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

b 21. Planning and control are
a. different names for the same thing.
b. the basic functions of management.
c. described equally well by the terms "decision
making" and "performance evaluation."
d. exemplified by, respectively, financial statements
and budgeting.
a 22. In contrast to a balance sheet, an income statement
a. is for a period of time, a balance sheet is at a point
in time.
b. gives information about cash and a balance sheet
does not.
c. is prepared after the statement of retained
earnings.
d. has two columns, while a balance sheet has more
than two.
c 23. One characteristic of the conventional
manufacturing environment is
a. flexible manufacturing systems.
b. manufacturing cells.
c. a just-in-case philosophy.
d. a high degree of quality control.
d 24. A characteristic of the just-in-time manufacturing
environment is
a. frequent deliveries of materials.
b. manufacturing cells.
c. little or no inventory of finished product.
d. all of the above.
d 25. Conventional and just-in-time manufacturers differ
in that the conventional manufacturer is likely to
a. be a new entrant into its industry.
b. need less storage space than its JIT competitors.
c. give less credibility to management accounting
reports.
d. have a longer production cycle than its JIT
competitors.
True-False
F 1. Published financial statements show costs classified
by behavior.
T 2. Generally accepted accounting principles govern
financial accounting but not managerial
accounting.
T 3. Economic events are the raw data for both financial
and managerial accounting.
F 4. Internal financial statements must be prepared using
generally accepted accounting principles.
T 5. The form and content of reports can influence
decisions made by managers.
F 6. Management-by-objectives and management-by-
exception are two names for the same general
management principle.
F 7. "Pro forma" is the name given to an income
statement that classifies costs by function.
T 8. Some managerial accounting reports contain costs
not incorporated in the basic accounting system.
F 9. A professional examination exists to test the
competence of financial accountants, but not of
managerial accountants.
F 10. Managerial accountants should, but have no
obligation to, maintain their professional skills.
CHAPTER 2: PROFIT PLANNING
Multiple Choice
c 1. Which formula gives unit sales required to earn a
target profit? (P = selling price, V = variable cost
per unit, F = total fixed costs, T = target profit)
a. F/(P - V)
b. (F + T)/P
c. (F + T)/(P - V)
d. (F + T)/V
c 2. Which formula gives the sales dollars required to
earn a target profit? (P = selling price, V =
variable cost per unit, F = total fixed costs, T =
target profit)
a. F/[(P - V)/P]
b. (F + T)/(P)
c. (F + T)/[(P - V)/P]
d. F + T/V
d 3. Over the relevant range, total revenues and total
costs
a. increase, but at a decreasing rate.
b. decrease.
c. remain constant.
d. can be graphed as straight lines.
2
b 4. At the break-even point, total contribution margin is
a. zero.
b. equal to total fixed costs.
c. equal to total costs.
d. equal to total variable costs.
c 5. If a company is operating at a loss,
a. fixed costs are greater than sales.
b. selling price is lower than variable cost per unit.
c. selling price is less than average total cost per unit.
d. fixed cost per unit is greater than variable cost per
unit.
b 6. As volume increases, average cost per unit
a. increases.
b. decreases.
c. remains constant.
d. increases in proportion to the change in volume.
d 7. All else constant, if the selling price falls,
a. total variable costs will be lower than expected.
b. contribution margin percentage will be higher than
expected.
c. total contribution margin will be higher than
expected.
d. per-unit contribution margin will be lower than
expected.
c 8. If all goes according to plan except that unit variable
cost falls,
a. total contribution margin will be lower than
expected.
b. the contribution margin percentage will be lower
than expected.
c. profit will be higher than expected.
d. per-unit contribution margin will be lower than
expected.
a 9. If all goes according to plan except that total fixed
costs rise,
a. income will be lower than expected.
b. total contribution margin will be lower than
expected.
c. total sales will be lower than expected.
d. income will be higher than expected.
a 10. Which of the following decreases per-unit
contribution margin the most for a company
currently earning a profit?
a. A 10% decrease in selling price.
b. A 10% increase in variable cost per unit.
 c. A 10% increase in fixed costs.
d. A 10% increase in fixed cost per unit.
c 11. If variable cost as a percentage of sales increases,
the
a. contribution margin percentage increases.
b. selling price increases.
c. break-even point in dollars increases.
d. fixed costs decrease.
b 12. Which cost is most likely to be variable for a
retailer?
a. Advertising.
b. Cost of goods sold.
c. Sales salaries.
d. Rent.
a 13. A cost-volume-profit graph reflects relationships
a. expected to hold over the relevant range.
b. of results over the past few years.
c. that the company's managers would like to have
happen.
d. likely to prevail for the industry.
d 14. A multiproduct company
a. cannot use CVP analysis.
b. must use a separate CVP graph for each of its
products.
c. can use CVP analysis only if the contribution margin
percentages on each product are the same.
d. could earn a higher-than-expected profit even
though the total number of units sold was
less than expected.
a 15. If selling price, per-unit variable cost, and total fixed
costs are constant,
a. the break-even point in units remains constant.
b. profit per unit remains constant for all levels of
volume within the relevant range.
c. total variable costs equal total fixed costs.
d. total contribution margin equals total fixed costs.
b 16. XYZ Company desires a profit of $120,000 and
expects to sell 20,000 units. Variable cost per
unit is $16 and total fixed costs are $160,000.
The selling price must be
a. $40.
b. $30.
c. $26.
d. $20.
a 17. Contribution margin percentage is 30% and
contribution margin per unit is $12. Which of the
following is true?
a. Variable cost per unit is $28.
b. Return on sales is 12%.
c. Selling price is $48.
d. Variable cost percentage is 12%.
b 18. Contribution margin is 30% of sales. Profit is
$80,000. Sales are $600,000. Fixed costs are
a. $ 90,000.
b. $100,000.
c. $160,000.
d. $180,000.
a 19. TRS Company changed production methods,
increasing fixed costs and decreasing its per-unit
variable costs. The change
a. increases risk and increases potential profit.
b. increases risk and decreases potential profit.
c. decreases risk and decreases potential profit.
d. decreases risk and increases potential profit.
c 20. Introducing income taxes into cost-volume-profit
analysis
a. raises the break-even point.
b. lowers the break-even point.
c. increases unit sales needed to earn a particular
target profit.
d. decreases the contribution margin percentage.
d 21. Selling price is $100, unit variable cost is $68, and
fixed costs are $400,000. Unit sales required to
earn a $120,000 profit are
a. 5,200
b. 7,647
c. 13,700
d. 16,250
c 22. The tax rate is 40%. A company that wants a profit
of $120,000 after taxes must earn how much
before taxes?
a. $ 48,000.
b. $ 72,000.
c. $200,000.
d. $300,000.
a 23. Genco Company has a 30% contribution margin
percentage and fixed costs of $30,000. To earn a
10% return on sales, Genco must have sales of
a. $150,000.
b. $100,000.
3
c. $40,000.
d. an amount that cannot be determined without more
information.
a 24. If a company is earning a profit, its fixed costs
a. are less than total contribution margin.
b. are equal to total contribution margin.
c. are greater than total variable costs.
d. can be greater than or less than total contribution
margin.
a 25. Per-unit variable cost
a. remains constant within the relevant range.
b. increases as volume increases within the relevant
range.
c. decreases as volume increases within the relevant
range.
d. decreases if volume increases beyond the relevant
range.
d 26. An increase in the income tax rate
a. raises the break-even point.
b. lowers the break-even point.
c. decreases sales required to earn a particular after-
tax profit.
d. increases sales required to earn a particular after-
tax profit.
b 27. Contribution margin is
a. the same as gross margin.
b. revenue minus variable costs.
c. revenue minus variable costs and fixed costs.
d. the ratio of income to sales.
c 28. Classifying a cost as fixed or variable depends on
how it behaves
a. per unit, as the volume of activity changes.
b. in total, as the volume of activity changes.
c. both a and b are correct.
d. none of the above.
d 29. Critical to CVP analysis in a multiproduct company is
that
a. the products be complementary.
b. the products be sold to the same kinds of
customers.
c. all products have about the same contribution
margin percentage.
d. the sales mix is relatively constant.
a 30. A fixed cost is the same percentage of sales in three
different months. Which of the following is true?
 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.
d. selling price of the product.
d 7. A non-value-adding cost is
a. usually direct to a product.
b. the same as a discretionary cost.
c. unavoidable.
d. not essential to manufacturing a product.
a 8. Fixed costs that cannot be reduced within a short
period of time are
a. committed.
b. variable.
c. avoidable.
d. unnecessary.
b 9. Which cost is most likely to be committed?
a. Repairs and maintenance.
b. Sum-of-the-years'-digits depreciation on the factory
building.
c. Fee for a consultant on the company's long-range
planning.
d. Advertising.
a 10. RST's average cost per unit is the same at all levels
of volume. Which of the following is true?
a. RST must have only variable costs.
b. RST must have only fixed costs.
c. RST must have some fixed costs and some variable
costs.
d. RST's cost structure cannot be determined from this
information.
b 11. A mixed cost
a. increases in steps as volume increases.
b. contains a fixed component and a variable
component.
c. varies with more than one measure of volume.
d. cannot be accurately predicted.
b 12. A non-value-adding activity
a. cannot be a cost driver.
b. should be eliminated.
c. usually drives only variable costs.
d. cannot usually be observed by managers.
d 13. A cost-predicting equation determined through
regression analysis
a. always gives close predictions.
b. will not work any better than one obtained using
the high-low method.
c. can be used only for costs that vary with sales or
production.
d. could be severely affected by outliers.
b 14. Which of the following do JIT operations try to c 21. Identifying cost drivers
eliminate? a. is not necessary with regression analysis.
a. Discretionary fixed costs. b. is the same as identifying cost pools.
b. Non-value-adding costs. c. is an important part of cost management.
c. Avoidable costs. d. is useful only with step-variable costs.
d. Direct costs.
d 22. A cost pool is
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
following is true? discretionary fixed costs.
a. Fixed costs are $40,000. c. all costs related to a product or product line.
b. Profit at sales of $800,000 would be $160,000. d. all costs that have the same driver.
c. The selling price per unit is $6.
d. Contribution margin is 60% of sales. b 23. As volume increases,
a. total fixed costs remain constant and per-unit fixed
costs increase.
b 16. A seasonal business that sets selling prices at 20%
b. total fixed costs remain constant and per-unit fixed
above average cost for the preceding month will
costs decrease.
a. be better off if it closed down during the off-season.
c. total fixed costs remain constant and per-unit fixed
b. charge higher prices in the off-season than in the
costs remain constant.
busy season.
d. total fixed costs increase and per-unit fixed costs
c. always charge higher prices than its competitors.
increase.
d. make a consistent return on sales of 20%.
d 24. Which cost is NOT subtracted from selling price to
b 17. The components of manufacturing cost are
calculate contribution margin per unit?
a. variable costs, fixed costs, and overhead costs.
a. Variable manufacturing overhead.
b. materials, direct labor, and overhead.
b. Variable selling expenses.
c. purchases, wages, and manufacturing overhead.
c. Direct labor.
d. wages and salaries, maintenance and repairs,
d. Fixed manufacturing overhead.
utilities, and depreciation.
c 25. A committed fixed cost
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-
income statement.
term.
b. Many costs vary with production activities, not with
c. can be eliminated in the long-term, but not in the
sales.
short-term.
c. The concepts of fixed and variable costs do not
d. can be eliminated in the short-term, but not in the
apply.
long-term.
d. Cost-volume-profit analysis is not appropriate.
d 19. Fixed costs that managers can change on short c 26. Avoidable costs are usually
notice are a. committed.
a. value-adding costs. b. common.
b. variable costs. c. direct.
c. unavoidable costs. d. fixed.
d. discretionary costs.
a 27. Direct costs are
c 20. A(n) __________ relationship is one that appears to a. associated with a specific activity.
exist even though there is no causal relationship. b. always variable.
a. Correlation. c. usually committed.
b. Outlier. d. usually discretionary.
c. Spurious.
