Processto be overstated.

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Discussion: If indirect laboris omitted fromthepredetermined overhead rate,then the
predetermined overhead rateis too low. (C) is correct becauseCostof GoodsManufactured is
increased by theamountof overhead applied. So if overhead applied istoo low,then Cost of
GoodsManufactured would betoo low. (A) would be trueif thepredetermined overhead rate
were too high. (D) could be true if predetermined overhead rateweretoo high. (C) refersto the
increasesin Manufacturing Overhead when overhead isincurred. It decreasesas it is applied to
jobsbased on thepredetermined overhead rate,so it is the credits to Manufacturing Overhead
thatcould be effected by this error.
2. In a job-ordercostingsystem, the use of directmaterialsthathave beenpreviouslypurchasedis
recordedas a debitto:
A. Raw Materialsinventory.
B. FinishedGoodsinventory.
C. Work in Processinventory.
D. ManufacturingOverhead.
Discussion: A debitincreasesanassetaccount. Whendirectmaterialsare usedRaw Materials
inventorydecreasesandWorkinProcessincreases.
3. In a job-ordercostingsystem,indirectmaterialsthathave beenpreviouslypurchasedandthatare
usedinproductionare recordedas a debitto:
A. Work inProcessinventory.
B. Manufacturing Overhead.
C. FinishedGoodsinventory.
D. Raw Materialsinventory.
Discussion: Indirectmaterialsincreasemanufacturingoverheadanddecrease Raw MaterialsInventory.
4.Overappliedmanufacturingoverheadoccurswhen:
A. appliedoverheadexceedsactual overhead.
B. appliedoverheadexceedsestimatedoverhead.
C. actual overheadexceedsestimatedoverhead.
D. budgetedoverheadexceedsactual overhead
Discussion: While estimatedoverheadorbudgetedoverheadisusedtocalculate the predetermined
manufacturingoverheadrate, overheadisthenappliedbasedonthe actual directlaborhours(or
machine hoursetc.). Soif the overheadappliedismore thanthe actual overheadincurred,then
overheadisoverapplied.
5. Wert Corporationusesa predeterminedoverheadrate basedondirectlaborcostto apply
manufacturingoverheadtojobs.Lastyear,the company'sestimatedmanufacturingoverheadwas
$1,200,000 and itsestimatedlevel of activitywas50,000 directlabor-hours.The company'sdirectlabor
wage rate is$12 perhour. Actual manufacturingoverheadamountedto$1,240,000, withactual direct
laborcost of $650,000. For the year,manufacturing overheadwas:
A. overappliedby$60,000
B. underappliedby$60,000
C. overappliedby$40,000
D. underappliedby$44,000
Discussion: The predeterminedmanufacturingoverheadrate is$1,200,000 inoverheadoverdirect
laborcost of 50,000 directlaborhours* $12 per hour: 1,200,000 / (12*50,000)=1200000/600,000=2.

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So the manufacturingoverheadappliedwouldhave been650,000*2=$1,300,000. Howeverthe actual
overheadis$1,240,000. $1,300,000- $1,240,000=$60,000 overapplied
6. Hayne Corporationbasesitspredeterminedoverheadrate onthe estimatedmachine-hoursforthe
upcomingyear.Data forthe mostrecentlycompletedyearappearbelow:
The predeterminedoverheadrate forthe recentlycompletedyearwasclosestto:
A. $7.89
B. $30.95
C. $24.52
D. $32.41
Discussion: predeterminedoverheadrate = estimatedtotal overhead/estimatedmachine
hours= $465,880 / 19,000 = 24.52
7. The followingdatahave beenrecordedforrecentlycompletedJob674 on itsjob costsheet.Direct
materialscostwas$2,039. A total of 32 directlabor-hoursand175 machine-hourswere workedonthe
job.The directlabor wage rate is $14 per labor-hour.The companyappliesmanufacturingoverheadon
the basisof machine-hours.The predeterminedoverheadrate is$15 permachine-hour. The total cost
for the jobon itsjob costsheetwouldbe:
A. $2,967
B. $2,487
C. $2,068
D. $5,112
Discussion: Total JobCost= 2,039 + 32*14+15*175=2039+448+2625=5,112
8. Hults Corporationhasprovideddataconcerningthe company'sManufacturingOverheadaccountfor
the monthof November.Priortothe closingof the overappliedorunderappliedbalance toCostof
GoodsSold,the total of the debitstothe ManufacturingOverheadaccountwas$75,000 and the total of
the creditsto the account was $57,000. Whichof the followingstatementsistrue?
A. ManufacturingoverheadtransferredfromFinishedGoodstoCostof Goods Soldduringthe
monthwas $75,000.
B. Actual manufacturingoverhead incurredduringthe monthwas$57,000.
C. ManufacturingoverheadappliedtoWorkinProcessfor the monthwas $75,000.
D. Manufacturing overheadfor the month was underappliedby$18,000.
Discussion: The $75,000 isthe actual amountof manufacturingincurred; $57,000 isthe amount
of overheadapplied.The differencebetweenthese twoisthe amountof overheadthatis
UNDERapplied,since actual overheadislessthanoverheadappliedby$75,000-
$57,000=$18,000
9. Wedd Corporationhad$35,000 of raw materialson handon May 1. Duringthe month,the company
purchasedan additional $68,000 of raw materials.DuringMay,$92,000 of raw materialswere

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requisitionedfromthe storeroomforuse inproduction.These raw materialsincludedbothdirectand
indirectmaterials.The indirectmaterialstotaled$5,000. The debitstothe Work inProcessaccount as a
consequence of the rawmaterialstransactionsinMaytotal:
A. $92,000
B. $0
C. $68,000
D. $87,000
Discussion: The decrease toRaw MaterialsInventoryis$92,000. Thisismade upof bothdirect
materialsandindirectmaterials. Since indirectmaterialsare $5,000, thendirectmaterials,
whichwouldbe a debittoWork inProcess,is92,000-5,000=87,000.
10. LietzCorporationhasprovidedthe followingdataconcerningmanufacturingoverheadforJanuary:
The company's Costof GoodsSoldwas $369,000 priorto closingoutitsManufacturingOverhead
account. The companyclosesoutits ManufacturingOverheadaccounttoCostof GoodsSold.Whichof
the followingstatementsistrue?
A. Manufacturingoverheadwasunderappliedby$23,000; Cost of Goods Soldafterclosingoutthe
ManufacturingOverheadaccountis$392,000
B. Manufacturingoverheadwasunderappliedby$23,000; Cost of Goods Soldafterclosingoutthe
ManufacturingOverhead accountis$346,000
C. Manufacturing overheadwas overappliedby $23,000; Cost of GoodsSold after closingout the
Manufacturing Overheadaccount is$346,000
D. Manufacturingoverheadwasoverappliedby$23,000; Costof GoodsSoldafterclosingoutthe
ManufacturingOverheadaccountis$392,000
Discussion: If Manufacturingoverheadisunderapplied,thenCostof GoodsSoldistoo lowand
will increase; If Manufacturingoverheadisoverapplied,thenCostof GoodsSoldistoohighand
will decrease. Thisisa case inwhichmanufacturingoverheadisoverapplied.
Chapter5
1. The break-evenpointinunitsalesisfoundbydividingtotal fixedexpensesby:
A. the contributionmarginratio.
B. the variable expensesperunit.
C. the salesprice perunit.
D. the contributionmargin per unit.
Discussion: breakevenpointinunits=fixedexpenses/contributionmarginperunit. If one is
computingbreakevenpointindollarsof sales=fixedexpenses/contributionmarginRATIO.
2. The break-evenpointinunitsalesincreaseswhenvariableexpenses:
A. increase and the sellingprice remainsunchanged.
B. decrease andthe sellingprice remainsunchanged.
C. decrease andthe sellingprice increases.
D. remainunchangedandthe sellingprice increases.

