a.

Assisting managers to interpret data in managerial and ends with the shipment of a completed good
MAS CHAPTER 1: INTRODUCTION accounting reports. is the
b. Designing systems to provide information for a. cycle time.
Multiple Choice internal and external reports. b. manufacturing cell.
c. Gathering data from sources other than the c. computer-integrated manufacturing.
a 1. The controller of a company or other organization is accounting system. d. performance period.
a. a staff manager. d. Deciding the best level of inventory to be
b. an operating manager. maintained. a 15. Which function is most directly related to
c. an accountant, not a manager. management by objectives?
d. a natural manager. c 8. Conventional and just-in-time manufacturers both a. Planning.
a. Maintain large inventories of their products. b. Control.
c 2. Which item is NOT an IMA Standard for Ethical b. Sell only to other manufacturing companies. c. Decision making.
Conduct? c. Desire to meet customers' deadlines. d. Reporting.
a. Integrity. d. Require about the same amount of space to
b. Competence. operate. d 16. Which consideration influences the frequency of an
c. Loyalty.
internal report?
d. Objectivity. d 9. Classifying costs by behavior is a. The wishes of the managers receiving the report.
a. associated primarily with financial accounting. b. The frequency with which decisions are made that
d 3. Which statement about the degree of detail in a b. not relevant to a company that has only selling require the information in the report.
report is true? expenses. c. The cost of preparing the report.
a. It depends on the level of the manager receiving c. common in reports prepared for external readers. d. All of the above.
the report. d. none of the above.
b. It may depend on the frequency of the report.
c. It depends on the type of manager receiving the a 10. Which is NOT a common accounting classification of a 17. A just-in-time manufacturer is more likely than a
report. costs? conventional manufacturer to
d. All of the above. a. By the method of payment for the expenditure. a. receive more frequent deliveries of materials.
b. By the objective of expenditure. b. spend less money on advertising.
b 4. Managerial accounting is similar to financial c. By behavior. c. need workers with fewer skills.
accounting in that d. By the function incurring the expenditure. d. all of the above.
a. both are governed by generally accepted
accounting principles. a 11. Which classification of costs is most relevant for c 18. A conventional manufacturer is more likely than a
b. both deal with economic events. income statements to be used internally? just-in-time manufacturer to
c. both concentrate on historical costs. a. Behavior. a. have a short production cycle.
d. both classify reported information in the same way. b. Function. b. produce goods in small batches.
c. Method of payment. c. hold large inventories to serve as buffers.
d 5. Managerial accounting differs from financial d. Object. d. none of the above.
accounting in that it is
a. more concerned with the future. d 12. The set of processes that transform raw materials a 19. The professional certification most relevant for
b. more concerned with segments of a company. into finished products is known as a managerial accountants is the
c. less constrained by rules and regulations. a. differentiation strategy. a. CMA.
d. all of the above. b. flexible manufacturing system. b. CPA.
c. lowest cost strategy. c. CSA.
b 6. One of the ways managerial accounting differs from d. value chain. d. MAS.
financial accounting is that managerial
accounting a 13. Income statements classifying costs by object show d 20. A firm that is competing using a
a. is bound by generally accepted accounting such items as _______________________ strategy is attempting to
principles. a. tax expense, wages expense, depreciation expense. create a perception of uniqueness that will
b. classifies information in different ways. b. cost of goods sold, selling expenses, administrative permit a higher selling price.
c. does not use financial statements. expenses. a. value chain
d. deals only with economic events. c. assets, liabilities, owners' equity. b. lowest cost
d. all of the above. c. lead time
d 7. Which activity is NOT normally performed by
d. differentiation
managerial accountants? a 14. The period that begins with the arrival of materials
1
 and managerial accounting.
b 21. Planning and control are b 4. At the break-even point, total contribution margin is
a. different names for the same thing. F 4. Internal financial statements must be prepared using a. zero.
b. the basic functions of management. generally accepted accounting principles. b. equal to total fixed costs.
c. described equally well by the terms "decision c. equal to total costs.
making" and "performance evaluation." T 5. The form and content of reports can influence d. equal to total variable costs.
d. exemplified by, respectively, financial statements decisions made by managers.
and budgeting. c 5. If a company is operating at a loss,
F 6. Management-by-objectives and management-by- a. fixed costs are greater than sales.
a 22. In contrast to a balance sheet, an income statement exception are two names for the same general b. selling price is lower than variable cost per unit.
a. is for a period of time, a balance sheet is at a point management principle. c. selling price is less than average total cost per unit.
in time. d. fixed cost per unit is greater than variable cost per
b. gives information about cash and a balance sheet unit.
F 7. "Pro forma" is the name given to an income
does not.
statement that classifies costs by function.
c. is prepared after the statement of retained b 6. As volume increases, average cost per unit
earnings. a. increases.
d. has two columns, while a balance sheet has more T 8. Some managerial accounting reports contain costs
b. decreases.
than two. not incorporated in the basic accounting system.
c. remains constant.
d. increases in proportion to the change in volume.
c 23. One characteristic of the conventional F 9. A professional examination exists to test the
manufacturing environment is competence of financial accountants, but not of
d 7. All else constant, if the selling price falls,
a. flexible manufacturing systems. managerial accountants.
a. total variable costs will be lower than expected.
b. manufacturing cells. b. contribution margin percentage will be higher than
c. a just-in-case philosophy. F 10. Managerial accountants should, but have no expected.
d. a high degree of quality control. obligation to, maintain their professional skills. c. total contribution margin will be higher than
expected.
d 24. A characteristic of the just-in-time manufacturing CHAPTER 2: PROFIT PLANNING d. per-unit contribution margin will be lower than
environment is expected.
a. frequent deliveries of materials. Multiple Choice
b. manufacturing cells.
c 8. If all goes according to plan except that unit variable
c. little or no inventory of finished product. c 1. Which formula gives unit sales required to earn a cost falls,
d. all of the above. target profit? (P = selling price, V = variable cost a. total contribution margin will be lower than
per unit, F = total fixed costs, T = target profit) expected.
d 25. Conventional and just-in-time manufacturers differ a. F/(P - V) b. the contribution margin percentage will be lower
in that the conventional manufacturer is likely to b. (F + T)/P than expected.
a. be a new entrant into its industry. c. (F + T)/(P - V) c. profit will be higher than expected.
b. need less storage space than its JIT competitors. d. (F + T)/V d. per-unit contribution margin will be lower than
c. give less credibility to management accounting expected.
reports. c 2. Which formula gives the sales dollars required to
d. have a longer production cycle than its JIT earn a target profit? (P = selling price, V = a 9. If all goes according to plan except that total fixed
competitors. variable cost per unit, F = total fixed costs, T = costs rise,
target profit) a. income will be lower than expected.
True-False a. F/[(P - V)/P] b. total contribution margin will be lower than
b. (F + T)/(P) expected.
F 1. Published financial statements show costs classified c. (F + T)/[(P - V)/P] c. total sales will be lower than expected.
by behavior. d. F + T/V d. income will be higher than expected.

T 2. Generally accepted accounting principles govern d 3. Over the relevant range, total revenues and total a 10. Which of the following decreases per-unit
financial accounting but not managerial costs contribution margin the most for a company
accounting. a. increase, but at a decreasing rate. currently earning a profit?
b. decrease. a. A 10% decrease in selling price.
c. remain constant. b. A 10% increase in variable cost per unit.
T 3. Economic events are the raw data for both financial
d. can be graphed as straight lines.
2
 c. A 10% increase in fixed costs. a 17. Contribution margin percentage is 30% and c. $40,000.
d. A 10% increase in fixed cost per unit. contribution margin per unit is $12. Which of the d. an amount that cannot be determined without more
following is true? information.
c 11. If variable cost as a percentage of sales increases, a. Variable cost per unit is $28.
the b. Return on sales is 12%. a 24. If a company is earning a profit, its fixed costs
a. contribution margin percentage increases. c. Selling price is $48. a. are less than total contribution margin.
b. selling price increases. d. Variable cost percentage is 12%. b. are equal to total contribution margin.
c. break-even point in dollars increases. c. are greater than total variable costs.
d. fixed costs decrease. b 18. Contribution margin is 30% of sales. Profit is d. can be greater than or less than total contribution
$80,000. Sales are $600,000. Fixed costs are margin.
b 12. Which cost is most likely to be variable for a a. $ 90,000.
retailer? b. $100,000. a 25. Per-unit variable cost
a. Advertising. c. $160,000. a. remains constant within the relevant range.
b. Cost of goods sold. d. $180,000. b. increases as volume increases within the relevant
c. Sales salaries. range.
d. Rent. a 19. TRS Company changed production methods, c. decreases as volume increases within the relevant
increasing fixed costs and decreasing its per-unit range.
a 13. A cost-volume-profit graph reflects relationships variable costs. The change d. decreases if volume increases beyond the relevant
a. expected to hold over the relevant range. a. increases risk and increases potential profit. range.
b. of results over the past few years. b. increases risk and decreases potential profit.
c. that the company's managers would like to have c. decreases risk and decreases potential profit. d 26. An increase in the income tax rate
happen. d. decreases risk and increases potential profit. a. raises the break-even point.
d. likely to prevail for the industry. b. lowers the break-even point.
c 20. Introducing income taxes into cost-volume-profit c. decreases sales required to earn a particular after-
d 14. A multiproduct company analysis tax profit.
a. cannot use CVP analysis. a. raises the break-even point. d. increases sales required to earn a particular after-
b. must use a separate CVP graph for each of its b. lowers the break-even point. tax profit.
products. c. increases unit sales needed to earn a particular
c. can use CVP analysis only if the contribution margin target profit. b 27. Contribution margin is
percentages on each product are the same. d. decreases the contribution margin percentage. a. the same as gross margin.
d. could earn a higher-than-expected profit even b. revenue minus variable costs.
though the total number of units sold was d 21. Selling price is $100, unit variable cost is $68, and c. revenue minus variable costs and fixed costs.
less than expected. fixed costs are $400,000. Unit sales required to d. the ratio of income to sales.
earn a $120,000 profit are
a. 5,200 c 28. Classifying a cost as fixed or variable depends on
a 15. If selling price, per-unit variable cost, and total fixed b. 7,647 how it behaves
costs are constant, c. 13,700 a. per unit, as the volume of activity changes.
a. the break-even point in units remains constant. d. 16,250 b. in total, as the volume of activity changes.
b. profit per unit remains constant for all levels of c. both a and b are correct.
volume within the relevant range. c 22. The tax rate is 40%. A company that wants a profit d. none of the above.
c. total variable costs equal total fixed costs. of $120,000 after taxes must earn how much
d. total contribution margin equals total fixed costs. before taxes? d 29. Critical to CVP analysis in a multiproduct company is
a. $ 48,000. that
b 16. XYZ Company desires a profit of $120,000 and b. $ 72,000. a. the products be complementary.
expects to sell 20,000 units. Variable cost per c. $200,000. b. the products be sold to the same kinds of
unit is $16 and total fixed costs are $160,000. d. $300,000. customers.
The selling price must be c. all products have about the same contribution
a. $40. a 23. Genco Company has a 30% contribution margin margin percentage.
b. $30. percentage and fixed costs of $30,000. To earn a d. the sales mix is relatively constant.
c. $26. 10% return on sales, Genco must have sales of
d. $20. a. $150,000. a 30. A fixed cost is the same percentage of sales in three
b. $100,000. different months. Which of the following is true?

3
 a. The company had the same sales in each of those | * * b. variable cost per unit.
months. | * * c. contribution margin per unit.
b. The cost is both fixed and variable. B|*__________* __________________________________ C d. contribution margin percentage.
c. The company is operating at its break-even point. | *
d. The company is achieving its target level of profit. | * d 38. The break-even point in dollars equals total fixed
| * costs divided by
c 31. If a company raises its target dollar profit, its | * a. selling price per unit.
a. break-even point rises. |*______________________________________________ b. variable cost as a percentage of selling price.
b. fixed costs increase. O E c. contribution margin per unit.
c. required total contribution margin increases. d. contribution margin percentage.
d. selling price rises. a. revenue.
b. total variable cost. c 39. Company A has a lower variable cost per unit and
a 32. If the sales mix shifts toward higher contribution c. profit or loss. higher total fixed costs than Company B. The
margin products, the break-even point d. total contribution margin. selling prices of their products are the same.
a. decreases. Sales fluctuate considerably for both companies.
b. increases. d 35. In the following graph, total variable costs are Therefore,
c. remains constant. represented by a. Company A has a lower break-even point than
d. it is impossible to tell without more information. Company B.
A b. Company A earns more profit than Company B.
a 33. In the following graph, revenue is represented by | * D c. Company A is more risky than Company B.
A | * * d. Company A has a lower contribution margin
| * D | * * percentage than Company B.
| * * | * * b 40. The margin of safety is
| * * | * * a. the profit currently earned in excess of the target
| * * | * profit.
| * * | * * b. the difference between current sales and sales at
| * | * * break-even.
| * * | * * c. the ratio of contribution margin to variable cost.
| * * B|*__________* __________________________________ C d. the difference between contribution margin
| * * | * currently earned and contribution margin at
B|*__________*___________________________________ C | * break even.
| * | *
| * | * a 41. The indifference point is the level of volume at
| * |*______________________________________________ which a company
| * O E a. earns the same profit under different operating
|*______________________________________________ schemes.
O E a. the line BD. b. earns no profit.
b. the line BC. c. earns its target profit.
a. the line OA. c. the vertical distance between the lines OA and BD. d. any of the above.
b. the line BD. d. the vertical distance between the lines BD and BC.
c. the vertical distance between the lines OA and BD. d 42. Selling price is $40, unit variable cost is $24, and
d. the vertical axis. d 36. Target costing is fixed costs are $400,000. Unit sales required to
a. a substitute for CVP analysis. break even are
c 34. In the following graph, the vertical distance between b. used by companies that cannot classify their costs a. 10,000.
the lines OA and BD represents by behavior. b. 12,500.
c. inappropriate if a company has already established c. 16,667.
| A D a target profit. d. 25,000.
| * * d. used in decisions to offer a new product or enter a
| * * new market. d 43. ABC's variable costs are 60% of total revenue. If
| * * fixed costs are $300,000, what is the break-even
| * * c 37. The break-even point in units equals total fixed costs sales volume?
| * divided by a. $120,000
| * * a. selling price per unit. b. $180,000

4
 c. $500,00 percentage changes with changes in sales mix.
d. $750,000
c 49. Scottso Enterprises has fixed costs of $120,000. At a
b 44. Acme has sales of $200,000, fixed costs of sales volume of $400,000, return on sales is CHAPTER 3: COST ANALYSIS
$100,000, and a profit of $20,000. What is 10%; at a $600,000 volume, return on sales is
Acme's margin of safety? 20%. What is the break-even volume?
a. $ 20,000 a. $160,000 Multiple Choices
b. $ 33,333 b. $210,000
c. $100,000 c. $300,000
b 1. The principal advantage of the scatter-diagram
d. An amount that cannot be determined without d. An amount that cannot be determined without
method over the high-low method of cost
more information. more information.
estimation is that the scatter-diagram method
a. includes costs outside the relevant range.
b 45. Machine A has fixed costs of $450,000 and a d 50. Samson Inc. has a contribution margin percentage
b. considers more than two points.
variable cost of $20. Machine B has fixed costs of of 35%. If fixed costs are $630,000, what is the
c. can be used with more types of costs than the high-
$600,000 and a variable cost of $14. What is the break-even point?
low method.
indifference point, in units? a. $ 220,500
d. gives a precise mathematical fit of the points to the
a. 22,500 b. $ 409,500
line.
b. 25,000 c. $ 969,231
c. 42,858 d. $1,800,000
a 2. The major objective of preparing a scatter-diagram is
d. An amount that cannot be determined without
to
more information.
a. derive an equation to predict future costs.
True-False
b. perform regression analysis on the results.
d 46. DJH Company has sales of $360,000, variable costs
c. determine the relevant range.
of $216,000, and fixed costs of $150,000. To F 1. Target costing is a technique for classifying costs
d. find the high and low points to use for the high-low
earn a 10% return on sales, DJH must have sales according to their behavior.
method of estimating costs.
of
a. $375,000. T 2. "Gross profit" and "contribution margin" refer to d 3. The cost estimation method that gives the most
b. $440,000. different things. mathematically precise cost prediction equation
c. $470,000.
is
d. $500,000.
F 3. A company that has no variable costs can never a. the high-low method.
break even. b. the scatter-diagram method.
b 47. DJH Company has sales of $400,000, variable costs c. the contribution margin method.
of $240,000, and fixed costs of $150,000. What d. regression analysis.
T 4. A company with no fixed costs has a break-even
is the break-even sales volume?
point of zero.
a. $150,000 c 4. Which cost is most likely to be mixed for a
b. $375,000 manufacturer?
c. $390,000 F 5. If a company's income statement shows a positive
a. Raw materials.
d. $550,000 contribution margin but a net loss, its fixed costs
b. Direct labor.
are too high.
c. Manufacturing overhead.
a 48. Alvarez Inc. sells three products with the following d. Insurance.
results: T 6. As unit sales increase, both average total cost and
fixed cost per unit decrease.
b 5. Which combination of object of cost and
X Y Z classification of cost is most reasonable?
------ ------ ------ T 7. An increase in contribution margin percentage Object of Cost Classification of Cost
Sales $10,000 $20,000 $30,000 reduces the break-even point. --------------- ----------------------
Variable costs 4,000 12,000 15,000 a. Materials used to make products Discretionary fixed
F 8. Return on sales is another name for contribution cost
What is the weighted average contribution margin percentage. b. Advertising cost Discretionary fixed cost
margin percentage? c. Straight-line depreciation Variable cost
a. 48.3% F 9. Contribution margin is total variable costs minus d. President's salary Avoidable fixed cost
b. 50.0% fixed costs.
c. 51.7% c 6. A cost is variable if it varies with the
d. Cannot be determined with the information T 10. The weighted-average contribution margin a. number of units manufactured.
given.
5
 b. number of units sold.
c. level of some activity. b 14. Which of the following do JIT operations try to c 21. Identifying cost drivers
d. selling price of the product. eliminate? a. is not necessary with regression analysis.
a. Discretionary fixed costs. b. is the same as identifying cost pools.
d 7. A non-value-adding cost is b. Non-value-adding costs. c. is an important part of cost management.
a. usually direct to a product. c. Avoidable costs. d. is useful only with step-variable costs.
b. the same as a discretionary cost. d. Direct costs.
c. unavoidable. d 22. A cost pool is
d. not essential to manufacturing a product. d 15. ABC Company breaks even at $600,000 sales and a. all of the costs of a particular department.
earns $60,000 at $700,000 sales. Which of the b. all costs in a group such as variable costs or
a 8. Fixed costs that cannot be reduced within a short following is true? discretionary fixed costs.
period of time are a. Fixed costs are $40,000. c. all costs related to a product or product line.
a. committed. b. Profit at sales of $800,000 would be $160,000. d. all costs that have the same driver.
b. variable. c. The selling price per unit is $6.
c. avoidable. d. Contribution margin is 60% of sales. b 23. As volume increases,
d. unnecessary. a. total fixed costs remain constant and per-unit fixed
costs increase.
b 16. A seasonal business that sets selling prices at 20%
b 9. Which cost is most likely to be committed? b. total fixed costs remain constant and per-unit fixed
above average cost for the preceding month will
a. Repairs and maintenance. costs decrease.
a. be better off if it closed down during the off-season.
b. Sum-of-the-years'-digits depreciation on the factory c. total fixed costs remain constant and per-unit fixed
b. charge higher prices in the off-season than in the
building. costs remain constant.
busy season.
c. Fee for a consultant on the company's long-range d. total fixed costs increase and per-unit fixed costs
c. always charge higher prices than its competitors.
planning. increase.
d. make a consistent return on sales of 20%.
d. Advertising.
d 24. Which cost is NOT subtracted from selling price to
a 10. RST's average cost per unit is the same at all levels b 17. The components of manufacturing cost are
calculate contribution margin per unit?
of volume. Which of the following is true? a. variable costs, fixed costs, and overhead costs.
a. Variable manufacturing overhead.
a. RST must have only variable costs. b. materials, direct labor, and overhead.
b. Variable selling expenses.
b. RST must have only fixed costs. c. purchases, wages, and manufacturing overhead.
c. Direct labor.
c. RST must have some fixed costs and some variable d. wages and salaries, maintenance and repairs,
d. Fixed manufacturing overhead.
costs. utilities, and depreciation.
d. RST's cost structure cannot be determined from this
c 25. A committed fixed cost
information. b 18. Which statement is true for a manufacturer?
a. can never be eliminated.
a. It cannot use the contribution-margin format of the
b. can be eliminated in the short-term and in the long-
b 11. A mixed cost income statement.
term.
a. increases in steps as volume increases. b. Many costs vary with production activities, not with
c. can be eliminated in the long-term, but not in the
b. contains a fixed component and a variable sales.
short-term.
component. c. The concepts of fixed and variable costs do not
d. can be eliminated in the short-term, but not in the
c. varies with more than one measure of volume. apply.
long-term.
d. cannot be accurately predicted. d. Cost-volume-profit analysis is not appropriate.
b 12. A non-value-adding activity
a. cannot be a cost driver. d 19. Fixed costs that managers can change on short c 26. Avoidable costs are usually
b. should be eliminated. notice are a. committed.
c. usually drives only variable costs. a. value-adding costs. b. common.
d. cannot usually be observed by managers. b. variable costs. c. direct.
c. unavoidable costs. d. fixed.
d 13. A cost-predicting equation determined through d. discretionary costs.
regression analysis a 27. Direct costs are
a. always gives close predictions. c 20. A(n) __________ relationship is one that appears to a. associated with a specific activity.
b. will not work any better than one obtained using exist even though there is no causal relationship. b. always variable.
the high-low method. a. Correlation. c. usually committed.
c. can be used only for costs that vary with sales or b. Outlier. d. usually discretionary.
production. c. Spurious.
d. could be severely affected by outliers. d. Value-added. c 28. Discretionary costs
6
 a. are usually unavoidable. b. 40%. a 40. The closeness of the relationship between the cost
b. are not necessary for successful operations. c. 70%. and the activity is called
c. can be either direct or indirect. d. 90%. a. correlation.
d. should be the first ones cut in a cost-reduction b. spurious.
program. b 35. DSP Company earned $100,000 on sales of c. regression analysis.