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
forecast sales is
a. the availability of a forecasted value for the
indicator.
b. an upward trend in the value of the indicator.
c. governmental collection of data for computing and
reporting the value of the indicator.
d. the availability of an indicator that covers the entire
country.
d 5. Which of the following equations can be used to
budget purchases? (BI = beginning inventory, EI
= ending inventory desired, CGS = budgeted
cost of goods sold)
a. Budgeted purchases = CGS + BI - EI
b. Budgeted purchases = CGS + BI
c. Budgeted purchases = CGS + EI + BI
d. Budgeted purchases = CGS + EI - BI
b 6. A flexible budget is
a. one that can be changed whenever a manager so
desires.
b. adjusted to reflect expected costs at the actual
level of activity.
c. one that uses the formula total cost = cost per unit
x units produced.
d. the same as a continuous budget.
b 7. The use of flexible (as opposed to static) budget
allowances is LEAST important for which of the
following?
a. Costs of the production department.
b. Costs of the general accounting department.
c. Costs of the product shipping department.
d. Costs of the material receiving department.
d 8. Budgets set at very high levels of performance (i.e.,
very low costs)
a. assist in planning the operations of the company.
b. stimulate people to perform better than they
ordinarily would.
c. are helpful in evaluating the performance of
managers.
d. can lead to low levels of performance.
c 9. Inventory policy is most critical in the budgeting of
a. sales.
b. cost of goods sold.
c. purchases.
d. expenses.
a 10. Budgeting expenditures by purpose is called
a. program budgeting.
b. zero-based budgeting.
c. line budgeting.
d. flexible budgeting.
c 11. Which of the following is a difference between a
static budget and a flexible budget?
a. A flexible budget includes only variable costs, a
static budget includes only fixed costs.
b. A flexible budget includes all costs, a static budget
includes only fixed costs.
c. A flexible budget gives different allowances for
different levels of activity; a static budget
does not.
d. None of the above.
a 12. A static budget is most appropriate for a true?
department
a. with only fixed costs.
b. with only variable costs.
c. with mostly mixed costs.
d. with any of the above characteristics.
d 13. Which of the following is NOT an advantage of
budgeting?
a. It requires managers to state their objectives.
b. It facilitates control by permitting comparisons of
budgeted and actual results.
c. It facilitates performance evaluation by permitting
comparisons of budgeted and actual results.
d. It provides a check-up device that allows managers
to keep close tabs on their subordinates.
b 14. An imposed budget
a. is the same as a static budget.
b. can lead to poor performance.
c. is best for planning purposes.
d. eliminates the need for a sales forecast.
b 15. Prohibiting managers from overspending budget
allowances
a. improves company performance.
b. can harm company performance.
c. eliminates the need for comparisons of budgeted
and actual amounts.
d. usually reduces the need to prepare a cash budget.
b 16. Which of the following will occur if X Co.'s actual
sales in May are lower than its budgeted sales
for that month?
a. X won't have enough cash to cover bills requiring
payment in May.
b. X's actual inventory at the end of May will be higher
than budgeted.
c. X's actual purchases in June will be higher than
budgeted.
17
d. All of the above.
c 17. JIT manufacturers are more likely than conventional
manufacturers to
a. use static budget allowances for manufacturing
costs.
b. prepare production budgets without a sales
forecast.
c. budget unit production equal to budgeted unit
sales.
d. experience budget variances.
a 18. If cash receipts from customers are greater than
sales, which of the following is most likely to be
a. The balance of accounts receivable will decrease.
b. The company's outstanding debt will decrease.
c. The company's cash balance will increase.
d. The company will show a profit.
c 19. A cash budget is NOT prepared until a company has
a. obtained a commitment from its bank that cash will
be available as needed.
b. prepared the pro forma balance sheet.
c. prepared its purchases budget.
d. determined that enough cash is available to meet
dividend payments.
a 20. Which of the following is LEAST likely to be affected
if unit sales for this month are lower than
budgeted?
a. Production for this month.
b. Production for next month.
c. Cash receipts for next month.
d. Inventory at the end of this month.
b 21. "Incremental budgeting" refers to
a. line-by-line approval of expenditures.
b. setting budget allowances based on prior year
expenditures.
c. requiring top management approval of increases in
budgets.
d. using incremental revenues and costs in budgeting.
b 22. The principal DISADVANTAGE of line budgeting is
a. it can only be used by not-for-profit entities.
b. it limits the flexibility of managers to accomplish
the entity's objectives.
c. it works only in conjunction with zero-based
budgeting.
d. none of the above.
a 23. The cash receipts budget
a. requires a sales forecast.
 b. requires a purchases or production budget.
c. is prepared after the cash disbursements budget.
d. has none of the above characteristics.
c 24. The type of company most likely to run short of cash
during the year is one with
a. little seasonality.
b. high contribution margin percentage.
c. high seasonality and rapid sales growth.
d. relatively low fixed costs.
d 25. If a company is earning a profit,
a. its cash balance is increasing.
b. its monthly cash disbursements will be stable.
c. its inventory is increasing.
d. it might have to borrow money.
a 26. One difference between budgeting in for-profit and
not-for-profit entities is that not-for-profit entities
usually
a. budget expenses before revenues.
b. don't need a cash budget.
c. are less likely to use incremental budgeting.
d. use computer software-packages to facilitate the
budgeting process.
d 27. To prepare its cash disbursements budget, a
company uses information from
a. its balance sheet at the end of the prior period.
b. its purchases budget.
c. its capital budget.
d. all of the above sources.
b 28. Just-in-time manufacturers are more likely than
conventional manufacturers to
a. prepare production budgets without a sales
forecast.
b. budget materials purchases equal to the current
month's needs for production.
c. budget unit production for the month at greater
than budgeted unit sales for the month.
d. experience cash shortages.
c 29. Quorum Company desires an ending inventory of
$120,000. It expects sales of $240,000 and has a
beginning inventory of $80,000. Cost of sales is
60% of sales. Budgeted purchases are
a. $120,000.
b. $144,000.
c. $184,000.
d. $264,000.
d 30. Garamond Company budgeted purchases of
$200,000. Cost of sales was $240,000 and the
desired ending inventory was $84,000. The
beginning inventory was
a. $40,000.
b. $64,000.
c. $84,000.
d. $124,000.
a 31. Wildwood Company budgeted purchases of 20,000
units. The budgeted beginning inventory was
4,800 units and the budgeted ending inventory
was 6,000 units. Budgeted sales were
a. 18,800 units.
b. 21,200 units.
c. 24,800 units.
d. 26,000 units.
c 32. Menomonie Company budgeted sales of 18,000
units. The budgeted beginning inventory was
3,000 units and the budgeted ending inventory
was 5,000 units. Budgeted production is
a. 23,000 units.
b. 21,000 units.
c. 20,000 units.
d. 16,000 units.
d 33. Baker Company budgets supplies as $20,000 +
($1.20 x direct labor hours). Baker has budgeted
18,000 direct labor hours, $130,000 direct labor
cost. The flexible budget allowance for supplies
is
a. $18,000.
b. $20,000.
c. $150,000.
d. some other number.
b 34. Equinox Company budgeted sales of 44,000 units
for January, 60,000 for February. The budgeted
beginning inventory for January 1 was 14,000
units. Equinox desires an ending inventory equal
to one-half of the following month's sales needs.
Budgeted production for January is
a. 74,000 units.
b. 60,000 units.
c. 52,000 units.
d. 28,000 units.
c 35. Sams Company manufactures a single product. It
keeps its inventory of finished goods at 75% the
coming month's budgeted sales, inventory of raw
materials at 50% of the coming month's
budgeted production needs. Each unit of product
requires two pounds of materials. The
production budget is, in units: May, 1,000; June,
1,200; July, 1,300; August, 1,600. Raw material
18
purchases in June would be
a. 1,525 pounds.
b. 2,550 pounds.
c. 2,800 pounds.
d. 3,050 pounds.
a 36. Hayward Company desires an ending inventory of
$70,000. It expects sales of $400,000 and has a
beginning inventory of $65,000. Cost of sales is
65% of sales. Budgeted purchases are
a. $265,000.
b. $395,000.
c. $405,000.
d. $535,000.
c 37. Bryce Company budgeted sales of 50,000 units for
January, 60,000 for February. Bryce Company
desires an ending inventory equal to one-half of
the following month's sales needs. Inventory on
January 1 was as desired. Budgeted production
for January is
a. 22,000 units.
b. 52,000 units.
c. 55,000 units.
d. 74,000 units.
c 38. Chetek Company budgeted purchases of 19,000
units. The budgeted beginning inventory was
12,400 units and the budgeted ending inventory
was 13,000 units. Budgeted sales were
a. 32,000 units.
b. 31,400 units.
c. 18,400 units.
d. 19,600 units.
d 39. Barron Company manufactures a single product.
Barron keeps inventory of raw materials at 50%
of the coming month's budgeted production
needs. Each unit of product requires three
pounds of materials. The production budget is,
in units: May, 1,000; June, 1,200; July, 1,300;
August, 1,600. Raw material purchases in July
would be
a. 1,450 pounds.
b. 2,400 pounds.
c. 3,900 pounds.
d. some other number.
c 40. Acker Company has prepared the following flexible
budget for production costs: total production
costs = $260,000 + $5X, where X is the number
of machine hours. Acker produced 20,000 units,
using 34,000 machine hours at a total cost of
$425,000. The flexible budget allowance for
production costs is
 a. $260,000.
b. $425,000.
c. $430,000.
d. $525,000.
c 41. Scooter Inc. has projected sales to be $130,000 in
June, $135,000 in July and $150,000 in August.
Scooter collects 30% of a month's sales in the
month of sale, 50% in the month following the
sale, and 16% in the second month following the
sale. Cash collections in August would be
a. $ 45,000.
b. $127,300.
c. $133,300.
d. $138,500.
d 42. Rundall Co. makes payments for purchases 30%
during the month of purchase and the remainder
the following month. April purchases are
projected to be $160,000; May purchases will be
$240,000. Cash payments in May will be
a. $ 72,000.
b. $108,000.
c. $168,000.
d. $184,000.
c 43. Randall Co. makes payments for purchases 30%
during the month of purchase and the remainder
the following month. April purchases are
projected to be $80,000; May purchases will be
$120,000. The accounts payable balance on May
31 will be
a. $36,000.
b. $54,000.
c. $84,000.
d. $92,000.
c 44. Alfuth Co. makes payments for purchases 10%
during the month of purchase, 60% in the
following month, and the remainder in the
second month following the purchase. Purchases
are projected to be $260,000 in January,
$280,000 in February, and $320,000 in March.
March payments will be
a. $ 32,000.
b. $168,000.
c. $278,000.
d. some other number.
d 45. Reid Co. makes payments for purchases 10% during
the month of purchase, 60% in the following
month, and the remainder in the second month
following the purchase. Purchases are projected
to be $130,000 in January, $140,000 in February,
and $160,000 in March. The March 31 accounts
payable balance will be
a. $48,000.
b. $96,000.
c. $144,000.
d. $186,000.
c 46. Andover Inc. has projected sales to be: February,
$10,000; March, $9,000; April, $8,000; May,
$10,000; and June, $11,000. Andover has 30%
cash sales and 70% sales on account. Accounts
are collected 40% in the month following the sale
and 55% collected the second month. Total cash
receipts in May would be
a. $3,000.
b. $8,150.
c. $8,705.
d. some other number.
d 47. Conde Inc. has projected sales to be: February,
$20,000; March, $18,000; April, $16,000; May,
$20,000; and June, $22,000. Conde has 30%
cash sales and 70% sales on account. Accounts
are collected 40% in the month following the sale
and 60% collected the second month. Accounts
receivable for May 31 would be
a. $ 6,160.
b. $13,300.
c. $14,000.
d. $20,720.
d 48. Holmgren estimates its supplies purchases to be
$21,000 in August and $28,000 in September.
Holmgren pays 70% of its accounts in the month
of purchase with the remainder paid the
following month. September payments would be
a. $14,700.
b. $19,600.
c. $23,100.
d. $55,900.
c 49. Danner Inc. has projected sales to be $100,000 in
June, $90,000 in July, and $70,000 in August.
