ACCT 5302 Multiple Choice Review Questions and Answers – Exam 2 1. The materials purchase budget:  A. is the beginning point in the budget process. B. must provide for desired ending inventory as well as for production. C. is accompanied by a schedule of cash collections. D. is completed after the cash budget. 2. Which of the following budgets are prepared before the sales budget?     A. Option A B. Option B C. Option C D. Option D 3. There are various budgets within the master budget. One of these budgets is the production budget. Which of the following BEST describes the production budget?  A. It details the required direct labor hours. B. It details the required raw materials purchases. C. It is calculated based on the sales budget and the desired ending inventory. D. It summarizes the costs of producing units for the budget period. 4. Tolla Company is estimating the following sales for the first six months of next year:    Sales at Tolla are normally collected as 70% in the month of sale, 25% in the month following the sale, and the remaining 5% being uncollectible. Also, those customers paying in the month of sale are given a 2% discount. Based on this information, how much cash should Tolla expect to collect during the month of April?  A. $281,260 B. $361,260 C. $366,010 D. $393,760 5. Golebiewski Inc. bases its manufacturing overhead budget on budgeted direct labor-hours. The direct labor budget indicates that 4,900 direct labor-hours will be required in November. The variable overhead rate is $8.40 per direct labor-hour. The company's budgeted fixed manufacturing overhead is $78,400 per month, which includes depreciation of $10,290. All other fixed manufacturing overhead costs represent current cash flows. The company recomputes its predetermined overhead rate every month. The predetermined overhead rate for November should be:  A. $22.30 B. $16.00 C. $24.40 D. $8.40 6. The Stacy Company makes and sells a single product, Product R. Budgeted sales for April are $300,000. Gross Margin is budgeted at 30% of sales dollars. If the net income for April is budgeted at $40,000, the budgeted selling and administrative expenses are:  A. $133,333 B. $50,000 C. $102,000 D. $78,000 Using the following information to answer questions 7-11  Justin's Plant Store, a retailer, started operations on January 1. On that date, the only assets were $16,000 in cash and $3,500 in merchandise inventory. For purposes of budget preparation, assume that the company's cost of goods sold is 60% of sales. Expected sales for the first four months appear below.    The company desires that the merchandise inventory on hand at the end of each month be equal to 50% of the next month's merchandise sales (stated at cost). All purchases of merchandise inventory must be paid in the month of purchase. Sixty percent of all sales should be for cash; the balance will be on credit. Seventy-five percent of the credit sales should be collected in the month following the.

1. ACCT 5302
Multiple Choice Review Questions and Answers – Exam 2
1. The materials purchase budget:
A. is the beginning point in the budget process.
B. must provide for desired ending inventory as well as for
production.
C. is accompanied by a schedule of cash collections.
D. is completed after the cash budget.
2. Which of the following budgets are prepared before the sales
budget?
A. Option A
B. Option B
C. Option C
D. Option D
3. There are various budgets within the master budget. One of
these budgets is the production budget. Which of the following
BEST describes the production budget?
A. It details the required direct labor hours.
B. It details the required raw materials purchases.
C. It is calculated based on the sales budget and the desired
ending inventory.
D. It summarizes the costs of producing units for the budget
period.
4. Tolla Company is estimating the following sales for the first
six months of next year:

2. Sales at Tolla are normally collected as 70% in the month of
sale, 25% in the month following the sale, and the remaining
5% being uncollectible. Also, those customers paying in the
month of sale are given a 2% discount. Based on this
information, how much cash should Tolla expect to collect
during the month of April?
A. $281,260
B. $361,260
C. $366,010
D. $393,760
5. Golebiewski Inc. bases its manufacturing overhead budget on
budgeted direct labor-hours. The direct labor budget indicates
that 4,900 direct labor-hours will be required in November. The
variable overhead rate is $8.40 per direct labor-hour. The
company's budgeted fixed manufacturing overhead is $78,400
per month, which includes depreciation of $10,290. All other
fixed manufacturing overhead costs represent current cash
flows. The company recomputes its predetermined overhead rate
every month. The predetermined overhead rate for November
should be:
A. $22.30
B. $16.00
C. $24.40
D. $8.40
6. The Stacy Company makes and sells a single product, Product
R. Budgeted sales for April are $300,000. Gross Margin is
budgeted at 30% of sales dollars. If the net income for April is
budgeted at $40,000, the budgeted selling and administrative
expenses are:
A. $133,333
B. $50,000
C. $102,000
D. $78,000