9. 9
Discussion: Since breakeveninsales=fixedexpenses/contributionmarginratiobreakevenin
salesincreaseswhenthe contributionmargingetssmaller. Contributionmargingetssmaller
whenvariable expensesincrease andthe sellingprice isthe same orsmaller. SelectionsB,C,
and D increase the contributionmarginratio.
3. The amountby whicha company'ssalescan decline before lossesare incurrediscalledthe:
A. contributionmargin.
B. degree of operatingleverage.
C. margin of safety.
D. contributionmarginratio.
Discussion: Definition.
4. The degree of operatingleverage canbe calculatedas:
A. contributionmargindividedbysales.
B. gross margindividedbynetoperatingincome.
C. netoperatingincome dividedbysales.
D. contributionmargin dividedby net operatingincome.
Discussion: Definition
5. Mancuso Corporationhas provideditscontributionformatincome statementforJanuary.The
companyproducesandsellsa single product.
If the companysells3,100 units,itstotal contributionmarginshouldbe closestto:
A. $27,045
B. $181,000
C. $162,400
D. $173,600
Discussion: ContributionMarginperunit= 162,400/2900 = 56. So if there are 3100 unitssold,
thencontributionmargin=3100 * 56=173,600
6. Rothe Companymanufacturesandsellsasingle productthatit sellsfor$90 perunitand has a
contributionmarginratioof 35%. The company'sfixedexpensesare $46,800. If Rothe desiresamonthly
target netoperatingincome equal to15% of sales,the amountof salesinunitswill have tobe
(rounded):
A. 1,486 units
B. 3,467 units
C. 1,040 units
D. 2,600 units
Discussion: The equationssetupfromthisproblemare the following:
NetOperatingincome =contributionmargin –fixedexpenses
NetOperatingIncome =35%*90*sales inunits – 46800.
NetOperatingIncome =15% * 90* salesinunits

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So settingthese equal andsolving
35%*90*sales in units -46800=15%*90*sales inunits
31.5 salesinunits – 46800=13.5*sales inunits
18 salesinunits= 46800
Salesinunits= 2600
7.Darth Companysellsthree products.Salesandcontributionmarginratios forthe three products
follow:
Giventhese data,the contributionmarginratioforthe companyas a whole wouldbe:
A. 25%
B. 75%
C. 33.3%
D. it isimpossible todetermine fromthe datagiven.
Discussion: Contributionmarginforcompanyasa whole = Total ContributionMargin/ Total
Sales
Total ContributionMargin=.45 * 20000 + .4 * 40000 + .15 * 100000 =
9000+16000+15000=40000
Total Sales= 20000+40000+100000=160000
Overall contributionmarginratio= 40000/160000=25%
8. Pool Company'svariable expensesare 36% of sales.Pool iscontemplatinganadvertisingcampaign
that will cost$20,000. If salesincrease by$80,000, the company'snet operatingincome shouldincrease
by:
A. $28,800
B. $64,000
C. $8,800
D. $31,200
Discussion: Incrementalincome=incremental contributionmargin-incremental fixedexpenses
Incremental contributionmargin=(1-.36) * 80000=.64*80000= 51200
Incremental fixedcost=20,000
Incremental income =51200-20000=31200
9. OlisCorporationsellsaproductfor $130 perunit.The product's currentsalesare 28,900 unitsand its
break-evensalesare 25,721 units.Whatis the marginof safetyindollars?
A. $413,270
B. $3,343,730
C. $2,504,667
D. $3,757,000
Discussion: Marginof Safety(indollars) =salesabove breakeven=(28,900-25,721)*$130=$413,270

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10. BalbuenaCorporationproducesandsellstwoproducts.Dataconcerningthose productsforthe most
recentmonthappearbelow:
The fixedexpensesof the entire companywere $15,630. If the salesmix were toshifttowardProduct
K87W withtotal salesdollarsremainingconstant,the overallbreak-evenpointforthe entire company:
A. wouldnotchange.
B. wouldincrease.
C. woulddecrease.
D. couldincrease ordecrease
Discussion:Whichproductismore profitable? ProductK87W has a contributionmarginratioof (17000-
7650)/17000= 55%; ProductI57P has a contributionmarginrationof (19000-9270)/19000=49%. So if
the companyhas a salesmix shifttowardK87W it istoward the higherprofitmarginproductandthe
companywill have alowerbreakevenpoint.
Chapter6
1. RoutsongCompanyhad the followingsalesandproductiondataforthe pastfour years:
Sellingprice perunit,variable costperunit,andtotal fixedcostare the same ineach year.Whichof the
followingstatementsisnotcorrect?
A. Undervariable costing,netoperatingincomeforYear1 andYear 2 wouldbe the same.
B. Because of the changes in productionlevels,undervariable costing the unitproduct cost
will change each year.
C. The total netoperatingincome forall fouryearscombinedwouldbe the same undervariable
and absorptioncosting.
D. Under absorptioncosting,netoperatingincome inYear4 wouldbe lessthanthe net
operatingincome inYear2.
Discussion: (A) is true becausetherewill be the samecontribution margin dueto thesame
amountof salesand variablecosting includes the fixed costsincurred during the year,which is
assumed to be thesame in this question. (B) is false becausevariablecostsper unitdon’t
changewiththe amountof production. (C) istruebecauseover thefouryear period the number
of units sold is equalto thenumberof units produced,so thereis no deferred manufacturing
overhead costs in ending inventory to differentiatevariableand absorption costing income
values. (D) is true becauseeven though therearefewer salesin year2 than in year4, in year2
there is much more production and 1/3 of the fixed manufacturingoverhead would bedeferred.
This deferred overhead would berecognized in partin Year 3 and in part in Year 4, making Year 4
incomelower.
2. Fixedmanufacturingoverheadisincludedinproductcostsunder:

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A. BothAbsorptioncostingandVariable costing
B OnlyAbsorption costing
C. OnlyVariable costing
D. NeitherAbsorptioncostingnorvariable costing
Discussion: Only Absorption costing includesfixed manufacturing overhead asa productcost.,
meaning thatit is partof the valueof inventory.In variablecosting, fixed manufacturing costs
are deducted asa period cost in the period in which it is incurred.
3. Netoperatingincome reportedunderabsorptioncostingwill exceednetoperatingincomereported
undervariable costingfora givenperiodif:
A. production equalssalesforthatperiod.
B. production exceedssalesforthat period.
C. salesexceedproductionforthatperiod.
D. the variable manufacturingoverheadexceedsthe fixedmanufacturingoverhead.
Discussion: When production ishigherthan sales,there is an increase in inventory and someof
the fixed manufacturingisin the valueof thatinventory. Thusa variable costing incomewill
havemoreexpensesthan absorption costing willhave.
4. In an income statementsegmentedbyproductline,afixedexpense thatcannotbe allocatedamong
productlinesona cause-and-effectbasisshouldbe:
A. classifiedasa traceable fixedexpense andnotallocated.
B. allocatedtothe product linesonthe basisof salesdollars.
C. allocatedtothe productlinesonthe basisof segmentmargin.
D. classifiedas a common fixedexpense andnotallocated.
Discussion: Fixed Expensesareclassified as either traceableto a segmentorcommon to the
company asa whole. Traceable fixed expensesarededucted fromsegmentrevenuesand
variableexpensesto calculate segmentmargin. Common fixed expensesarenotallocated,but
deducted fromcompany incomeasa whole.
5. All otherthingsequal,if adivision'straceable fixedexpensesdecrease:
A. the division'ssegmentmarginwill increase.
B. the overall companynetoperatingincome will decrease.
C. the division'scontributionmarginwill increase.
D. the division'ssalesvolumewillincrease.
Discussion: Traceablefixed expensesarededucted fromsegmentRevenueslessVariable
expenses. When fixed expensesaresmaller,then there is more leftoverin segmentmargin. It
doesnotaffectsales. It is deducted aftercontribution margin is calculated. It affectsonly the
segment,and thereare otherfactorsthatmay affectthe overall company.
6. OldsInc., whichproducesasingle product,hasprovidedthe followingdataforitsmost recentmonth
of operations:

13. 13
There were nobeginningorendinginventories.The absorptioncostingunitproductcostwas:
A. $97
B. $130
C. $99
D. $207
Discussion: Theabsorption costincludesboth thevariableproductcostsof $99 fromthe direct
materials, direct labor,and variable manufacturing overhead aswellas the allocation of fixed
manufacturing overhead of 31000/1000 = $31 per unit fora total of $130.
7. Cockriel Inc.,whichproducesasingle product,hasprovidedthe followingdataforitsmost recent
monthof operations:
There were nobeginningorendinginventories.The variable costingunitproductcostwas:
A. $42
B. $43
C. $37
D. $48
Discussion: Variablecosting of theproductincludesonly the Direct materials, direct labor and
variablemanufacturing overhead costsof $14 + $22 + $1 = $37. Selling and administrative
expensesarenotproductcosts. Fixed costsare notconsidered productcostsin VariableCosting.
8. Craft Companyproducesa single product.Last year,the companyhad a netoperatingincome of
$80,000 usingabsorptioncostingand$74,500 usingvariable costing.The fixedmanufacturingoverhead
cost was$5 perunit.There were nobeginninginventories.If 21,500 unitswere producedlastyear,then
saleslastyearwere:

14. 14
A. 16,000 units
B. 20,400 units
C. 22,600 units
D. 27,000 units
Discussion: Thedifferencein the incomebetween absorption and variablecosting = $80,000-
$74,500 = $5,500. This $5,500 is the deferred fixed manufacturing overhead thatisdeducted in
variablecosting,butnot in fixed costing. If fixed manufacturing overhead is$5 per unit,then the
$5,500 represents$5,500/$5 = 1,100 unitsin ending inventory. If 21,500 wereproduced and
1,100 are in ending inventory and therewas no beginning inventory,then salesare 21,500+0-
1100=20,400 units.
9. Moore Companyproducesa single product.Duringlastyear,Moore'svariable productioncosts
totaled$10,000 and itsfixedmanufacturingoverheadcoststotaled$6,800. The companyproduced
5,000 unitsduringthe yearand sold4,600 units.There were nounitsinthe beginninginventory.Which
of the followingstatementsistrue?
A. The netoperatingincome underabsorptioncostingforthe yearwill be $800 higherthannet
operatingincome undervariablecosting.
B. The net operatingincome underabsorptioncostingforthe yearwill be $544 higherthannet
operatingincome undervariablecosting.
C. The net operatingincome under absorptioncosting for the year will be $544 lowerthan net
operatingincome undervariable costing.
D. The netoperatingincome underabsorptioncostingforthe yearwill be $800 lowerthannet
operatingincome undervariablecosting.
Discussion: Thedifferencein income is the amountof deferred fixed manufacturing overhead.
The ending inventory of 5,000-4,600=400 unitswere allocated fixed overhead of 6800/5000 =
1.36 for a totalof 400 * 1.36=544. This amountisstill part of ending inventory and isnot
deducted in an absorption costing incomestatement. So netoperating incomeunderabsorption
is lower undervariablecosting than underabsorption costing when production isgreaterthan
sales.
10. Sugiki Corporationhastwodivisions:the AlphaDivisionandthe DeltaDivision.The AlphaDivision
has salesof $820,000, variable expensesof $369,000, and traceable fixedexpensesof $347,300. The
DeltaDivisionhassalesof $460,000, variable expensesof $294,400, and traceable fixedexpenses of
$134,100. The total amountof commonfixedexpensesnottraceable tothe individual divisionsis
$97,300. What is the company'snetoperatingincome?
A. $135,200
B. $37,900
C. $616,600
D. $519,300
Discussion: NetOperating incomeis calculated as the sumof all of the segmentmarginsless
common fixed expenses. The segmentmargin forAlpha = 820000-369000-347300=103700. The
segmentmargin forDelta = 460000-294400-134100=31,500. Net Operating income= 103700 +
31,500-97,300=37,900.
Chapter7
1. Whichof the followingactivitieswouldbe classifiedasabatch-level activity?
A. Settingup equipment.