Danner collects 50% of a month's sales in the
month of sale, 30% in the month following the
sale, and 16% in the second month following the
sale. Cash collections in August would be
a. $35,000.
b. $62,000.
c. $78,000.
d. $86,000.
a 50. Clearwater Inc. has projected sales to be $160,000
in April, $200,000 in May, and $240,000 in June.
19
Clearwater collects 40% of a month's sales in the
month of sale, 40% in the month following the
sale, and 20% in the second month following the
sale. The accounts receivable balance on June 30
would be
a. $184,000.
b. $144,000.
c. $ 40,000.
d. some other number.
True-False
F 1. A just-in-time manufacturer does NOT need a sales
budget.
T 2. A flexible budget allowance is NOT especially useful
for budgeting discretionary costs.
F 3. The purchases budget is prepared before the sales
budget because the company cannot estimate
what it will sell until it has some idea of what will
be on hand.
F 4. The longer the time period covered by a budget, the
more useful the budget will be for controlling
operations.
F 5. A purchases budget is normally prepared after the
company has forecast how much cash it will
have available to pay for purchases.
F 6. Imposed budgets are exceptionally ambitious goals
not likely to be achieved without making
fundamental changes in the way a job is done.
F 7. A JIT manufacturer that maintains no inventory
doesn't need a cash disbursements budget.
F 8. The budget for a retailer is likely to be more complex
than that for a manufacturer because a retailer
has a wider variety of customers.
F 9. The increasing public demand for accountability from
governmental and other not-for-profit
organizations has resulted in an increased use of
incremental budgeting.
T 10. Line-by-line budget authorization is common in
governmental units.
CHAPTER 7: CAPITAL BUDGETING DECISIONSPART I
Multiple Choice
d 1. Calculating the payback period for a capital project
requires knowing which of the following?
a. Useful life of the project.
b. The company's minimum required rate of return.
c. The project's NPV.
d. The project's annual cash flow.
c 2. The payback criterion for capital investment
decisions
a. is conceptually superior to the IRR criterion.
b. takes into consideration the time value of money.
c. gives priority to rapid recovery of cash.
d. emphasizes the most profitable projects.
a 3. Which of the following is NOT relevant in calculating
annual net cash flows for an investment?
a. Interest payments on funds borrowed to finance the
project.
b. Depreciation on fixed assets purchased for the
project.
c. The income tax rate.
d. Lost contribution margin if sales of the product
invested in will reduce sales of other
products.
a 4. If the present value of the future cash flows for an
investment equals the required investment, the
IRR is
a. equal to the cutoff rate.
b. equal to the cost of borrowed capital.
c. equal to zero.
d. lower than the company's cutoff rate of return.
b 5. The relationship between payback period and IRR is
that
a. a payback period of less than one-half the life of a
project will yield an IRR lower than the
target rate.
b. the payback period is the present value factor for
the IRR.
c. a project whose payback period does not meet the
company's cutoff rate for payback will not
meet the company's criterion for IRR.
d. none of the above.
c 6. Which of the following events is most likely to reduce
the expected NPV of an investment?
a. The major competitor for the product to be
manufactured with the machinery being
considered for purchase has been rated
"unsatisfactory" by a consumer group.
b. The interest rate on long-term debt declines.
c. The income tax rate is raised by the Congress.
d. Congress approves the use of faster depreciation
than was previously available.
a 7. If an investment has a positive NPV,
a. its IRR is greater than the company's cost of
capital.
b. cost of capital exceeds the cutoff rate of return.
c. its IRR is less than the company's cutoff rate of
return.
d. the cutoff rate of return exceeds cost of capital.
c 8. Which of the following describes the annual returns
that are discounted in determining the NPV of an
investment?
a. Net incomes expected to be earned by the project.
b. Pre-tax cash flows expected from the project.
c. After-tax cash flows expected from the project.
d. After-tax cash flows adjusted for the time value of
money.
b 9. Which of the following capital budgeting methods
does NOT consider the time value of money?
a. IRR.
b. Book rate of return.
c. Time-adjusted rate of return.
d. NPV.
b 10. All other things being equal, as cost of capital
increases
a. more capital projects will probably be acceptable.
b. fewer capital projects will probably be acceptable.
c. the number of capital projects that are acceptable
will change, but the direction of the change
is not determinable just by knowing the
direction of the change in cost of capital.
d. the company will probably want to borrow money
rather than issue stock.
d 11. Which of the following is a basic difference between
the IRR and the book rate of return (BRR) criteria
for evaluating investments?
a. IRR emphasizes expenses and BRR emphasizes
expenditures.
b. IRR emphasizes revenues and BRR emphasizes
receipts.
c. IRR is used for internal investments and BRR is
used for external investments.
d. IRR concentrates on receipts and expenditures and
BRR concentrates on revenues and
expenses.
20
a 12. If a project has a payback period shorter than its
life,
a. its NPV may be negative.
b. its IRR is greater than cost of capital.
c. it will have a positive NPV.
d. its incremental cash flows may not cover its cost.
c 13. Cost of capital is
a. the amount the company must pay for its plant
assets.
b. the dividends a company must pay on its equity
securities.
c. the cost the company must incur to obtain its
capital resources.
d. the cost the company is charged by investment
bankers who handle the issuance of equity
or long-term debt securities.
d 14. The normal methods of analyzing investments
a. cannot be used by not-for-profit entities.
b. do not apply if the project will not produce
revenues.
c. cannot be used if the company plans to finance the
project with funds already available
internally.
d. require forecasts of cash flows expected from the
project.
a 15. Which of the following is NOT a defect of the
payback method?
a. It ignores cash flows because it uses net income.
b. It ignores profitability.
c. It ignores the present values of cash flows.
d. It ignores the pattern of cash flows beyond the
payback period.
b 16. A company with cost of capital of 15% plans to
finance an investment with debt that bears 10%
interest. The rate it should use to discount the
cash flows is
a. 10%.
b. 15%.
c. 25%.
d. some other rate.
c 17. Which of the following events will increase the NPV
of an investment involving a new product?
a. An increase in the income tax rate.
b. An increase in the expected per-unit variable cost
of the product.
c. An increase in the expected annual unit volume of
the product.
d. A decrease in the expected salvage value of
equipment.

b 18. An investment has a positive NPV discounting the
cash flows at a 14% cost of capital. Which
statement is true?
a. The IRR is lower than 14%.
b. The IRR is higher than 14%.
c. The payback period is less than 14 years.
d. The book rate of return is 14%.
a 19. The technique most concerned with liquidity is
a. payback.
b. NPV.
c. IRR.
d. book rate of return.
d 20. The technique that does NOT use cash flows is
a. payback.
b. NPV.
c. IRR.
d. book rate of return.
a 21. If there were no income taxes,
a. depreciation would be ignored in capital budgeting.
b. the NPV method would not work.
c. income would be discounted instead of cash flow.
d. all potential investments would be desirable.
a 22. Two new products, X and Y, are alike in every way
except that the sales of X will start low and rise
throughout its life, while those of Y will be the
same each year. Total volumes over their five-
year lives will be the same, as will selling prices,
unit variable costs, cash fixed costs, and
investment. The NPV of product X
a. will be less than that of product Y.
b. will be the same as that of product Y.
c. will be greater than that of product Y.
d. none of the above.
d 23. Which of the following events is most likely to
increase the number of investments that meet a
company's acceptance criteria?
a. Top management raises the target rate of return.
b. The interest rate on long-term debt rises.
c. The income tax rate rises.
d. The IRS allows companies to expense purchases of
fixed assets, instead of depreciating them
over their lives.
d 24. Investment A has a payback period of 5.4 years,
investment B one of 6.7 years. From this
information we can conclude
a. that investment A has a higher NPV than B.
b. that investment A has a higher IRR than B.
c. that investment A's book rate of return is higher
than B's.
d. none of the above.
d 25. Investment A has a book rate of return of 26%,
investment B one of 18%. From this information
we can conclude
a. that investment A has a higher NPV than B.
b. that investment A has a higher IRR than B.
c. that investment A has a shorter payback period
than B.
d. none of the above.
c 26. A dollar now is worth more than a dollar to be
received in the future because of
a. inflation.
b. uncertainty.
c. the opportunity cost of waiting.
d. none of the above.
a 27. In contrast to the payback and book rate of return
methods, the NPV and IRR methods
a. consider the time value of money.
b. ignore depreciation.
c. use after-tax cash flows.
d. all of the above.
a 28. Which of the following is a discounted cash flow
method?
a. NPV.
b. Payback.
c. Book rate of return.
d. All of the above.
a 29. Which statement describes the relevance of
depreciation in calculating cash flows?
a. Depreciation is relevant only when income taxes
exist.
b. Depreciation is always relevant.
c. Depreciation is never relevant.
d. Depreciation is relevant only with discounted cash
flow methods.
b 30. As the discount rate increases
a. present value factors increase.
b. present value factors decrease.
c. present value factors remain constant.
d. it is impossible to tell what happens to the factors.
a 31. As the length of an annuity increases
a. present value factors increase.
b. present value factors decrease.
c. present value factors remain constant.
d. it is impossible to tell what happens to present
21
value factors.
a 32. The only future costs that are relevant to deciding
whether to accept an investment are those that
will
a. be different if the project is accepted rather than
rejected.
b. be saved if the project is accepted rather than
rejected.
c. be deductible for tax purposes.
d. affect net income in the period that they are
incurred.
a 33. Which of the following is true of an investment?
a. The lower the cost of capital, the higher the NPV.
b. The lower the cost of capital, the higher the IRR.
c. The longer the project's life, the shorter its payback
period.
d. The higher the project's NPV, the shorter its life.
c 34. Which of the following methods FAILS to distinguish
between return of investment and return on
investment?
a. NPV.
b. IRR.
c. Payback.
d. Book rate of return.
c 35. If a company is NOT subject to income tax, which of
the following is true of a proposed investment?
a. The project's IRR equals the entity's cost of capital.
b. The project's NPV is zero.
c. Depreciation on assets required for the project is
irrelevant to the evaluation.
d. The expected annual increase in future cash flows
equals the investment required to undertake
the project.
d 36. Which of the following increases NPV and IRR?
a. An upward revision in expected annual net cash
flows.
b. An upward revision of expected life.
c. An upward revision of the residual value of the long-
lived assets being acquired for the project.
d. All of the above.
d 37. Qualitative issues could increase the acceptability of
a project under which of the following
conditions?
a. The IRR is less than the company's cutoff rate.
b. The project has a negative NPV.
c. The payback period is longer than the company's
cutoff period.
d. All of the above.
 d. $78,959.
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
X must be sure the cutoff rate is expected to yield net cash flows of $22,000
a. at least equal to its cost of capital. annually for five years. The payback period of
b. at least equal to the rate used by similar the investment is
companies. a. 0.4 years.
c. greater than the IRR on projects accepted in the b. 2.5 years.
past. c. $33,000.
d. greater than the current book rate of return. d. some other number.
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
a. Interest payments on funds that would be borrowed annually for five years. The IRR of the
to finance Project N. investment is between
b. Depreciation on assets purchased for Project N. a. 10 and 12%.
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%.
will reduce sales of other products. d. 16 and 18%.
d. The income tax rate applicable to the entity.
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
a. its NPV is positive. annually for five years. The cost of capital is
b. its annual cash flows equal its required investment. 10%. The book rate of return would be
c. it is generally a wise investment. a. 10%.
d. its cash flows decrease over its life. b. 20%.
c. 30%.
d 41. If depreciation on a new asset exceeds its savings in d. 33.3%.
cash operating costs, which of the following is
true? a 47. An investment opportunity costing $150,000 is
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
be greater than the savings in cash at a cutoff rate of 12% would be
operating costs. a. $(2,004).
c. The project has a negative NPV. b. $2,004.
d. All of the above. c. $150,000.
d. $147,996.
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
money. expected to yield net cash flows of $22,000
b. the return an entity's stockholders expect on their annually for seven years. The payback period of
investment. the investment is
c. the rate of return the entity can earn from investing a. 0.22 years.
available cash. b. 3.08 years.
d. a concept of managerial finance incorporating all of c. 4.55 years.