3. Using the following information to answer questions 7-11
Justin's Plant Store, a retailer, started operations on January 1.
On that date, the only assets were $16,000 in cash and $3,500 in
merchandise inventory. For purposes of budget preparation,
assume that the company's cost of goods sold is 60% of sales.
Expected sales for the first four months appear below.
The company desires that the merchandise inventory on hand at
the end of each month be equal to 50% of the next month's
merchandise sales (stated at cost). All purchases of merchandise
inventory must be paid in the month of purchase. Sixty percent
of all sales should be for cash; the balance will be on credit.
Seventy-five percent of the credit sales should be collected in
the month following the month of sale, with the balance
collected in the following month. Variable selling and
administrative expenses should be 10% of sales and fixed
expenses (all depreciation) should be $3,000 per month. Cash
payments for the variable selling and administrative expenses
are made during the month the expenses are incurred.
7. In a budgeted income statement for the month of February,
net income would be:
A. $9,000
B. $1,800
C. $0
D. $4,200
8. In a budgeted balance sheet, the Merchandise Inventory on
February 28:
A. $4,800
B. $7,500
C. $9,600
D. $3,200

4. 9. The Accounts Receivable balance that would appear in the
March 31 budgeted balance sheet would be:
A. $15,000
B. $16,000
C. $8,800
D. $12,400
10. In a cash budget for March, the total cash receipts would
be:
A. $17,800
B. $8,200
C. $20,200
D. $16,000
11. In a cash budget for March, the total cash disbursements
would be:
A. $11,200
B. $13,900
C. $22,300
D. $16,900
Using the following information to answer questions 12-15
Reenu Company manufactures wigs out of used dental floss.
The variable cost standards for wig production developed by
Reenu are as follows:
Variable overhead at Reenu is based on direct labor-hours. The
actual results for the month of October were as follows:
12. What is Reenu's materials price variance for October?
A. $1,680 favorable
B. $12,760 unfavorable
C. $14,440 unfavorable

5. D. $15,420 unfavorable
13. What is Reenu's materials quantity variance for October?
A. $2,660 unfavorable
B. $14,440 unfavorable
C. $17,100 unfavorable
D. $51,300 unfavorable
14. What is Reenu's labor efficiency variance for October?
A. $2,700 favorable
B. $7,200 unfavorable
C. $9,900 unfavorable
D. $27,600 favorable
15. What is Reenu's variable overhead rate variance for
October?
A. $3,400 favorable
B. $4,850 unfavorable
C. $8,250 unfavorable
D. $26,400 favorable
16. Which of the following represents value-added time in the
manufacturing cycle?
A. Inspection time.
B. Queue time.
C. Move time.
D. Process time.
17. A labor efficiency variance resulting from the use of poor
quality materials should be charged to:
A. the production manager.
B. the purchasing agent.
C. manufacturing overhead.
D. the engineering department.
18. A favorable labor rate variance indicates that

6. A. actual hours exceed standard hours.
B. standard hours exceed actual hours.
C. the actual rate exceeds the standard rate.
D. the standard rate exceeds the actual rate.
19. The materials price variance should be computed:
A. when materials are purchased.
B. when materials are used in production.
C. based upon the amount of materials used in production when
only a portion of materials purchased is actually used.
D. based upon the difference between the actual quantity of
inputs and the standard quantity allowed for output times the
standard price.
20. Under a standard cost system, the materials price variances
are usually the responsibility of the:
A. production manager.
B. sales manager.
C. purchasing manager.
D. engineering manager.
21. Managers sometimes do not act in ways that are in the best
interests of the overall company. What is the term for this?
A. Strategic approach
B. Suboptimization
C. Optimal motivation
D. Responsibility accounting
22. Division X of Charter Corporation makes and sells a single
product which is used by manufacturers of fork lift trucks.
Presently it sells 12,000 units per year to outside customers at
$24 per unit. The annual capacity is 20,000 units and the
variable cost to make each unit is $16. Division Y of Charter
Corporation would like to buy 10,000 units a year from Division
X to use in its products. There would be no cost savings from
transferring the units within the company rather than selling