$1,000,000. It earned $130,000 on sales of d. manufacturing overhead.
a 29. Ogden Company had $300,000 overhead cost at $1,100,000. Total fixed costs are
20,000 machine hours, $320,000 overhead cost a. $0. d 41. R-squared is a measure of
at 25,000 hours. Variable overhead cost per b. $200,000. a. the spurious relationship between cost and
machine hour is c. $420,000. activity.
a. $ 4.00. d. $900,000. b. the fixed cost component.
b. $12.80. c. the variable cost per unit of activity.
c. $15.00. c 36. Predicting costs at activity levels that are outside d. how well the regression line accounts for the
d. some other number. the relevant range is called changes in the dependent variable.
a. association.
b. correlation. c 42. DJH has an average unit cost of $20 at 20,000 units
b 30. Sacramento Company had $400,000 overhead cost
c. extrapolation. and $13.75 at 40,000 units. What is the variable
at 50,000 machine hours and $460,000
d. none of the above. cost per unit?
overhead cost at 60,000 hours. Total fixed
a. $5.00
overhead is
b. $6.25
a. $ 60,000 a 37. A non-value-adding cost
c. $7.50
b. $100,000 a. is driven by a non-value-adding activity.
d. An amount that cannot be determined without
c. $120,000. b. is discretionary.
more information.
d. $320,000. c. is direct to a product.
d. allows the company to charge a higher price for the
b 43. DJH has an average unit cost of $20 at 20,000 units
d 31. Which cost is LEAST likely to be discretionary? product.
and $13.75 at 40,000 units. What is the total
a. Salaries of salespeople. fixed cost?
b. Advertising. b 38. Looking at the following scatter diagrams we can
a. $125,000
c. Building maintenance. conclude that
b. $250,000
d. Insurance. $ $
c. $400,000
| ** | **
d. An amount that cannot be determined without
| * ** | ** *
a 32. Which cost is LEAST likely to be direct to a particular more information.
| *** * | * *
product?
| * * | **
a. Salaries of salespeople who sell all of the a 44. GMH Company had $200,000 overhead cost at
| |
company's products. 25,000 machine hours and $240,000 overhead
| |
b. Advertising of the product. cost at 60,000 hours. Variable overhead per
|__________________ |__________________
c. License fees paid to the designer of the product. machine hour is
activity activity
d. Cost of materials used to make the product. a. $4.00.
Cost A Cost B
b. $1.00.
c 33. Which cost is most likely to be avoidable in deciding c. $0.83.
a. cost A will be easier to predict than cost B.
whether to shut down one of the four assembly d. some other number.
b. cost B will be easier to predict than cost A.
lines in a factory? c. cost A is out-of-control.
a. Depreciation on the factory building. d 45. Elmwood Company had $300,000 overhead cost at
d. cost B has no fixed component.
b. Salaries of maintenance workers who service all 40,000 machine hours, and $360,000 overhead
assembly lines. cost at 60,000 hours. Total fixed overhead is
b 39. MNO has a break-even point of 200,000 units and
c. Power used to operate equipment on the assembly a. $ 36,000
earns a $100,000 profit at sales of 250,000 units.
line. b. $ 40,000
Which of the following is true?
d. Heat and light for the building. c. $ 60,000.
a. Fixed costs are $100,000.
d. $180,000.
b. Total contribution margin at 200,000 units is
c 34. DSP Company earned $100,000 on sales of $400,000.
$1,000,000. It earned 130,000 on sales of b 46. Crookston Company breaks even at $300,000 sales
c. Profit at sales of 300,000 units is $120,000.
$1,100,000. Variable costs as a percentage of and earns $40,000 at $400,000 sales. Which of
d. Selling price per unit is $2.
sales are the following is true?
a. 30%. a. Fixed costs are $120,000.
7
 b. Profit at sales of $500,000 would be $50,000. d. Unit
c. The selling price per unit is $4. T 5. High-low, scatter diagram, and regression analysis
d. Contribution margin is 10% of sales. are methods of developing formulas to predict b 5. Landscaping is an example of a(n) _____________
mixed costs. activity.
a 47. Glenwood has an average unit cost of $45 at 20,000 a. Batch
units and $25 at 60,000 units. What is the F 6. As volume increases, the per-unit amount of a mixed b. Facility-sustaining
variable cost per unit? cost increases. c. Product-sustaining
a. $15 d. Unit
b. $20 T 7. In developing a cost-prediction equation using
c. $35 d 6. Material cost is an example of a(n) _____________
regression analysis, you might not select the one
d. An amount that cannot be determined without activity.
with the highest correlation.
more information. a. Batch
b. Facility-sustaining
F 8. A company using activity-based costing need not do
b 48. Glenwood has an average unit cost of $45 at 20,000 c. Product-sustaining
regression analysis or scatter diagrams.
units and $25 at 60,000 units. What is the total d. Unit
fixed cost? F 9. An r-squared of .91 with a regression equation means
a. $400,000 c 7. The activities that drive resource requirements are
that predictions will be accurate 91% of the time.
b. $600,000 called the
c. $900,000 a. activity drivers
T 10. A multiple regression equation uses more than one
d. An amount that cannot be determined without b. cost objects
driver to predict costs.
more information. c. resource drivers
d. sustaining activities
CHAPTER 4: ACTIVITY-BASED COSTING AND
b 49. Osceola Company earned $50,000 on sales of MANAGEMENT
$400,000. It earned $70,000 on sales of b 8. The resource utilized by a given product divided by
$450,000. Contribution margin as a percentage the total amount of the resource available is
of sales is called the
Multiple Choice
a. 30%. a. activity driver
b. 40%. b. consumption ratio
a 1. Activity-based costing
c. 60%. c. cost object
a. requires the identification of cost drivers.
d. 70%. d. sustaining activity
b. is used only in JIT operations.
c. applies only to discretionary fixed costs.
c 9. The segment for which you are estimating the cost is
c 50. Osceola Company earned $50,000 on sales of d. does not help to identify activities as value-adding
called the
$400,000. It earned $70,000 on sales of or non-value-adding.
a. activity driver
$450,000. Total fixed costs are
b. consumption ratio
a. $ 0. a 2. A company using activity-based costing
c. cost object
b. $ 50,000. a. tries to identify cost drivers.
d. sustaining activity
c. $110,000. b. allocates all costs to individual products.
d. $180,000. c. looks for the activity with which total costs are most
a 10. A tool that focuses on manufacturing processes and
closely associated.
seeks to reduce or optimize the activities
d. is probably using the JIT philosophy.
performed within the process is
True-False
a. process value analysis
a 3. Machine setups is an example of a(n) ____________ b. re-engineering
F 1. The major variable cost in a manufacturing company activity. c. caveat analysis
is factory overhead. a. Batch d. benchmarking
b. Facility-sustaining
T 2. In interpreting regression results, the higher the c. Product-sustaining d 11. A tool that compares how tasks are performed
correlation, the better cost predictions are likely d. Unit internally with the best practices of industry
to be. leaders is
d 4. Machine hours is an example of a(n) ____________ a. process value analysis
F 3. Discretionary costs are step-variable. activity. b. re-engineering
a. Batch c. caveat analysis
b. Facility-sustaining d. benchmarking
F 4. Discretionary fixed costs are not necessary to
c. Product-sustaining
successful operation of the business.
8
b 12. An approach to developing new ways to perform d. Unit a 26. The quality costs that are incurred to determine
existing activities is called whether particular units of product meet quality
a. process value analysis d 19. Production volume is an example of a(n) standards are
b. re-engineering _____________ activity. a. appraisal costs.
c. caveat analysis a. Batch b. external failure costs.
d. benchmarking b. Facility-sustaining c. internal failure costs.
c. Product-sustaining d. prevention costs.
c 13. Which of the following statements is true? d. Unit
a. The traditional approach to costing uses c 27. The cost of downtime on machines while rework
many different cost drivers. d 20. ____________ are those performed each time a unit is is being performed is a(n)
b. Costs that are indirect to products are by produced or sold. a. appraisal cost.
definition traceable to directly to products. a. Batch-level activities b. external failure cost.
c. Costs that are indirect to products are b. Facility-sustaining activities c. internal failure cost.
traceable to some activity. c. Sustaining activities d. prevention cost.
d. All of the above statements are true. d. Unit-level activities
b 28. The cost of processing customer complaints is
a 14. Which of the following is NOT a sign of poor cost a 21. ____________ are those that a company performs a(n)
data? when it makes a group of units. a. appraisal cost.
a. Competitors' prices for high-volume a. Batch-level activities b. external failure cost.
products appear much too high. b. Facility-sustaining activities c. internal failure cost.
b. The company seems to have a highly c. Sustaining activities d. prevention cost.
profitable niche all to itself. d. Unit-level activities
c. Customers don't balk at price increases for d 29. Worker training is a(n)
low-volume products. b 22. ____________ relate to an entire plant as a whole. a. appraisal cost.
d. Competitors' prices for low-volume products a. Batch-level activities b. external failure cost.
appear much too high. b. Facility-sustaining activities c. internal failure cost.
d 15. Which of the following is a sign of poor cost data? c. Sustaining activities d. prevention cost.
a. Competitors' prices for high-volume products d. Unit-level activities
appear much too high. b 30. The cost to repair a unit of product that fails after
b. The company seems to have a highly c 23. ____________ arise because a company maintains a it is sold is a(n)
profitable niche all to itself. particular product or service. a. appraisal cost.
c. Customers don't balk at price increases for a. Batch-level activities b. external failure cost.
low-volume products. b. Facility-sustaining activities c. internal failure cost.
d. All of the statements are true. c. Sustaining activities d. prevention cost.
d. Unit-level activities
a 16. Number of purchase orders is an example of a(n) b 31. Genco manufactures two versions of a product.
____________ activity. d 24. Which of the following is not a type of sustaining Production and cost information show the
a. Batch activity? following:
b. Facility-sustaining a. Capacity-sustaining
c. Product-sustaining b. Customer-sustaining Model A Model B
d. Unit c. Distribution-channel sustaining Units produced 200 400
d. Unit-sustaining Material moves (total) 20 80
d 17. Direct labor hours is an example of a(n) ____________ Direct labor hours per unit 1 2
activity. a 25. Which of the following is true regarding activity-
a. Batch based management? Material handling costs total $200,000. Under ABC,
b. Facility-sustaining a. ABM is using information about activities to the material handling costs allocated to each
c. Product-sustaining manage portions of the organization other unit of Model A would be:
d. Unit than costs. a. $10
b. ABM is applying ABC to external financial b. $200
b 18. Property taxes on the plant is an example of a(n) reporting. c. $333
_____________ activity. c. ABM requires the use of re-engineering d. Some other number
a. Batch principles.
b. Facility-sustaining d. All of the above are true. c 32. Genco manufactures two versions of a product.
c. Product-sustaining Production and cost information show the
9
 following: Model X Model Y Model Z Number of inspections 20 30 50
Units produced 1,000 3,000 6,000
Model A Model B Direct labor hours 2,000 1,000 2,000 Inspection costs totaled $100,000. . Using direct labor
Units produced 200 400 Number of inspections 20 30 50 hours as the allocation base, inspections costs
Material moves (total) 20 80 allocated to each unit of Model Y would be
Direct labor hours per unit 1 2 Inspection costs totaled $100,000. Using ABC, a. $6.67
inspections costs allocated to each unit of Model b. $10.00
Material handling costs total $200,000. Under ABC, Y would be c. $20.00
the material handling costs allocated to each a. $ 6.67 d. Some other number
unit of Model B would be: b. $10.00
a. $200 c. $20.00 a 39. Cadott Manufacturing produces three products.
b. $333 d. Some other number Production and cost information show the
c. $400 following:
d. Some other number b 36. Cadott Manufacturing produces three products.
Production and cost information show the Model X Model Y Model Z
a 33. Genco manufactures two versions of a product. following: Units produced 1,000 3,000 6,000
Production and cost information show the Direct labor hours 2,000 1,000 2,000
following: Model X Model Y Model Z Number of inspections 20 30 50
Units produced 1,000 3,000 6,000
Model A Model B Direct labor hours 2,000 1,000 2,000 Inspection costs totaled $100,000. Using direct labor
Units produced 200 400 Number of inspections 20 30 50 hours as the allocation base, inspections costs
Material moves (total) 20 80 allocated to each unit of Model Z would be
Direct labor hours per unit 1 3 Inspection costs totaled $100,000. Using ABC, a. $6.67
inspections costs allocated to each unit of Model b. $8.33
Material handling costs total $200,000. Direct labor Z would be c. $10.00
hours are used to allocate overhead costs. The a. $ 6.67 d. Some other number
material handling costs allocated to each unit of b. $ 8.33
Model A would be: c. $10.00 b 40. Superior Inc. produces three products. Production
a. $143 d. Some other number and cost information is as follows:
b. $200
c. $333 c 37. Cadott Manufacturing produces three products. Model Q Model R Model S
d. Some other number Production and cost information show the Units produced 2,000 6,000 12,000
following: Direct labor hours 4,000 2,000 4,000
b 34. Cadott Manufacturing produces three products. Number of setups 100 150 250
Production and cost information show the Model X Model Y Model Z
following: Units produced 1,000 3,000 6,000 The consumption ratios for number of setups would
Direct labor hours 2,000 1,000 2,000 be:
Model X Model Y Model Z Number of inspections 20 30 50 Q R S
Units produced 1,000 3,000 6,000 a. 40%-20%-40%
Direct labor hours 2,000 1,000 2,000 Inspection costs totaled $100,000. Using direct labor b. 20%-30%-50%
Number of inspections 20 30 50 hours as the allocation base, inspections costs c. 10%-30%-60%
allocated to each unit of Model X would be d. Some other numbers
Inspection costs totaled $100,000. Using ABC, a. $10.00
inspections costs allocated to each unit of Model b. $20.00 c 41. Superior Inc. produces three products. Production
X would be c. $40.00 and cost information is as follows:
a. $10.00 d. Some other number
b. $20.00 Model Q Model R Model S
c. $40.00 a 38. Cadott Manufacturing produces three products. Units produced 2,000 6,000 12,000
d. Some other number Production and cost information show the Direct labor hours 4,000 2,000 4,000
following: Number of setups 100 150 250
b 35. Cadott Manufacturing produces three products.
Production and cost information show the Model X Model Y Model Z The consumption ratios based on units produced
following: Units produced 1,000 3,000 6,000 would be:
Direct labor hours 2,000 1,000 2,000 Q R S
10
 a. 40%-20%-40% Model A if activity-based costing were used? The controller has determined total overhead to be
b. 20%-30%-50% a. $20.50 $480,000. $120,000 relates to material moves;
c. 10%-30%-60% b. $74.00 $150,000 relates to testing; the remainder is
d. Some other numbers c. $82.00 related to labor time.
d. Some other number
a 42. Superior Inc. produces three products. Production If Kimball uses direct labor hours to allocate overhead
and cost information is as follows: a 45. Waupaca Company produces three products with to each model, what would overhead per unit be
the following production and cost information: for Model 1?
Model Q Model R Model S a. $10.00
Units produced 2,000 6,000 12,000 Model A Model B Model C b. $120.00
Direct labor hours 4,000 2,000 4,000 Units produced 2,000 6,000 12,000 c. $240.00
Number of setups 100 150 250 Direct labor hours (total) 4,000 2,000 4,000 d. $400.00
Number of setups 100 150 250
The consumption ratios for direct labor hours would Number of shipments 200 225 275 b 48. Kimball Company produces two products in a single
be: Engineering change orders 15 10 5 factory. The following production and cost
Q R S information has been determined:
a. 40%-20%-40% Overhead costs include setups $90,000; shipping
b. 20%-30%-50% costs $140,000; and engineering costs $180,000. Model 1 Model 2
c. 10%-30%-60% What would be the per unit overhead cost for Units produced 1,000 200
d. Some other numbers Model B if activity-based costing were used? Material moves (total) 100 40
a. $22.00 Testing time (total) 250 125
c 43. Waupaca Company produces three products with b. $66.00 Direct labor hours per unit 1 5
the following production and cost information: c. $123.00
d. Some other number The controller has determined total overhead to be
Model A Model B Model C $480,000. $140,000 relates to material moves;
Units produced 2,000 6,000 12,000 a 46. Waupaca Company produces three products with $150,000 relates to testing; the remainder is
Direct labor hours (total) 4,000 2,000 4,000 the following production and cost information: related to labor time.
Number of setups 100 150 250
Number of shipments 200 225 275 Model A Model B Model C If Kimball uses activity-based costing to allocate
Engineering change orders 15 10 5 Units produced 2,000 6,000 12,000 overhead to each model, what would overhead
Direct labor hours (total) 4,000 2,000 4,000 per unit be for Model 1?
Overhead costs include setups $90,000; shipping Number of setups 100 150 250 a. $400.00
costs $140,000; and engineering costs $180,000. Number of shipments 200 225 275 b. $295.00
What would be the per unit overhead cost for Engineering change orders 15 10 5 c. $240.00
Model A if direct labor hours were the allocation d. $120.00
base? Overhead costs include setups $90,000; shipping
a. $20.50 costs $140,000; and engineering costs $180,000. d 49. Kimball Company produces two products in a single
b. $41.00 What would be the per unit overhead cost for factory. The following production and cost
c. $82.00 Model C if activity-based costing were used? information has been determined:
d. Some other number a. $10.83
b. $32.50 Model 1 Model 2
b 44. Waupaca Company produces three products with c. $245.28 Units produced 1,000 200
the following production and cost information: d. Some other number Material moves (total) 100 40
Testing time (total) 250 125
Model A Model B Model C c 47. Kimball Company produces two products in a single Direct labor hours per unit 1 5
Units produced 2,000 6,000 12,000 factory. The following production and cost
Direct labor hours (total) 4,000 2,000 4,000 information has been determined: The controller has determined total overhead to be
Number of setups 100 150 250 $480,000. $140,000 relates to material moves;
Number of shipments 200 225 275 Model 1 Model 2 $150,000 relates to testing; the remainder is
Engineering change orders 15 10 5 Units produced 1,000 200 related to labor time.
Material moves (total) 100 40
Overhead costs include setups $90,000; shipping Testing time (total) 250 125 If Kimball uses direct labor hours to allocate overhead
costs $140,000; and engineering costs $180,000. Direct labor hours per unit 1 5 to each model, what would overhead per unit be
What would be the per unit overhead cost for for Model 2?
11
 a. $158.33 F 9. External failure costs are made up solely of c. dropping it will increase the total profit of the
b. $400.00 opportunity costs. company.
c. $950.00 d. it is not essential to the company's product line.
d. $1,200.00 F 10. The acceptable quality level is the point where
internal failure costs are minimized. a 7. From its refining process an oil company obtains
c 50. Kimball Company produces two products in a single three products, one of which can be processed
factory. The following production and cost further into a different product, the other two of
information has been determined: CHAPTER 5: SHORT-TERM DECISIONS AND ACCOUNTING which can be sold after further refining. The
INFORMATION refining process is
Model 1 Model 2 a. a joint process.
Units produced 1,000 200 Multiple Choice b. a mixed cost process.
Material moves (total) 100 40 c. an unavoidable process.
Testing time (total) 250 125 a 1. The salary or wage that you could be earning while d. a process whose costs should be allocated to the
Direct labor hours per unit 1 5 you are taking this test is resulting products.
a. an opportunity cost.
The controller has determined total overhead to be b. a sunk cost. b 8. The Accessories Department shows sales of $35,000.
$480,000. $140,000 relates to material moves; c. an incremental cost. Variable costs are $30,000 and allocated
$150,000 relates to testing; the remainder is d. a joint cost. unavoidable fixed costs are $9,000, leaving a
related to labor time. $4,000 loss. Based on this information and all
d 2. The kind of cost that can be ignored in short-term other things equal,
If Kimball uses activity-based costing to allocate decision making is a. the department contributes $35,000 to total profits.
overhead to each model, what would overhead a. a differential cost. b. dropping the department will reduce total company
per unit be for Model 2? b. an opportunity cost. profits by $5,000.
a. $158.33 c. a relevant cost. c. the department should be closed.
b. $415.93 d. a sunk cost. d. the department should be kept only if unit volume
c. $925.00 can be increased enough to increase sales
d. Some other number b 3. The role of sunk costs in decision making can be by $4,000.
summed up in which of the following sayings?
a. Nothing ventured, nothing gained. d 9. A major factor in evaluating a special order is
True-False b. Bygones are bygones. a. the expected contribution margin on the order.
c. A penny saved is a penny earned. b. the possible effects on sales at regular prices.
F 1. ABC can only be used in a company that produces a d. The love of money is the root of all evil. c. the availability of capacity to produce the additional
single product. units.
c 4. Allocated costs are d. all of the above.
F 2. A company that uses only volume-based measures a. generally separable.
will overcost its low-volume products. b. generally variable. a 10. Which of the following is true for a make-or-buy
c. generally common. decision?
T 3. ABC will be most useful in estimating fixed costs. d. especially important in deciding whether to drop a a. The reliability of the outside supplier of the
segment. component is important to the decision.
b. Depreciation on equipment used in making the
T 4. Two major influences on costs are complexity and
a 5. The Robinson-Patman Act forbids charging different component and having no other use is the
diversity.
prices to different customers unless critical factor in the decision.
a. the price differences are justified by differences in c. Opportunity costs are irrelevant.
T 5. Volume-based measures will tend to overcost high d. The company should make the component if the
distribution costs.
volume products. purchase price is less than the per-unit
b. prices offered competitors are fully disclosed to all
customers. variable cost to make the component.
F 6. Activities that drive resource requirements are
c. such prices produce profits no greater than normal
known as activity drivers. b 11. Which of the following costs is relevant in deciding
profits.
d. the customers are located within the seller's state. whether to sell joint products at split-off or
F 7. ABC is required for GAAP financial reporting. process them further?
a. The unavoidable costs of further processing.