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
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
investment at a cutoff rate of 14% would be investment is between
a. $(3,959). a. 10 and 12%.
b. $3,959. b. 12 and 14%.
c. $75,000. c. 14 and 16%.
22
d. 16 and 18%.
b 50. An investment opportunity costing $80,000 is
expected to yield net cash flows of $25,000
annually for four years. The cost of capital is
10%. The book rate of return would be
a. 10.0%.
b. 12.5%.
c. 21.3%.
d. 32.0%.
True-False
T 1. Payback period is the length of time it will take a
company to recoup its outlay for an investment.
T 2. Discounted cash flow techniques apply to
investments that involve either costs only, or
both costs and revenues.
F 3. Cost of capital is the interest rate that a company
expects to pay to finance a particular capital
investment project.
F 4. The higher the cost of capital, the higher the present
value of future cash inflows.
F 5. If the IRR on a capital project is positive, its NPV will
be positive.
T 6. Salvage value is usually ignored in computing the
tax depreciation on an investment in depreciable
assets.
F 7. IRR can be computed for even cash flows, but not for
uneven cash flows.
T 8. If IRR is less than the cost of capital, the NPV will be
negative.
F 9. IF NPV is negative, IRR is equal to the cost of capital.
T 10. Payback emphasizes the return of the investment
and ignores the return on the investment.
CHAPTER 8: CAPITAL BUDGETING DECISIONSPART II
Multiple Choice
c 1. Which of the following groups of capital budgeting
techniques uses the time value of money?
a. Book rate of return, payback, and profitability
 index.
b. IRR, payback, and NPV.
c. IRR, NPV, and profitability index.
d. IRR, book rate of return, and profitability index.
b 2. Discounted cash flow techniques for analyzing
capital budgeting decisions are NOT normally
applied to projects
a. requiring no investment after the first year of life.
b. having useful lives shorter than one year.
c. that are essential to the business.
d. involving replacement of existing assets.
d 3. The profitability index
a. does not use present values of cash flows.
b. is generally preferable to any other approach for
evaluating mutually exclusive investment
alternatives.
c. produces the same ranking of investment
alternatives as does the IRR criterion.
d. is a discounted cash flow method.
a 4. Companies using MACRS for tax purposes and
straight-line depreciation for financial reporting
purposes usually find that the relationship
between the tax basis and book value of their
assets is
a. the tax basis is lower than book value.
b. the tax basis is higher than book value.
c. the tax basis is the same as book value.
d. none of the above.
c 5. A company that wants to use MACRS for tax
purposes must
a. request permission from the IRS.
b. acquire new assets at or near the middle of the
year.
c. ignore salvage value in calculating depreciation.
d. do none of the above.
c 6. The government could encourage increases in
investment by
a. increasing tax rates.
b. lengthening the MACRS periods.
c. letting a company expense fixed assets in the year
acquired instead of through annual
depreciation charges.
d. taking actions that would increase interest rates.
a 7. In choosing from among mutually exclusive
investments the manager should normally select
the one with the highest
a. NPV.
b. IRR.
c. profitability index.
d. book rate of return.
a 8. In deciding whether to replace a machine, which of
the following is NOT a sunk cost?
a. The expected resale price of the existing machine.
b. The book value of the existing machine.
c. The original cost of the existing machine.
d. The depreciated cost of the existing machine.
a 9. A company is considering replacing a machine with
one that will save $50,000 per year in cash
operating costs and have $20,000 more
depreciation expense per year than the existing
machine. The tax rate is 40%. Buying the new
machine will increase annual net cash flows of
the company by
a. $38,000.
b. $30,000.
c. $20,000.
d. $12,000.
c 10. Not-for-profit entities
a. cannot use capital budgeting techniques because
profitability is irrelevant to them.
b. cannot use discounted cash flow techniques
because the time value of money is
irrelevant to them.
c. might have serious problems in quantifying the
benefits expected from an investment.
d. should use the IRR method to make investment
decisions.
c 11. A major difference between an investment in
working capital and one in depreciable assets is
that
a. an investment in working capital is never
returned, while most depreciable assets have
some residual value.
b. an investment in working capital is returned in
full at the end of a project's life, while an
investment in depreciable assets has no residual
value.
c. an investment in working capital is not tax-
deductible when made, nor taxable when
returned, while an investment in depreciable
assets does allow tax deductions.
d. because an investment in working capital is usually
returned in full at the end of the project's
life, it is ignored in computing the amount of
the investment required for the project.
d 12. The proper treatment of an investment in
receivables and inventory is to
23
a. ignore it.
b. add it to the required investment in fixed assets.
c. add it to the required investment in fixed assets
and subtract it from the annual cash flows.
d. add it to the investment in fixed assets and add the
present value of the recovery to the present
value of the annual cash flows.
a 13. If a company uses a five-year MACRS period to
depreciate assets instead of a 10-year life with
straight-line depreciation,
a. the NPV of the investment is higher.
b. the IRR of the investment is lower.
c. there is no difference in either NPV or IRR.
d. total cash flows over the useful life would be lower.
a 14. The NPV and IRR methods give
a. the same decision (accept or reject) for any single
investment.
b. the same choice from among mutually exclusive
investments.
c. different rankings of projects with unequal lives.
d. the same rankings of projects with different
required investments.
d 15. An investment with a positive NPV also has
a. a positive profitability index.
b. a profitability index of one.
c. a profitability index less than one.
d. a profitability index greater than one.
b 16. Classifying an asset in a MACRS life category is
based on
a. useful life estimated by the company.
b. asset depreciation range (ADR) guidelines.
c. the cost of the asset.
d. any of the above factors.
d 17. Which of the following makes investments more
desirable than they had been?
a. An increase in the income tax rate.
b. An increase in interest rates.
c. An increase in the number of years over which
assets must be depreciated.
d. None of the above.
c 18. Which of the following statements is true?
a. All revenue is taxed.
b. All expenses are tax-deductible.
c. Some revenues and expenses have no tax effects.
d. Income taxes are based solely on revenues and
expenses.
b 19. The profitability index is the ratio of
 a. total cash inflows to the cost of the investment.
b. the present value of cash inflows to the cost of the
investment.
c. the NPV of the investment to the cost of the
investment.
d. the IRR to the company's cost of capital.
c 20. With respect to income taxes, the principal
advantage of MACRS over straight-line
depreciation is that
a. total taxes will be lower under MACRS.
b. taxes will be constant from year to year under
MACRS.
c. taxes will be lower in the earlier years under
MACRS.
d. taxes will decline in future years under MACRS.
a 21. If the profitability index is less than one,
a. the IRR is less than cost of capital.
b. the IRR is the same as cost of capital.
c. the IRR is greater than cost of capital.
d. none of the above is true.
c 22. Which of the following combinations is possible?
Profitability Index NPV IRR
------------------- -------- -------------------------
a. greater than 1 positive equals cost of capital
b. greater than 1 negative less than cost of capital
c. less than 1 negative less than cost of capital
d. less than 1 positive less than cost of capital
d 23. Which of the following combinations is NOT
possible?
Profitability Index NPV IRR
------------------- -------- --------------------------
a. greater than 1 positive more than cost of capital
b. equals 1 zero equals cost of capital
c. less than 1 negative less than cost of capital
d. less than 1 positive less than cost of capital
b 24. In capital budgeting, sensitivity analysis is used
a. to determine whether an investment is profitable.
b. to see how a decision would be affected by changes
in variables.
c. to test the relationship of the IRR and NPV.
d. to evaluate mutually exclusive investments.
b 25. A unique feature of the analysis of a replacement
decision is that
a. the analysis considers total rather than differential
costs.
b. the amount used as the cost of the investment is
not likely to equal the price to be paid for
the new asset.
c. the time value of money is ignored.
d. such decisions seldom involve cash flows.
a 26. Because of idle capacity, a company is considering
two assets for sale. They are identical in all
respects except that asset A has a higher tax
basis than asset B. Only one need be sold now
and the market price is the same for both assets.
Which of the following is true?
a. The cash flow is greater from selling asset A.
b. The cash flow is greater from selling asset B.
c. The cash flow is the same no matter which one is
sold.
d. It is not possible to determine how the cash flows
from sales of the assets will differ.
a 27. If the tax law were changed so that owners of
apartment buildings had to depreciate them over
50 years instead of the current 31.5 years,
a. rents would rise.
b. rents would fall because annual depreciation
charges would fall.
c. rents would stay about the same.
d. more people would invest in apartment buildings.
b 28. Which statement could express the results of a
sensitivity analysis of an investment decision?
a. The NPV of the project is $50,000.
b. A 5% decline in volume will make the project
unprofitable.
c. This project ranks third out of the five available.
d. This project does not meet the cutoff rate of return.
c 29. XYZ Co. is adopting just-in-time principles. When
evaluating an investment project that would
reduce inventory, how should XYZ treat the
reduction?
a. Ignore it.
b. Decrease the cost of the investment and decrease
cash flows at the end of the project's life.
c. Decrease the cost of the investment.
d. Decrease the cost of the investment and increase
the cash flow at the end of the project's life.
b 30. Which of the following combinations of capital
budgeting techniques includes only discounted
cash flow techniques?
a. Book rate of return, payback, and profitability
index.
b. NPV, IRR, and profitability index.
c. IRR, payback, and NPV.
d. Profitability index, NPV, and payback.
d 31. An investment whose profitability index is 1.00
a. has an IRR equal to the prevailing interest rate.
24
b. returns to the company only the cash outlay for the
investment.
c. has a payback period equal to its useful life.
d. has an NPV of zero.
a 32. In connection with a capital budgeting project, an
investment in working capital is normally
recovered
a. at the end of the project's life.
b. in the first year of the project's life.
c. evenly through the project's life.
d. when the company goes out of business.
b 33. For investments that have only costs (no revenues
or cost savings), an appropriate decision rule is
to accept the project that has the
a. longest payback period.
b. lowest present value of cash outflows.
c. higher present value of future cash outflows.
d. lowest internal rate of return.
b 34. The cash inflow from the return of an investment in
working capital is
a. adjusted for taxes due.
b. discounted to present value.
c. ignored if any depreciable assets also involved in
the project have no expected residual value.
d. not real.
d 35. NPV is appropriate to use to analyze which decision
relating to a joint-products company?
a. Whether or not to sell facilities now used for
additional processing of one of the joint
products.
b. Whether or not to acquire facilities needed for
additional processing of one of the joint
products.
c. Whether or not to sell facilities now used to operate
the joint process.
d. All of the above.
d 36. If X Co. expects to get a one-year bank loan to help
cover the initial financing of capital project Q, the
analysis of Q should
a. offset the loan against any investment in inventory
or receivables required by the project.
b. show the loan as an increase in the investment.
c. show the loan as a cash outflow in the second year
of the project's life.
d. ignore the loan.
d 37. A project that has a negative NPV
a. has a payback period longer than its life.
b. has a negative profitability index.
 c. must be rejected.
d. doesn't necessarily fit any of the above
descriptions.
c 38. A company evaluates a project using straight-line
depreciation over its 10-year estimated useful
life and then reevaluates it using a 7-year MACRS
class life. The second analysis will show
a. a lower IRR for the project.
b. the same NPV and IRR for the project.
c. a higher NPV for the project.
d. lower total cash flows over the 10 years.
a 39. Assuming that a project has already been evaluated
using the following techniques, the evaluation
under which technique is least likely to be
affected by an increase in the estimated residual
value of the project?
a. Payback period.
b. IRR.
c. NPV.
d. PI.
d 40. Qualitative factors can influence managers to
a. accept an investment project having negative NPV.
b. reject an investment project having an IRR greater
than the company's cutoff rate.
c. raise the "ranking" of an investment project.
d. take any of the above courses of action.
a 41. The replacement decision is
a. an example of a decision among mutually exclusive
alternatives.
b. best arrived at by using the total-project rather
than the differential approach.
c. devoid of qualitative issues.
d. none of the above.
c 42. Acme is considering the sale of a machine with a
book value of $160,000 and 3 years remaining in
its useful life. Straight-line depreciation of
$50,000 annually is available. The machine has a
current market value of $200,000. What is the
cash flow from selling the machine if the tax rate
is 40%?
a. $50,000
b. $160,000
c. $184,000
d. $200,000
c 43. Hoff is considering the sale of a machine with a book
value of $160,000 and 3 years remaining in its
useful life. Straight-line depreciation of $50,000
annually is available. The machine has a current
market value of $100,000. What is the cash flow
from selling the machine if the tax rate is 40%?
a. $50,000
b. $100,000
c. $124,000
d. $160,000
a 44. Altoona Company is considering replacing a
machine with a book value of $200,000, a
remaining useful life of 4 years, and annual
straight-line depreciation of $50,000. The
existing machine has a current market value of
$175,000. The replacement machine would cost
$320,000, have a 4 year life, and save $100,000
per year in cash operating costs. If the
replacement machine would be depreciated
using the straight-line method and the tax rate is
40%, what would be the increase in annual
income taxes if the company replaces the
machine?
a. $28,000
b. $40,000
c. $42,000
d. $64,000
b 45. An investment opportunity costing $300,000 is
expected to yield net cash flows of $100,000
annually for five years. The profitability index of
the investment at a cutoff rate of 14% would be
a. 3.0.
b. 1.14.
c. 0.33.
d. 14%.
d 46. A project has a NPV of $30,000 when the cutoff rate
is 10%. The annual cash flows are $41,010 on an
investment of $100,000. The profitability index
for this project is
a. 1.367.
b. 3.333.
c. 2.438.
d. 1.300.
c 47. A project has an IRR in excess of the cost of capital.