15. 15
B. Designinganewproduct.
C. Trainingemployees.
D. Millingapart requiredforthe final product.
Discussion: A batch level activity occursfor each time the company producesan orderora
group of a particularkind of product,such asequipmentsetup.
2. Whichof the followingisnota limitationof activity-basedcosting?
A. Maintaininganactivity-basedcostingsystemismore costlythanmaintainingatraditional
directlabor-basedcostingsystem.
B. Changingfroma traditional directlabor-basedcostingsystemtoanactivity-basedcosting
systemchangesproductmarginsandotherkeyperformance indicatorsusedbymanagers.
Such changesare oftenresistedbymanagers.
C. In practice,mostmanagersinsistonfullyallocatingall coststoproducts,customers,and
othercostingobjectsinan activity-basedcostingsystem.Thisresultsinoverstatedcosts
D. More accurate product costs may resultin increasingthe sellingpricesofsome products.
Discussion: (D) is an advantageand nota limitation of activity-based costing. If thecompany
hasbeen underpricing a productand thuslosing money on each sale of theproduct,activity-
based costing may identify that productso thatit can becomeprofitableforthecompany.
3. Designinganewproductisan example of (an):
A. Unit-level activity
B. Batch-level activity
C. Product-level activity
D. Organization-sustainingactivity.
Discussion: Designing a new productis a product-levelactivity becauseit occurs oncefor
each typeof product.
4. Propertytaxesare an example of acost that wouldbe consideredtobe:
A. Unit-level.
B. Batch-level.
C. Product-level.
D. Organization-sustaining.
Discussion: Propertytaxesaretypically assessed atthe level of theorganization and occurson
an ongoing basisasa period cost. This describesan organization-sustaining cost.
5. McKenrick Corporationusesanactivity-basedcostingsystemwiththreeactivitycostpools.The
companyhas providedthe followingdataconcerningitscostsandits activitybasedcosting
system:

16. 16
How muchcost, intotal,wouldbe allocatedinthe first-stage allocationtothe SettingUpactivity
cost pool?
A. $229,000
B. $155,000
C. $310,000
D. $248,000
Discussion: The wayto use thisinformationfromanactivitycostingsystemisthatthe Setting
Up Cost Pool wouldbe 25% * 280,000 + 45% * 220,000 + 50% * 120,000 =
70,000+99,000+60,000=229,000

17. 17
6. Spendlove Corporationhasprovidedthe followingdatafromitsactivity-basedcostingsystem:
Assembly $19.56 per machine hour
Processingorders $26.12 per order
Inspection $68.80 per inspectionhour
The companymakes430 unitsof productS78N a year,requiringatotal of 1,120 machine-hours,
40 orders,and 30 inspection-hoursperyear.The product'sdirectmaterialscostis$49.81 per
unitand itsdirectlaborcost is $12.34 perunit. Accordingto the activity-basedcostingsystem,
the total costsfor thisproductline is
A. $26,725
B. $75,951
C. $23,736
D. $50,460
Discussion: Inactivitybasedcosting,the activitiesare measuredforeachproductand costing
usesthose measures:
Cost Amountused forthe
productline
Total
Assembly 19.56 permachine
hour
1120 machine hours 21907.20
Processingorders 26.12 perorder 40 orders 1044.8
Inspection 68.80 perinspection
hour
30 inspectionhours 783.6
DirectMaterials 49.81 perunit 430 units 21418.3
DirectLabor 12.34 perunit 430 units 5306.2
Total costs $50,460.1
7. Gaucher Corporationhasprovidedthe followingdatafromitsactivity-basedcostingaccounting
system:
The activityrate forthe "designingproducts"activitycostpool isclosest to:
A. $78 per productdesignhour
B. $582,016 perproduct designhour
C. $128 per product designhour
D. $89 perproduct designhour
Discussion: Finding therateto use in activity based costing beginswith information on measuring the
amountof costcreated by the amountof activity. Here $582,016 in cost occursover 4,547 product
design hours. So the cost perproductdesign houris $582016/4547 = $128
Chapter8

18. 18
A. Whichof the followingrepresentsthe normal sequenceinwhichthe indicatedbudgetsare
prepared?
A. DirectMaterials,Cash,Sales
B. Production, Cash,Income Statement
C. Sales,Balance Sheet,DirectLabor
D. Production,ManufacturingOverhead,Sales
B. Self-imposedbudgetstypicallyare:
A. notsubjectto reviewbyhigherlevelsof managementsince todoso wouldcontradictthe
participative aspectof the budgetingprocessing.
B. not subjecttoreviewbyhigherlevelsof managementexceptinspecificcaseswhere the
inputof highermanagementisrequired.
C. subjectto reviewby higherlevelsof managementin order to preventthe budgetsfrom
becomingtoo loose.
D. not critical to the successof a budgetingprogram.
C. A continuous(orperpetual) budget:
A. ispreparedfora range of activitysothat the budgetcan be adjustedforchangesinactivity.
B. is a plan that is updated monthlyor quarterly,dropping one periodand addinganother.
C. isa strategicplanthatdoesnot change.
D. isusedin companiesthatexperiencenochange insales.
DISCUSSION: A continuousbudgetisadjusted on an ongoing basisbased on theresultsin the
mostrecent period.
D. Budgetedproductioninunitsare determinedby:
A. adding budgetedsalesin unitsto the desiredendinginventoryinunits and deductingthe
beginninginventoryinunits from this total.
B. addingbudgetedsalesinunitstothe beginninginventoryinunitsanddeductingthe desired
endinginventoryinunitsfromthistotal.
C. addingbudgetedsalesinunitstothe desiredendinginventoryinunits.
D. deductingthe beginninginventoryinunitsfrom budgetedsalesinunits.
DISCUSSION: Budgetedproductionmustmeetthe forecastedsalesinthe periodof production
as well aspreparingforthe nextperiod’sexpectedsales. Thissumisthenadjustedforthe
amountof inventoryexpectedtoalreadybe on hand.

19. 19
E. Shownbelowisthe salesforecastforCooperInc.forthe firstfourmonthsof the comingyear.
On average,50% of creditsalesare paid forin the monthof the sale,30% inthe month following
sale,andthe remainderare paidtwomonths afterthe monthof the sale.Assumingthereare no
bad debts,the expectedcashinflowinMarchis:
A. $138,000
B. $122,000
C. $119,000
D. $108,000
Discussion: March cash sales+ 50% of March creditsales+ 30% of Februarycreditsales
+ 20% * Januarycreditsales=18,000+50%*90,000+30% * 120,000+20%*100,000 =
18,000 + 45,000 + 36,000 + 20,000 = 119,000
F. PrestwichCompanyhasbudgetedproductionfornextyearasfollows:
Two poundsof material A are requiredforeachunitproduced.The companyhasa policyof
maintainingastockof material A onhand at the endof eachquarter equal to25% of the
nextquarter'sproductionneedsformaterial A.A total of 30,000 poundsof material A are
on handto start the year. Budgetedpurchasesof material A forthe secondquarterwould
be:
A. 82,500 pounds
B. 165,000 pounds
C. 200,000 pounds
D. 205,000 pounds
Discussion: In quarter2, the materialsneeded are forproduction of 80,000 units+ for25%
of the third quarter90,000 production = 80,000 * 2 pounds+.25 * 90,000 * 2 pounds=
160,000+45,000 =205,000 pounds. Theamounton hand atthebeginning of thesecond
quarteris 25% of the second quartersales= .25 * 80,000 * 2 = 40,000. So purchasesare
205,000- 40,000 = 165,000. Notethatthe amountatthebeginning of the yearis a distractor
and notused in thesolution of thisproblem.
G. Hagos Corporationisworkingonitsdirectlaborbudgetforthe nexttwomonths.Each unit
of outputrequires0.84 directlabor-hours.The directlaborrate is$9.40 perdirectlabor-
hour.The productionbudgetcallsforproducing2,100 unitsin June and1,900 unitsinJuly.If
the directlaborwork force isfullyadjustedtothe total directlabor-hoursneededeach
month,whatwouldbe the total combineddirectlaborcostfor the two months?