F 8. ABC will benefit a JIT operation more than a non-JIT c 6. A product should be dropped if
b. The avoidable costs of further processing.
operation. a. it has a negative incremental profit.
c. The variable cost of operating the joint process.
b. it has a negative contribution margin.
d. The cost of materials used to make the joint
12
 products. a. Fixed--variable.
b 12. A manufacturing process that invariably produces a 18. The best characterization of an opportunity cost is b. Joint--common
two or more products that it is c. Avoidable--unavoidable.
a. is a complementary process. a. relevant to decision making but is not usually d. Direct--common.
b. is a joint process. reflected in accounting records.
c. normally has only fixed costs. b. not relevant to decision making and is not usually d 25. Which of the following is NOT relevant in deciding
d. usually has primarily variable costs. reflected in accounting records. whether to process a joint product beyond its
c. relevant to decision making and is usually reflected split-off point?
d 13. Which of the following is a short-term decision in in accounting records. a. The split-off value.
which opportunity costs are not relevant? d. not relevant to decision making and is usually b. The price after additional processing.
a. Make-or-buy decision. reflected in accounting records. c. The cost of further processing.
b. Special-order decision. d. The cost of operating the joint process.
c. Drop-a-segment decision. a 19. A sunk cost is
d. None of the above. a. not avoidable. c 26. Benson Company has 200 units of an obsolete part.
b. avoidable under one alternative but not under The variable cost to produce them was $4 per
c 14. Which of the following is a true statement? another. unit. They could now be sold for $3 each and it
a. Theory of Constraints is useful for identifying c. joint or common. would cost $6 to make them now. The parts
physical constraints but cannot incorporate d. direct to a segment. could be reworked for $8 each and sold for $17.
nonphysical constraints. What is the monetary advantage of reworking
b. Theory of Constraints is useful in analyzing b 20. Differential costs are costs that are the parts over the next-best action?
internal constraints but cannot identify a. not avoidable. a. $ 600.
external constraints. b. avoidable under one alternative but not under b. $1,000.
c. Constraints may be either internal or another. c. $1,200.
external. c. joint or common. d. $2,000.
d. Internal constraints are physical while d. not direct to a segment.
external constraints are imaginary. b 27. Pueblo Company sells a product for $60. Variable
a 21. A common cost cost is $32. Pueblo could accept a special order
b 15. A company has space that it uses to make a a. relates to a process that produces more than one for 1,000 units at $46. If Pueblo accepted the
component. It could rent the space to another product. order, how many units could it lose at the regular
company. The rent is b. should be allocated to the segments of a company. price before the decision became unwise?
a. a sunk cost. \ c. can usually be avoided in its entirety by dropping a a. 1,000.
b. an opportunity cost. segment. b. 500.
c. a joint cost. d. none of the above. c. 200.
d. an avoidable cost. d. 0.
a 22. An opportunity cost commonly associated with a
a 16. Escanaba Company has 200 units of an obsolete special order is c 28. Which of the following is NOT a short-term decision?
component. The variable cost to produce them a. the contribution margin on lost sales. a. Accept a special order.
was $10 per unit. They could now be sold for b. the variable costs of the order. b. Make-or-buy a component.
$1.75 each and it would cost $7.60 to make c. additional fixed costs related to the increased c. Replace a machine.
them now. If the units could be used to make a output. d. Sell a joint product at split-off or process it further.
product for a special order, their relevant cost is d. any of the above.
a. $ 1.75. d 29. The variable cost of a unit of product made
b. $ 7.60. b 23. Which of the following statements pertaining to yesterday is
c. $10.00. the Theory of Constraints is true? a. an incremental cost.
d. some other number. a. Inventory is evil and should never be kept. b. an opportunity cost.
b. Inventory is important to keep immediately c. a differential cost.
c 17. In a make-or-buy decision, which of the following is before a bottleneck process. d. a sunk cost.
true? c. Inventory should be kept before every
a. Variable costs are the only relevant costs. machining process to prevent any d 30. The most profitable use of a resource that has
b. Allocated fixed costs are relevant. downtime. limited capacity and is needed in the production
c. Alternative uses of space and machinery are d. None of the above are true. of more than one product is a function of which
relevant. of the following?
d. Making is the correct decision when there is idle c 24. Which of the following cost-classification schemes is a. The number of units of each product the company
capacity. most relevant to decision making? can sell.
13
 b. The contribution margin of each product. d. $480 increase. A 120 $20
c. The amount of resource-use required for each unit 5
of each product. a 36. Tyler Company currently sells 1,000 units of product B 80 36
d. All of the above. M for $1 each. Variable costs are $0.40 and 10
avoidable fixed costs are $400. A discount store C 100 50
c 31. Which of the following is NOT relevant in a make-or- has offered $0.80 per unit for 400 units of 15
buy decision about a part the entity uses in some product M. The managers believe that if they
of its products? accept the special order, they will lose some There are 2400 minutes available on the
a. The reliability of the outside supplier. sales at the regular price. Determine the machine during the week. How many units
b. The alternative uses of owned equipment used to number of units they could lose before the order should be produced and sold to maximize the
make the part. became unprofitable. weekly contribution?
c. The outside supplier's per-unit variable cost to a. 267 units A B C
make the part. b. 500 units a. 120 80 100
d. The number of units of the part needed each c. 600 units b. 20 80 100
period. d. Some other number. c. 120 30 100
d. 120 80 66
d 32. Which of the following is NOT relevant to a decision b 37. Bear Valley produces three products: A, B, and C.
about whether to drop a segment? One machine is used to produce the products. a 39. Black Oak Company makes and sells oak
a. The contribution margin expected to be produced The contribution margins, sales demands, and boxes for a price of $60 each. Unit costs
by the segment. time on the machine (in minutes) are as follows: based on anticipated monthly sales of
b. The avoidable fixed costs direct to that segment. 1,000 boxes are as follows:
c. The complementary effects of dropping the time on
segment. Demand CM Direct material cost
d. "None of the above" is the best answer because all machine $15
of the above are relevant. ------ ---- Direct labor cost 12
-------- Variable manufacturing
a 33. Just-in-time manufacturers are less likely than A 100 $25 overhead 3
conventional manufacturing companies to 10 Variable selling overhead 5
a. operate a joint process that results in joint B 80 18 Fixed costs
products. 5 2
b. be able to accommodate special orders. C 150 30
c. have constraints on their productive capacity. 10 A chain store has offered to buy 100
d. fit any of the above characterizations. boxes per month at $58 each. To accept
There are 2400 minutes available on the this special order, Black Oak will have to
d 34. The total demand for Product Z is relevant to a machine during the week. How many units restrict its sales to regular customers to
decision about should be produced and sold to maximize the only 900 boxes per monthly because its
a. the best use of a resource that is in limited supply weekly contribution? production capacity cannot be expanded
and is used in the production of Product Z A B C in the short run. However, no variable
and one other of the company's products. a. 100 80 150 selling expenses will be incurred for this
b. whether to sell Product Z, a joint product, at split- b. 50 80 150 special order. If Black Oak accepts the
off or process it further into another salable c. 90 0 150 chain store's offer, its profit will
product. d. 100 80 100 a. increase by $300.
c. replacing Product Z with another product. b. increase by $500.
d. all of the above decisions. d 38. Elk Grove produces three products: A, B, and C. A c. decrease by $200.
machine is used to produce the products. The d. decrease by $500.
c 35. Buchanan Company currently sells 4,000 units of contribution margins, sales demands, and time
product Q for $1 each. Capacity is 5,000 units. on the machine (in minutes) are as follows: a 40. Medford Corporation operates a plant with a
Variable costs are $0.40 and avoidable fixed productive capacity to manufacture 20,000 units
costs are $400. A chain store has offered $0.80 of its product a year. The follow information
time on
per unit for 400 units of Q. If Buchanan accepts pertains to the production costs at capacity:
Demand CM
the order, the change in income will be a
machine
a. $60 decrease. Variable costs $160,000
------ ----
b. $80 decrease. Fixed costs 240,000
--------
c. $160 increase. --------
14
 Total costs $400,000 from the outside supplier. What is the maximum
========= price that DJH Company should be willing to pay Direct materials $100,000
the outside supplier? Direct labor 120,000
A supplier has offered to sell 4,000 units to a. $60 Variable overhead 60,000
Medford annually. Assume no change in the fixed b. $40 Fixed overhead 30,000
costs. What is the price per unit that makes c. $36
Medford indifferent between the "make" and d. $25 The selling price is $50 per unit. The company
"buy" options? currently operates at full capacity of 10,000
a. $8 c 43. Scooter Company produces three products from a units. Capacity can be increased to 13,000 units
b. $12 joint process costing $100,000. The following by operating overtime. Variable costs increase by
c. $20 information is available: $14 per unit for overtime production. Fixed
d. $0 overhead costs remain unchanged when
overtime operations occur. Colfax Company has
b 41. DJH Company produces 1,000 units of Part X per Costs to Selling Price received a special order from a wholesaler who
month. The total manufacturing costs of the part Selling Price Process After has offered to buy 1,000 units at $45 each. What
are as follows: Further is the incremental cost associated with this
Units at Split-off Further special order?
Direct materials $10,000 Processing a. $14,000
Direct labor 15,000 ----- ------------ ------- ---------- b. $28,000
Variable overhead 5,000 A 10,000 $35 $70,000 $40 c. $42,000
Fixed overhead 30,000 B 20,000 $40 $30,000 $45 d. $45,000
------- C 30,000 $20 $90,000 $25
Total manufacturing cost $60,000 b 46. Colfax Company expects to incur the following costs
======= Which products should be processed further? at the planned production level of 10,000 units:
a. A only.
An outside supplier has offered to supply the part b. A and B. Direct materials $100,000
at $40 per unit. It is estimated that 20% of the c. B and C. Direct labor 120,000
fixed overhead assigned to Part X will no longer d. A, B, and C. Variable overhead 60,000
be incurred if the company purchases the part Fixed overhead 30,000
from the outside supplier. If DJH Company b 44. Genco Company produces three products from a
purchases 1,000 units of Part X from the outside joint process costing $100,000. The following The selling price is $50 per unit. The company
supplier per month, then its monthly operating information is available: currently operates at full capacity of 10,000
income will units. Capacity can be increased to 13,000 units
a. decrease by $20,000. by operating overtime. Variable costs increase by
b. decrease by $4,000. $14 per unit for overtime production. Fixed
Costs to Selling Price
c. not change. overhead costs remain unchanged when
Selling Price Process After
d. increase by $20,000. overtime operations occur. Colfax Company has
Further
received a special order from a wholesaler who
Units at Split-off Further
c 42. DJH Company produces 1,000 units of Part X per has offered to buy 1,000 units at $45 each. What
Processing
month. The total manufacturing costs of the part is the impact on Colfax's operating income if this
----- ------------ ------- ---------
are as follows: special order is accepted?
A 2,000 $25 $60,000 $50
a. $17,000 increase
B 3,000 $30 $60,000 $45
Direct materials $10,000 b. $3,000 increase
C 5,000 $40 $80,000 $60
Direct labor 15,000 c. no change
Variable overhead 5,000 d. $5,000 decrease
Which products should be sold without further
Fixed overhead 30,000
processing?
------- c 47. GMH Company manufactures 100,000 units of Part X
a. B only.
Total manufacturing cost $60,000 annually for use in one of its main products. The
b. A and B.
======= total manufacturing cost for 100,000 units of Part
c. B and C.
X is as follows:
d. A, B, and C.
An outside supplier has offered to supply the part
at $40 per unit. It is estimated that 20% of the Direct materials $120,000
c 45. Colfax Company expects to incur the following costs
fixed overhead assigned to Part X will no longer Direct labor 80,000
at the planned production level of 10,000 units:
be incurred if the company purchases the part Variable overhead 40,000
15
 Fixed overhead 160,000 M1 on M2 T 4. In general, the smaller the segment being
------- A 100 $12 considered in a decision, the fewer the avoidable
Total cost $400,000 5 10 costs.
======== B 80 18
10 5 T 5. A given fixed cost might be separable and relevant
Selin Company has offered to sell GMH 100,000 C 100 25 for the purpose of one decision and common and
units of Part X per year. If GMH accepts this offer, 15 5 irrelevant for the purpose of another decision in
the facilities used to produce Part X can be used the same company.
in the production of other components. This There are 2,400 minutes available on each
change would save GMH $10,000 in rent for the machine during the week. How many units F 6. Opportunity cost is usually the amount paid for a
leased production facility used at present to should be produced and sold to maximize the resource.
support the production of other components. weekly contribution?
What is the amount of relevant costs for this A B C T 7. Fixed costs that are allocated to several segments
make-or-buy decision? a. 100 80 100 are normally irrelevant to decisions for one of
a. $200,000 b. 20 80 100 those segments.
b. $240,000 c. 100 40 100
c. $250,000 d. 100 80 73 T 8. The only revenues or costs that are relevant in
d. $400,000 decision making are the differential revenues or
b 50. Barrie, Inc., produces three products: A, B, and C. costs.
d 48. GMH Company manufactures 100,000 units of Part X Two machines are used to produce the products.
annually for use in one of its main products. The The contribution margins, sales demands, and T 9. Constraints may be internal to the firm or external to
total manufacturing cost for 100,000 units of Part time on each machine (in minutes) is as follows: the firm.
X is as follows:
time time T 10. Management's objective should be to exploit a
Direct materials $120,000 Demand CM on constraint rather than to eliminate it.
Direct labor 80,000 M1 on M2
Variable overhead 40,000 A 100 $12
Fixed overhead 160,000 5 10 CHAPTER 6:
-------- B 80 18 OPERATIONAL AND FINANCIAL BUDGETING
Total cost $400,000 10 5
======== C 150 25 Multiple Choice
5 10
Sutton Company has offered to sell GMH 100,000 a 1. The starting point in preparing a comprehensive
units of Part X per year. If GMH accepts this offer, There are 2,400 minutes available on each budget is
the facilities used to produce Part X can be used machine during the week. How many units a. the sales forecast.
in the production of other components. This should be produced and sold to maximize the b. the cash budget.
change would save GMH $10,000 in rent for the weekly contribution? c. the budgeted income statement.
leased production facility used at present to A B C d. the flexible expense budget.
support the production of other components. a. 100 80 150
What is the maximum price that GMH should be b. 50 80 150 d 2. Budgets are related to which of the following
willing to pay Sutton for part X? c. 90 0 150 management functions?
a. $1.20 e. 100 80 100 a. Planning.
b. $2.00 b. Control.
c. $2.40 True-False c. Performance evaluation.
d. $2.50 d. All of the above.
F 1. If the results of a decision are not as good as
d 49. Barrie, Inc., produces three products: A, B, and C. expected, there has been an error in the d 3. Which of the following should be used to forecast
Two machines are used to produce the products. decision-making process. sales?
The contribution margins, sales demands, and a. Regression analysis.
time on each machine (in minutes) is as follows: T 2. The costs of operating a joint process can be fixed or b. The scatter diagram.
variable. c. The judgment of the most experienced managers.
d. Whatever method produces the most accurate
time time
T 3. Incremental costs can be either fixed or variable. forecast.
Demand CM on

16
a 4. A critical factor for using indicator methods to c. line budgeting. d. All of the above.
forecast sales is d. flexible budgeting.
a. the availability of a forecasted value for the c 17. JIT manufacturers are more likely than conventional
indicator. c 11. Which of the following is a difference between a manufacturers to
b. an upward trend in the value of the indicator. static budget and a flexible budget? a. use static budget allowances for manufacturing
c. governmental collection of data for computing and a. A flexible budget includes only variable costs, a costs.
reporting the value of the indicator. static budget includes only fixed costs. b. prepare production budgets without a sales
d. the availability of an indicator that covers the entire b. A flexible budget includes all costs, a static budget forecast.
country. includes only fixed costs. c. budget unit production equal to budgeted unit
c. A flexible budget gives different allowances for sales.
d 5. Which of the following equations can be used to different levels of activity; a static budget d. experience budget variances.
budget purchases? (BI = beginning inventory, EI does not.
= ending inventory desired, CGS = budgeted d. None of the above. a 18. If cash receipts from customers are greater than
cost of goods sold) sales, which of the following is most likely to be
a. Budgeted purchases = CGS + BI - EI a 12. A static budget is most appropriate for a true?
b. Budgeted purchases = CGS + BI department a. The balance of accounts receivable will decrease.
c. Budgeted purchases = CGS + EI + BI a. with only fixed costs. b. The company's outstanding debt will decrease.
d. Budgeted purchases = CGS + EI - BI b. with only variable costs. c. The company's cash balance will increase.
c. with mostly mixed costs. d. The company will show a profit.
b 6. A flexible budget is d. with any of the above characteristics.
a. one that can be changed whenever a manager so c 19. A cash budget is NOT prepared until a company has
desires. d 13. Which of the following is NOT an advantage of a. obtained a commitment from its bank that cash will
b. adjusted to reflect expected costs at the actual budgeting? be available as needed.
level of activity. a. It requires managers to state their objectives. b. prepared the pro forma balance sheet.
c. one that uses the formula total cost = cost per unit b. It facilitates control by permitting comparisons of c. prepared its purchases budget.
x units produced. budgeted and actual results. d. determined that enough cash is available to meet
d. the same as a continuous budget. c. It facilitates performance evaluation by permitting dividend payments.
comparisons of budgeted and actual results.
b 7. The use of flexible (as opposed to static) budget d. It provides a check-up device that allows managers a 20. Which of the following is LEAST likely to be affected
allowances is LEAST important for which of the to keep close tabs on their subordinates. if unit sales for this month are lower than
following? budgeted?
a. Costs of the production department. b 14. An imposed budget a. Production for this month.
b. Costs of the general accounting department. a. is the same as a static budget. b. Production for next month.
c. Costs of the product shipping department. b. can lead to poor performance. c. Cash receipts for next month.
d. Costs of the material receiving department. c. is best for planning purposes. d. Inventory at the end of this month.
d. eliminates the need for a sales forecast.
d 8. Budgets set at very high levels of performance (i.e., b 21. "Incremental budgeting" refers to
very low costs) b 15. Prohibiting managers from overspending budget a. line-by-line approval of expenditures.
a. assist in planning the operations of the company. allowances b. setting budget allowances based on prior year
b. stimulate people to perform better than they a. improves company performance. expenditures.
ordinarily would. b. can harm company performance. c. requiring top management approval of increases in
c. are helpful in evaluating the performance of c. eliminates the need for comparisons of budgeted budgets.
managers. and actual amounts. d. using incremental revenues and costs in budgeting.
d. can lead to low levels of performance. d. usually reduces the need to prepare a cash budget.
b 22. The principal DISADVANTAGE of line budgeting is
c 9. Inventory policy is most critical in the budgeting of b 16. Which of the following will occur if X Co.'s actual a. it can only be used by not-for-profit entities.
a. sales. sales in May are lower than its budgeted sales b. it limits the flexibility of managers to accomplish
b. cost of goods sold. for that month? the entity's objectives.
c. purchases. a. X won't have enough cash to cover bills requiring c. it works only in conjunction with zero-based
d. expenses. payment in May. budgeting.
b. X's actual inventory at the end of May will be higher d. none of the above.
a 10. Budgeting expenditures by purpose is called than budgeted.
a. program budgeting. c. X's actual purchases in June will be higher than a 23. The cash receipts budget
b. zero-based budgeting. budgeted. a. requires a sales forecast.
17
 b. requires a purchases or production budget. desired ending inventory was $84,000. The purchases in June would be
c. is prepared after the cash disbursements budget. beginning inventory was a. 1,525 pounds.
d. has none of the above characteristics. a. $40,000. b. 2,550 pounds.
b. $64,000. c. 2,800 pounds.
c 24. The type of company most likely to run short of cash c. $84,000. d. 3,050 pounds.
during the year is one with d. $124,000. a 36. Hayward Company desires an ending inventory of
a. little seasonality. $70,000. It expects sales of $400,000 and has a
b. high contribution margin percentage. a 31. Wildwood Company budgeted purchases of 20,000 beginning inventory of $65,000. Cost of sales is
c. high seasonality and rapid sales growth. units. The budgeted beginning inventory was 65% of sales. Budgeted purchases are
d. relatively low fixed costs. 4,800 units and the budgeted ending inventory a. $265,000.
was 6,000 units. Budgeted sales were b. $395,000.
d 25. If a company is earning a profit, a. 18,800 units. c. $405,000.
a. its cash balance is increasing. b. 21,200 units. d. $535,000.
b. its monthly cash disbursements will be stable. c. 24,800 units.
c. its inventory is increasing. d. 26,000 units. c 37. Bryce Company budgeted sales of 50,000 units for
d. it might have to borrow money. January, 60,000 for February. Bryce Company
c 32. Menomonie Company budgeted sales of 18,000 desires an ending inventory equal to one-half of
a 26. One difference between budgeting in for-profit and units. The budgeted beginning inventory was the following month's sales needs. Inventory on
not-for-profit entities is that not-for-profit entities 3,000 units and the budgeted ending inventory January 1 was as desired. Budgeted production
usually was 5,000 units. Budgeted production is for January is
a. budget expenses before revenues. a. 23,000 units. a. 22,000 units.
b. don't need a cash budget. b. 21,000 units. b. 52,000 units.
c. are less likely to use incremental budgeting. c. 20,000 units. c. 55,000 units.
d. use computer software-packages to facilitate the d. 16,000 units. d. 74,000 units.
budgeting process.
d 33. Baker Company budgets supplies as $20,000 + c 38. Chetek Company budgeted purchases of 19,000
d 27. To prepare its cash disbursements budget, a ($1.20 x direct labor hours). Baker has budgeted units. The budgeted beginning inventory was
company uses information from 18,000 direct labor hours, $130,000 direct labor 12,400 units and the budgeted ending inventory
a. its balance sheet at the end of the prior period. cost. The flexible budget allowance for supplies was 13,000 units. Budgeted sales were
b. its purchases budget. is a. 32,000 units.
c. its capital budget. a. $18,000. b. 31,400 units.
d. all of the above sources. b. $20,000. c. 18,400 units.
c. $150,000. d. 19,600 units.
b 28. Just-in-time manufacturers are more likely than d. some other number.
conventional manufacturers to d 39. Barron Company manufactures a single product.
a. prepare production budgets without a sales b 34. Equinox Company budgeted sales of 44,000 units Barron keeps inventory of raw materials at 50%
forecast. for January, 60,000 for February. The budgeted of the coming month's budgeted production
b. budget materials purchases equal to the current beginning inventory for January 1 was 14,000 needs. Each unit of product requires three
month's needs for production. units. Equinox desires an ending inventory equal pounds of materials. The production budget is,
c. budget unit production for the month at greater to one-half of the following month's sales needs. in units: May, 1,000; June, 1,200; July, 1,300;
than budgeted unit sales for the month. Budgeted production for January is August, 1,600. Raw material purchases in July
d. experience cash shortages. a. 74,000 units. would be
b. 60,000 units. a. 1,450 pounds.
c 29. Quorum Company desires an ending inventory of c. 52,000 units. b. 2,400 pounds.