The profitability index for this project would be
a. less than zero.
b. between zero and one.
c. greater than one.
d. cannot be determined without more
information.
b 48. A project has an IRR less than the cost of capital.
The profitability index for this project would be
25
a. less than zero.
b. between zero and one.
c. greater than one.
d. cannot be determined without more
information.
b 49. Portage Press Company is considering replacing a
machine with a book value of $200,000, a
remaining useful life of 5 years, and annual
straight-line depreciation of $40,000. The
existing machine has a current market value of
$200,000. The replacement machine would cost
$300,000, have a 5-year life, and save $100,000
per year in cash operating costs. If the
replacement machine would be depreciated
using the straight-line method and the tax rate is
40%, what would be the increase in annual net
cash flow if the company replaces the machine?
a. $60,000
b. $68,000
c. $76,000
d. $84,000
b 50. Winneconne Company is considering replacing a
machine with a book value of $400,000, a
remaining useful life of 5 years, and annual
straight-line depreciation of $80,000. The
existing machine has a current market value of
$400,000. The replacement machine would cost
$550,000, have a 5-year life, and save $75,000
per year in cash operating costs. If the
replacement machine would be depreciated
using the straight-line method and the tax rate is
40%, what would be the net investment required
to replace the existing machine?
a. $90,000
b. $150,000
c. $330,000
d. $550,000
True-False
T 1. The higher the IRR on an investment project, the
higher its profitability index.
F 2. If the payback period of an investment project is
shorter than its life, the project's profitability
index is greater than 1.
F 3. If a company has decided that a certain task must be
performed and three machines accomplish that
task, the machine with the lowest initial cash
outlay should be selected.

T 4. An investment with an IRR greater than cost of
capital has a profitability index greater than 1.
T 5. The only costs and revenues relevant to a
replacement decision are those that will change
if a replacement is made.
T 6. Both the incremental and the total-project
approaches to analyzing a replacement decision
should yield the same decision.
F 7. Both the IRR and the book rate of return methods of
analyzing investments should yield the same
decision.
F 8. If the payback period of an investment is shorter
than its life, its profitability index is greater than
l.
T 9. When compared with straight-line depreciation,
using MACRS will result in a larger NPV.
F 10. IRR and book rate of return will usually yield the
same value for an investment.
CHAPTER 9: RESPONSIBILITY ACCOUNTING
Multiple Choice
c 1. Goal congruence exists when
a. the goals of the company harmonize with each
other.
b. the company's managers are pursuing their own
goals effectively.
c. the company's managers are pursuing the goals of
the company.
d. all of the above are true.
c 2. Goal congruence is most likely to result when
a. reports to managers include all costs.
b. managers' behavior is affected by the criteria used
to judge their performances.
c. performance evaluation criteria encourage behavior
in the company's best interests as well as in
the manager's best interests.
d. a manager knows the criteria used to judge his or
her performance.
d 3. In responsibility accounting the most relevant
classification of costs is
a. fixed and variable.
b. incremental and nonincremental.
c. discretionary and committed.
d. controllable and noncontrollable.
c 4. Which of the following is critically important for a
responsibility accounting system to be effective?
a. Each employee should receive a separate
performance report.
b. Service department costs should be allocated to
the operating departments that use the
service.
c. Each manager should know the criteria used for
evaluating his or her performance.
d. The details on the performance reports for
individual managers should add up to the
totals on the report to their supervisor.
c 5. Which of the following items is LEAST likely to appear
on the performance report of the manager of a
product line?
a. Variable manufacturing costs for products in the
line.
b. Selling expenses for the line.
c. A share of company-wide advertising.
d. Revenues from the line.
b 6. The sequence that reflects increasing breadth of
responsibility is
a. cost center, investment center, profit center.
b. cost center, profit center, investment center.
c. profit center, cost center, investment center.
d. investment center, cost center, profit center.
a 7. The criteria used for evaluating performance
a. should be designed to help achieve goal
congruence.
b. can be used only with profit centers and investment
centers.
c. should be used to compare past performance with
current performance.
d. motivate people to work in the company's best
interests.
b 8. A balanced scorecard approach to performance
measurement
a. can only be used in profit or investment centers.
b. balances financial measures with nonfinancial
measures.
c. uses only qualitative data to evaluate performance.
d. uses budgeted data rather than historical data.
b 9. If a company has a favorable sales volume variance,
its
a. sales price variance is also favorable.
b. total contribution margin might be less than
planned.
26
c. total contribution margin will be more than planned.
d. income will be positive.
c 10. Transfer prices
a. reduce employee turnover.
b. are necessary for investment centers.
c. should encourage the kinds of behavior that upper-
level management wants.
d. are not used for departments with high amounts of
fixed costs.
b 11. A transfer price is
a. an accounting device to turn profit centers into
investment centers.
b. the price charged by one segment of the company
for goods or services provided to another
segment.
c. only useful in a segment that deals with outsiders
as well as with other segments of the same
company.
d. the amount charged by a cost center for a service
performed for a profit center.
c 12. The cost allocation policy most likely to encourage
use of a service is based on
a. budgeted total costs of the service department.
b. actual total costs of the service department.
c. budgeted variable costs for the service department.
d. actual variable costs for the service department.
c 13. Which of the following statements is true?
a. A company changes its total income when it
changes the bases used to allocate indirect
costs.
b. A company should select an allocation basis so as
to raise or lower reported income on given
products.
c. A company's total income will remain unchanged no
matter how indirect costs are allocated.
d. Costs should be allocated on an "ability-to-bear"
basis.
a 14. If a company allocates costs of a service department
to other departments, it should
a. consider the likely effects of the allocations on the
use of the services.
b. use the method that best reflects the relative sizes
of the departments.
c. turn the service department into an investment
center.
d. allocate only the fixed costs of the service
department.
a 15. If a computer department does work for other
 departments, charging a flat price per hour, the
computer department is
a. an artificial profit center.
b. a cost center.
c. an investment center.
d. none of the above.
a 16. The WORST method of allocating service
department costs is
a. to allocate total actual costs based on actual use of
the service.
b. to allocate total budgeted costs based on long-term
expected use of the service.
c. to allocate total budgeted costs based on actual use
of the service.
d. none of the above, because all the above are
equally undesirable.
b 17. As a general rule, the best transfer price to use to
transfer the costs of a service center to an
operating department is
a. the price charged by an outside company for the
same service.
b. the price that encourages goal congruence.
c. one that is based on budgeted variable cost.
d. one that is based on budgeted total cost.
b 18. Which of the following costs is LEAST likely to
appear on the performance report for the
foreman of a production department?
a. Wages of direct laborers.
b. Rent on machinery used in department.
c. Repairs to machinery used in department.
d. Cost of materials used.
d 19. ABC Company operates a factory that makes
components for other ABC factories to assemble.
The factory could be treated as
a. a cost center.
b. an artificial profit center.
c. an investment center.
d. any of the above.
d 20. For reports to follow the principles of responsibility
accounting, which of the following must be true?
a. Each segment of the entity is an artificial profit
center.
b. The company is decentralized.
c. The company uses transfer prices.
d. The reports show controllable costs separately from
noncontrollable costs.
c 21. The effective use of responsibility accounting
requires that performance reports for cost
centers
a. show only variable costs.
b. show a fair share of allocated costs.
c. distinguish between controllable and
noncontrollable costs.
d. show a fair share of revenues attributable to the
center.
b 22. Criteria for evaluating performance should be
carefully selected because
a. they must be approved by the IRS.
b. a manager's behavior can be affected by the
criteria used to judge his or her
performance.
c. managers may find out what they are.
d. stockholders inquire about them at annual
meetings.
d 23. Which of the following is NOT a good reason for
allocating indirect costs to operating
departments?
a. To remind managers of the need to cover indirect
costs.
b. So that operating managers will encourage service
department managers to keep costs down.
c. To encourage managers to use services wisely.
d. To determine the true costs of operating
departments.
b 24. An artificial profit center
a. has no investment.
b. does not provide its goods or services outside the
entity.
c. cannot control its costs.
d. could not be operated as a cost center.
c 25. A responsibility center is
a. any department.
b. any manager.
c. any area of activity for which a manager is
responsible.
d. only large departments.
a 26. ABC's actual selling price was less than planned and
actual unit volume more than planned.
Therefore,
a. ABC had a favorable sales volume variance.
b. ABC's total contribution margin was more than
planned.
c. ABC had a favorable sales price variance.
d. ABC's actual total sales equaled planned total sales.
b 27. The term "dual rates" refers to
a. allocating costs to several operating departments.
b. allocating fixed costs based on capacity
27
requirements and variable costs based on
use.
c. allocating both actual costs and budgeted costs.
d. using the budgeted rate to allocate some costs, the
actual rate to allocate others.
a 28. Which of the following methods of allocating the
costs of service departments provides the
broadest recognition of departments served?
a. Reciprocal allocation.
b. Step-down allocation.
c. Direct allocation.
d. Arbitrary allocation.
d 29. Which of the following is a good reason for
allocating indirect costs to operating
departments?
a. The company could lose money if the operating
departments do not pay for the services
they use.
b. To remind managers of the need to cover indirect
costs.
c. To encourage managers to use more services.
d. To determine the true costs of operating
departments.
b 30. When a manager takes an action that benefits his or
her responsibility center, but not the company as
a whole,
a. it is a non-controllable action.
b. there is a lack of goal congruence.
c. the center must be an artificial profit center.
d. the manager should be fired.
d 31. Which of the following is a good reason for NOT
allocating indirect costs to operating
departments?
a. The company saves money if the operating
departments do not pay for the services
they use.
b. To remind managers of the need to cover indirect
costs.
c. To encourage managers to use more services.
d. The costs are not controllable by the operating
departments.
d 32. Which of the following is a good reason for NOT
allocating indirect costs to operating
departments?
a. To remind managers that revenues must cover
indirect costs.
b. To recognize that operating departments benefit
from the services.
c. To encourage managers to use services wisely.
 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
center. The percentage of services used in the
current year are Store A, 45%; Store B, 35%; and
Store C, 20%. The expected long-term budgeted
usages are Store A, 30%; Store B, 40%; and
Store C, 30%. The service center costs were
budgeted at $450,000 fixed and $550,000
variable. Actual fixed costs were $430,000 and
actual variable costs were $570,000. Olson
allocates the budgeted variable costs of the
central purchasing unit based on actual use of
the unit's services, and allocates budgeted fixed
costs based on expected long-term use of the
unit's services. Service center costs allocated to
Basin uses the step-down method to allocate
service department costs. Department A costs
are allocated first. The service department cost
allocated to Department X is
a. $457.
b. $443.
c. $320.
d. $300.
c 50. Basin Co. has two service departments (A and B)
and two producing departments (X and Y). Data
provided are as follows:
Service Depts. Operating Depts.