20. 20
A. $15,792.00
B. $15,002.40
C. $16,581.60
D. $31,584.00
Discussion: The DirectLabor cost forJune and Julyisfor 2100 + 1900 units= 4000 units.
The labor forthese unitsis.84 DLH per unit* 4000 = 3360 DLH. The amount employees
are paidfor 3360 hoursis3360 * 9.40 = 31,584
H. Lunderville Inc.basesitssellingandadministrative expense budgetonbudgetedunitsales.The sales
budgetshows3,200 unitsare plannedtobe soldinDecember.The variable sellingand
administrativeexpense is$3.10 per unit.The budgetedfixedsellingandadministrative expense is
$60,800 permonth,whichincludesdepreciationof $6,720 permonth.The remainderof the fixed
sellingandadministrative expense representscurrentcashflows.The cashdisbursementsforselling
and administrative expensesonthe Decembersellingandadministrative expensebudgetshould
be:
A. $70,720
B. $54,080
C. $64,000
D. $9,920
Discussion: The cashdisbursementsforselling&administrative expensesare the variable
selling&administrative expensesplusthe cash-basedfixedexpenses. Thisis(3,200 *3.10)+
(60,800-6720)=9920+54080=64000
I. MosbeyInc. isworkingonitscash budgetfor June.The budgetedbeginningcashbalance is$16,000.
Budgetedcashreceiptstotal $188,000 and budgetedcashdisbursementstotal $187,000. The
desiredendingcashbalance is$40,000. The excess(deficiency) of cashavailable overdisbursements
for June will be:
A. $15,000
B. $1,000
C. $17,000
D. $204,000
Discussion: The endingbalance of cashis$16,000 beginningbalance +$188,000
receipts - $187,000 indisbursements=$17,000
10. ShuckInc. basesitsmanufacturingoverheadbudgetonbudgeteddirectlabor-hours.The directlabor
budgetindicatesthat8,100 directlabor-hourswillbe requiredinMay.The variable overheadrate is
$1.40 perdirectlabor-hour.The company'sbudgetedfixedmanufacturingoverheadis$100,440 per
month,whichincludesdepreciationof $8,910. All otherfixedmanufacturingoverheadcostsrepresent
currentcash flows.The May cash disbursementsformanufacturingoverheadonthe manufacturing
overheadbudgetshouldbe:
A. $102,870
B. $11,340
C. $91,530
D. $111,780
Discussion: Onthe overheadbudgetall overheadcountsincludingthe non-cashoverheadof
depreciation. Variableoverheadof 8100 * 1.40 + 100,440=11,340+100,440=111,780

21. 21
Chapter9
1. The purpose of a flexible budgetisto:
A. remove itemsfromperformance reportsthatare notcontrollable bymanagers.
B. permitmanagerstoreduce the numberof unfavorable variancesthat are reported.
C. update the static planningbudgetto reflectthe actual level ofactivity ofthe period.
D. reduce the amountof conflictbetweendepartmentswhenthe masterbudgetisprepared.
Discussion: Definition
2. SalyersFamilyInnisabedand breakfastestablishmentinaconverted100-year-oldmansion.The
Inn'sguestsappreciate itsgourmetbreakfastsandindividuallydecoratedrooms.The Inn's
overheadbudgetforthe mostrecentmonthappearsbelow
The Inn's variable overheadcostsare drivenbythe numberof guests.
What wouldbe the total budgetedoverheadcostfora monthif the activitylevel is53guests?
A. $7,159.20
B. $6,680.60
C. $7,184.80
D. $26,154.40
Discussion: Variableoverhead perunit * actual guests + Fixedoverhead=Total overhead;
(148.2+216.6)/57*53+(170+4310+2340) = 7159.2
3. Wadhams SnowRemoval'scostformulaforitsvehicle operatingcostis$1,900 permonth plus$430
persnow-day.Forthe monthof December,the companyplannedforactivity of 16snow-days,butthe
actual level of activitywas21 snow-days.The actual vehicle operatingcostforthe monthwas $11,470.
The vehicle operatingcostinthe planningbudgetforDecemberwouldbe closestto:
A. $10,930
B. $11,470
C. $8,739
D. $8,780
Discussion: The planningbudgetusesthe expectedsnow daysof 16. So the amountplanned
wouldbe 1900 + 430 * 16 = 1900 + 6880=8780.
4. OrschelnSnowRemoval'scostformulaforitsvehicle operatingcostis$2,800 permonthplus$381
persnow-day.Forthe monthof February,the companyplannedforactivityof 17 snow-days,butthe

22. 22
actual level of activitywas14 snow-days.The actual vehicle operatingcostforthe monthwas $7,920.
The activityvariance forvehicle operatingcostinFebruarywouldbe closestto:
A. $1,357 F
B. $1,357 U
C. $1,143 F
D. $1,143 U
Discussion:Activityvariance isthe difference due solelytothe change from17 plannedsnow
daysto 14 actual snowdays. The planningbudgetcostis2800+381*17=9277. The flexible
budgetcostis 2800 + 381 * 14 = 8134. Thisisa favorable variance because costsare LESS. The
amountis 9277-8134=1,143
5. Farver Airusestwomeasuresof activity,flightsandpassengers,inthe costformulasinitsbudgets
and performance reports.The costformulaforplane operatingcostsis$44,420 permonthplus$2,008
perflightplus$1 perpassenger.The companyexpecteditsactivityinMayto be 80 flightsand281
passengers,butthe actual activitywas81 flightsand277 passengers.The actual costfor plane operating
costs inMay was$199,650. The spendingvariance forplane operatingcostsinMaywouldbe closestto:
A. $5,691 F
B. $7,695 U
C. $7,695 F
D. $5,691 U
Discussion: The spendingvariance isthe difference betweenthe flexiblebudgetandactual costs. The
flexible budgetcostis44420+2008*81 flights+ 1*277 passengers=207345. The actual costs were
199650. The variance is favorable because actual costswere lessthanthe flexiblebudget. The amount
is207345-199650=7695
6. Lantto Air uses twomeasuresof activity,flightsandpassengers,inthe costformulasinitsbudgets
and performance reports.The costformulaforplane operatingcostsis$34,810 permonthplus$2,850
perflightplus$12 perpassenger.The companyexpecteditsactivity inJune tobe 70 flightsand292
passengers,butthe actual activitywas69 flightsand291 passengers.The actual costfor plane operating
costs inJune was$236,550. The plane operatingcostsinthe flexible budgetforJune wouldbe closest
to:
A. $237,814
B. $234,952
C. $236,550
D. $234,417
Discussion: The flexible budgetusesthe parametersof the planningbudgetatthe actual activitylevels:
34810+2850*69+12*291=34810+196650+3492=234952
Use the followinginformationforquestions 7to10.
MacPhail Corporationmanufacturesandsellsasingle product.The companyusesunitsasthe measure
of activityinitsbudgetsandperformance reports.DuringApril,the companybudgetedfor5,600 units,
but itsactual level of activitywas5,650 units.The companyhas providedthe followingdataconcerning
the formulasusedinitsbudgetinganditsactual resultsforApril:
Data usedinbudgeting:

23. 23
Actual resultsforApril:
7. The revenue variance forApril wouldbe closestto:
A. $1,645 F
B. $1,645 U
C. $3,840 U
D. $3,840 F
Discussion: Flexible Budgetrevenue=43.90*5650 = 248035 vs. actual revenue of 244195. The
difference is3840 UNFAVORABLEbecause actual resultsare lessthanthe flexible budgetamount.
8. The spendingvariance fordirect materialsinAprilwouldbe closestto:
A. $3,215 U
B. $2,260 U
C. $2,260 F
D. $3,215 F
Discussion: The flexiblebudgetcostfordirectmaterialsis19.10*5650 = 107915 and actual resultsare
110,175. The differenceis2260 Unfavorable because actual costsare more than flexiblebudget
expectedcosts.
9. The spendingvariance formanufacturingoverheadinApril wouldbe closestto:
A. $875 F
B. $970 U
C. $970 F
D. $875 U
Discussion: The spendingvariance formanufacturingoverheadisbasedonthe difference betweenthe
actual resultsof $47,565 and the flexiblebudgetresultsof $48,535 (37800+1.9*5650). The difference is
970 andis favorable because actual costsare less.

24. 24
10. The overall revenue andspendingvariance (i.e.,the variance fornetoperatingincomeinthe
revenue andspendingvariance columnonthe flexible budgetperformance report) forApril wouldbe
closestto:
A. $4,880 U
B. $4,090 F
C. $4,090 U
D. $4,880 F
Discussion: The FlexibleBudgetNOI= (43.90-28.10)*5650-61700=27570; The actual NOI= 244195-
36105-110175-47565-27660=22690; The difference betweenthe flexible budgetandthe actual resultsis
4,880. Thisisunfavorable because the actual income islessthanthe flexiblebudgetincome.
Chapter10
1. If the laborefficiencyvariance isunfavorable,then
A. actual hours exceededstandardhours allowedfor the actual output.
B. standardhours allowedforthe actual outputexceededactual hours.
C. the standardrate exceededthe actual rate.
D. the actual rate exceededthe standardrate.
Discussion: Laborefficiencyvariance isthe difference betweenthe standardnumberof hours
usedinproductionandthe actual numberof hoursusedin productiontimesthe standardwage
rate perhour. So (C) and(D) are wrong. Unfavorable meansitreducesincome andthat
happenswhenthe actual hoursare more.
2. Variable manufacturingoverheadisappliedtoproductsonthe basisof standard directlabor-hours.If
the directlaborefficiencyvariance isunfavorable,the variable overheadefficiencyvariance will be:
A. favorable.
B. unfavorable.
C. eitherfavorable orunfavorable.
D. zero.
Discussion: The variable overheadefficiencyvariance is the differencebetweenthe standardnumber
of directlaborhoursand the actual numberof direct laborhourstimesthe standardvariable overhead
rate perhour. So the difference indirectlaborhoursisa factor inboththe laborefficiencyvariance and
the overheadefficiencyvariance
3. Last month75,000 poundsof directmaterial were purchased and71,000 poundswere used.If the
actual purchase price perpoundwas$0.50 more than the standardpurchase price per pound,thenthe
materialsprice variance was:
A. $2,000 F
B. $37,500 F
C. $37,500 U
D. $35,500 U
Discussion: The material price variance =the differenceinprice betweenstandardprice perpoundand
actual price perpoundtimesthe amountpurchased. .50 * 75000 = 37500. This isunfavorable because
actual purchase price ismore.
4. The followingmaterialsstandardshave been establishedforaparticularproduct:

25. 25
The followingdatapertaintooperationsconcerningthe productforthe lastmonth:
What isthe materialsquantityvariance forthe month?
A. $19,460 F
B. $9,730 U
C. $10,115 U
D. $20,230 F
Discussion: The materialsquantityvariance isthe difference betweenthe standardquantity*standard
price and the actual quantitytimesstandardprice. 7.3poundsper unit*$14.45 perpound*1000 units –
5900*$14.45 = 20230 FAVORABLEbecause the standardquantity(7300) ismore than the actual
quantity(5900)
5. The followinglaborstandardshave beenestablishedforaparticularproduct:
The followingdatapertaintooperationsconcerningthe productforthe lastmonth:
What isthe laborefficiencyvariance forthe month?
A. $13,805 U
B. $13,530 U
C. $15,305 U
D. $15,305 F
Discussion: The laborefficiencyvariance isthe standardquantity*standardprice – actual quantity*
standardprice = 4.0 hours* 1,500 units*$12.30 perhour – 7100 hours * $12.30 perhour = 1325. It is
unfavorable becauseactual quantityis 7100 and the standardquantityis6000.
6. The followinglaborstandardshave beenestablishedforaparticularproduct:

26. 26
The followingdatapertaintooperationsconcerningthe productforthe lastmonth:
What isthe laborrate variance forthe month?
A. $1,325 U
B. $1,780 F
C. $430 F
D. $430 U
Discussion: Laborrate variance = Actual quantity* standardprice – actual quantity* actual price = 5300
* 17.55 – 94340 = 1325. It is unfavorable because AQ*SP=$93,015, whichisLESS thanthe actual cost
of $94,340.
Use the followinginformationforquestions 7to10
ArrowIndustriesusesastandardcost systeminwhichdirectmaterialsinventoryiscarriedatstandard
cost. Arrowhas establishedthe followingstandardsforthe prime costsof one unitof product.
DuringMay, Arrow purchased160,000 poundsof directmaterial ata total cost of $304,000. The total
directlaborwagesfor May were $37,800. Arrow manufactured19,000 unitsof productduringMay
using142,500 poundsof directmaterial and5,000 directlabor-hours.
7. The directmaterialsprice variance forMay is:
A. $16,000 favorable
B. $16,000 unfavorable
C. $14,250 favorable
D. $14,250 unfavorable
Discussion: Directmaterialsprice variance =Actual quantity*standard price – actual quantity* actual
price = 1.80 * 160,000 – 304000 = 16,000. Thisisunfavorable because atthe standardprice the cost of
materialswouldhave been$288,000, whichislessthan the actual cost at $304,000. Note thatthe price
variance usesthe amountPURCHASED andnot the amountUSED.
8. The directmaterialsquantityvariance forMayis:
A. $14,400 unfavorable
B. $1,100 favorable