$120,000. It expects sales of $240,000 and has a d. 28,000 units. c. 3,900 pounds.
beginning inventory of $80,000. Cost of sales is d. some other number.
60% of sales. Budgeted purchases are c 35. Sams Company manufactures a single product. It
a. $120,000. keeps its inventory of finished goods at 75% the c 40. Acker Company has prepared the following flexible
b. $144,000. coming month's budgeted sales, inventory of raw budget for production costs: total production
c. $184,000. materials at 50% of the coming month's costs = $260,000 + $5X, where X is the number
d. $264,000. budgeted production needs. Each unit of product of machine hours. Acker produced 20,000 units,
requires two pounds of materials. The using 34,000 machine hours at a total cost of
d 30. Garamond Company budgeted purchases of production budget is, in units: May, 1,000; June, $425,000. The flexible budget allowance for
$200,000. Cost of sales was $240,000 and the 1,200; July, 1,300; August, 1,600. Raw material production costs is
18
 a. $260,000. and $160,000 in March. The March 31 accounts Clearwater collects 40% of a month's sales in the
b. $425,000. payable balance will be month of sale, 40% in the month following the
c. $430,000. a. $48,000. sale, and 20% in the second month following the
d. $525,000. b. $96,000. sale. The accounts receivable balance on June 30
c. $144,000. would be
c 41. Scooter Inc. has projected sales to be $130,000 in d. $186,000. a. $184,000.
June, $135,000 in July and $150,000 in August. b. $144,000.
Scooter collects 30% of a month's sales in the c 46. Andover Inc. has projected sales to be: February, c. $ 40,000.
month of sale, 50% in the month following the $10,000; March, $9,000; April, $8,000; May, d. some other number.
sale, and 16% in the second month following the $10,000; and June, $11,000. Andover has 30%
sale. Cash collections in August would be cash sales and 70% sales on account. Accounts True-False
a. $ 45,000. are collected 40% in the month following the sale
b. $127,300. and 55% collected the second month. Total cash F 1. A just-in-time manufacturer does NOT need a sales
c. $133,300. receipts in May would be budget.
d. $138,500. a. $3,000.
b. $8,150. T 2. A flexible budget allowance is NOT especially useful
d 42. Rundall Co. makes payments for purchases 30% c. $8,705. for budgeting discretionary costs.
during the month of purchase and the remainder d. some other number.
the following month. April purchases are F 3. The purchases budget is prepared before the sales
projected to be $160,000; May purchases will be d 47. Conde Inc. has projected sales to be: February, budget because the company cannot estimate
$240,000. Cash payments in May will be $20,000; March, $18,000; April, $16,000; May, what it will sell until it has some idea of what will
a. $ 72,000. $20,000; and June, $22,000. Conde has 30% be on hand.
b. $108,000. cash sales and 70% sales on account. Accounts
c. $168,000. are collected 40% in the month following the sale F 4. The longer the time period covered by a budget, the
d. $184,000. and 60% collected the second month. Accounts more useful the budget will be for controlling
receivable for May 31 would be operations.
c 43. Randall Co. makes payments for purchases 30% a. $ 6,160.
during the month of purchase and the remainder b. $13,300. F 5. A purchases budget is normally prepared after the
the following month. April purchases are c. $14,000. company has forecast how much cash it will
projected to be $80,000; May purchases will be d. $20,720. have available to pay for purchases.
$120,000. The accounts payable balance on May
31 will be d 48. Holmgren estimates its supplies purchases to be F 6. Imposed budgets are exceptionally ambitious goals
a. $36,000. $21,000 in August and $28,000 in September. not likely to be achieved without making
b. $54,000. Holmgren pays 70% of its accounts in the month fundamental changes in the way a job is done.
c. $84,000. of purchase with the remainder paid the
d. $92,000. following month. September payments would be F 7. A JIT manufacturer that maintains no inventory
a. $14,700. doesn't need a cash disbursements budget.
c 44. Alfuth Co. makes payments for purchases 10% b. $19,600.
during the month of purchase, 60% in the c. $23,100. F 8. The budget for a retailer is likely to be more complex
following month, and the remainder in the d. $55,900. than that for a manufacturer because a retailer
second month following the purchase. Purchases has a wider variety of customers.
are projected to be $260,000 in January, c 49. Danner Inc. has projected sales to be $100,000 in
$280,000 in February, and $320,000 in March. June, $90,000 in July, and $70,000 in August. F 9. The increasing public demand for accountability from
March payments will be Danner collects 50% of a month's sales in the governmental and other not-for-profit
a. $ 32,000. month of sale, 30% in the month following the organizations has resulted in an increased use of
b. $168,000. sale, and 16% in the second month following the incremental budgeting.
c. $278,000. sale. Cash collections in August would be
d. some other number. a. $35,000. T 10. Line-by-line budget authorization is common in
b. $62,000. governmental units.
d 45. Reid Co. makes payments for purchases 10% during c. $78,000.
the month of purchase, 60% in the following d. $86,000.
month, and the remainder in the second month
following the purchase. Purchases are projected a 50. Clearwater Inc. has projected sales to be $160,000
to be $130,000 in January, $140,000 in February, in April, $200,000 in May, and $240,000 in June.
19
CHAPTER 7: CAPITAL BUDGETING DECISIONSPART I "unsatisfactory" by a consumer group. a 12. If a project has a payback period shorter than its
b. The interest rate on long-term debt declines. life,
Multiple Choice c. The income tax rate is raised by the Congress. a. its NPV may be negative.
d. Congress approves the use of faster depreciation b. its IRR is greater than cost of capital.
d 1. Calculating the payback period for a capital project than was previously available. c. it will have a positive NPV.
requires knowing which of the following? d. its incremental cash flows may not cover its cost.
a. Useful life of the project. a 7. If an investment has a positive NPV,
b. The company's minimum required rate of return. a. its IRR is greater than the company's cost of c 13. Cost of capital is
c. The project's NPV. capital. a. the amount the company must pay for its plant
d. The project's annual cash flow. b. cost of capital exceeds the cutoff rate of return. assets.
c. its IRR is less than the company's cutoff rate of b. the dividends a company must pay on its equity
c 2. The payback criterion for capital investment return. securities.
decisions d. the cutoff rate of return exceeds cost of capital. c. the cost the company must incur to obtain its
a. is conceptually superior to the IRR criterion. capital resources.
b. takes into consideration the time value of money. c 8. Which of the following describes the annual returns d. the cost the company is charged by investment
c. gives priority to rapid recovery of cash. that are discounted in determining the NPV of an bankers who handle the issuance of equity
d. emphasizes the most profitable projects. investment? or long-term debt securities.
a. Net incomes expected to be earned by the project.
a 3. Which of the following is NOT relevant in calculating b. Pre-tax cash flows expected from the project. d 14. The normal methods of analyzing investments
annual net cash flows for an investment? c. After-tax cash flows expected from the project. a. cannot be used by not-for-profit entities.
a. Interest payments on funds borrowed to finance the d. After-tax cash flows adjusted for the time value of b. do not apply if the project will not produce
project. money. revenues.
b. Depreciation on fixed assets purchased for the c. cannot be used if the company plans to finance the
project. b 9. Which of the following capital budgeting methods project with funds already available
c. The income tax rate. does NOT consider the time value of money? internally.
d. Lost contribution margin if sales of the product a. IRR. d. require forecasts of cash flows expected from the
invested in will reduce sales of other b. Book rate of return. project.
products. c. Time-adjusted rate of return.
d. NPV. a 15. Which of the following is NOT a defect of the
a 4. If the present value of the future cash flows for an payback method?
investment equals the required investment, the b 10. All other things being equal, as cost of capital a. It ignores cash flows because it uses net income.
IRR is increases b. It ignores profitability.
a. equal to the cutoff rate. a. more capital projects will probably be acceptable. c. It ignores the present values of cash flows.
b. equal to the cost of borrowed capital. b. fewer capital projects will probably be acceptable. d. It ignores the pattern of cash flows beyond the
c. equal to zero. c. the number of capital projects that are acceptable payback period.
d. lower than the company's cutoff rate of return. will change, but the direction of the change
is not determinable just by knowing the b 16. A company with cost of capital of 15% plans to
b 5. The relationship between payback period and IRR is direction of the change in cost of capital. finance an investment with debt that bears 10%
that d. the company will probably want to borrow money interest. The rate it should use to discount the
a. a payback period of less than one-half the life of a rather than issue stock. cash flows is
project will yield an IRR lower than the a. 10%.
target rate. d 11. Which of the following is a basic difference between b. 15%.
b. the payback period is the present value factor for the IRR and the book rate of return (BRR) criteria c. 25%.
the IRR. for evaluating investments? d. some other rate.
c. a project whose payback period does not meet the a. IRR emphasizes expenses and BRR emphasizes
company's cutoff rate for payback will not expenditures. c 17. Which of the following events will increase the NPV
meet the company's criterion for IRR. b. IRR emphasizes revenues and BRR emphasizes of an investment involving a new product?
d. none of the above. receipts. a. An increase in the income tax rate.
c. IRR is used for internal investments and BRR is b. An increase in the expected per-unit variable cost
c 6. Which of the following events is most likely to reduce used for external investments. of the product.
the expected NPV of an investment? d. IRR concentrates on receipts and expenditures and c. An increase in the expected annual unit volume of
a. The major competitor for the product to be BRR concentrates on revenues and the product.
manufactured with the machinery being expenses. d. A decrease in the expected salvage value of
considered for purchase has been rated equipment.
20
 c. that investment A's book rate of return is higher value factors.
b 18. An investment has a positive NPV discounting the than B's.
cash flows at a 14% cost of capital. Which d. none of the above. a 32. The only future costs that are relevant to deciding
statement is true? whether to accept an investment are those that
a. The IRR is lower than 14%. d 25. Investment A has a book rate of return of 26%, will
b. The IRR is higher than 14%. investment B one of 18%. From this information a. be different if the project is accepted rather than
c. The payback period is less than 14 years. we can conclude rejected.
d. The book rate of return is 14%. a. that investment A has a higher NPV than B. b. be saved if the project is accepted rather than
b. that investment A has a higher IRR than B. rejected.
a 19. The technique most concerned with liquidity is c. that investment A has a shorter payback period c. be deductible for tax purposes.
a. payback. than B. d. affect net income in the period that they are
b. NPV. d. none of the above. incurred.
c. IRR.
d. book rate of return. c 26. A dollar now is worth more than a dollar to be a 33. Which of the following is true of an investment?
received in the future because of a. The lower the cost of capital, the higher the NPV.
d 20. The technique that does NOT use cash flows is a. inflation. b. The lower the cost of capital, the higher the IRR.
a. payback. b. uncertainty. c. The longer the project's life, the shorter its payback
b. NPV. c. the opportunity cost of waiting. period.
c. IRR. d. none of the above. d. The higher the project's NPV, the shorter its life.
d. book rate of return.
a 27. In contrast to the payback and book rate of return c 34. Which of the following methods FAILS to distinguish
a 21. If there were no income taxes, methods, the NPV and IRR methods between return of investment and return on
a. depreciation would be ignored in capital budgeting. a. consider the time value of money. investment?
b. the NPV method would not work. b. ignore depreciation. a. NPV.
c. income would be discounted instead of cash flow. c. use after-tax cash flows. b. IRR.
d. all potential investments would be desirable. d. all of the above. c. Payback.
d. Book rate of return.
a 22. Two new products, X and Y, are alike in every way a 28. Which of the following is a discounted cash flow
except that the sales of X will start low and rise method? c 35. If a company is NOT subject to income tax, which of
throughout its life, while those of Y will be the a. NPV. the following is true of a proposed investment?
same each year. Total volumes over their five- b. Payback. a. The project's IRR equals the entity's cost of capital.
year lives will be the same, as will selling prices, c. Book rate of return. b. The project's NPV is zero.
unit variable costs, cash fixed costs, and d. All of the above. c. Depreciation on assets required for the project is
investment. The NPV of product X irrelevant to the evaluation.
a. will be less than that of product Y. a 29. Which statement describes the relevance of d. The expected annual increase in future cash flows
b. will be the same as that of product Y. depreciation in calculating cash flows? equals the investment required to undertake
c. will be greater than that of product Y. a. Depreciation is relevant only when income taxes the project.
d. none of the above. exist.
b. Depreciation is always relevant. d 36. Which of the following increases NPV and IRR?
d 23. Which of the following events is most likely to c. Depreciation is never relevant. a. An upward revision in expected annual net cash
increase the number of investments that meet a d. Depreciation is relevant only with discounted cash flows.
company's acceptance criteria? flow methods. b. An upward revision of expected life.
a. Top management raises the target rate of return. c. An upward revision of the residual value of the long-
b. The interest rate on long-term debt rises. b 30. As the discount rate increases lived assets being acquired for the project.
c. The income tax rate rises. a. present value factors increase. d. All of the above.
d. The IRS allows companies to expense purchases of b. present value factors decrease.
fixed assets, instead of depreciating them c. present value factors remain constant. d 37. Qualitative issues could increase the acceptability of
over their lives. d. it is impossible to tell what happens to the factors. a project under which of the following
conditions?
d 24. Investment A has a payback period of 5.4 years, a 31. As the length of an annuity increases a. The IRR is less than the company's cutoff rate.
investment B one of 6.7 years. From this a. present value factors increase. b. The project has a negative NPV.
information we can conclude b. present value factors decrease. c. The payback period is longer than the company's
a. that investment A has a higher NPV than B. c. present value factors remain constant. cutoff period.
b. that investment A has a higher IRR than B. d. it is impossible to tell what happens to present d. All of the above.
21
 d. $78,959. d. 16 and 18%.
a 38. If Co. X wants to use IRR to evaluate long-term
decisions and to establish a cutoff rate of return, b 44. An investment opportunity costing $55,000 is b 50. An investment opportunity costing $80,000 is
X must be sure the cutoff rate is expected to yield net cash flows of $22,000 expected to yield net cash flows of $25,000
a. at least equal to its cost of capital. annually for five years. The payback period of annually for four years. The cost of capital is
b. at least equal to the rate used by similar the investment is 10%. The book rate of return would be
companies. a. 0.4 years. a. 10.0%.
c. greater than the IRR on projects accepted in the b. 2.5 years. b. 12.5%.
past. c. $33,000. c. 21.3%.
d. greater than the current book rate of return. d. some other number. d. 32.0%.

a 39. Which of the following is NOT relevant in calculating c 45. An investment opportunity costing $180,000 is
net cash flows for Project N? expected to yield net cash flows of $53,000 True-False
a. Interest payments on funds that would be borrowed annually for five years. The IRR of the
to finance Project N. investment is between T 1. Payback period is the length of time it will take a
b. Depreciation on assets purchased for Project N. a. 10 and 12%. company to recoup its outlay for an investment.
c. The contribution margin the company would lose if b. 12 and 14%.
sales of the product introduced by Project N c. 14 and 16%. T 2. Discounted cash flow techniques apply to
will reduce sales of other products. d. 16 and 18%. investments that involve either costs only, or
d. The income tax rate applicable to the entity. both costs and revenues.
b 46. An investment opportunity costing $150,000 is
b 40. If the IRR on an investment is zero, expected to yield net cash flows of $45,000 F 3. Cost of capital is the interest rate that a company
a. its NPV is positive. annually for five years. The cost of capital is expects to pay to finance a particular capital
b. its annual cash flows equal its required investment. 10%. The book rate of return would be investment project.
c. it is generally a wise investment. a. 10%.
d. its cash flows decrease over its life. b. 20%. F 4. The higher the cost of capital, the higher the present
c. 30%. value of future cash inflows.
d 41. If depreciation on a new asset exceeds its savings in d. 33.3%.
cash operating costs, which of the following is F 5. If the IRR on a capital project is positive, its NPV will
true? a 47. An investment opportunity costing $150,000 is be positive.
a. The project is usually unacceptable. expected to yield net cash flows of $36,000
b. The annual after-tax cash flow on the new asset will annually for six years. The NPV of the investment T 6. Salvage value is usually ignored in computing the
be greater than the savings in cash at a cutoff rate of 12% would be tax depreciation on an investment in depreciable
operating costs. a. $(2,004). assets.
c. The project has a negative NPV. b. $2,004.
d. All of the above. c. $150,000. F 7. IRR can be computed for even cash flows, but not for
d. $147,996. uneven cash flows.
d 42. Cost of capital is
a. the interest rate an entity must pay to borrow c 48. An investment opportunity costing $100,000 is T 8. If IRR is less than the cost of capital, the NPV will be
money. expected to yield net cash flows of $22,000 negative.
b. the return an entity's stockholders expect on their annually for seven years. The payback period of
investment. the investment is F 9. IF NPV is negative, IRR is equal to the cost of capital.
c. the rate of return the entity can earn from investing a. 0.22 years.
available cash. b. 3.08 years. T 10. Payback emphasizes the return of the investment
d. a concept of managerial finance incorporating all of c. 4.55 years. and ignores the return on the investment.
the above ideas. d. some other number.

b 43. An investment opportunity costing $75,000 is a 49. An investment opportunity costing $200,000 is CHAPTER 8: CAPITAL BUDGETING DECISIONSPART II
expected to yield net cash flows of $23,000 expected to yield net cash flows of $39,000
annually for five years. The NPV of the annually for eight years. The IRR of the Multiple Choice
investment at a cutoff rate of 14% would be investment is between
a. $(3,959). a. 10 and 12%. c 1. Which of the following groups of capital budgeting
b. $3,959. b. 12 and 14%. techniques uses the time value of money?
c. $75,000. c. 14 and 16%. a. Book rate of return, payback, and profitability
22
 index. c. profitability index. a. ignore it.
b. IRR, payback, and NPV. d. book rate of return. b. add it to the required investment in fixed assets.
c. IRR, NPV, and profitability index. c. add it to the required investment in fixed assets
d. IRR, book rate of return, and profitability index. a 8. In deciding whether to replace a machine, which of and subtract it from the annual cash flows.
the following is NOT a sunk cost? d. add it to the investment in fixed assets and add the
b 2. Discounted cash flow techniques for analyzing a. The expected resale price of the existing machine. present value of the recovery to the present
capital budgeting decisions are NOT normally b. The book value of the existing machine. value of the annual cash flows.
applied to projects c. The original cost of the existing machine.
a. requiring no investment after the first year of life. d. The depreciated cost of the existing machine. a 13. If a company uses a five-year MACRS period to
b. having useful lives shorter than one year. depreciate assets instead of a 10-year life with
c. that are essential to the business. a 9. A company is considering replacing a machine with straight-line depreciation,
d. involving replacement of existing assets. one that will save $50,000 per year in cash a. the NPV of the investment is higher.
operating costs and have $20,000 more b. the IRR of the investment is lower.
d 3. The profitability index depreciation expense per year than the existing c. there is no difference in either NPV or IRR.
a. does not use present values of cash flows. machine. The tax rate is 40%. Buying the new d. total cash flows over the useful life would be lower.
b. is generally preferable to any other approach for machine will increase annual net cash flows of
evaluating mutually exclusive investment the company by a 14. The NPV and IRR methods give
alternatives. a. $38,000. a. the same decision (accept or reject) for any single
c. produces the same ranking of investment b. $30,000. investment.
alternatives as does the IRR criterion. c. $20,000. b. the same choice from among mutually exclusive
d. is a discounted cash flow method. d. $12,000. investments.
c. different rankings of projects with unequal lives.
a 4. Companies using MACRS for tax purposes and c 10. Not-for-profit entities d. the same rankings of projects with different
straight-line depreciation for financial reporting a. cannot use capital budgeting techniques because required investments.
purposes usually find that the relationship profitability is irrelevant to them.
between the tax basis and book value of their b. cannot use discounted cash flow techniques d 15. An investment with a positive NPV also has
assets is because the time value of money is a. a positive profitability index.
a. the tax basis is lower than book value. irrelevant to them. b. a profitability index of one.
b. the tax basis is higher than book value. c. might have serious problems in quantifying the c. a profitability index less than one.
c. the tax basis is the same as book value. benefits expected from an investment. d. a profitability index greater than one.
d. none of the above. d. should use the IRR method to make investment
decisions. b 16. Classifying an asset in a MACRS life category is
c 5. A company that wants to use MACRS for tax based on
purposes must c 11. A major difference between an investment in a. useful life estimated by the company.
a. request permission from the IRS. working capital and one in depreciable assets is b. asset depreciation range (ADR) guidelines.
b. acquire new assets at or near the middle of the that c. the cost of the asset.
year. a. an investment in working capital is never d. any of the above factors.
c. ignore salvage value in calculating depreciation. returned, while most depreciable assets have
d. do none of the above. some residual value. d 17. Which of the following makes investments more
b. an investment in working capital is returned in desirable than they had been?
c 6. The government could encourage increases in full at the end of a project's life, while an a. An increase in the income tax rate.
investment by investment in depreciable assets has no residual b. An increase in interest rates.
a. increasing tax rates. value. c. An increase in the number of years over which
b. lengthening the MACRS periods. c. an investment in working capital is not tax- assets must be depreciated.
c. letting a company expense fixed assets in the year deductible when made, nor taxable when d. None of the above.
acquired instead of through annual returned, while an investment in depreciable
depreciation charges. assets does allow tax deductions. c 18. Which of the following statements is true?
d. taking actions that would increase interest rates. d. because an investment in working capital is usually a. All revenue is taxed.
returned in full at the end of the project's b. All expenses are tax-deductible.
a 7. In choosing from among mutually exclusive life, it is ignored in computing the amount of c. Some revenues and expenses have no tax effects.
investments the manager should normally select the investment required for the project. d. Income taxes are based solely on revenues and
the one with the highest expenses.
a. NPV. d 12. The proper treatment of an investment in
b. IRR. receivables and inventory is to b 19. The profitability index is the ratio of
23
 a. total cash inflows to the cost of the investment. d. such decisions seldom involve cash flows. b. returns to the company only the cash outlay for the
b. the present value of cash inflows to the cost of the investment.
investment. a 26. Because of idle capacity, a company is considering c. has a payback period equal to its useful life.
c. the NPV of the investment to the cost of the two assets for sale. They are identical in all d. has an NPV of zero.
investment. respects except that asset A has a higher tax
d. the IRR to the company's cost of capital. basis than asset B. Only one need be sold now a 32. In connection with a capital budgeting project, an
and the market price is the same for both assets. investment in working capital is normally
c 20. With respect to income taxes, the principal Which of the following is true? recovered
advantage of MACRS over straight-line a. The cash flow is greater from selling asset A. a. at the end of the project's life.
depreciation is that b. The cash flow is greater from selling asset B. b. in the first year of the project's life.
a. total taxes will be lower under MACRS. c. The cash flow is the same no matter which one is c. evenly through the project's life.
b. taxes will be constant from year to year under sold. d. when the company goes out of business.