29
F 7. A profit center will always have sales to outside
customers.
T 8. The sales price variance is the difference between
the actual selling price and the planned selling
price multiplied by actual units sold.
T 9. The direct method of allocating service department
costs ignores all of the interactions between
service departments.
F 10. The reciprocal method of allocating service
department costs considers only the usage by
the producing departments in determining the
 allocations.
CHAPTER 10: DIVISIONAL PERFORMANCE MEASUREMENT
Multiple Choice
c 1. Both ROI and RI can be used for performance
evaluation of
a. cost centers.
b. profit centers.
c. investment centers.
d. all of the above.
b 2. The best transfer price is usually
a. actual cost plus a percentage markup.
b. a reliable market price.
c. budgeted full cost plus a percentage markup.
d. budgeted variable cost plus a percentage markup.
d 3. This year Division A made sales to Division B at a
higher transfer price than was used last year. All
other things equal, which of the following is true?
a. A's profit this year should be about the same as last
year.
b. B's profit this year should be about the same as last
year.
c. The company's total profit should be higher this
year than last year.
d. The company's total profit should be about the
same this year as last year.
b 4. Goal congruence is especially relevant to all of the
following EXCEPT
a. setting transfer prices for an artificial profit center.
b. quoting prices for outside customers of an
investment center.
c. selecting costs to be included in performance
reports.
d. setting transfer prices for an investment center.
d 5. For a division, ROI
a. is usually less than ROI for the company as a whole.
b. eliminates the distortion that cost allocation can
produce in other measures of performance.
c. usually cannot be computed if divisional assets are
valued at their replacement costs.
d. is a performance measure inferior, for some
purposes, to residual income.
a 6. Divisional ROI is usually
a. higher than that for the company as a whole.
b. lower than that for an outside company operating
in the same industry.
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
c 7. Divisional profits should residual income is lower than that of Division
a. exclude revenues and expenses related to dealings B.
with other divisions within the same d. ROI for Division B is greater than ROI for Division A.
enterprise.
b. be computed so that the total profits of all the d 13. Which equation describes ROI? (I = investment, S =
divisions equals the total profit for the sales, and
company. N = income)
c. be based on the principle of controllability. a. S/I
d. be based on cash flows rather than accrual basis b. S/I x N
accounting. c. S/I x S/N
d. N/S x S/I
c 8. Divisional profit
a. is computed in essentially the same way as is a 14. Which equation describes residual income? (I =
income for the company as a whole. investment, N = income, and K = minimum
b. should include a deduction for an appropriate share required ROI)
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. is not affected by depreciation methods. c. N/I - K
d. (K x I) - (N/I)
d 9. Using replacement costs for assets in computing ROI
and RI c 15. If Division C has a 10% return on sales, income of
a. is prohibited because it violates generally accepted $10,000, and an investment turnover of 4 times,
accounting principles. its sales are
b. will increase both ROI and RI for a division. a. $10,000.
c. is unfair to divisional managers. b. $40,000.
d. is less popular than the use of book values in those c. $100,000.
computations. d. $400,000.
c 10. Using residual income for evaluating performance b 16. If Division C has a 10% return on sales, income of
a. penalizes managers whose segments have low $10,000, and an investment turnover of 4 times,
ROIs. divisional investment is
b. penalizes managers of relatively large segments. a. $10,000.
c. encourages managers to maximize dollars of profit b. $25,000.
after a required ROI has been achieved. c. $40,000.
d. encourages managers to maximize ROI for the d. $100,000.
company.
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,
a divisional manager to reduce a transfer price to its ROI is
meet a price offered to another division by an a. 5000%.
outside supplier? b. 100%.
a. Opportunity cost. c. 40%.
b. Variable manufacturing costs. d. 10%.
c. Fixed divisional overhead.
d. The price offered by the outside supplier. b 18. If a division's ROI and the minimum required ROI are
the same, the division's residual income is
c 12. Division A earns $6,000 on an investment of a. positive.
$36,000. On an investment of $84,000, Division b. zero.
B earns $12,000. Which of the following is true? c. negative.
a. Division A's profits are too low. d. none of the above.
b. If there are further costs that are common to both
30
a 19. If residual income for Division Q of Company Z is
negative, which of the following is true?
a. Q's ROI is less than Z's minimum required ROI.
b. Q's ROI equals Z's minimum required ROI.
c. Q's ROI is higher than Z's minimum required ROI.
d. None of the above.
b 20. Market-based transfer prices are best for
a. the company when the selling division is operating
below capacity.
b. the company when the selling division is operating
at capacity.
c. the buying division if it is operating at capacity.
d. the buying division.
d 21. The worst transfer-pricing method is to base the
prices on
a. market prices.
b. budgeted variable costs.
c. budgeted total costs.
d. actual total costs.
d 22. All other things remaining constant, if a division
doubles its investment turnover, its ROI will
a. decrease.
b. remain constant.
c. increase.
d. double.
c 23. Residual income
a. is always the best measure of divisional
performance.
b. is not as good a measure of performance as ROI.
c. overcomes some of the problems associated with
ROI.
d. cannot be used by divisions that deal with others in
the same company.
b 24. If two divisions earn the same ROI and RI, which of
the following is true?
a. Their managers must be about equally skillful.
b. Their incomes and investments must be the same.
c. Both divisions are doing as well as they should be.
d. All of the above.
c 25. Which of the following is most likely to be included
in calculating divisional profit?
a. Interest on corporate debt.
b. Income taxes.
c. Sales to other divisions within the company.
d. A share of corporate administration expenses.
b 26. If sales increase, while income and investment
remain constant, which of the following is true?
a. Investment turnover decreases.
b. ROS decreases.
c. ROI increases. a 34. Which of the following is true about transfer prices
d. ROI could increase or decrease. for sales between divisions located in different
countries?
c 27. Compared to a jewelry store, a supermarket has a. They should consider the tax structures in the two
a. higher margin and higher turnover. countries.
b. higher margin and lower turnover. b. They are usually set by the governments of the two
c. lower margin and higher turnover. countries.
d. lower margin and lower turnover. c. They cannot affect the total income of the company.
d. All of the above.
c 28. If income increases while sales and investment
remain constant, which of the following is true? d 35. Multinational companies face special problems in
a. Investment turnover increases. which of the following areas of managerial
b. ROS decreases. practice?
c. ROI increases. a. Performance evaluation.
d. ROI could increase or decrease. b. Transfer prices.
c. Allocating common costs.
a 29. Which transfer price is ideal for the company when d. All of the above.
the selling division is at capacity?
a. Market price. b 36. Which of the following describes the computation of
b. Incremental cost. ROI?
c. Budgeted full cost. a. Return on Sales x Investment
d. Actual variable cost plus a percentage profit. b. Investment Turnover x Return on Sales
c. Income - (Investment x Minimum RI)
c 30. From the standpoint of the company, the important d. Sales x Investment Turnover
question in transfer pricing is
a. what is fair to the divisions. b 37. If the investment turnover increased by 20% and
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%.
d. when the transfer should be made. b. decrease by 16%.
c. increase by 4%.
d 31. The ROI of Division A relative to that of Division B d. none of the above.
can be influenced by
a. the industry in which each division operates. b 38. Scottso Division has the following results for the
b. the transfer price used for sales to Division B. year:
c. the tax structures of the countries in which the
divisions operate. Revenues $1,080,000
d. all of the above. Variable expenses 440,000
Fixed expenses 400,000
c 32. Considering liabilities in computing divisional
investment
Total divisional assets are $1,600,000. The
a. encourages managers of divisions to pay their bills
company's minimum required rate of return is 14
faster.
percent. Residual income for Scottso is
b. discourages managers of divisions from acquiring
a. $(64,000).
long-term financing.
b. $16,000.
c. raises divisional ROI above what it would otherwise
c. $151,200.
be.
d. $224,000.
d. is a bad managerial practice.
c 39. Scottso Division has the following results for the
d 33. Interdivisional sales
year:
a. lower the company's public image.
b. minimize income taxes.
c. are ignored when computing divisional ROI. Revenues $1,080,000
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
the lowest ROI.
T 8. Transfer prices equal to market prices are least
appropriate when the selling division has excess
productive capacity.
F 9. Multinational companies must use transfer prices
based on actual costs.
F 10. Return on investment is defined as net income
divided by stockholders' equity.
CHAPTER 11: CONTROL AND EVALUATION OF COST
CENTERS
Multiple Choice
c 1. The two general types of variable cost variances are
the
a. rate variance and spending variance.
b. price variance and budget variance.
c. price variance and quantity variance.
d. quantity variance and efficiency variance.
d 2. A major advantage of using standard costs is that
a. they are easier to compute than actual costs.
b. they are lower than actual costs.
c. products with standard costs can be sold at lower
prices.
d. they provide information for control purposes.
a 3. Setting standards
a. has important behavioral implications.
b. is largely a matter of calculating rates and
quantities.
c. should be done to make them as tight as possible.
d. is done only for manufacturing activities.
d 4. Which of the following is NOT a quantity variance?
a. Material use variance.
b. Labor efficiency variance.
c. Variable overhead efficiency variance.
d. Fixed overhead budget variance.
a 5. A major drawback to setting standards based on
historical results is that such standards
a. can perpetuate inefficiencies.
b. are harder to compute than are engineered
standards.
c. are usually too hard to meet because of inflation.
d. are usually not well received by workers.
b 6. Cascade Company, which has a $3 standard cost per
unit and budgeted production at 1,000 units,
actually produced 1,200 units. Total standard
cost for the period is
a. $3,000.
b. $3,600.
c. an amount that cannot be determined without
knowing the variances for the period.
d. none of the above.
c 7. Which variance is LEAST likely to be affected by
hiring workers with less skill than those already
working?
a. Material use variance.
b. Labor rate variance.
c. Material price variance.
d. Variable overhead efficiency variance.
c 8. Which variance is MOST likely to be affected by
buying a more expensive material that produces
less waste and is easier to handle?
a. Labor rate variance.
b. Variable overhead spending variance.
c. Direct labor efficiency variance.
d. Fixed overhead budget variance.
b 9. Filter Company's budget for overhead costs is:
total overhead cost = $50,000 + ($4 x
direct labor hours)
Standard direct labor time is 1.5 hours per unit of
product. The standard wage rate is $6 per hour.
Standard variable overhead cost for a unit of
product is
a. $4.00.
b. $6.00.
c. $9.00.
d. $10.00.
b 10. The major variance used in controlling fixed costs is
the
a. efficiency variance.
b. budget variance.
c. use variance.
d. none of the above.
d 11. If the variable overhead standard is based on direct
labor hours and actual hours worked exceed
standard hours allowed, the result is
a. a favorable labor efficiency variance.
b. an unfavorable variable overhead spending
variance.
33
c. a favorable variable overhead spending variance.
d. an unfavorable variable overhead efficiency
variance.
a 12. Control charts are used
a. to decide whether to investigate variances.
b. to develop standard costs.
c. to calculate variances.
d. for all of the above purposes.
c 13. An unfavorable labor efficiency variance
a. means that workers were inefficient and their
supervisor did a poor job.
b. causes a favorable variable overhead efficiency
variance.
c. can result from an action taken by a manager other
than the supervisor of the workers.
d. should always be investigated and corrected.
d 14. The sum of the material price variance and material
use variance always equals the difference
between
a. actual and standard material purchases.
b. actual material purchases and standard material
use.
c. standard material purchases and standard material
use.
d. none of the above pairs of amounts.
c 15. Which set of terms describes the same type of
variance?
a. Price variance, rate variance, use variance.
b. Price variance, rate variance, efficiency variance.
c. Use variance, efficiency variance, quantity variance.
d. Use variance, efficiency variance, spending
variance.
d 16. A product requires 0.60 standard labor hours, the
standard labor rate is $10 per hour, and
production was 300 units. Actual labor cost was
$1,862 at $9.80 per hour. Which of the following
is true?
a. The labor rate variance was $98 favorable.
b. The labor rate variance was $62 unfavorable.
c. The labor efficiency variance was $62 unfavorable.
d. The labor efficiency variance was $100
unfavorable.
d 17. Cascade Company bought 10,000 pounds of
material and used 9,500. The material price
 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
overhead. The variable overhead efficiency
variance is
a. $6,300 unfavorable
b. $3,600 unfavorable
c. $2,700 favorable
d. $3,300 favorable
c 50. Silver Bow manufactured the first batch of
product in 100 hours. The second batch took an
additional 60 hours. What percent learning
occurred?
a. 100%
b. 90%
c. 80%
d. Cannot be determined with the information
given.