7. them on the outside market. What should be the lowest
acceptable transfer price from the perspective of Division X?
A. $24.00
B. $21.40
C. $17.60
D. $16.00
Using the following to answer questions 23-25
The Vega Division of Ace Company makes wheels which can
either be sold to outside customers or transferred to the Walsh
Division of Ace Company. Last month the Walsh Division
bought all 4,000 of its wheels from the Vega Division for $42
each. The following data are available from last month's
operations for the Vega Company:
If the Vega Division sells wheels to the Walsh Division, Vega
can avoid $2 per wheel in sales commissions. An outside
supplier has offered to supply wheels to the Walsh Division for
$41 each.
23. Suppose that the Vega Division has ample idle capacity so
that transfers to the Walsh Division would not cut into its sales
to outside customers. What should be the lowest acceptable
transfer price from the perspective of the Vega Division?
A. $28
B. $30
C. $42
D. $45
24. What is the maximum price per wheel that Walsh should be
willing to pay Vega?
A. $28
B. $41

8. C. $42
D. $45
25. Suppose that Vega can sell 9,000 wheels each month to
outside consumers, so transfers to the Walsh Division cut into
outside sales. What should be the lowest acceptable transfer
price from the perspective of the Vega Division?
A. $28.00
B. $31.75
C. $41.00
D. $42.00
26. A company that has a profit can increase its return on
investment by:
A. increasing sales revenue and operating expenses by the same
dollar amount.
B. increasing average operating assets and operating expenses
by the same dollar amount.
C. increasing sales revenue and operating expenses by the same
percentage.
D. decreasing average operating assets and sales by the same
percentage.
27. Bonniwell Corporation has two divisions: the Delta Division
and the Alpha Division. The Delta Division has sales of
$620,000, variable expenses of $359,600, and traceable fixed
expenses of $229,200. The Alpha Division has sales of
$820,000, variable expenses of $541,200, and traceable fixed
expenses of $172,900. The total amount of common fixed
expenses not traceable to the individual divisions is $122,000.
What is the company's net operating income?
A. $539,200
B. $15,100
C. $137,100
D. $417,200
28. Given the following data:

9. Return on investment (ROI) would be:
A. 10%
B. 20%
C. 16.7%
D. 80%
Using the following to answer questions 29-30
Licuado Juice Company has four product lines; Orange,
Tomato, Carrot, and Grape. Shown below is last year's income
statement segmented by product line:
Net operating income last year for Licuado Company as a whole
was $24,800.
29. If the Carrot product line would have been dropped at the
beginning of last year, how would this have changed the net
operating income of Licuado Company as a whole?
A. $2,400 increase
B. $3,000 decrease
C. $5,400 increase
D. $12,000 decrease
30 Licuado is considering the implementation of a $5,000
advertising program specifically targeted at one of the four
product lines. The program is expected to increase sales for any
one of the product lines by $12,000. If the goal is to maximize
the company's net operating income, for which product line
should Licuado implement the advertising program?
A. Orange
B. Tomato
C. Carrot
D. Grape
E. any one of the product lines; the effect on net operating

10. income will be identical
Using the following to answer questions 31-33
Kulp Corporation has two major business segments-East and
West. In July, the East business segment had sales revenues of
$900,000, variable expenses of $441,000, and traceable fixed
expenses of $171,000. During the same month, the West
business segment had sales revenues of $450,000, variable
expenses of $234,000, and traceable fixed expenses of $45,000.
The common fixed expenses totaled $321,000 and were
allocated as follows: $180,000 to the East business segment and
$141,000 to the West business segment.
31. The contribution margin of the West business segment is:
A. $108,000
B. $675,000
C. $288,000
D. $216,000
32. A properly constructed segmented income statement in a
contribution format would show that the segment margin of the
East business segment is:
A. $288,000
B. $279,000
C. $108,000
D. $441,000
33. A properly constructed segmented income statement in a
contribution format would show that the net operating income
of the company as a whole is:
A. $138,000
B. $675,000
C. $459,000
D. -$183,000
Using the following to answer questions 34-37

11. The Axle Division of LaBate Company makes and sells only
one product. Annual data on the Axle Division's single product
follow:
34. If Axle sells 15,000 units per year, the residual income
should be:
A. $30,000
B. $100,000
C. $50,000
D. $10,000
35. If Axle sells 16,000 units per year, the return on investment
should be:
A. 12%
B. 15%
C. 16%
D. 18%
36. Suppose the manager of Axle desires a return on investment
of 22%. In order to achieve this goal, Axle must sell how many
units per year?
A. 14,500
B. 16,750
C. 18,250
D. 19,500
37. Suppose the manager of Axle desires an annual residual
income of $45,000. In order to achieve this, Axle should sell
how many units per year?
A. 14,500
B. 16,750
C. 18,250
D. 19,500