MACRS. d. It is not possible to determine how the cash flows
c. taxes will be lower in the earlier years under from sales of the assets will differ. b 33. For investments that have only costs (no revenues
MACRS. or cost savings), an appropriate decision rule is
d. taxes will decline in future years under MACRS. a 27. If the tax law were changed so that owners of to accept the project that has the
apartment buildings had to depreciate them over a. longest payback period.
a 21. If the profitability index is less than one, 50 years instead of the current 31.5 years, b. lowest present value of cash outflows.
a. the IRR is less than cost of capital. a. rents would rise. c. higher present value of future cash outflows.
b. the IRR is the same as cost of capital. b. rents would fall because annual depreciation d. lowest internal rate of return.
c. the IRR is greater than cost of capital. charges would fall.
d. none of the above is true. c. rents would stay about the same. b 34. The cash inflow from the return of an investment in
d. more people would invest in apartment buildings. working capital is
c 22. Which of the following combinations is possible? a. adjusted for taxes due.
Profitability Index NPV IRR b 28. Which statement could express the results of a b. discounted to present value.
------------------- -------- ------------------------- sensitivity analysis of an investment decision? c. ignored if any depreciable assets also involved in
a. greater than 1 positive equals cost of capital a. The NPV of the project is $50,000. the project have no expected residual value.
b. greater than 1 negative less than cost of capital b. A 5% decline in volume will make the project d. not real.
c. less than 1 negative less than cost of capital unprofitable.
d. less than 1 positive less than cost of capital c. This project ranks third out of the five available. d 35. NPV is appropriate to use to analyze which decision
d 23. Which of the following combinations is NOT d. This project does not meet the cutoff rate of return. relating to a joint-products company?
possible? a. Whether or not to sell facilities now used for
Profitability Index NPV IRR c 29. XYZ Co. is adopting just-in-time principles. When additional processing of one of the joint
------------------- -------- -------------------------- evaluating an investment project that would products.
a. greater than 1 positive more than cost of capital reduce inventory, how should XYZ treat the b. Whether or not to acquire facilities needed for
b. equals 1 zero equals cost of capital reduction? additional processing of one of the joint
c. less than 1 negative less than cost of capital a. Ignore it. products.
d. less than 1 positive less than cost of capital b. Decrease the cost of the investment and decrease c. Whether or not to sell facilities now used to operate
cash flows at the end of the project's life. the joint process.
b 24. In capital budgeting, sensitivity analysis is used c. Decrease the cost of the investment. d. All of the above.
a. to determine whether an investment is profitable. d. Decrease the cost of the investment and increase
b. to see how a decision would be affected by changes the cash flow at the end of the project's life. d 36. If X Co. expects to get a one-year bank loan to help
in variables. cover the initial financing of capital project Q, the
c. to test the relationship of the IRR and NPV. b 30. Which of the following combinations of capital analysis of Q should
d. to evaluate mutually exclusive investments. budgeting techniques includes only discounted a. offset the loan against any investment in inventory
cash flow techniques? or receivables required by the project.
b 25. A unique feature of the analysis of a replacement a. Book rate of return, payback, and profitability b. show the loan as an increase in the investment.
decision is that index. c. show the loan as a cash outflow in the second year
a. the analysis considers total rather than differential b. NPV, IRR, and profitability index. of the project's life.
costs. c. IRR, payback, and NPV. d. ignore the loan.
b. the amount used as the cost of the investment is d. Profitability index, NPV, and payback.
not likely to equal the price to be paid for d 37. A project that has a negative NPV
the new asset. d 31. An investment whose profitability index is 1.00 a. has a payback period longer than its life.
c. the time value of money is ignored. a. has an IRR equal to the prevailing interest rate. b. has a negative profitability index.
24
 c. must be rejected. market value of $100,000. What is the cash flow a. less than zero.
d. doesn't necessarily fit any of the above from selling the machine if the tax rate is 40%? b. between zero and one.
descriptions. a. $50,000 c. greater than one.
b. $100,000 d. cannot be determined without more
c 38. A company evaluates a project using straight-line c. $124,000 information.
depreciation over its 10-year estimated useful d. $160,000
life and then reevaluates it using a 7-year MACRS b 49. Portage Press Company is considering replacing a
class life. The second analysis will show a 44. Altoona Company is considering replacing a machine with a book value of $200,000, a
a. a lower IRR for the project. machine with a book value of $200,000, a remaining useful life of 5 years, and annual
b. the same NPV and IRR for the project. remaining useful life of 4 years, and annual straight-line depreciation of $40,000. The
c. a higher NPV for the project. straight-line depreciation of $50,000. The existing machine has a current market value of
d. lower total cash flows over the 10 years. existing machine has a current market value of $200,000. The replacement machine would cost
$175,000. The replacement machine would cost $300,000, have a 5-year life, and save $100,000
a 39. Assuming that a project has already been evaluated $320,000, have a 4 year life, and save $100,000 per year in cash operating costs. If the
using the following techniques, the evaluation per year in cash operating costs. If the replacement machine would be depreciated
under which technique is least likely to be replacement machine would be depreciated using the straight-line method and the tax rate is
affected by an increase in the estimated residual using the straight-line method and the tax rate is 40%, what would be the increase in annual net
value of the project? 40%, what would be the increase in annual cash flow if the company replaces the machine?
a. Payback period. income taxes if the company replaces the a. $60,000
b. IRR. machine? b. $68,000
c. NPV. a. $28,000 c. $76,000
d. PI. b. $40,000 d. $84,000
c. $42,000
d 40. Qualitative factors can influence managers to d. $64,000 b 50. Winneconne Company is considering replacing a
a. accept an investment project having negative NPV. machine with a book value of $400,000, a
b. reject an investment project having an IRR greater b 45. An investment opportunity costing $300,000 is remaining useful life of 5 years, and annual
than the company's cutoff rate. expected to yield net cash flows of $100,000 straight-line depreciation of $80,000. The
c. raise the "ranking" of an investment project. annually for five years. The profitability index of existing machine has a current market value of
d. take any of the above courses of action. the investment at a cutoff rate of 14% would be $400,000. The replacement machine would cost
a. 3.0. $550,000, have a 5-year life, and save $75,000
a 41. The replacement decision is b. 1.14. per year in cash operating costs. If the
a. an example of a decision among mutually exclusive c. 0.33. replacement machine would be depreciated
alternatives. d. 14%. using the straight-line method and the tax rate is
b. best arrived at by using the total-project rather 40%, what would be the net investment required
than the differential approach. d 46. A project has a NPV of $30,000 when the cutoff rate to replace the existing machine?
c. devoid of qualitative issues. is 10%. The annual cash flows are $41,010 on an a. $90,000
d. none of the above. investment of $100,000. The profitability index b. $150,000
for this project is c. $330,000
c 42. Acme is considering the sale of a machine with a a. 1.367. d. $550,000
book value of $160,000 and 3 years remaining in b. 3.333.
its useful life. Straight-line depreciation of c. 2.438.
$50,000 annually is available. The machine has a d. 1.300. True-False
current market value of $200,000. What is the
cash flow from selling the machine if the tax rate T 1. The higher the IRR on an investment project, the
is 40%? c 47. A project has an IRR in excess of the cost of capital. higher its profitability index.
a. $50,000 The profitability index for this project would be
b. $160,000 a. less than zero. F 2. If the payback period of an investment project is
c. $184,000 b. between zero and one. shorter than its life, the project's profitability
d. $200,000 c. greater than one. index is greater than 1.
d. cannot be determined without more
c 43. Hoff is considering the sale of a machine with a book information. F 3. If a company has decided that a certain task must be
value of $160,000 and 3 years remaining in its performed and three machines accomplish that
useful life. Straight-line depreciation of $50,000 b 48. A project has an IRR less than the cost of capital. task, the machine with the lowest initial cash
annually is available. The machine has a current The profitability index for this project would be outlay should be selected.
25
 d. controllable and noncontrollable. c. total contribution margin will be more than planned.
T 4. An investment with an IRR greater than cost of d. income will be positive.
capital has a profitability index greater than 1. c 4. Which of the following is critically important for a
responsibility accounting system to be effective? c 10. Transfer prices
T 5. The only costs and revenues relevant to a a. Each employee should receive a separate a. reduce employee turnover.
replacement decision are those that will change performance report. b. are necessary for investment centers.
if a replacement is made. b. Service department costs should be allocated to c. should encourage the kinds of behavior that upper-
the operating departments that use the level management wants.
T 6. Both the incremental and the total-project service. d. are not used for departments with high amounts of
approaches to analyzing a replacement decision c. Each manager should know the criteria used for fixed costs.
should yield the same decision. evaluating his or her performance.
d. The details on the performance reports for b 11. A transfer price is
F 7. Both the IRR and the book rate of return methods of individual managers should add up to the a. an accounting device to turn profit centers into
analyzing investments should yield the same totals on the report to their supervisor. investment centers.
decision. b. the price charged by one segment of the company
c 5. Which of the following items is LEAST likely to appear for goods or services provided to another
F 8. If the payback period of an investment is shorter on the performance report of the manager of a segment.
than its life, its profitability index is greater than product line? c. only useful in a segment that deals with outsiders
l. a. Variable manufacturing costs for products in the as well as with other segments of the same
line. company.
T 9. When compared with straight-line depreciation, b. Selling expenses for the line. d. the amount charged by a cost center for a service
using MACRS will result in a larger NPV. c. A share of company-wide advertising. performed for a profit center.
d. Revenues from the line.
F 10. IRR and book rate of return will usually yield the c 12. The cost allocation policy most likely to encourage
same value for an investment. b 6. The sequence that reflects increasing breadth of use of a service is based on
responsibility is a. budgeted total costs of the service department.
CHAPTER 9: RESPONSIBILITY ACCOUNTING a. cost center, investment center, profit center. b. actual total costs of the service department.
b. cost center, profit center, investment center. c. budgeted variable costs for the service department.
Multiple Choice c. profit center, cost center, investment center. d. actual variable costs for the service department.
d. investment center, cost center, profit center.
c 1. Goal congruence exists when c 13. Which of the following statements is true?
a. the goals of the company harmonize with each a 7. The criteria used for evaluating performance a. A company changes its total income when it
other. a. should be designed to help achieve goal changes the bases used to allocate indirect
b. the company's managers are pursuing their own congruence. costs.
goals effectively. b. can be used only with profit centers and investment b. A company should select an allocation basis so as
c. the company's managers are pursuing the goals of centers. to raise or lower reported income on given
the company. c. should be used to compare past performance with products.
d. all of the above are true. current performance. c. A company's total income will remain unchanged no
d. motivate people to work in the company's best matter how indirect costs are allocated.
c 2. Goal congruence is most likely to result when interests. d. Costs should be allocated on an "ability-to-bear"
a. reports to managers include all costs. basis.
b. managers' behavior is affected by the criteria used b 8. A balanced scorecard approach to performance
to judge their performances. measurement a 14. If a company allocates costs of a service department
c. performance evaluation criteria encourage behavior a. can only be used in profit or investment centers. to other departments, it should
in the company's best interests as well as in b. balances financial measures with nonfinancial a. consider the likely effects of the allocations on the
the manager's best interests. measures. use of the services.
d. a manager knows the criteria used to judge his or c. uses only qualitative data to evaluate performance. b. use the method that best reflects the relative sizes
her performance. d. uses budgeted data rather than historical data. of the departments.
c. turn the service department into an investment
d 3. In responsibility accounting the most relevant b 9. If a company has a favorable sales volume variance, center.
classification of costs is its d. allocate only the fixed costs of the service
a. fixed and variable. a. sales price variance is also favorable. department.
b. incremental and nonincremental. b. total contribution margin might be less than
c. discretionary and committed. planned. a 15. If a computer department does work for other
26
 departments, charging a flat price per hour, the centers requirements and variable costs based on
computer department is a. show only variable costs. use.
a. an artificial profit center. b. show a fair share of allocated costs. c. allocating both actual costs and budgeted costs.
b. a cost center. c. distinguish between controllable and d. using the budgeted rate to allocate some costs, the
c. an investment center. noncontrollable costs. actual rate to allocate others.
d. none of the above. d. show a fair share of revenues attributable to the
center. a 28. Which of the following methods of allocating the
a 16. The WORST method of allocating service costs of service departments provides the
department costs is b 22. Criteria for evaluating performance should be broadest recognition of departments served?
a. to allocate total actual costs based on actual use of carefully selected because a. Reciprocal allocation.
the service. a. they must be approved by the IRS. b. Step-down allocation.
b. to allocate total budgeted costs based on long-term b. a manager's behavior can be affected by the c. Direct allocation.
expected use of the service. criteria used to judge his or her d. Arbitrary allocation.
c. to allocate total budgeted costs based on actual use performance.
of the service. c. managers may find out what they are. d 29. Which of the following is a good reason for
d. none of the above, because all the above are d. stockholders inquire about them at annual allocating indirect costs to operating
equally undesirable. meetings. departments?
a. The company could lose money if the operating
b 17. As a general rule, the best transfer price to use to d 23. Which of the following is NOT a good reason for departments do not pay for the services
transfer the costs of a service center to an allocating indirect costs to operating they use.
operating department is departments? b. To remind managers of the need to cover indirect
a. the price charged by an outside company for the a. To remind managers of the need to cover indirect costs.
same service. costs. c. To encourage managers to use more services.
b. the price that encourages goal congruence. b. So that operating managers will encourage service d. To determine the true costs of operating
c. one that is based on budgeted variable cost. department managers to keep costs down. departments.
d. one that is based on budgeted total cost. c. To encourage managers to use services wisely.
d. To determine the true costs of operating b 30. When a manager takes an action that benefits his or
b 18. Which of the following costs is LEAST likely to departments. her responsibility center, but not the company as
appear on the performance report for the b 24. An artificial profit center a whole,
foreman of a production department? a. has no investment. a. it is a non-controllable action.
a. Wages of direct laborers. b. does not provide its goods or services outside the b. there is a lack of goal congruence.
b. Rent on machinery used in department. entity. c. the center must be an artificial profit center.
c. Repairs to machinery used in department. c. cannot control its costs. d. the manager should be fired.
d. Cost of materials used. d. could not be operated as a cost center.
d 31. Which of the following is a good reason for NOT
d 19. ABC Company operates a factory that makes c 25. A responsibility center is allocating indirect costs to operating
components for other ABC factories to assemble. a. any department. departments?
The factory could be treated as b. any manager. a. The company saves money if the operating
a. a cost center. c. any area of activity for which a manager is departments do not pay for the services
b. an artificial profit center. responsible. they use.
c. an investment center. d. only large departments. b. To remind managers of the need to cover indirect
d. any of the above. costs.
a 26. ABC's actual selling price was less than planned and c. To encourage managers to use more services.
d 20. For reports to follow the principles of responsibility actual unit volume more than planned. d. The costs are not controllable by the operating
accounting, which of the following must be true? Therefore, departments.
a. Each segment of the entity is an artificial profit a. ABC had a favorable sales volume variance.
center. b. ABC's total contribution margin was more than d 32. Which of the following is a good reason for NOT
b. The company is decentralized. planned. allocating indirect costs to operating
c. The company uses transfer prices. c. ABC had a favorable sales price variance. departments?
d. The reports show controllable costs separately from d. ABC's actual total sales equaled planned total sales. a. To remind managers that revenues must cover
noncontrollable costs. indirect costs.
b 27. The term "dual rates" refers to b. To recognize that operating departments benefit
c 21. The effective use of responsibility accounting a. allocating costs to several operating departments. from the services.
requires that performance reports for cost b. allocating fixed costs based on capacity c. To encourage managers to use services wisely.
27
 d. Because allocating them might prompt operating Planned Actual service center costs are allocated to the stores
managers to use nonincremental costs in ------- ------- based on actual usage of the service center.
making decisions. Sales $80,000 $78,900 Service center costs allocated to Store Y are
Variable costs 50,000 48,500 a. $140,000.
b 33. A profit center is a responsibility center ------- ------- b. $148,000.
a. that sells its output outside the company. Contribution margin $30,000 $30,400 c. $240,000.
b. whose manager is responsible for both revenues ======= ======= d. $260,000.
and costs.
c. that provides a service to other responsibility Planned sales were 10,000 units; actual sales c 43. Wabasha Co. has two service departments (A
centers. were 9,700 units. The sales price variance is and B) and two producing departments (X and
d. within an investment center. a. $1,100 U. Y). Data provided are as follows:
b. $1,000 F.
d 34. An investment center is c. $900 U. Service Depts. Operating Depts.
a. larger than a cost center. d. $400 F. -------------- ---------------
b. larger than a profit center. A B X Y
c. seldom the responsibility of a single manager. c 40. Cascade Company had the following results in June. ------- ------ ------ ------
d. not truthfully characterized in any of the above Direct costs $240 $400
statements. Planned Actual Services performed by Dept. A 40%
------- ------- 40% 20%
a 35. The managerial level at which a particular cost is Sales $80,000 $78,900 Services performed by Dept. B. 20%
controllable Variable costs 50,000 48,500 70% 10%
a. varies from company to company. ------- -------
b. depends on whether the cost is fixed or variable. Contribution margin $30,000 $30,400 Wabasha uses the direct method to allocate
c. depends on whether the cost is direct or indirect. ======= ======= service department costs. The service
d. is irrelevant to the preparation of performance department cost allocated to Department Y is
reports. Planned sales were 10,000 units, actual sales a. $88.
were 9,700 units. The sales volume variance is b. $96.
d 36. If at all possible, a manager's performance report a. $1,100 U. c. $130.
should b. $1,000 F. d. $240.
a. consider the results that the manager can control. c. $900 U.
b. consider only the results that the manager can d. $400 F. c 44. Wabasha Co. has two service departments (A
control. and B) and two producing departments (X and
c. not be influenced by the results of decisions made b 41. Certainty Stores has three stores and one service Y). Data provided are as follows:
by other managers. center. The percentage of services used in the
d. reflect all of the above characteristics. current year are Store X, 35%; Store Y, 40%; and Service Depts. Operating Depts.
Store Z, 25%. The service center costs were -------------- ---------------
d 37. Comparing budgeted and actual amounts is budgeted at $160,000 fixed and $240,000 A B X Y
important in evaluating the variable. Actual fixed costs were $140,000 and ------- ------ ------ ------
performance of actual variable costs were $270,000. Actual Direct costs $250 $400
a. the manager of a cost center. service center costs are allocated to the stores Services performed by Dept. A 40%
b. the manager of a profit center. based on actual usage of the service center. 40% 20%
c. the manager of an investment center. Service center costs allocated to Store Y are Services performed by Dept. B. 20%
d. any manager. a. $64,000. 70% 10%
b. $164,000.
c 38. Direct, step-down, and reciprocal are names for c. $410,000. Wabasha uses the step-down method to allocate
a. the allocation methods most likely to produce goal d. some other number. service department costs. Department A costs
congruence. are allocated first. The service department cost
b. transfer-pricing methods. c 42. Certainty Stores has three stores and one service allocated to Department Y is
c. methods for allocating costs of service departments center. The percentage of services used in the a. $90.
to operating departments. current year are Store X, 35%; Store Y, 40%; and b. $97.50.
d. alternative organizational structures. Store Z, 25%. The service center costs were c. $112.50.
budgeted at $350,000 fixed and $250,000 d. $130.
b 39. Cascade Company had the following results in June. variable. Actual fixed costs were $370,000 and
actual variable costs were $280,000. Budgeted c 45. Wabasha Co. has two service departments (A
28
 and B) and two producing departments (X and Store B are A B X Y
Y). Data provided are as follows: a. $350,000. ------- ------ ------ ------
b. $372,500. Direct costs $200 $400
Service Depts. Operating Depts. c. $400,000. Services performed by Dept. A 20%
-------------- --------------- d. $550,000. 40% 40%
A B X Y Services performed by Dept. B. 30%
------- ------ ------ ------ d 48. Basin Co. has two service departments (A and B) 60% 10%
Direct costs $150 $300 and two producing departments (X and Y). Data
Services performed by Dept. A 40% provided are as follows: Basin uses the reciprocal method to allocate
40% 20% service department costs. The service
Services performed by Dept. B. 20% Service Depts. Operating Depts. department cost allocated to Department X is
70% 10% A B X Y a. $300.
Wabasha uses the reciprocal method to allocate ------- ------ ------ ------ b. $340.
service department costs. The service Direct costs $200 $400 c. $417.
department cost allocated to Department Y is Services performed by Dept. A 20% d. $468.
a. $60. 40% 40%
b. $75. Services performed by Dept. B. 30% True-False
c. $85. 60% 10%
d. $135. F 1. All responsibility centers are either natural or
Basin uses the direct method to allocate service artificial.
d 46. Olson Stores has three stores and one service department costs. The service department cost
center. The percentage of services used in the allocated to Department X is F 2. The sales volume variance is the difference between
current year are Store A, 40%; Store B, 25%; and a. $280. actual and planned unit sales multiplied by the
Store C, 45%. The expected long-term budgeted b. $300. actual contribution margin per unit.
usages are Store A, 30%; Store B, 30%; and c. $320.