27. 27
C. $17,100 unfavorable
D. $17,100 favorable
Discussion: The directmaterialsquantityvariance isstandardprice *standardquantity – standardprice
* actual quantity= 1.80 * 8 * 19000 – 1.8 * 142,500 = 273600-256500 = 17,100. It is favorable because
the cost at the standardquantityismore than at the actual quantity. Note thatthe quantityvariance
usesthe amountUSED and notthe amountPURCHASED.
8. The directlaborrate variance forMay is:
A. $2,200 favorable
B. $1,900 unfavorable
C. $2,000 unfavorable
D. $2,090 favorable
Discussion: Direct laborrate variance = standardprice * actual quantity – actual price * actual quantity
= 8 * 5000 – 37800 = 40,000 – 37,800=2200. Thisis favorable because the expectedcostatthe standard
rate ismore than the actual cost.
10. The directlabor efficiencyvariance forMayis:
A. $2,200 favorable
B. $2,000 favorable
C. $2,000 unfavorable
D. $1,800 unfavorable
Discussion: The directlaborefficiency=standardprice * standardquantity – standardprice * actual
quantity= 8 * .25 * 19,000 – 8 * 5000 = 38,000 – 40,000 = 2000. This isunfavorable because the
expectedcostatthe standardquantityislessthanthe actual costat the actual quantity.
Chapter11
1. Turnoveriscomputedbydividingaverage operatingassetsinto:
A. investedcapital.
B. total assets.
C. netoperatingincome.
D. sales.
Discussion: Definition
2. Which of the followingwill notresultinanincrease inthe residual income,assumingotherfactors
remainconstant?
A. Anincrease insales.
B. An increase inthe minimumrequiredrate of return.
C. A decrease inexpenses.
D. A decrease inoperatingassets.
Discussion: Residualincome =Netoperatingincome –(Average OperatingAssets*MinimumRequired
Rate of Return. An increase inminimumrequiredrate of return increasesthe amountdeductedfrom
netoperatingincome togetresidual income,soitmakesresidual income smaller. (A) and(C) increase
netoperatingincome. (D) makesthe amountdeductedsmaller.
3. Whichof the followingistrue?

28. 28
I. A profitcenterhascontrol overbothcost and revenue.
II.An investmentcenterhascontrol overinvestedfunds,butnotovercostsand revenue.
III.A cost centerhasno control oversales.
A. OnlyI
B. OnlyII
C. Only I and III
D. OnlyI and II
Discussion: Definitions
4. Average operatingassetsare $110,000 and netoperatingincome is$23,100. The companyinvests
$25,000 innewassetsfora projectthatwill increase netoperatingincome by$4,750. What isthe return
on investment(ROI) of the newproject?
A. 21%
B. 19%
C. 18.5%
D. 20%
Discussion: Returnoninvestment=netoperatingincome /average operatingassets=23100/110000=
21%
5. Average operatingassetsare $110,000, netoperatingincome is$23,100, andsalesare $300,000.
What isthe profitmargin?
A. 7.70%
B. 21.00%
C. 36.67%
D. 92.30%
Discussion: ProfitMargin= Netoperatingincome /sales= 23100/300000=7.7%
7. A company'scurrentnetoperatingincome is$16,800 and itsaverage operatingassetsare
$80,000. The company'srequiredrate of returnis18%. A new projectbeingconsideredwould
require aninvestmentof $15,000 and wouldgenerate annual netoperatingincomeof $3,000.
What isthe residual income of the new project?
A. 20.8%
B. 20%
C. ($150)
D. $300
Discussion: Residualincome =netoperatingincome- (average operatingassets*minimum
requiredrate of return)=3,000-(15,000*.18)=3000-2,700=300
8. GalanisCorporationkeepscareful trackof the time requiredtofill orders.Dataconcerninga
particularorderappearbelow:

29. 29
The throughputtime was:
A. 38.8 hours
B. 33.4 hours
C. 14.1 hours
D. 5.4 hours
Discussion: Throughputtime includesprocesstime,inspectiontime,move timeandqueue
time: 1.4 +.4+3.6+8.7=14.1
9. NiemiecCorporationkeepscareful trackof the time requiredtofill orders.The timesrecorded
for a particularorderappearbelow:
The manufacturingcycle efficiency(MCE) wasclosestto:
A. 0.20
B. 0.06
C. 0.12
D. 0.96
Discussion: MCE = processtime / throughputtime = 1.5/((2.6+8.5+1.5+.2)=1.5/12.8=11.7%
9. Which are the groupsof performance measuresonabalancedscorecard?
A. financial measures,customermeasures,internal businessprocessmeasures,and external business
process measures.
B. Unit,Batch, Product,and sustainingmeasures
C. Operatingandnon-operatingmeasures
D. Product measures,Sellingmeasures,andAdministrativemeasures
Discussion: The balancedscorecardcreatesmeasuresacrossthe unitsof a companyand notjust
financial measures.
10. Whichof the followingwouldbe ameasure inthe categoryof LearningandGrowth for a balanced
scorecard?
A. The percentage of customersthatreporttheywouldrecommendourcompanytoothers
B. The percentage ofemployeesthat receivedcertificationsintheirarea of expertise
C. The percentage of productionthatpassedqualitycontrols
D. The salesgrowthoverthe previousyear
Discussion: LearningandGrowthpertainstomeasuresaboutemployeesandtheir
competencies.
Chapter12
1. The opportunitycostof makinga componentpartin a factory withno excesscapacityisthe:
A. variable manufacturingcostof the component.