12. 38. For which of the following decisions are opportunity costs
relevant?
A. Option A
B. Option B
C. Option C
D. Option D
39. Which of the following costs are always irrelevant in
decision making?
A. avoidable costs
B. sunk costs
C. opportunity costs
D. fixed costs
40. For which of the following decisions are sunk costs
relevant?
A. the decision to keep an old machine or buy a new one.
B. the decision to sell a product at the split-off point or after
further processing.
C. the decision to accept or reject a special order offer.
D. all of the above.
E. none of the above.
41. The opportunity cost of making a component part in a
factory with excess capacity for which there is no alternative
use is:
A. the variable manufacturing cost of the component.
B. the total manufacturing cost of the component.
C. the fixed manufacturing cost of the component.
D. zero.
42. Allocated common fixed costs:
A. can make a product line appear to be unprofitable.
B. are always incremental costs.

13. C. are always relevant in decisions involving dropping a
product line.
D. responses A, B, and C are all correct.
43. Curly Inc. is considering whether to continue to make a
component or to buy it from an outside supplier. The company
uses 16,000 of the components each year. The unit product cost
of the component according to the company's cost accounting
system is given as follows:
Assume that direct labor is a variable cost. Of the fixed
manufacturing overhead, 30% is avoidable if the component
were bought from the outside supplier. In addition, making the
component uses 1 minute on the machine that is the company's
current constraint. If the component were bought, this machine
time would be freed up for use on another product that requires
2 minutes on the constraining machine and that has a
contribution margin of $8.10 per unit.
When deciding whether to make or buy the component, what
cost of making the component should be compared to the price
of buying the component?
A. $20.60
B. $17.52
C. $24.65
D. $21.57
44. A customer has requested that Daleske Corporation fill a
special order for 2,000 units of product D84 for $20.30 a unit.
While the product would be modified slightly for the special
order, product D84's normal unit product cost is $18.50:
Direct labor is a variable cost. The special order would have no
effect on the company's total fixed manufacturing overhead
costs. The customer would like modifications made to product

14. D84 that would increase the variable costs by $2.50 per unit and
that would require an investment of $7,000 in special molds that
would have no salvage value.
This special order would have no effect on the company's other
sales. The company has ample spare capacity for producing the
special order. If the special order is accepted, the company's
overall net operating income would increase (decrease) by:
A. ($14,900)
B. ($5,800)
C. $3,600
D. ($8,400)
45. Supreme Celery Corporation manufactures four celery based
products. Floods and fire on the west coast are going to cause a
shortage of celery for Supreme next month. Information related
to the four celery products that it produces are shown below.
The numbers relate to the cost per case and the amount of celery
per case of product:
To maximize profit next month, in what order would it be best
for Supreme to schedule production (first to last)?
A. Jelly, Cracker Spread, Soup, Snack Bars
B. Jelly, Snack Bars, Cracker Spread, Soup
C. Cracker Spread, Snack Bars, Jelly, Soup
D. Snack Bars, Jelly, Soup, Cracker Spread
46. (Ignore income taxes in this problem.) The Whitton
Company uses a discount rate of 16%. The company has an
opportunity to buy a machine now for $18,000 that will yield
cash inflows of $10,000 per year for each of the next three
years. The machine would have no salvage value. The net
present value of this machine to the nearest whole dollar is:
A. $22,460
B. $4,460

15. C. $(9,980)
D. $12,000
Using the following to answer questions 47-50
(Ignore income taxes in this problem.) Jones and Company has
just purchased a new piece of equipment, the cost
characteristics of which are given below:
The company uses a required rate of return of 10% and
depreciates equipment using the straight-line method.
47. The payback period for the investment is:
A. 5 years
B. 15 years
C. 2 years
D. 7.143 years
48. The simple rate of return for the investment (rounded to the
nearest tenth of a percent) is:
A. 20.0%
B. 13.3%
C. 18.0%
D. 10.0%
49. The net present value of the investment is:
A. $15,636
B. $24,000
C. $45,636
D. $60,000
50. The internal rate of return of the investment is closest to:
A. 16%
B. 18%

16. C. 20%
D. 22%
ANSWERS:
1. B
2. D
3. C
4. B
5. C
6. B
7. D
8. A
9. C
10. A
11. B
12. A
13. A
14. C
15. A
16. D

17. 17. B
18. D
19. A
20. C
21. B
22. C
23. A
24. B
25. B
26. C
27. B
28. B
29. B
30. B
31. D
32. A
33. A
34. D

18. 35. C
36. C
37. B
38. A
39. B
40. E
41. D
42. A
43. D
44. B
45. C
46. B
47. A
48. B
49. A
50. B
14