Store C, 40%. The service center costs were d. $443. F 3. The principle of controllability is less important to the
budgeted at $450,000 fixed and $550,000 internal reporting for a centralized company than
variable. Actual fixed costs were $430,000 and a 49. Basin Co. has two service departments (A and B) for a decentralized one.
actual variable costs were $570,000. Olson and two producing departments (X and Y). Data
allocates the budgeted variable costs of the provided are as follows: F 4. Allocated costs are less important to the internal
central purchasing unit based on actual use of reporting for a centralized company than for a
the unit's services, and allocates budgeted fixed Service Depts. Operating Depts. decentralized company.
costs based on expected long-term use of the A B X Y
unit's services. Service center costs allocated to ------- ------ ------ ------ F 5. Achieving goal congruence is less important in a
Store A are Direct costs $200 $400 centralized organization than in a decentralized
a. $135,000. Services performed by Dept. A 20% one.
b. $220,000. 40% 40%
c. $300,000. Services performed by Dept. B. 30% T 6. It is not always possible to separate the variable and
d. $355,000. 60% 10% fixed components of actual costs.

b 47. Olson Stores has three stores and one service Basin uses the step-down method to allocate F 7. A profit center will always have sales to outside
center. The percentage of services used in the service department costs. Department A costs customers.
current year are Store A, 45%; Store B, 35%; and are allocated first. The service department cost
Store C, 20%. The expected long-term budgeted allocated to Department X is T 8. The sales price variance is the difference between
usages are Store A, 30%; Store B, 40%; and a. $457. the actual selling price and the planned selling
Store C, 30%. The service center costs were b. $443. price multiplied by actual units sold.
budgeted at $450,000 fixed and $550,000 c. $320.
variable. Actual fixed costs were $430,000 and d. $300. T 9. The direct method of allocating service department
actual variable costs were $570,000. Olson costs ignores all of the interactions between
allocates the budgeted variable costs of the c 50. Basin Co. has two service departments (A and B) service departments.
central purchasing unit based on actual use of and two producing departments (X and Y). Data
the unit's services, and allocates budgeted fixed provided are as follows: F 10. The reciprocal method of allocating service
costs based on expected long-term use of the department costs considers only the usage by
unit's services. Service center costs allocated to Service Depts. Operating Depts. the producing departments in determining the
29
 allocations. c. lower than return on sales for the division. divisions, the total company's ROI is
d. lower than that for the enterprise as a whole. probably greater than 15%.
c. If the minimum desired ROI is 10%, Division A's
CHAPTER 10: DIVISIONAL PERFORMANCE MEASUREMENT c 7. Divisional profits should residual income is lower than that of Division
a. exclude revenues and expenses related to dealings B.
Multiple Choice with other divisions within the same d. ROI for Division B is greater than ROI for Division A.
enterprise.
c 1. Both ROI and RI can be used for performance b. be computed so that the total profits of all the d 13. Which equation describes ROI? (I = investment, S =
evaluation of divisions equals the total profit for the sales, and
a. cost centers. company. N = income)
b. profit centers. c. be based on the principle of controllability. a. S/I
c. investment centers. d. be based on cash flows rather than accrual basis b. S/I x N
d. all of the above. accounting. c. S/I x S/N
d. N/S x S/I
b 2. The best transfer price is usually c 8. Divisional profit
a. actual cost plus a percentage markup. a. is computed in essentially the same way as is a 14. Which equation describes residual income? (I =
b. a reliable market price. income for the company as a whole. investment, N = income, and K = minimum
c. budgeted full cost plus a percentage markup. b. should include a deduction for an appropriate share required ROI)
d. budgeted variable cost plus a percentage markup. of the company's common costs. a. N - (K x I)
c. normally includes the results of intracompany sales. b. (K x I) - N
d 3. This year Division A made sales to Division B at a d. is not affected by depreciation methods. c. N/I - K
higher transfer price than was used last year. All d. (K x I) - (N/I)
other things equal, which of the following is true? d 9. Using replacement costs for assets in computing ROI
a. A's profit this year should be about the same as last and RI c 15. If Division C has a 10% return on sales, income of
year. a. is prohibited because it violates generally accepted $10,000, and an investment turnover of 4 times,
b. B's profit this year should be about the same as last accounting principles. its sales are
year. b. will increase both ROI and RI for a division. a. $10,000.
c. The company's total profit should be higher this c. is unfair to divisional managers. b. $40,000.
year than last year. d. is less popular than the use of book values in those c. $100,000.
d. The company's total profit should be about the computations. d. $400,000.
same this year as last year.
c 10. Using residual income for evaluating performance b 16. If Division C has a 10% return on sales, income of
b 4. Goal congruence is especially relevant to all of the a. penalizes managers whose segments have low $10,000, and an investment turnover of 4 times,
following EXCEPT ROIs. divisional investment is
a. setting transfer prices for an artificial profit center. b. penalizes managers of relatively large segments. a. $10,000.
b. quoting prices for outside customers of an c. encourages managers to maximize dollars of profit b. $25,000.
investment center. after a required ROI has been achieved. c. $40,000.
c. selecting costs to be included in performance d. encourages managers to maximize ROI for the d. $100,000.
reports. company.
d. setting transfer prices for an investment center. c 17. If Division C has a 10% return on sales, income of
c 11. Which item is usually NOT relevant to a decision by $10,000, and an investment turnover of 4 times,
d 5. For a division, ROI a divisional manager to reduce a transfer price to its ROI is
a. is usually less than ROI for the company as a whole. meet a price offered to another division by an a. 5000%.
b. eliminates the distortion that cost allocation can outside supplier? b. 100%.
produce in other measures of performance. a. Opportunity cost. c. 40%.
c. usually cannot be computed if divisional assets are b. Variable manufacturing costs. d. 10%.
valued at their replacement costs. c. Fixed divisional overhead.
d. is a performance measure inferior, for some d. The price offered by the outside supplier. b 18. If a division's ROI and the minimum required ROI are
purposes, to residual income. the same, the division's residual income is
c 12. Division A earns $6,000 on an investment of a. positive.
a 6. Divisional ROI is usually $36,000. On an investment of $84,000, Division b. zero.
a. higher than that for the company as a whole. B earns $12,000. Which of the following is true? c. negative.
b. lower than that for an outside company operating a. Division A's profits are too low. d. none of the above.
in the same industry. b. If there are further costs that are common to both
30
a 19. If residual income for Division Q of Company Z is b. ROS decreases.
negative, which of the following is true? c. ROI increases. a 34. Which of the following is true about transfer prices
a. Q's ROI is less than Z's minimum required ROI. d. ROI could increase or decrease. for sales between divisions located in different
b. Q's ROI equals Z's minimum required ROI. countries?
c. Q's ROI is higher than Z's minimum required ROI. c 27. Compared to a jewelry store, a supermarket has a. They should consider the tax structures in the two
d. None of the above. a. higher margin and higher turnover. countries.
b. higher margin and lower turnover. b. They are usually set by the governments of the two
b 20. Market-based transfer prices are best for c. lower margin and higher turnover. countries.
a. the company when the selling division is operating d. lower margin and lower turnover. c. They cannot affect the total income of the company.
below capacity. d. All of the above.
b. the company when the selling division is operating c 28. If income increases while sales and investment
at capacity. remain constant, which of the following is true? d 35. Multinational companies face special problems in
c. the buying division if it is operating at capacity. a. Investment turnover increases. which of the following areas of managerial
d. the buying division. b. ROS decreases. practice?
c. ROI increases. a. Performance evaluation.
d 21. The worst transfer-pricing method is to base the d. ROI could increase or decrease. b. Transfer prices.
prices on c. Allocating common costs.
a. market prices. a 29. Which transfer price is ideal for the company when d. All of the above.
b. budgeted variable costs. the selling division is at capacity?
c. budgeted total costs. a. Market price. b 36. Which of the following describes the computation of
d. actual total costs. b. Incremental cost. ROI?
c. Budgeted full cost. a. Return on Sales x Investment
d 22. All other things remaining constant, if a division d. Actual variable cost plus a percentage profit. b. Investment Turnover x Return on Sales
doubles its investment turnover, its ROI will c. Income - (Investment x Minimum RI)
a. decrease. c 30. From the standpoint of the company, the important d. Sales x Investment Turnover
b. remain constant. question in transfer pricing is
c. increase. a. what is fair to the divisions. b 37. If the investment turnover increased by 20% and
d. double. b. how to determine the profit of the divisions. ROS decreased by 30%, the ROI would
c. whether or not the transfer should take place. a. increase by 20%.
c 23. Residual income d. when the transfer should be made. b. decrease by 16%.
a. is always the best measure of divisional c. increase by 4%.
performance. d 31. The ROI of Division A relative to that of Division B d. none of the above.
b. is not as good a measure of performance as ROI. can be influenced by
c. overcomes some of the problems associated with a. the industry in which each division operates. b 38. Scottso Division has the following results for the
ROI. b. the transfer price used for sales to Division B. year:
d. cannot be used by divisions that deal with others in c. the tax structures of the countries in which the
the same company. divisions operate. Revenues $1,080,000
b 24. If two divisions earn the same ROI and RI, which of d. all of the above. Variable expenses 440,000
the following is true? Fixed expenses 400,000
a. Their managers must be about equally skillful. c 32. Considering liabilities in computing divisional
b. Their incomes and investments must be the same. investment
Total divisional assets are $1,600,000. The
c. Both divisions are doing as well as they should be. a. encourages managers of divisions to pay their bills
company's minimum required rate of return is 14
d. All of the above. faster.
percent. Residual income for Scottso is
b. discourages managers of divisions from acquiring
a. $(64,000).
c 25. Which of the following is most likely to be included long-term financing.
b. $16,000.
in calculating divisional profit? c. raises divisional ROI above what it would otherwise
c. $151,200.
a. Interest on corporate debt. be.
d. $224,000.
b. Income taxes. d. is a bad managerial practice.
c. Sales to other divisions within the company.
c 39. Scottso Division has the following results for the
d. A share of corporate administration expenses. d 33. Interdivisional sales
year:
a. lower the company's public image.
b 26. If sales increase, while income and investment b. minimize income taxes.
remain constant, which of the following is true? c. are ignored when computing divisional ROI. Revenues $1,080,000
a. Investment turnover decreases. d. do none of the above. Variable expenses 440,000

31
 Fixed expenses 400,000 currently purchases 10,000 units of part X from information.
Alcatraz for $40. Capone has been approached
Total divisional assets are $1,600,000. The by an outside supplier willing to supply the parts c 49. Durand Division has the following results for the
company's minimum required rate of return is 14 for $36. What is the effect on XYZ's overall profit year:
percent. Return on investment for Scottso is if Alcatraz REFUSES the outside price and
a. 54%. Capone decides to buy outside? Revenues $470,000
b. 18%. a. no change Net income 130,000
c. 15%. b. $140,000 decrease in XYZ profits
d. 10%. c. $80,000 decrease in XYZ profits Total divisional assets are $625,000. The
d. $40,000 increase in XYZ profits company's minimum required rate of return is 12
b 40. Monrovia Division has net income of $240,000 on percent. Return on investment for Durand is
sales of $3,200,000. If the investment is a 45. Alcatraz Division of XYZ Corp. sells 80,000 units of a. 9.0%.
$1,600,000 what is ROS? part X to the outside market. Part X sells for $40, b. 18.3%.
a. 15.0% has a variable cost of $22, and a fixed cost per c. 20.8%.
b. 7.5% unit of $10. Alcatraz has a capacity to produce d. 27.7%.
c. 10.0 100,000 units per period. Capone Division
d. 2.0 currently purchases 10,000 units of part X from d 50. Durand Division has the following results for the
Alcatraz for $40. Capone has been approached year:
c 41. Scottso Division has the following results for the by an outside supplier willing to supply the parts
year: for $36. What is the effect on XYZ's overall profit
Revenues $470,000
if Alcatraz ACCEPTS the outside price and
Net income 130,000
Revenues $1,080,000 Capone continues to buy inside?
Variable expenses 440,000 a. no change
Total divisional assets are $625,000. The
Fixed expenses 400,000 b. $140,000 decrease in XYZ profits
company's minimum required rate of return is 12
c. $80,000 decrease in XYZ profits
percent. Return on sales for Durand is
Total divisional assets are $1,600,000. The d. $40,000 increase in XYZ profits
a. 9.0%.
company's minimum required rate of return is 14 b. 18.3%.
percent. Return on sales for Scottso is c 46. If the investment turnover decreased by 20% and
c. 20.8%.
a. 1.5%. ROS decreased by 30%, the ROI would
d. 27.7%.
b. 15.0%. a. increase by 30%.
c. 22.2%. b. decrease by 20%.
True-False
d. 67.5%. c. decrease by 44%.
d. none of the above.
F 1. Multinational companies cannot use transfer prices.
d 42. Monrovia Division has net income of $240,000 on
sales of $3,200,000. If the investment is c 47. If the investment turnover increased by 10% and
T 2. Long-term debt is seldom considered in determining
$1,600,000 what is asset turnover? ROS increased by 20%, the ROI would
divisional ROI.
a. 15.0% a. increase by 10%.
b. 7.5% b. increase by 20%.
F 3. The measure most commonly used for evaluating
c. 10.0 c. increase by 30%.
divisional performance is investment turnover.
d. 2.0 d. increase by 32%.
T 4. Allocating all common assets, liabilities, and costs to
a 43. Monrovia Division has net income of $240,000 on b 48. Durand Division has the following results for the
divisions does not affect the ROI of the company
sales of $3,200,000. If the investment is year:
as a whole.
$1,600,000 what is ROI?
a. 15.0% Revenues $470,000 T 5. Using residual income as a criterion for evaluating
b. 7.5% Net income 130,000 divisional performance requires that the
c. 10.0 company establish a minimum desired rate of
d. 2.0 Total divisional assets are $625,000. The return on investment.
company's minimum required rate of return is 12
b 44. Alcatraz Division of XYZ Corp. sells 80,000 units of percent. Residual income for Durand is F 6. Return on investment is the product of return on
part X to the outside market. Part X sells for $40, a. $3,760. sales and inventory turnover.
has a variable cost of $22, and a fixed cost per b. $55,000.
unit of $10. Alcatraz has a capacity to produce c. $73,600. F 7. Return on investment for a multidivision company
100,000 units per period. Capone Division d. cannot be determined without further
32
 will be lower than the ROI for the division with b 6. Cascade Company, which has a $3 standard cost per c. a favorable variable overhead spending variance.
the lowest ROI. unit and budgeted production at 1,000 units, d. an unfavorable variable overhead efficiency
actually produced 1,200 units. Total standard variance.
T 8. Transfer prices equal to market prices are least cost for the period is
appropriate when the selling division has excess a. $3,000. a 12. Control charts are used
productive capacity. b. $3,600. a. to decide whether to investigate variances.
c. an amount that cannot be determined without b. to develop standard costs.
F 9. Multinational companies must use transfer prices knowing the variances for the period. c. to calculate variances.
based on actual costs. d. none of the above. d. for all of the above purposes.

F 10. Return on investment is defined as net income c 7. Which variance is LEAST likely to be affected by c 13. An unfavorable labor efficiency variance
divided by stockholders' equity. hiring workers with less skill than those already a. means that workers were inefficient and their
working? supervisor did a poor job.
CHAPTER 11: CONTROL AND EVALUATION OF COST a. Material use variance. b. causes a favorable variable overhead efficiency
CENTERS b. Labor rate variance. variance.
c. Material price variance. c. can result from an action taken by a manager other
Multiple Choice d. Variable overhead efficiency variance. than the supervisor of the workers.
d. should always be investigated and corrected.
c 1. The two general types of variable cost variances are
c 8. Which variance is MOST likely to be affected by
the
buying a more expensive material that produces
a. rate variance and spending variance.
less waste and is easier to handle?
b. price variance and budget variance.
a. Labor rate variance. d 14. The sum of the material price variance and material
c. price variance and quantity variance.
b. Variable overhead spending variance. use variance always equals the difference
d. quantity variance and efficiency variance.
c. Direct labor efficiency variance. between
d. Fixed overhead budget variance. a. actual and standard material purchases.
d 2. A major advantage of using standard costs is that
b. actual material purchases and standard material
a. they are easier to compute than actual costs.
b 9. Filter Company's budget for overhead costs is: use.
b. they are lower than actual costs.
c. standard material purchases and standard material
c. products with standard costs can be sold at lower
total overhead cost = $50,000 + ($4 x use.
prices.
direct labor hours) d. none of the above pairs of amounts.
d. they provide information for control purposes.
Standard direct labor time is 1.5 hours per unit of c 15. Which set of terms describes the same type of
a 3. Setting standards product. The standard wage rate is $6 per hour. variance?
a. has important behavioral implications. Standard variable overhead cost for a unit of a. Price variance, rate variance, use variance.
b. is largely a matter of calculating rates and product is b. Price variance, rate variance, efficiency variance.
quantities. a. $4.00. c. Use variance, efficiency variance, quantity variance.
c. should be done to make them as tight as possible. b. $6.00. d. Use variance, efficiency variance, spending
d. is done only for manufacturing activities. c. $9.00. variance.
d. $10.00.
d 4. Which of the following is NOT a quantity variance?
d 16. A product requires 0.60 standard labor hours, the
a. Material use variance. b 10. The major variance used in controlling fixed costs is standard labor rate is $10 per hour, and
b. Labor efficiency variance. the production was 300 units. Actual labor cost was
c. Variable overhead efficiency variance. a. efficiency variance. $1,862 at $9.80 per hour. Which of the following
d. Fixed overhead budget variance. b. budget variance. is true?
c. use variance. a. The labor rate variance was $98 favorable.
a 5. A major drawback to setting standards based on d. none of the above. b. The labor rate variance was $62 unfavorable.
historical results is that such standards c. The labor efficiency variance was $62 unfavorable.
a. can perpetuate inefficiencies. d 11. If the variable overhead standard is based on direct d. The labor efficiency variance was $100
b. are harder to compute than are engineered labor hours and actual hours worked exceed unfavorable.
standards. standard hours allowed, the result is
c. are usually too hard to meet because of inflation. a. a favorable labor efficiency variance. d 17. Cascade Company bought 10,000 pounds of
d. are usually not well received by workers. b. an unfavorable variable overhead spending material and used 9,500. The material price
variance.
33
 variance was $300 unfavorable and the standard
price per pound is $3. The cost of materials b 23. Using activity-based costing in setting standards d 30. An 80% learning curve means that
purchased was a. is most valuable for direct labor standards. a. the incremental time for each unit is 80% of the
a. $28,200 b. should provide better variable overhead standards. time of the unit before it.
b. $28,800 c. is unnecessary. b. the cumulative average time is 80% of the
c. $29,700 d. gives the same standards that traditional methods cumulative average time at the previous
d. $30,300 do. unit.
c. as production doubles, the incremental time for a
c 18. The standard price of a material is $2 per pound. c 24. A purchasing manager bought cheaper-than-normal unit is 80% of the time at the previous
The company bought 2,000 pounds at $1.90 per materials that are difficult to handle. Which doubling point.
pound and used 1,700 pounds. Standard use was combination of variances is LEAST likely to be d. as production doubles, the cumulative average time
1,800 pounds. The material price variance was affected by this decision? is 80% of the time at the previous doubling
a. $170 favorable. a. Material use and direct labor use. point.
b. $180 favorable. b. Material use, direct labor use, and variable
c. $200 favorable. overhead efficiency. b 31. In which company is the learning effect probably
d. $400 favorable. c. Direct labor rate and variable overhead budget. most important?
d. Direct labor use and variable overhead efficiency. a. A canner of orange juice.
c 19. A company made 1,200 units with a $550 favorable b. A manufacturer of airplanes.
labor use variance. There was no labor rate d 25. Standard costs are useful for c. A highly automated chemical manufacturer.
variance and actual labor cost was $19,250. The a. planning. d. A manufacturer of nails.
actual wage rate was $11. Standard labor time b. control.
per unit is c. performance evaluation. a 32. Which of the following is NOT a reason why some JIT
a. 0.5 hours d. all of the above. operations do not use standards?
b. 1.0 hour a. Standards are often set too tight for JIT operations.
c. 1.5 hours b 26. Which kinds of variances should be investigated? b. Using standards can stifle continuous improvement.
d. 2.0 hours a. Those that are large and unfavorable. c. Standards focus on cost centers, not on the entire
b. Those that are large and either favorable or manufacturing operation.
unfavorable. d. All of the above are reasons.
a 20. Which formula calculates a price or rate variance?
(AQ = actual quantity of the factor, AP = actual c. All variances, despite their size.
d. Only use variances. d 33. The role of activity-based costing in standard costs
price of the factor, SQ = standard price of the
is to
factor, SQ = standard quantity of the factor)
a. determine the standard material content of
a. (AQ x AP) - (AQ x SP). b 27. The material price variance is calculated
products.
b. (AQ x AP) - (SQ x AP). a. the same as the labor rate variance.
b. find value-adding activities.
c. (AQ x SP) - (SQ x SP) b. on the quantity of materials bought, not the
c. determine the variable overhead rate per direct
d. (AQ x SP) - (SQ x AP). quantity used.
labor hour.
c. on the quantity of materials used, not the quantity
d. identify drivers of overhead costs.
b 21. Which formula calculates a use or efficiency bought.
variance? (AQ = actual quantity of the factor, AP d. by multiplying the difference between the actual
a 34. A company that uses activity-based costing
= actual price of the factor, SQ = standard price and standard price of materials times the
to develop standard costs
of the factor, SQ = standard quantity of the quantity of materials used.
a. will usually have more than one variable
factor) overhead component in its
a. (AQ x AP) - (SQ x SP). standard costs.
b. (AQ x SP) - (SQ x SP). b 28. Probably the best level at which to set standards is b. cannot compute variable overhead
c. (AQ x AP) - (AQ x SP) a. historical performance. efficiency variances.
d. (SQ x SP) - (SQ x AP). b. currently attainable performance. c. will have less information about the
c. ideal performance. profitability of individual products.
b 22. Using variances to evaluate performance d. any of the above. d. all of the above.
a. is especially useful to JIT companies.
b. can be misleading because of interdependence d 29. The use of ideal standards d 35. Advanced manufacturers
among variances. a. motivates workers to perform well. a. are especially concerned with material price
c. cannot be used with activity-based overhead b. results in mostly favorable variances. variances.
standards. c. is preferred by most managers. b. almost always seek out the least expensive
d. all of the above. d. can cause performance to suffer. vendors.