30. 30
B. fixedmanufacturingcostof the component.
C. total manufacturingcostof the component.
D. net benefitforegone fromthe bestalternative use of the capacity required.
Discussion: Forexample,if the factoryoutsourcesmakingthe headlightsforitsvehicles,thenitwill
have the floorspace to set upanotherassemblyline tomeetdemand. Sothe netoperatingincome of
the secondassemblyline wouldbe anopportunitycostinthe Make or Buy decision.
2. Freestone CompanyisconsideringrentingMachine Yto replace Machine X.It isexpectedthatY will
waste lessdirectmaterialsthandoesX.If Y is rented,Xwill be soldonthe openmarket.Forthis
decision,whichof the followingfactorsis(are) relevant?
A. Costof directmaterialsusedonly
B. Resale value of Machine Xonly
C. Both cost of directmaterials and resale value of Machine X
D. NeitherCostof directmaterialsusednorresale value of Machine X
Discussion: Relevantcostsdifferbetweenthe twoalternatives.
3. When there isa productionconstraint,acompanyshouldemphasizethe productswith:
A. the highestunitcontributionmargins.
B. the highestcontributionmarginratios.
C. the highestcontribution margin per unit of the constrained resource.
D. the highestcontributionmarginsandcontributionmarginratios.
Discussion: The highestcontributionmarginaloneisn’tenough. Since there isaconstrainedresource,
the companymust use that constrained resource mostprofitablyandobtainthe mostprofitperunitof
the constrainedresource.
4. Cung Inc. hassome material thatoriginallycost$68,400. The material hasa scrap value of $30,100 as
is,but if reworkedata cost of $1,400, itcouldbe soldfor$30,800. What wouldbe the incremental
effectonthe company'soverall profitof reworkingandsellingthe material ratherthansellingitasisas
scrap?
A. -$69,100
B. -$700
C. $29,400
D. -$39,000
Discussion: Sell orProcessFurtherDecision. The companywill LOSE$700 if it processesfurther.
The revenue atsplitoff: $30,100.
The net revenue if processedfurther: $30,800-1400=$29,400
5. A studyhas beenconductedtodetermine if ProductA shouldbe dropped.Salesof the producttotal
$200,000 peryear; variable expensestotal $140,000 per year.Fixedexpenseschargedtothe product
total $90,000 peryear.The companyestimatesthat$40,000 of these fixedexpenseswill continue even
if the product isdropped.These dataindicate thatif Product A isdropped,the company'soverall net
operatingincome would:
A. decrease by$20,000 peryear
B. increase by$20,000 per year
C. decrease by $10,000 peryear
D. increase by$30,000 per year
Discussion: Dropor AddDecision.

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The contributiontonetoperatingincome isRevenue–Avoidable Expenses=200,000-140,000-(90000-
40000)=10,000. ProductA makesa $10,000 contributiontothe company,sothe company’sincome
woulddecrease by$10,000 peryearif the productwere discontinued.
6. PelusoCompany,amanufacturerof snowmobiles,isoperatingat70% of plantcapacity. Peluso'splant
manageris consideringmakingthe headlightsnow beingpurchasedfromanoutside supplierfor$11
each.The Pelusoplanthasidle equipmentthatcouldbe usedtomanufacture the headlights.The design
engineerestimatesthateachheadlightrequires$4of directmaterials,$3of directlabor,and$6.00 of
manufacturingoverhead.Fortypercentof the manufacturingoverheadisafixedcostthatwouldbe
unaffectedbythisdecision.A decisionbyPelusoCompanytomanufacture the headlightsshouldresult
ina netgain(loss) foreachheadlightof:
A. $(2.00)
B. $1.60
C. $0.40
D. $2.80
DISCUSSION: Make or BuyDecision. The companyshouldselectthe “Make”because the costis lessfor
the firm. There is 40%*6=2.40 of manufacturingoverheadthatisirrelevantbecauseitispresent
whetherthe companyMakesor Buys.
Make Buy Difference
Cost to Supplier 11
DirectMaterial 4
DirectLabor 3
ManufacturingOverhead -- Avoidable 60%*6=3.60
TOTAL 10.60 11 .40
7. A customerhas requestedthatIngaCorporationfill aspecial orderfor2,000 unitsof productK81 for
$25.00 a unit.While the productwouldbe modifiedslightlyforthe special order,productK81's
normal unitproductcost is $19.90:
Directlabor isa variable cost.The special orderwouldhave noeffectonthe company'stotal fixed
manufacturingoverheadcosts.The customerwouldlike modificationsmade toproductK81 that
wouldincrease the variable costsby$1.20 perunitand that wouldrequire aninvestmentof $10,000
inspecial moldsthatwouldhave nosalvage value.
Thisspecial orderwouldhave noeffectonthe company'sothersales.The companyhas
ample spare capacityfor producingthe special order.If the special orderisaccepted,the
company'soverall netoperatingincome wouldincrease (decrease) by:
A. $13,000
B. $(9,700)

32. 32
C. $10,200
D. $(2,200)
Discussion: The increase tonetoperatingincome will be the contributionmarginfrom the
special orderlessthe additionalinvestment. Revenue=25*2000=50000; Variable expenses
= (5.60+4+2.70+ 1.20)*2000 = 13.50 * 2000 = 27,000; Contributionmargin=50,000 – 27,000
= 23,000. Contributionmarginlessadditional investment=23,000 – 10,000 = 13,000
8. An automatedturningmachine isthe currentconstraintat NaikCorporation.Three productsuse this
constrainedresource.Dataconcerningthose productsappearbelow:
Rank the productsinorder of theircurrentprofitabilityfrommostprofitabletoleastprofitable.Inother
words,rank the productsinthe orderinwhichtheyshouldbe emphasized.
A. OP,KU, YY
B. YY, OP, KU
C. KU, YY, OP
D. YY, KU, OP
Discussion:
KU has a contributionmarginof $104.89-$82.11=$22.78; CM perminute=22.78/1.7=13.4 per minute
OP hasa contributionmarginof $528.09-$429.78= 98.31; CM per minute =98.31/8.7=11.3
YY hasa contributionmarginof $558.03-420.08=137.95; CM perminute = 137.95/8.9=15.5
RANKYY, thenKU, thenOP
9. WrightCompanyproduces productsI,J, and K froma single raw material input.Budgeteddatafor
the nextmonthfollows:
If the cost of the raw material inputis$78,000, whichof the productsshouldbe processedbeyond
the split-off point?
A. ProjectJonly
B. ProjectI andProjectJ only
C. ProjectJ andProjectK only
D. Project I and ProjectK only
ProjectI

33. 33
Sell atsplitoff for$10
Sell after$2 of processingcostsfor$15: $15-2=$13 This ismore profit
ProjectJ
Sell atsplitoff for$12
Sell after$4 of processingcostsfor$15: $15-4=$11 Thisis lessprofit
ProjectK
Sell atsplitoff for$15
Sell after$4 of processingcostsfor$20: $20-$4=$16 Thisismore profit
10. GalluzzoCorporationprocessessugarbeetsinbatches.A batchof sugar beetscosts$51 to buy from
farmersand $14 to crush inthe company'splant.Twointermediateproducts,beetfiberandbeetjuice,
emerge fromthe crushingprocess.The beetfibercanbe soldas isfor $20 or processedfurtherfor$18
to make the endproduct industrial fiberthatissoldfor$45. The beetjuice canbe soldasis for $41 or
processedfurtherfor$21 to make the endproduct refinedsugarthatissoldfor$62. How much profit
(loss) doesthe companymake byprocessingone batchof sugar beetsintothe endproductsindustrial
fiberandrefinedsugar?
A. $(104)
B. $(4)
C. $7
D. $3
Beet Fiber
A) Sell for$20 as is, or
B) Sell for$45 aftercostsof $18 = 45-18=$27
Beet Juice
A) Sell for$41,or
B) Sell for62 after costsof $21= 62-21=$41
SugarBeets cost$51 forrawmaterials + $14 for crushing: $65
If the company producesindustrialfiberand refined sugar,thecompany gets27 + 41 = 68
The profitis 68-65 = 3