True-False
T 1. Standard costs are per-unit expressions of flexible
budget allowances based on output.
F 2. The value of b, the exponent in the learning curve
formula, is the learning rate.
T 3. The use of ideal standards could have undesirable
effects on output.
F 4. Learning curves can only be used for a one-of-a-kind
special order product.
F 5. So long as total actual costs approximate total
budgeted costs there is no need for managerial
concern or action.
T 6. It is not always possible to separate the variable and
fixed components of actual overhead cost.
F 7. When an unfavorable variance occurs, there is some
action that some manager can take to correct
the event or circumstance that gave rise to the
variance.
F 8. Standard costs are devices for measuring
effectiveness but not efficiency.
F 9. "Ideal standards" are those most likely to be met
under most conditions.
T 10. The labor efficiency variance excludes the effects of
laborers being paid more or than the standard
labor rate.
CHAPTER 12: INTRODUCTION TO PRODUCT COSTING
Multiple Choice
b 1. The three major components of manufacturing cost
are
a. materials, work in process, and finished goods.
b. materials, labor, and manufacturing overhead.
c. materials, labor, and finished goods.
d. materials, labor, and production costs.
a 2. A predetermined overhead rate CANNOT be used
a. if a company does not budget its overhead costs.
b. by a company that uses job-order costing.
c. in a multiple-product company.
d. by a highly automated company where labor is a
minor part of product cost.
a 3. Assigning overhead to jobs using a predetermined
overhead rate is called
a. applying.
b. budgeting.
c. product costing.
d. job-order costing.
d 4. Predetermined overhead rates are based on activity
measured by
a. number of jobs.
b. units of sales.
c. units of production.
d. units of an input factor.
b 5. Absorption costing is required
a. for financial accounting purposes only.
b. for financial accounting and tax purposes.
c. for financial and managerial accounting purposes.
d. for managerial accounting purposes only.
a 6. Both actual and normal costing
a. include material, labor, and overhead in product
cost.
b. require predetermined overhead rates.
c. are likely to result in over- or underabsorption of
overhead.
d. will show a favorable volume variance if production
is greater than budgeted.
b 7. An advantage of normal costing over actual costing
is that
a. the company can compute the exact cost of a unit
of product.
b. unit costs are not affected by monthly fluctuations
in production activity.
c. control over fixed costs is improved.
36
d. the company need not forecast the level of
productive activity for the year.
d 8. An unfavorable volume variance signifies that
a. cost control was poor.
b. sales were less than budgeted.
c. production was less than sales.
d. production was less than the level used to set the
fixed overhead application rate.
b 9. The principal reason for using more than one rate to
apply overhead is
a. to keep the individual rates low.
b. that overhead costs are driven by more than one
activity.
c. that such rates recognize the seasonal nature of
some costs.
d. to simplify recordkeeping.
a 10. Activity-based overhead rates are more useful than
a single plant-wide rate if
a. overhead costs are driven by several activities.
b. direct labor cost varies significantly from
department to department.
c. all products require about the same amounts of all
activities.
d. manufacturing overhead costs are nearly all fixed.
c 11. Actual costing and normal costing differ in treating
a. materials cost.
b. direct labor cost.
c. overhead cost.
d. all of the above.
d 12. Which company is LEAST likely to use job-order
costing?
a. Furniture maker.
b. Printer.
c. Construction company.
d. Flour maker.
d 13. A cost pool is
a. all costs of a production department.
b. the material and labor cost used on a particular job.
c. overapplied or underapplied overhead costs.
d. a group of overhead costs driven by the same
activity.
c 14. Each group of overhead costs should be applied
based on
a. direct labor hours or cost.
b. units produced.
c. whatever activity drives those specific overhead
costs.
 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
a. $4,500 overapplied.
b. $4,500 underapplied.
c. $2,500 overapplied.
d. $2,500 underapplied.
b 34. Waldorf had a $10,000 unfavorable fixed overhead
budget variance, a $6,000 unfavorable variable
overhead spending variance, and a $2,000
favorable volume variance. The total overhead
was
a. $14,000 overapplied.
b. $14,000 underapplied.
c. $18,000 overapplied.
d. $18,000 underapplied.
a 35. Bacon had a $18,000 unfavorable volume variance,
a $5,000 unfavorable fixed overhead budget
variance, and $12,000 total underapplied
overhead. The variable overhead spending
variance was
a. $11,000 favorable.
b. $1,000 favorable.
c. $11,000 unfavorable.
d. $23,000 unfavorable.
d 36. Gonzalez Company uses the equation $520,000 +
$2 per direct labor hour to budget manufacturing
overhead. Gonzalez has budgeted 150,000 direct
labor hours for the year. Actual results were
150,000 direct labor hours and $817,500 total
manufacturing overhead. The total overhead
applied for the year is
a. $300,000.
b. $520,000.
c. $817,500.
d. $820,000.
a 37. Gonzalez Company uses the equation $520,000 +
$2 per direct labor hour to budget manufacturing
overhead. Gonzalez has budgeted 150,000 direct
labor hours for the year. Actual results were
150,000 direct labor hours and $817,500 total
manufacturing overhead. The total overhead
variance for the year is
a. $2,500 favorable.
b. $12,500 favorable.
c. $2,500 unfavorable.
d. some other number.
c 38. Bonds Company uses the equation $300,000 +
$1.75 per direct labor hour to budget
manufacturing overhead. Bonds has budgeted
125,000 direct labor hours for the year. Actual
results were 110,000 direct labor hours,
$297,000 fixed overhead, and $194,500 variable
overhead. The total overhead variance for the
year is
a. $2,000.
b. $3,000.
c. $47,000.
d. $48,000.
a 39. Bonds Company uses the equation $300,000 +
$1.75 per direct labor hour to budget
manufacturing overhead. Bonds has budgeted
125,000 direct labor hours for the year. Actual
results were 110,000 direct labor hours,
$297,000 fixed overhead, and $194,500 variable
overhead. The variable overhead spending
variance for the year is
a. $2,000.
b. $3,000.
c. $47,000.
d. $48,000.
b 40. Bonds Company uses the equation $300,000 +
$1.75 per direct labor hour to budget
manufacturing overhead. Bonds has budgeted
125,000 direct labor hours for the year. Actual
results were 110,000 direct labor hours,
$297,000 fixed overhead, and $194,500 variable
overhead. The fixed overhead budget variance
for the year is
a. $2,000.
b. $3,000.
c. $47,000.
d. $48,000.
d 41. Bonds Company uses the equation $300,000 +
$1.75 per direct labor hour to budget
manufacturing overhead. Bonds has budgeted
125,000 direct labor hours for the year. Actual
results were 110,000 direct labor hours,
$297,000 fixed overhead, and $194,500 variable
overhead. The fixed overhead volume variance
for the year is
a. $2,000.
b. $3,000.
c. $47,000.
d. $48,000.
a 42. Machine hours used to set the predetermined
overhead rate were 80,000, actual hours were
90,000, and overhead applied was $117,000.
Budgeted overhead for the year was
a. $104,000.
b. $117,000.
38
c. $131,625.
d. some other number.
a 43. Cooke Company uses the equation $450,000 +
$1.50 per direct labor hour to budget
manufacturing overhead. Cooke has budgeted
150,000 direct labor hours for the year. Actual
results were 156,000 direct labor hours and
$697,500 total manufacturing overhead. The
total overhead variance for the year is
a. $4,500 favorable.
b. $18,000 favorable.
c. $4,500 unfavorable.
d. $18,000 unfavorable.
b 44. Antaya Company uses the equation $375,000 +
$1.20 per direct labor hour to budget
manufacturing overhead. Antaya has budgeted
75,000 direct labor hours for the year. Actual
results were 81,000 direct labor hours, $388,000
fixed overhead, and $98,600 variable overhead.
The total overhead variance for the year is
a. $2,700.
b. $10,700.
c. $22,000.
d. $30,000.
a 45. Antaya Company uses the equation $375,000 +
$1.20 per direct labor hour to budget
manufacturing overhead. Antaya has budgeted
75,000 direct labor hours for the year. Actual
results were 81,000 direct labor hours, $388,000
fixed overhead, and $98,600 variable overhead.
The variable overhead spending variance for the
year is
a. $2,700.
b. $10,700.
c. $22,000.
d. $30,000.
c 46. Antaya Company uses the equation $375,000 +
$1.20 per direct labor hour to budget
manufacturing overhead. Antaya has budgeted
75,000 direct labor hours for the year. Actual
results were 81,000 direct labor hours, $388,000
fixed overhead, and $98,600 variable overhead.
The fixed overhead budget variance for the year
is
a. $2,700.
b. $10,700.
c. $22,000.
d. $30,000.
d 47. Antaya Company uses the equation $375,000 +
 $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.
40
 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
41
 information.
c 44. Madison Industries manufactures a single product
using standard costing. Variable production costs
are $26 and fixed production costs are $250,000.
Madison uses a normal activity of 12,500 units to
set its standard costs. Madison began the year
with 1,000 units in inventory, produced 11,000
units, and sold 11,500 units. Ending inventory
under absorption costing would be
a. $10,000.
b. $13,000.
c. $23,000.
d. cannot be determined without further
information.
d 45. Madison Industries manufactures a single product
using standard costing. Variable production costs
are $26 and fixed production costs are $250,000.
Madison uses a normal activity of 12,500 units to
set its standard costs. Madison began the year
with 1,000 units in inventory, produced 11,000
units, and sold 11,500 units. The volume
variance under variable costing would be
a. $10,000.
b. $20,000.
c. $30,000.
d. some other number.
c 46. Madison Industries manufactures a single product
using standard costing. Variable production costs
are $26 and fixed production costs are $250,000.
Madison uses a normal activity of 12,500 units to
set its standard costs. Madison began the year
with 1,000 units in inventory, produced 11,000
units, and sold 11,500 units. The volume
variance under absorption costing would be
a. $10,000.
b. $20,000.
c. $30,000.
d. some other number.
b 47. Madison Industries manufactures a single product
using standard costing. Variable production costs
are $26 and fixed production costs are $250,000.
Madison uses a normal activity of 12,500 units to
set its standard costs. Madison began the year
with 1,000 units in inventory, produced 11,000
units, and sold 11,500 units. The standard cost of
goods sold under variable costing would be
a. $230,000.
b. $299,000.
c. $506,000.
d. $529,000.
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
favorable volume variance of $18,000 resulted. production as a whole, they do not benefit any
What was the volume produced? particular unit of product.
a. 8,000
b. 9,000 T 6. A company using absorption costing can increase its
c. 10,000 income by increasing production without
d. Cannot be determined without further increasing sales.
information.
F 7. A company using variable costing can increase its
c 49. Western Co. has total budgeted fixed costs of income by increasing production without
$72,000. Actual production of 5,500 units increasing sales.
resulted in a $6,000 unfavorable volume
variance. What normal capacity was used to F 8. Variable costing must be used for internal reporting.
determine the fixed overhead rate?
a. 5,000 F 9. According to GAAP, absorption costing must be used
b. 5,500 for internal reporting.
c. 6,000
d. Cannot be determined without further T 10. According to GAAP, absorption costing must be used
information. for external financial reporting.
d 50. Madison Industries manufactures a single product
using standard costing. Variable production costs CHAPTER 14: PROCESS COSTING AND THE COST
are $26 and fixed production costs are $250,000. ACCOUNTING CYCLE
Madison uses a normal activity of 12,500 units to
set its standard costs. Madison began the year Multiple Choice
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.
goods sold under absorption costing would be Work in Process Inventory $200,000
a. $230,000. Direct Labor $188,000
b. $299,000. Direct Labor Rate Variance 12,000
c. $506,000. From this entry we can tell that ABC uses
d. $529,000. a. job-order costing.
b. process costing.