34
 c. use more materials than conventional production of 1,700 units. Standards allow 3
manufacturers. b 41. Acme has a standard price of $6 per pound for labor hours per unit at a rate of $6.50 per hour.
d. are generally more concerned with quality and materials. July's results showed an unfavorable Actual hours totaled 5,150. The direct labor rate
delivery than with price. material price variance of $44 and a favorable variance was
quantity variance of $228. If 1,066 pounds were a. $1,250 favorable
b 36. For a company whose variable overhead relates to used in production, what was the standard b. $925 favorable
direct labor, the variable overhead efficiency quantity allowed for materials? c. $325 favorable
variance a. 1,066 d. $325 unfavorable
a. results from efficient or inefficient use of variable b. 1,104
overhead elements. c. 1,294 d 47. Chippewa paid $32,225 to direct labor for the
b. results from efficient or inefficient use of direct d. some other number production of 1,700 units. Standards allow 3
labor. labor hours per unit at a rate of $6.50 per hour.
c. is always the same as the direct labor efficiency Actual hours totaled 5,150. The direct labor
variance. c 42. Genco paid $78,800 to direct labor for the efficiency variance was
d. is more like a budget variance than a use variance. production of 1,500 units. Standards allow 2 a. $1,250 favorable
labor hours per unit at a rate of $25.00 per hour. b. $925 favorable
b 37. Acme Company produced 500 units with a $50 Actual hours totaled 2,900. The direct labor rate c. $325 favorable
unfavorable labor rate variance. The labor use variance was d. $325 unfavorable
variance was $180 favorable. Actual labor cost a. $2,050 favorable
was $17,870. The standard wage rate was $9. b. $3,800 favorable a 48. Chetek Company has standard variable costs as
Actual hours were c. $6,300 unfavorable follows:
a. 1,520 d. some other number Materials, 3 pounds at $4.00 per pound
b. 1,980 $12.00
c. 2,000 a 43. Genco paid $78,800 to direct labor for the Labor, 2 hours at $10.00 per hour
d. 2,020 production of 1,500 units. Standards allow 2 20.00
labor hours per unit at a rate of $25.00 per hour. Variable overhead, $7.50 per labor hour
a 38. Crunch Company expects a 90% learning curve. The Actual hours totaled 2,900. The direct labor 15.00
first batch of a new product required 1,000 efficiency variance was
hours. The total time for the first four batches a. $2,500 favorable $47.00
should be b. $3,800 favorable
a. 3,240 hours. c. $6,300 unfavorable During September, Chetek produced 5,000 units,
b. 3,600 hours. d. some other number using 9,640 labor hours at a total wage of
c. 4,000 hours. $94,670 and incurring $78,600 in variable
d. some other number of hours. c 44. Danner had a $550 favorable direct labor rate overhead. The variable overhead budget
variance and a $720 unfavorable efficiency variance is
c 39. Crunch Company expects a 90% learning curve. The variance. Danner paid $6,650 for 800 hours of a. $6,300 unfavorable
first batch of a new product required 10 hours. labor. What was the standard direct labor wage b. $3,600 unfavorable
The first four batches should take an average of rate? c. $2,700 favorable
a. 10 hours. a. $8.10 d. some other number
b. 9 hours. b. $8.31
c. 8.1 hours. c. $9.00 c 49. Barron Company has standard variable costs as
d. some other number of hours. d. some other number follows:
Materials, 3 pounds at $4.00 per pound
c 40. Acme has a standard of 15 parts of component X c 45. Jeter's Company had a $510 unfavorable direct labor $12.00
costing $1.50 each. Acme purchased 14,910 rate variance and a $1,000 favorable efficiency Labor, 2 hours at $10.00 per hour
units of X for $21,950. Acme generated a $415 variance. Jeter's standard payroll was $11,200 at 20.00
favorable price variance and a $3,735 favorable a standard wage of $10 per hour. What was the Variable overhead, $7.50 per labor hour
quantity variance. If there were no changes in actual direct labor wage rate? 15.00
the component inventory, how many units of a. $9.56
finished product were produced? b. $10.00
$47.00
a. 994 units c. $10.50
b. 1,000 units d. some other number
During September, Barron produced 5,000 units,
c. 1,160 units using 9,640 labor hours at a total wage of
d. some other number a 46. Chippewa paid $32,225 to direct labor for the
35
 $94,670 and incurring $78,600 in variable d. the company need not forecast the level of
overhead. The variable overhead efficiency CHAPTER 12: INTRODUCTION TO PRODUCT COSTING productive activity for the year.
variance is Multiple Choice
a. $6,300 unfavorable d 8. An unfavorable volume variance signifies that
b. $3,600 unfavorable b 1. The three major components of manufacturing cost a. cost control was poor.
c. $2,700 favorable are b. sales were less than budgeted.
d. $3,300 favorable a. materials, work in process, and finished goods. c. production was less than sales.
b. materials, labor, and manufacturing overhead. d. production was less than the level used to set the
c 50. Silver Bow manufactured the first batch of c. materials, labor, and finished goods. fixed overhead application rate.
product in 100 hours. The second batch took an d. materials, labor, and production costs.
additional 60 hours. What percent learning b 9. The principal reason for using more than one rate to
occurred? a 2. A predetermined overhead rate CANNOT be used apply overhead is
a. 100% a. if a company does not budget its overhead costs. a. to keep the individual rates low.
b. 90% b. by a company that uses job-order costing. b. that overhead costs are driven by more than one
c. 80% c. in a multiple-product company. activity.
d. Cannot be determined with the information d. by a highly automated company where labor is a c. that such rates recognize the seasonal nature of
given. minor part of product cost. some costs.
d. to simplify recordkeeping.
True-False a 3. Assigning overhead to jobs using a predetermined
overhead rate is called a 10. Activity-based overhead rates are more useful than
T 1. Standard costs are per-unit expressions of flexible a. applying. a single plant-wide rate if
budget allowances based on output. b. budgeting. a. overhead costs are driven by several activities.
c. product costing. b. direct labor cost varies significantly from
d. job-order costing. department to department.
F 2. The value of b, the exponent in the learning curve
c. all products require about the same amounts of all
formula, is the learning rate.
d 4. Predetermined overhead rates are based on activity activities.
measured by d. manufacturing overhead costs are nearly all fixed.
T 3. The use of ideal standards could have undesirable
a. number of jobs.
effects on output.
b. units of sales. c 11. Actual costing and normal costing differ in treating
c. units of production. a. materials cost.
F 4. Learning curves can only be used for a one-of-a-kind d. units of an input factor. b. direct labor cost.
special order product. c. overhead cost.
b 5. Absorption costing is required d. all of the above.
F 5. So long as total actual costs approximate total a. for financial accounting purposes only.
budgeted costs there is no need for managerial b. for financial accounting and tax purposes. d 12. Which company is LEAST likely to use job-order
concern or action. c. for financial and managerial accounting purposes. costing?
d. for managerial accounting purposes only. a. Furniture maker.
T 6. It is not always possible to separate the variable and b. Printer.
fixed components of actual overhead cost. a 6. Both actual and normal costing c. Construction company.
a. include material, labor, and overhead in product d. Flour maker.
F 7. When an unfavorable variance occurs, there is some cost.
action that some manager can take to correct b. require predetermined overhead rates. d 13. A cost pool is
the event or circumstance that gave rise to the c. are likely to result in over- or underabsorption of a. all costs of a production department.
variance. overhead. b. the material and labor cost used on a particular job.
F 8. Standard costs are devices for measuring d. will show a favorable volume variance if production c. overapplied or underapplied overhead costs.
effectiveness but not efficiency. is greater than budgeted. d. a group of overhead costs driven by the same
activity.
F 9. "Ideal standards" are those most likely to be met b 7. An advantage of normal costing over actual costing
under most conditions. is that c 14. Each group of overhead costs should be applied
a. the company can compute the exact cost of a unit based on
T 10. The labor efficiency variance excludes the effects of of product. a. direct labor hours or cost.
laborers being paid more or than the standard b. unit costs are not affected by monthly fluctuations b. units produced.
labor rate. in production activity. c. whatever activity drives those specific overhead
c. control over fixed costs is improved. costs.
36
 d. machine time. overhead rate is c. The resulting overhead rates are all about the
a. budgeted manufacturing overhead cost. same.
d 15. A POOR reason to use activity-based overhead rates b. actual manufacturing overhead cost. d. All jobs require about the same percentage of
is that c. budgeted activity. time in all departments.
a. some departments are labor-intensive, some are d. fixed manufacturing overhead.
machine-intensive. c 28. In contrast to a company that uses a single
b. significant amounts of overhead are driven by c 22. The denominator in calculating a predetermined overhead rate, one that uses activity-based
different factors. overhead rate is costing
c. rates calculated for some departments are much a. budgeted manufacturing overhead cost. a. will have higher product costs than one using
higher than for other departments. b. actual manufacturing overhead cost. a single overhead rate.
d. all jobs require about the same amounts of cost- c. budgeted activity. b. cannot compute budget variances.
driving activities. d. actual activity. c. will incur additional costs for recordkeeping.
d. must have a preponderance of fixed overhead
a 16. XYZ had an $8,000 unfavorable volume variance, a c 23. In a factory operated largely by robots, the best costs.
$11,500 unfavorable variable overhead spending basis for applying overhead is probably
variance, and $1,500 total underapplied a. direct labor hours. a 29. Which of the following is a sign of poor cost control?
overhead. The fixed overhead budget variance b. direct labor cost. a. A high unfavorable budget variance.
was c. machine hours. b. A high unfavorable volume variance.
a. $18,000 favorable. d. raw material use. c. High underapplied overhead.
b. $21,000 favorable. d. High overapplied overhead.
c. $17,500 unfavorable. a 24. Spooner applies overhead based on direct labor
d. $21,000 unfavorable. cost. It had budgeted manufacturing overhead of
$50,000 and budgeted direct labor of $25,000.
d 17. Machine hours used to set the predetermined Actual overhead was $52,500, actual labor cost c 30. Hoyt Company applies overhead at $4 per direct
overhead rate were 25,000, actual hours were was $27,000. Overhead was labor hour. In March Hoyt incurred overhead of
24,000, and overhead applied was $60,000. a. overapplied by $1,500. $96,000. Underapplied overhead was $4,000.
Budgeted overhead for the year was b. overapplied by $2,000. How many direct labor hours did Hoyt work?
a. $57,600. c. overapplied by $2,500. a. 25,000
b. $59,000. d. underapplied by $2,000. b. 24,000
c. $60,000. c. 23,000
d. $62,500. c 25. Hayward applies overhead at $5 per machine hour. d. 22,000
During March it worked 10,000 hours and
c 18. The three inventory accounts in a manufacturing overapplied overhead by $3,000. Actual d 31. A company using activity-based overhead rates
company are overhead was a. will usually have higher budget variances than
a. Materials, Labor, and Manufacturing Overhead. a. $53,000. one using a single rate.
b. Materials, Labor, and Finished Goods. b. $50,000. b. will usually have higher volume variances than
c. Materials, Work in Process, and Finished Goods. c. $47,000. one using a single rate.
d. Materials, Finished Goods, and Inventory Sold. d. none of the above. c. cannot compute fixed and variable
components of overhead cost.
a 19. A predetermined overhead rate is calculated using b 26. Aurora applies overhead at $9 per direct labor hour d. should have better information for planning
a. budgeted overhead cost and budgeted activity. of which $4 is variable overhead. Budgeted and control than one using a single rate.
b. actual overhead cost and actual activity. direct labor hours were 80,000. Budgeted fixed
c. budgeted overhead cost and budgeted direct labor overhead was a 32. Daly had a $9,000 favorable volume variance, a
hours. a. $320,000 $7,500 unfavorable variable overhead spending
d. budgeted overhead cost and budgeted direct labor b. $400,000. variance, and $6,000 total overapplied overhead.
cost. c. $720,000. The fixed overhead budget variance was
d. none of the above. a. $4,500 favorable.
d 20. Under normal costing, income can be b. $8,000 favorable.
a. lower than under actual costing. a 27. Which is a good reason to use separate overhead c. $4,500 unfavorable.
b. higher than under actual costing. rates? d. $8,000 unfavorable.
c. the same as under actual costing. a. Some departments are labor-intensive, some
d. any of the above. are machine-intensive. d 33. Acme had a $6,000 favorable fixed overhead budget
b. Labor rates vary considerably among variance, a $2,500 unfavorable variable
a 21. The numerator in computing a predetermined departments. overhead spending variance, and $1,000 total
37
 overapplied overhead. The volume variance was results were 110,000 direct labor hours, c. $131,625.
a. $4,500 overapplied. $297,000 fixed overhead, and $194,500 variable d. some other number.
b. $4,500 underapplied. overhead. The total overhead variance for the
c. $2,500 overapplied. year is a 43. Cooke Company uses the equation $450,000 +
d. $2,500 underapplied. a. $2,000. $1.50 per direct labor hour to budget
b. $3,000. manufacturing overhead. Cooke has budgeted
b 34. Waldorf had a $10,000 unfavorable fixed overhead c. $47,000. 150,000 direct labor hours for the year. Actual
budget variance, a $6,000 unfavorable variable d. $48,000. results were 156,000 direct labor hours and
overhead spending variance, and a $2,000 $697,500 total manufacturing overhead. The
favorable volume variance. The total overhead a 39. Bonds Company uses the equation $300,000 + total overhead variance for the year is
was $1.75 per direct labor hour to budget a. $4,500 favorable.
a. $14,000 overapplied. manufacturing overhead. Bonds has budgeted b. $18,000 favorable.
b. $14,000 underapplied. 125,000 direct labor hours for the year. Actual c. $4,500 unfavorable.
c. $18,000 overapplied. results were 110,000 direct labor hours, d. $18,000 unfavorable.
d. $18,000 underapplied. $297,000 fixed overhead, and $194,500 variable
overhead. The variable overhead spending b 44. Antaya Company uses the equation $375,000 +
a 35. Bacon had a $18,000 unfavorable volume variance, variance for the year is $1.20 per direct labor hour to budget
a $5,000 unfavorable fixed overhead budget a. $2,000. manufacturing overhead. Antaya has budgeted
variance, and $12,000 total underapplied b. $3,000. 75,000 direct labor hours for the year. Actual
overhead. The variable overhead spending c. $47,000. results were 81,000 direct labor hours, $388,000
variance was d. $48,000. fixed overhead, and $98,600 variable overhead.
a. $11,000 favorable. The total overhead variance for the year is
b. $1,000 favorable. b 40. Bonds Company uses the equation $300,000 + a. $2,700.
c. $11,000 unfavorable. $1.75 per direct labor hour to budget b. $10,700.
d. $23,000 unfavorable. manufacturing overhead. Bonds has budgeted c. $22,000.
125,000 direct labor hours for the year. Actual d. $30,000.
d 36. Gonzalez Company uses the equation $520,000 + results were 110,000 direct labor hours,
$2 per direct labor hour to budget manufacturing $297,000 fixed overhead, and $194,500 variable a 45. Antaya Company uses the equation $375,000 +
overhead. Gonzalez has budgeted 150,000 direct overhead. The fixed overhead budget variance $1.20 per direct labor hour to budget
labor hours for the year. Actual results were for the year is manufacturing overhead. Antaya has budgeted
150,000 direct labor hours and $817,500 total a. $2,000. 75,000 direct labor hours for the year. Actual
manufacturing overhead. The total overhead b. $3,000. results were 81,000 direct labor hours, $388,000
applied for the year is c. $47,000. fixed overhead, and $98,600 variable overhead.
a. $300,000. d. $48,000. The variable overhead spending variance for the
b. $520,000. year is
c. $817,500. d 41. Bonds Company uses the equation $300,000 + a. $2,700.
d. $820,000. $1.75 per direct labor hour to budget b. $10,700.
manufacturing overhead. Bonds has budgeted c. $22,000.
a 37. Gonzalez Company uses the equation $520,000 + 125,000 direct labor hours for the year. Actual d. $30,000.
$2 per direct labor hour to budget manufacturing results were 110,000 direct labor hours,
overhead. Gonzalez has budgeted 150,000 direct $297,000 fixed overhead, and $194,500 variable c 46. Antaya Company uses the equation $375,000 +
labor hours for the year. Actual results were overhead. The fixed overhead volume variance $1.20 per direct labor hour to budget
150,000 direct labor hours and $817,500 total for the year is manufacturing overhead. Antaya has budgeted
manufacturing overhead. The total overhead a. $2,000. 75,000 direct labor hours for the year. Actual
variance for the year is b. $3,000. results were 81,000 direct labor hours, $388,000
a. $2,500 favorable. c. $47,000. fixed overhead, and $98,600 variable overhead.
b. $12,500 favorable. d. $48,000. The fixed overhead budget variance for the year
c. $2,500 unfavorable. is
d. some other number. a 42. Machine hours used to set the predetermined a. $2,700.
overhead rate were 80,000, actual hours were b. $10,700.
c 38. Bonds Company uses the equation $300,000 + 90,000, and overhead applied was $117,000. c. $22,000.
$1.75 per direct labor hour to budget Budgeted overhead for the year was d. $30,000.
manufacturing overhead. Bonds has budgeted a. $104,000.
125,000 direct labor hours for the year. Actual b. $117,000. d 47. Antaya Company uses the equation $375,000 +
38
 $1.20 per direct labor hour to budget high overapplied and underapplied overhead variances if standard hours do not equal
manufacturing overhead. Antaya has budgeted during individual months of the year. actual hours.
75,000 direct labor hours for the year. Actual d. normal costing is less appropriate for
results were 81,000 direct labor hours, $388,000 F 5. Underapplied overhead indicates inefficient multiproduct firms.
fixed overhead, and $98,600 variable overhead. operations.
The fixed overhead volume variance for the year d 5. Variable costing and absorption costing will show the
is F 6. Activity-based overhead rates give higher costs than same incomes when there are no
a. $1,400. does a single, plant-wide rate. a. beginning inventories.
b. $13,000. b. ending inventories.
c. $15,600. F 7. A cost pool consists of all of the costs of a particular c. variable costs.
d. $30,000. department. d. beginning and ending inventories.

a 48. Machine hours used to set the predetermined T 8. Absorption costing is required by GAAP for external c 6. ABC had the same activity in 20X3 as in 20X2 except
overhead rate were 68,000, actual hours were financial reporting. that production was higher in 20X3 than in 20X2.
64,000, and budgeted overhead was $142,800. ABC will show
Overhead applied for the year was F 9. Variable costing and full costing are the same thing. a. higher income in 20X3 than in 20X2.
a. $134,400. b. the same income in both years.
b. $136,500. T 10. Overhead variances do not exist when actual c. the same income in both years under variable
c. $142,800. costing is used. costing.
d. $151,725. d. the same income in both years under
CHAPTER 13: STANDARD COSTING, absorption costing.
a 49. Rhoda had a $2,000 favorable volume variance, a VARIABLE COSTING, AND THROUGHPUT COSTING
$7,000 unfavorable variable overhead spending Multiple Choice b 7. The use of variable costing requires knowing
variance, and $3,000 total underapplied a. the contribution margin and break-even point
overhead. The fixed overhead budget variance a 1. Which of the following is NOT a type of absorption for each product.
was costing? b. the variable and fixed components of
a. $1,000 favorable. a. Direct costing. production cost.
b. $8,000 favorable. b. Actual costing. c. controllable and noncontrollable components
c. $2,000 unfavorable. c. Normal costing. of all costs.
d. $8,000 unfavorable. d. None of the above. d. the number of units of each product produced
during the period.
b 50. Katrina Inc. had a $30,000 favorable fixed overhead b 2. Variable costing is UNACCEPTABLE for
budget variance, a $44,000 unfavorable variable a. managerial accounting. d 8. Which measure of activity is likely to give the
overhead spending variance, and $44,000 total b. financial accounting. LOWEST standard fixed cost per unit?
underapplied overhead. The volume variance c. transfer pricing. a. Actual activity.
was d. reporting by product lines for internal b. Normal capacity.
a. $30,000 overapplied. purposes. c. Budgeted activity.
b. $30,000 underapplied. d. Practical capacity.
c. $58,000 overapplied. d 3. A criticism of variable costing for managerial
d. $58,000 underapplied. accounting purposes is that it c 9. Which item is NOT used to compute the fixed
a. is not acceptable for product line segmented overhead volume variance?
True-False reporting. a. Standard fixed cost per unit.
b. does not reflect cost-volume-profit b. Budgeted fixed overhead.
T 1. A major advantage of normal costing over actual relationships. c. Actual fixed overhead.
costing is that it smoothes out fluctuations in c. overstates inventories. d. Actual quantity produced.
unit costs. d. might encourage managers to emphasize the
short term at the expense of the long term. b 10. Which variance is LEAST relevant for control
F 2. Normal costing incomes are less than actual costing purposes?
incomes. c 4. Normal costing and standard costing differ in that a. Material use variance.
a. the two systems can show different overhead b. Fixed overhead volume variance.
T 3. The term overapplied overhead is not used with budget variances. c. Fixed overhead budget variance.
actual costing. b. only normal costing can be used with d. Labor efficiency variance.
absorption costing.
T 4. A seasonal business using normal costing expects c. the two systems show different volume a 11. A company that sets a standard fixed cost based on
39
 practical capacity administrative costs. d. any of the above.
a. should expect unfavorable volume variances. d. all production costs plus all selling and
b. will set its selling prices too low. administrative costs. b 23. York Company had $200,000 income using
c. has a higher cost per unit than a company absorption costing. York has no variable
using normal activity to set the standard. b 17. Inventoriable costs under variable costing include manufacturing costs. Beginning inventory was
d. usually overapplies its fixed costs. a. fixed and variable production costs. $15,000 and ending inventory was $22,000.
b. variable production costs. Income under variable costing would have been
a 12. A predetermined overhead rate for fixed costs is c. all production costs plus variable selling and a. $178,000.
unlike a standard fixed cost per unit in that a administrative costs. b. $193,000.
predetermined overhead rate is d. all production costs plus all selling and c. $200,000.
a. based on an input factor like direct labor hours administrative costs. d. $207,000.
and a standard cost per unit is based on a
unit of output. d 18. Absorption costing and variable costing differ in that c 24. An unfavorable volume variance means that
b. based on practical capacity and a standard a. income is lower under variable costing. a. cost control was probably poor.
fixed cost can be based on any level of b. variable costing treats selling costs as period b. absorption costing income is lower than
activity. costs. variable costing income.
c. used with variable costing while a standard c. variable costing treats all variable costs as c. actual output was less than the level used to
fixed cost is used with absorption costing. product costs. set the standard fixed cost.
d. likely to be higher than a standard fixed cost d. inventory cost is higher under absorption d. actual output was more than the level used to
per unit. costing. set the standard fixed cost.

b 13. ABC had $400,000 budgeted fixed overhead costs c 19. Absorption costing differs from variable costing in d 25. Which variance CANNOT arise under variable
and based its standard on normal activity of that costing?
40,000 units. Actual fixed overhead costs were a. standards can be used with absorption a. variable overhead budget variance.
$430,000, actual production was 36,000 units, costing, but not with variable costing. b. variable overhead efficiency variance.
and sales were 30,000 units. The volume b. absorption costing inventories are more c. fixed overhead budget variance.
variance was correctly valued. d. fixed overhead volume variance.
a. $30,000. c. production influences income under absorption
b. $40,000. costing, but not under variable costing. a 26. Standard costing differs from normal costing in the
c. $70,000. d. companies using absorption costing have treatment of
d. $77,777. lower fixed costs. a. materials, direct labor, and overhead.
b. materials and direct labor.
a 14. Advocates of variable costing for internal reporting a 20. Which method gives the lowest inventory cost per c. direct labor and overhead.
purposes do NOT rely on which of the following unit? d. overhead.
points? a. Variable costing.
a. The matching concept. b. Absorption costing using normal activity to set d 27. Normal costing differs from actual costing in treating
b. Price-volume relationships. the standard fixed cost. a. materials, direct labor, and overhead.
c. Absorption costing does not include selling c. Absorption costing using practical capacity to b. materials and direct labor.
and administrative expenses as part of set the standard fixed cost. c. direct labor and overhead.
inventoriable cost. d. Actual absorption costing. d. overhead.
d. Production influences income under
absorption costing. b 21. Which costs are treated differently under absorption c 28. As compared to normal costing, standard costing
costing and variable costing? can yield
d 15. Calculating income under variable costing does NOT a. Variable manufacturing costs. a. different volume variances and budget
require knowing b. Fixed manufacturing costs. variances.
a. unit sales. c. Variable selling and administrative expenses. b. different budget variances.
b. unit variable manufacturing costs. d. Fixed selling and administrative expenses. c. different volume variances.
c. selling price. d. none of the above.
d. unit production. a 22. ABC Company had 15,000 units in ending inventory.
The total cost of those units under variable c 29. Under variable costing there can be no
a 16. Inventoriable costs under absorption costing include costing is a. fixed overhead variances.
a. both fixed and variable production costs. a. less than it is under absorption costing. b. fixed overhead budget variance.
b. only variable production costs. b. the same as it is under absorption costing. c. fixed overhead volume variance.
c. all production costs plus variable selling and c. more than it is under absorption costing. d. no fixed overhead.
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 production costs are $300,000. Rounder uses a d. Cannot be determined without further
c 30. ABC had the same activity in 20X4 as in 20X3 normal activity of 20,000 units to set its standard information.
except that production was lower in 20X4 than in costs. Rounder began the year with no inventory,
20X3. ABC will show produced 22,000 units, and sold 21,000 units. a 39. Gamma Corporation has total budgeted fixed
a. lower income in 20X4 than in 20X3. The volume variance under absorption costing costs of $150,000. Actual production was 8,000
b. the same income in both years. would be units; normal capacity is 7,500 units. What was
c. the same income in both years under variable a. $0. the volume variance?
costing. b. $20,000. a. $10,000 favorable
d. the same income in both years under c. $30,000. b. $15,000 favorable
absorption costing. d. some other number. c. $15,000 unfavorable
d. $10,000 unfavorable
a 31. Rounder Industries manufactures a single product. b 35. Rounder Industries manufactures a single product.
Variable production costs are $20 and fixed Variable production costs are $20 and fixed b 40. Eastern Co. has total budgeted fixed costs of
production costs are $300,000. Rounder uses a production costs are $300,000. Rounder uses a $150,000. Actual production of 39,000 units
normal activity of 20,000 units to set its standard normal activity of 20,000 units to set its standard resulted in a $6,000 favorable volume variance.
costs. Rounder began the year with no inventory, costs. Rounder began the year with no inventory, What normal capacity was used to determine the
produced 22,000 units, and sold 21,000 units. produced 22,000 units, and sold 21,000 units. fixed overhead rate?
Ending inventory under variable costing would The standard cost of goods sold under variable a. 33,000
be costing would be b. 37,500
a. $20,000. a. $400,000. c. 40,560
b. $30,000. b. $420,000. d. Cannot be determined without further
c. $35,000. c. $735,000. information.
d. cannot be determined without further d. some other number.
information. a 41. Western Company has a standard fixed cost of
c 36. Rounder Industries manufactures a single product. $8 per unit. At an actual production of 8,000
c 32. Rounder Industries manufactures a single product. Variable production costs are $20 and fixed units a favorable volume variance of $12,000
Variable production costs are $20 and fixed production costs are $300,000. Rounder uses a resulted. What were total budgeted fixed costs?
production costs are $300,000. Rounder uses a normal activity of 20,000 units to set its standard a. $52,000
normal activity of 20,000 units to set its standard costs. Rounder began the year with no inventory, b. $64,000
costs. Rounder began the year with no inventory, produced 22,000 units, and sold 21,000 units. c. $76,000
produced 22,000 units, and sold 21,000 units. The standard cost of goods sold under d. Cannot be determined without further
Ending inventory under absorption costing would absorption costing would be information.
be a. $400,000.
a. $20,000. b. $420,000. d 42. Monona Corporation has total budgeted fixed
b. $30,000. c. $735,000. costs of $64,000. Actual production was 15,000
c. $35,000. d. some other number. units; normal capacity is 16,000 units. What was
d. cannot be determined without further the volume variance?
information. c 37. Alpha Company has a standard fixed cost of $10 per a. $4,000 favorable
unit. At an actual production of 16,000 units an b. $4,267 favorable
a 33. Rounder Industries manufactures a single product. unfavorable volume variance of $20,000 c. $4,267 unfavorable
Variable production costs are $20 and fixed resulted. What were total budgeted fixed costs? d. $4,000 unfavorable
production costs are $300,000. Rounder uses a a. $140,000
normal activity of 20,000 units to set its standard b. $160,000 b 43. Madison Industries manufactures a single product
costs. Rounder began the year with no inventory, c. $180,000 using standard costing. Variable production costs
produced 22,000 units, and sold 21,000 units. d. Cannot be determined without further are $26 and fixed production costs are $250,000.
The volume variance under variable costing information. Madison uses a normal activity of 12,500 units to
would be set its standard costs. Madison began the year
a. $0. a 38. Beta Company has a standard fixed cost of $10 with 1,000 units in inventory, produced 11,000
b. $20,000. per unit using a normal capacity of 11,000 units. units, and sold 11,500 units. Ending inventory
c. $30,000. An unfavorable volume variance of $12,000 under variable costing would be
d. some other number. resulted. What was the volume produced? a. $10,000.
a. 9,800 b. $13,000.
c 34. Rounder Industries manufactures a single product. b. 11,000 c. $23,000.
Variable production costs are $20 and fixed c. 12,200 d. cannot be determined without further
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 information. c 48. Sigma Company has a standard fixed cost of $18 T 5. Proponents of variable costing for external reporting
per unit using a normal capacity of 9,000 units. A argue that while fixed production costs benefit
c 44. Madison Industries manufactures a single product favorable volume variance of $18,000 resulted. production as a whole, they do not benefit any
using standard costing. Variable production costs What was the volume produced? particular unit of product.
are $26 and fixed production costs are $250,000. a. 8,000
Madison uses a normal activity of 12,500 units to b. 9,000 T 6. A company using absorption costing can increase its
set its standard costs. Madison began the year c. 10,000 income by increasing production without
with 1,000 units in inventory, produced 11,000 d. Cannot be determined without further increasing sales.
units, and sold 11,500 units. Ending inventory information.
under absorption costing would be F 7. A company using variable costing can increase its
a. $10,000. c 49. Western Co. has total budgeted fixed costs of income by increasing production without
b. $13,000. $72,000. Actual production of 5,500 units increasing sales.
c. $23,000. resulted in a $6,000 unfavorable volume
d. cannot be determined without further variance. What normal capacity was used to F 8. Variable costing must be used for internal reporting.
information. determine the fixed overhead rate?
d 45. Madison Industries manufactures a single product a. 5,000 F 9. According to GAAP, absorption costing must be used
using standard costing. Variable production costs b. 5,500 for internal reporting.
are $26 and fixed production costs are $250,000. c. 6,000
Madison uses a normal activity of 12,500 units to d. Cannot be determined without further T 10. According to GAAP, absorption costing must be used
set its standard costs. Madison began the year information. for external financial reporting.
with 1,000 units in inventory, produced 11,000
units, and sold 11,500 units. The volume d 50. Madison Industries manufactures a single product
variance under variable costing would be using standard costing. Variable production costs CHAPTER 14: PROCESS COSTING AND THE COST
a. $10,000. are $26 and fixed production costs are $250,000. ACCOUNTING CYCLE
b. $20,000. Madison uses a normal activity of 12,500 units to
c. $30,000. set its standard costs. Madison began the year Multiple Choice
d. some other number. with 1,000 units in inventory, produced 11,000
units, and sold 11,500 units. The standard cost of c 1. ABC Company made the following journal entry.
c 46. Madison Industries manufactures a single product goods sold under absorption costing would be Work in Process Inventory $200,000
using standard costing. Variable production costs a. $230,000. Direct Labor $188,000
are $26 and fixed production costs are $250,000. b. $299,000. Direct Labor Rate Variance 12,000
Madison uses a normal activity of 12,500 units to c. $506,000. From this entry we can tell that ABC uses
set its standard costs. Madison began the year d. $529,000. a. job-order costing.
with 1,000 units in inventory, produced 11,000 b. process costing.
units, and sold 11,500 units. The volume True-False c. standard costing.
variance under absorption costing would be d. normal costing.
a. $10,000. F 1. Absorption costing incomes are always higher than
b. $20,000. variable costing incomes. d 2. CDE Company made the following journal entry.
c. $30,000. Finished Goods Inventory $250,000
d. some other number. F 2. Income under standard variable costing is not Work in Process Inventory $250,000
influenced by the total amount of fixed From this entry we can tell that CDE uses
b 47. Madison Industries manufactures a single product manufacturing costs. a. job-order costing.
using standard costing. Variable production costs b. process costing.
are $26 and fixed production costs are $250,000. T 3. A multiproduct company using standard absorption c. standard costing.
Madison uses a normal activity of 12,500 units to costing calculates standard fixed costs for each d. any of the above.
set its standard costs. Madison began the year product using a standard fixed overhead rate
with 1,000 units in inventory, produced 11,000 based on an input factor such as direct labor b 3. Which of the following is NOT relevant in determining
units, and sold 11,500 units. The standard cost of hours. weighted-average unit cost in process costing?
goods sold under variable costing would be a. Cost of beginning inventory.
a. $230,000. T 4. A major difference between standard costing and b. Equivalent unit production in beginning
b. $299,000. normal costing is that one uses actual hours to inventory.
c. $506,000. apply overhead and the other uses standard c. Equivalent unit production in ending inventory.
d. $529,000. hours. d. Units completed.

42
d 4. Standard process costing does NOT require c. Net income for the period. c. current period cost plus cost of beginning
information about d. Cost per unit of ending inventory of work in inventory.
a. units completed during the period. process. d. cost of goods sold.
b. equivalent unit production in ending inventory. a 18. The numerator of the FIFO unit cost calculation is
c. standard cost per unit. c 12. It is usually necessary to calculate equivalent unit a. current period cost.
d. actual unit cost for the period. production for b. cost of beginning inventory.
a. materials. c. current period cost plus cost of beginning
d 5. A company that uses job-order costing b. conversion costs. inventory.
a. cannot use standard costs. c. materials and conversion costs. d. cost of goods sold.
b. accumulates costs by department. d. materials, conversion costs, and overhead.
c. probably makes a single product. b 19. FIFO equivalent unit production (EUP) is 6,200 units.
d. does not have to calculate equivalent b 13. If a company uses actual process costing, the EUP in ending inventory is 300, in beginning
production. amount transferred from Work in Process inventory it is 125. Weighted-average EUP is
Inventory to Finished Goods Inventory is the cost a. 6,500.
c 6. Which company is most likely to use job-order of b. 6,325.
costing? a. equivalent unit production for the period. c. 6,025.
a. A brewery. b. units completed during the period. d. 5,900.
b. An automobile manufacturer. c. units completed and sold during the period.
c. A bridge builder. d. all units worked on during the period. a 20. Weighted-average EUP is 4,100 units. Cost incurred
d. A button manufacturer. during the period are $11,250, and the beginning
b 14. If a company uses standard process costing, the inventory was $2,150. Unit cost is
c 7. Which company is most likely to use process costing? amount transferred from Work in Process a. $3.268.
a. A manufacturer of nuclear reactors. Inventory to Finished Goods Inventory is the b. $2.744.
b. A construction contractor. a. standard cost of equivalent unit production for c. $2.220
c. A cannery. the period. d. $0.524.
d. A textbook publisher. b. standard cost of units completed during the
period. a 21. Weighted-average EUP is 11,400 units. Beginning
a 8. Fixed production costs are inventoriable only if a c. actual cost of units completed and sold during inventory was 1,000 units 60% complete, ending
company the period. inventory is 2,000 units 20% complete. The
a. uses absorption costing. d. actual cost of all units worked on during the number of units completed is
b. uses standard costing. period. a. 11,000.
c. produces a single product. b. 10,800.
d. receives permission from the Internal Revenue a 15. Under standard costing, the amount of direct labor c. 10,400.
Service. cost charged (debited) to Work in Process d. 9,400.
d 9. Which cost accumulation method is most likely to be Inventory is
used by a company that mass produces similar a. standard labor hours at standard rates. c 22. Algoma completed 10,000 units, had beginning
products? b. standard labor hours at actual rates. inventory of 2,500 units 40% complete, and
a. Actual costing. c. actual labor hours at actual rates. ending inventory of 1,000 units 20% complete.
b. Normal costing. d. actual direct labor cost incurred. Weighted-average EUP was
c. Job-order costing. a. 9,200.
d. Standard costing. d 16. A company that uses standard costing b. 10,000.
a. must make only one product. c. 10,200.
c 10. Standard costing can be used in b. always has a volume variance unless normal d. 11,000.
a. only job-order costing systems. capacity and practical capacity are the
b. only process costing systems. same. d 23. Which formula gives weighted-average equivalent
c. either job-order or process systems. c. shows higher incomes than it would if it used unit production? (UC = units completed, BI =
d. either manufacturing or retailing firms. actual costing. equivalent units in beginning inventory, EI =
d. shows the same per-unit cost of inventory equivalent units in ending inventory)
a 11. Which of the following is the same whether the each month. a. UC + BI + EI.
company uses standard process costing or actual b. UC + BI - EI.
process costing? c 17. The numerator of weighted-average unit cost c. UC + EI - BI.
a. Equivalent production. calculations is d. UC + EI.
b. Cost of goods transferred from work in process a. current period cost.
to finished goods. b. cost of beginning inventory. c 24. Which formula gives FIFO equivalent unit
43
 production? (UC = units completed, BI = production and unit costs a. 17,500.
equivalent units in beginning inventory, EI = a. is less likely to be accurate than the weighted- b. 16,950.
equivalent units in ending inventory) average method. c. 16,050.
a. UC + BI + EI. b. is more useful for control purposes than the d. 15,050.
b. UC + BI - EI. weighted-average method.
c. UC + EI - BI. c. cannot be used unless a company also uses a 37. Cheatem has a weighted-average EUP of 30,000
d. UC + EI. standard costing. units. Beginning inventory was 4,000 units 40%
d. eliminates the need to calculate separate complete; ending inventory was 5,000 units 60%
c 25. The entry to apply overhead in a job-order system is equivalent-production numbers for each complete. The number of units completed is
a. debit Cost of Goods Sold, credit Manufacturing element of manufacturing cost. a. 27,000.
Overhead. b. 29,000.
b. debit Finished Goods Inventory, credit Work-in- a 32. Backflushing, or backflush costing c. 30,000.
Process Inventory. a. requires significantly less recordkeeping than d. 31,000.
c. debit Work-in-Process Inventory, credit other methods.
Manufacturing Overhead. b. can be used by any company. b 38. Cheatem has a weighted-average EUP of 30,000
d. debit Work-in-Process Inventory, credit Direct c. ignores inventories. units. Beginning inventory was 4,000 units 40%
Labor. d. does not distinguish between materials and complete; ending inventory was 5,000 units 60%
conversion costs. complete. FIFO EUP is
a 26. Conversion costs are a. 25,400.
a. labor and overhead costs. c 33. Scooter Corp had no beginning inventories, finished b. 28,400.
b. materials and labor costs. 40,000 units, and sold 36,000 units. There were c. 30,000.
c. all fixed manufacturing costs. no ending inventories of materials or work in d. 31,000.
d. all manufacturing costs. process. Materials purchased and used were
a 27. Which item is NOT relevant in determining FIFO unit $225,000; direct labor and overhead were d 39. Howe has a FIFO EUP of 46,580 units. Beginning
cost? $170,000. Ending inventory would be valued at inventory of 6,500 units was 80% complete; the
a. Cost of beginning inventory. a. $17,000. ending inventory of 2,800 units was 60%
b. Equivalent unit production in beginning b. $22,500. complete. How many units were completed
inventory. c. $39,500. during the period?
c. Equivalent unit production in ending inventory. d. some other number. a. 39,700
d. Units completed. b. 44,900
b 34. Scooter Corp had no beginning inventories, finished c. 46,200
c 28. Weighted-average equivalent production is always 40,000 units, and sold 36,000 units. There were d. 50,100
a. less than the number of units completed. no ending inventories of materials or work in
b. equal to the number of units completed. process. Materials purchased and used were c 40. Howe has a FIFO EUP of 46,580 units. Beginning
c. equal to or greater than the number of units $225,000; direct labor and overhead were inventory of 6,500 units was 80% complete; the
completed. $170,000. Cost of goods sold would be valued at ending inventory of 2,800 units was 60%
d. any of the above. a. $39,500. complete. Weighted-average EUP is
b. $355,500. a. 46,580.
d 29. FIFO equivalent production can be c. $395,000. b. 47,880.
a. less than the number of units completed. d. some other number. c. 51,780.
b. equal to the number of units completed. d. some other number.
c. equal to or greater than the number of units b 35. Dewey Company had a beginning inventory of 3,000
completed. units 35% complete, and an ending inventory of b 41. Sosa Inc. had $3,000 in beginning work in process
d. any of the above. 2,500 units 20% complete. If 17,500 units were and incurred an additional $28,500 during the
completed, weighted-average EUP is period. If weighted-average EUP was 10,000
a 30. Which item is NOT relevant in determining FIFO a. 17,500. units, unit cost would be
equivalent unit production? b. 18,000. a. $2.85.
a. Cost of beginning inventory. c. 18,550. b. $3.15.
b. Equivalent unit production in beginning d. 20,000. c. $9.50.
inventory. d. some other number.
c. Equivalent unit production in ending inventory. b 36. Dewey Company had a beginning inventory of 3,000
d. Units completed. units 35% complete, and an ending inventory of a 42. Granger Co. had $3,000 in beginning work in
2,500 units 20% complete. If 17,500 units were process and incurred an additional $28,500
b 31. The FIFO method of calculating equivalent completed, FIFO EUP is during the period. If FIFO EUP was 10,000 units,
44
 unit cost would be for conversion costs. All materials are added at beginning inventory were $1,960; conversion
a. $2.85. the start of the process. Beginning inventory cost costs added during the period were $40,825.
b. $3.15. $9,400. The cost of finished units transferred out Conversion costs per unit are
c. $9.50. is a. $0.82.
d. some other number. a. $69,875. b. $0.86.
b. $92,900. c. $0.70.
b 43. Field Company had a beginning inventory of 2,000 c. $93,500. d. cannot be determined with the information
units 40% complete, ending inventory of 1,500 d. $103,700. given.
units 70% complete, and transferred out 23,500
units. Weighted-average unit costs were $1.15 b 46. Garden Co. had a beginning inventory of 3,000 units a 49. Grover Co. had a beginning inventory of 1,750 units
for materials, $0.75 for conversion costs. All 60% complete, ending inventory of 3,000 units 70% complete, ending inventory of 3,000 units
materials are added at the start of the process. 80% complete, and transferred out 27,500 units. 20% complete, and transferred out 24,500 units.
The cost of finished units transferred to finished FIFO unit costs were $2.15 for materials, $1.25 Weighted-average unit costs were $2.15 for
goods is for conversion costs. All materials are added at materials, $1.75 for conversion costs. All
a. $28,750. the start of the process. Beginning inventory cost materials are added at the start of the process.
b. $44,650. $9,400. The cost of ending inventory is The cost of finished units transferred to finished
c. $47,500. a. $8,160. goods is
d. $52,250. b. $9,450. a. $95,550.
c. $10,200. b. $102,375.
b 44. Field Company had a beginning inventory of 4,000 d. $17,000. c. $107,250.
units 40% complete, ending inventory of 3,000 d. $114,075.
units 70% complete, and transferred out 47,000 d 47. Woods Run has a weighted-average EUP of 49,750
units. Weighted-average unit costs were $1.15 units. Beginning inventory of 4,500 units was c 50. Grover Co. had a beginning inventory of 1,750 units
for materials, $0.75 for conversion costs. All 60% complete; the ending inventory of 4,800 70% complete, ending inventory of 3,000 units
materials are added at the start of the process. units was 60% complete. The units completed 20% complete, and transferred out 24,500 units.
The cost of ending inventory is during the period is Weighted-average unit costs were $2.15 for
a. $5,700. a. 49,750. materials, $1.75 for conversion costs. All
b. $5,025 b. 44,950. materials are added at the start of the process.
c. $3,990. c. 47,050. The cost of ending inventory is
d. some other number. d. 46,870. a. $2,340.
b. $6,450.
b 45. Garden Co. had a beginning inventory of 3,000 units b 48. Woods Run has a weighted-average EUP of 49,750 c. $7,500.
60% complete, ending inventory of 3,000 units units. Beginning inventory of 4,500 units was d. $11,700.
80% complete, and transferred out 27,500 units. 60% complete; the ending inventory of 4,800
FIFO unit costs were $2.15 for materials, $1.25 units was 60% complete. Conversion costs in

45