True-False c. standard costing.
d. normal costing.
F 1. Absorption costing incomes are always higher than
variable costing incomes. d 2. CDE Company made the following journal entry.
Finished Goods Inventory $250,000
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
manufacturing costs. a. job-order costing.
b. process costing.
T 3. A multiproduct company using standard absorption c. standard costing.
costing calculates standard fixed costs for each d. any of the above.
product using a standard fixed overhead rate
based on an input factor such as direct labor b 3. Which of the following is NOT relevant in determining
hours. weighted-average unit cost in process costing?
a. Cost of beginning inventory.
T 4. A major difference between standard costing and b. Equivalent unit production in beginning
normal costing is that one uses actual hours to inventory.
apply overhead and the other uses standard c. Equivalent unit production in ending inventory.
hours. d. Units completed.
42
d 4. Standard process costing does NOT require
information about
a. units completed during the period.
b. equivalent unit production in ending inventory.
c. standard cost per unit.
d. actual unit cost for the period.
d 5. A company that uses job-order costing
a. cannot use standard costs.
b. accumulates costs by department.
c. probably makes a single product.
d. does not have to calculate equivalent
production.
c 6. Which company is most likely to use job-order
costing?
a. A brewery.
b. An automobile manufacturer.
c. A bridge builder.
d. A button manufacturer.
c 7. Which company is most likely to use process costing?
a. A manufacturer of nuclear reactors.
b. A construction contractor.
c. A cannery.
d. A textbook publisher.
a 8. Fixed production costs are inventoriable only if a
company
a. uses absorption costing.
b. uses standard costing.
c. produces a single product.
d. receives permission from the Internal Revenue
Service.
d 9. Which cost accumulation method is most likely to be
used by a company that mass produces similar
products?
a. Actual costing.
b. Normal costing.
c. Job-order costing.
d. Standard costing.
c 10. Standard costing can be used in
a. only job-order costing systems.
b. only process costing systems.
c. either job-order or process systems.
d. either manufacturing or retailing firms.
a 11. Which of the following is the same whether the
company uses standard process costing or actual
process costing?
a. Equivalent production.
b. Cost of goods transferred from work in process
to finished goods.
c. Net income for the period. c. current period cost plus cost of beginning
d. Cost per unit of ending inventory of work in inventory.
process. d. cost of goods sold.
a 18. The numerator of the FIFO unit cost calculation is
c 12. It is usually necessary to calculate equivalent unit a. current period cost.
production for b. cost of beginning inventory.
a. materials. c. current period cost plus cost of beginning
b. conversion costs. inventory.
c. materials and conversion costs. d. cost of goods sold.
d. materials, conversion costs, and overhead.
b 19. FIFO equivalent unit production (EUP) is 6,200 units.
b 13. If a company uses actual process costing, the EUP in ending inventory is 300, in beginning
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.
of b. 6,325.
a. equivalent unit production for the period. c. 6,025.
b. units completed during the period. d. 5,900.
c. units completed and sold during the period.
d. all units worked on during the period. a 20. Weighted-average EUP is 4,100 units. Cost incurred
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
amount transferred from Work in Process a. $3.268.
Inventory to Finished Goods Inventory is the b. $2.744.
a. standard cost of equivalent unit production for c. $2.220
the period. d. $0.524.
b. standard cost of units completed during the
period. a 21. Weighted-average EUP is 11,400 units. Beginning
c. actual cost of units completed and sold during inventory was 1,000 units 60% complete, ending
the period. inventory is 2,000 units 20% complete. The
d. actual cost of all units worked on during the number of units completed is
period. a. 11,000.
b. 10,800.
a 15. Under standard costing, the amount of direct labor c. 10,400.
cost charged (debited) to Work in Process d. 9,400.
Inventory is
a. standard labor hours at standard rates. c 22. Algoma completed 10,000 units, had beginning
b. standard labor hours at actual rates. inventory of 2,500 units 40% complete, and
c. actual labor hours at actual rates. ending inventory of 1,000 units 20% complete.
d. actual direct labor cost incurred. Weighted-average EUP was
a. 9,200.
d 16. A company that uses standard costing b. 10,000.
a. must make only one product. c. 10,200.
b. always has a volume variance unless normal d. 11,000.
capacity and practical capacity are the
same. d 23. Which formula gives weighted-average equivalent
c. shows higher incomes than it would if it used unit production? (UC = units completed, BI =
actual costing. equivalent units in beginning inventory, EI =
d. shows the same per-unit cost of inventory equivalent units in ending inventory)
each month. a. UC + BI + EI.
b. UC + BI - EI.
c 17. The numerator of weighted-average unit cost c. UC + EI - BI.
calculations is d. UC + EI.
a. current period cost.
b. cost of beginning inventory. c 24. Which formula gives FIFO equivalent unit
43
 production? (UC = units completed, BI =
equivalent units in beginning inventory, EI =
equivalent units in ending inventory)
a. UC + BI + EI.
b. UC + BI - EI.
c. UC + EI - BI.
d. UC + EI.
c 25. The entry to apply overhead in a job-order system is
a. debit Cost of Goods Sold, credit Manufacturing
Overhead.
b. debit Finished Goods Inventory, credit Work-in-
Process Inventory.
c. debit Work-in-Process Inventory, credit
Manufacturing Overhead.
d. debit Work-in-Process Inventory, credit Direct
Labor.
a 26. Conversion costs are
a. labor and overhead costs.
b. materials and labor costs.
c. all fixed manufacturing costs.
d. all manufacturing costs.
a 27. Which item is NOT relevant in determining FIFO unit
cost?
a. Cost of beginning inventory.
b. Equivalent unit production in beginning
inventory.
c. Equivalent unit production in ending inventory.
d. Units completed.
c 28. Weighted-average equivalent production is always
a. less than the number of units completed.
b. equal to the number of units completed.
c. equal to or greater than the number of units
completed.
d. any of the above.
d 29. FIFO equivalent production can be
a. less than the number of units completed.
b. equal to the number of units completed.
c. equal to or greater than the number of units
completed.
d. any of the above.
a 30. Which item is NOT relevant in determining FIFO
equivalent unit production?
a. Cost of beginning inventory.
b. Equivalent unit production in beginning
inventory.
c. Equivalent unit production in ending inventory.
d. Units completed.
b 31. The FIFO method of calculating equivalent
production and unit costs a. 17,500.
a. is less likely to be accurate than the weighted- b. 16,950.
average method. c. 16,050.
b. is more useful for control purposes than the d. 15,050.
weighted-average method.
c. cannot be used unless a company also uses a 37. Cheatem has a weighted-average EUP of 30,000
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%
equivalent-production numbers for each complete. The number of units completed is
element of manufacturing cost. a. 27,000.
b. 29,000.
a 32. Backflushing, or backflush costing c. 30,000.
a. requires significantly less recordkeeping than d. 31,000.
other methods.
b. can be used by any company. b 38. Cheatem has a weighted-average EUP of 30,000
c. ignores inventories. units. Beginning inventory was 4,000 units 40%
d. does not distinguish between materials and complete; ending inventory was 5,000 units 60%
conversion costs. complete. FIFO EUP is
a. 25,400.
c 33. Scooter Corp had no beginning inventories, finished b. 28,400.
40,000 units, and sold 36,000 units. There were c. 30,000.
no ending inventories of materials or work in d. 31,000.
process. Materials purchased and used were
$225,000; direct labor and overhead were d 39. Howe has a FIFO EUP of 46,580 units. Beginning
$170,000. Ending inventory would be valued at inventory of 6,500 units was 80% complete; the
a. $17,000. ending inventory of 2,800 units was 60%
b. $22,500. complete. How many units were completed
c. $39,500. during the period?
d. some other number. a. 39,700
b. 44,900
b 34. Scooter Corp had no beginning inventories, finished c. 46,200
40,000 units, and sold 36,000 units. There were d. 50,100
no ending inventories of materials or work in
process. Materials purchased and used were c 40. Howe has a FIFO EUP of 46,580 units. Beginning
$225,000; direct labor and overhead were inventory of 6,500 units was 80% complete; the
$170,000. Cost of goods sold would be valued at ending inventory of 2,800 units was 60%
a. $39,500. complete. Weighted-average EUP is
b. $355,500. a. 46,580.
c. $395,000. b. 47,880.
d. some other number. c. 51,780.
d. some other number.
b 35. Dewey Company had a beginning inventory of 3,000
units 35% complete, and an ending inventory of b 41. Sosa Inc. had $3,000 in beginning work in process
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. 17,500. units, unit cost would be
b. 18,000. a. $2.85.
c. 18,550. b. $3.15.
d. 20,000. c. $9.50.
d. some other number.
b 36. Dewey Company had a beginning inventory of 3,000
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
completed, FIFO EUP is during the period. If FIFO EUP was 10,000 units,
44
 unit cost would be
a. $2.85.
b. $3.15.
c. $9.50.
d. some other number.
b 43. Field Company had a beginning inventory of 2,000
units 40% complete, ending inventory of 1,500
units 70% complete, and transferred out 23,500
units. Weighted-average unit costs were $1.15
for materials, $0.75 for conversion costs. All
materials are added at the start of the process.
The cost of finished units transferred to finished
goods is
a. $28,750.
b. $44,650.
c. $47,500.
d. $52,250.
b 44. Field Company had a beginning inventory of 4,000
units 40% complete, ending inventory of 3,000
units 70% complete, and transferred out 47,000
units. Weighted-average unit costs were $1.15
for materials, $0.75 for conversion costs. All
materials are added at the start of the process.
The cost of ending inventory is
a. $5,700.
b. $5,025
c. $3,990.
d. some other number.
b 45. Garden Co. had a beginning inventory of 3,000 units
60% complete, ending inventory of 3,000 units
80% complete, and transferred out 27,500 units.
FIFO unit costs were $2.15 for materials, $1.25
for conversion costs. All materials are added at
the start of the process. Beginning inventory cost
$9,400. The cost of finished units transferred out
is
a. $69,875.
b. $92,900.
c. $93,500.
d. $103,700.
b 46. Garden Co. had a beginning inventory of 3,000 units
60% complete, ending inventory of 3,000 units
80% complete, and transferred out 27,500 units.
FIFO unit costs were $2.15 for materials, $1.25
for conversion costs. All materials are added at
the start of the process. Beginning inventory cost
$9,400. The cost of ending inventory is
a. $8,160.
b. $9,450.
c. $10,200.
d. $17,000.
d 47. Woods Run has a weighted-average EUP of 49,750
units. Beginning inventory of 4,500 units was
60% complete; the ending inventory of 4,800
units was 60% complete. The units completed
during the period is
a. 49,750.
b. 44,950.
c. 47,050.
d. 46,870.
b 48. Woods Run has a weighted-average EUP of 49,750
units. Beginning inventory of 4,500 units was
60% complete; the ending inventory of 4,800
units was 60% complete. Conversion costs in
45
beginning inventory were $1,960; conversion
costs added during the period were $40,825.
Conversion costs per unit are
a. $0.82.
b. $0.86.
c. $0.70.
d. cannot be determined with the information
given.
a 49. Grover Co. had a beginning inventory of 1,750 units
70% complete, ending inventory of 3,000 units
20% complete, and transferred out 24,500 units.
Weighted-average unit costs were $2.15 for
materials, $1.75 for conversion costs. All
materials are added at the start of the process.
The cost of finished units transferred to finished
goods is
a. $95,550.
b. $102,375.
c. $107,250.
d. $114,075.
c 50. Grover Co. had a beginning inventory of 1,750 units
70% complete, ending inventory of 3,000 units
20% complete, and transferred out 24,500 units.
Weighted-average unit costs were $2.15 for
materials, $1.75 for conversion costs. All
materials are added at the start of the process.
The cost of ending inventory is
a. $2,340.
b. $6,450.
c. $7,500.
d. $11,700.