INTRODUCTION TO MANAGEMENT ACCOUNTING 16TH EDITION By HORNGREN – TEST BANK

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INTRODUCTION TO MANAGEMENT ACCOUNTING 16TH EDITION By HORNGREN – TEST BANK

Introduction to Management Accounting, 16e (Horngren)

Chapter 2   Introduction to Cost Behavior and Cost-Volume-Profit Relationships

 

2.1   Questions

 

1) Why is it important to identify the most appropriate cost drivers for a particular product?

  1. A) so managers can identify the activities necessary to manufacture a product
  2. B) so managers can control product costs better
  3. C) so managers can predict product costs better and make better decisions
  4. D) B and C

Answer:  D

Diff: 1

LO:  2-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

2) A brainstorming group in the Research and Development area is charged with developing new product ideas for the company. What is a good cost driver of the cost of this activity?

  1. A) number of parts in new products proposed
  2. B) number of new product proposals
  3. C) number of workers
  4. D) number of engineering hours

Answer:  B

Diff: 1

LO:  2-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

3) Janitors clean the factory at the end of each workday. The wages of the janitors are used to determine the cost of the only manufactured product in the factory. What is a good cost driver for the wages of the janitors?

  1. A) number of janitors
  2. B) number of kilowatt hours used
  3. C) number of machine hours on cleaning machines
  4. D) number of labor hours worked by janitors

Answer:  D

Diff: 1

LO:  2-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

4) Janitors clean the factory with scrubbing machines and polishing machines. Scrubbing machines scrub the factory floor and polishing machines polish the floor. The cost associated with cleaning the factory is treated as a product cost. What is a good cost driver for the Depreciation Expense associated with the scrubbing and polishing machines?

  1. A) number of janitors operating machines
  2. B) number of labor hours put in by janitors
  3. C) number of kilowatt hours used
  4. D) number of machine hours used

Answer:  D

Diff: 1

LO:  2-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

5) Cost drivers are ________.

  1. A) the different functions in the value chain
  2. B) different types of functional areas in the firm
  3. C) measures of activities that require the use of resources and thereby cause costs
  4. D) different types of cost calculations

Answer:  C

Diff: 2

LO:  2-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

6) Consider the following activity: The installation of seats by an airplane manufacturer in a commercial airplane. What is an appropriate cost driver for the labor resources used for this activity?

  1. A) number of service center hours
  2. B) number of labor hours used to install seats
  3. C) number of mechanic hours
  4. D) number of engineering hours

Answer:  B

Diff: 2

LO:  2-1

AACSB:  Analytic skills

Learning Outcome:  None

 

7) Consider the following activity: The manufacturer in a commercial airplane. What is an appropriate cost driver for the cost of the seats?

  1. A) number of seats installed
  2. B) number of labor hours used to install seats
  3. C) number of mechanic hours
  4. D) number of engineering hours

Answer:  A

Diff: 2

LO:  2-1

AACSB:  Analytic skills

Learning Outcome:  None

2.2   Questions

 

1) Within the relevant range, the total amount of ________ cost changes in direct proportion to changes in the cost driver. Within the relevant range, the total amount of ________ cost does not change in direct proportion to changes in the cost driver.

  1. A) fixed; variable
  2. B) variable; fixed
  3. C) step; mixed
  4. D) mixed; step

Answer:  B

Diff: 2

LO:  2-2

AACSB:  Reflective thinking skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

 

2) As cost-driver level decreases in the relevant range, fixed costs per unit of cost driver ________, but total fixed costs ________.

  1. A) increase; do not change
  2. B) decrease: do not change
  3. C) do not change; increase
  4. D) do not change; decrease

Answer:  A

Diff: 2

LO:  2-2

AACSB:  Analytic skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

 

3) As cost-driver level increases in the relevant range, a fixed cost does not change ________, but the fixed cost ________ becomes progressively smaller.

  1. A) per unit of cost driver; total
  2. B) in total; per unit of cost driver
  3. C) per-unit; per unit of cost driver
  4. D) in total; per year

Answer:  B

Diff: 1

LO:  2-2

AACSB:  Analytic skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

 

 

4) As the cost-driver level increases in the relevant range, variable costs per unit of cost driver ________ but total variable costs ________.

  1. A) do not change; increase in direct proportion to the cost-driver activity level
  2. B) do not change; decrease in direct proportion to the cost-driver activity level
  3. C) increase; do not change
  4. D) decrease; do not change

Answer:  A

Diff: 1

LO:  2-2

AACSB:  Analytic skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

5) Which of the following costs is a variable cost?

  1. A) rental expense for factory building for manufacturer of electronics
  2. B) lease cost for factory machine for manufacturer of electronics
  3. C) fuel for airplane for airline
  4. D) depreciation expense of airplane for airline

Answer:  C

Diff: 1

LO:  2-2

AACSB:  Analytic skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

 

6) What happens when the cost-driver level increases within the relevant range?

  1. A) Total fixed costs remain unchanged.
  2. B) Fixed costs per unit of cost driver increase.
  3. C) Total variable costs decrease.
  4. D) Variable costs per unit of cost driver increase.

Answer:  A

Diff: 2

LO:  2-2

AACSB:  Analytic skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

 

7) What happens when the cost-driver activity level increases within the relevant range?

  1. A) Total fixed costs increase.
  2. B) Fixed costs per unit of cost driver decrease.
  3. C) Total variable costs decrease.
  4. D) Variable costs per unit of cost driver decrease.

Answer:  B

Diff: 2

LO:  2-2

AACSB:  Analytic skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

 

 

8) What happens when the cost-driver activity level decreases within the relevant range?

  1. A) Total fixed costs increase.
  2. B) Fixed costs per unit of cost driver decrease.
  3. C) Total variable costs decrease.
  4. D) Variable costs per unit of cost driver decrease.

Answer:  C

Diff: 2

LO:  2-2

AACSB:  Analytic skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

9) What happens when the cost-driver activity level decreases within the relevant range?

  1. A) Total fixed costs increase.
  2. B) Fixed costs per unit of cost driver decrease.
  3. C) Total variable costs increase.
  4. D) Variable costs per unit of cost driver are unchanged.

Answer:  D

Diff: 2

LO:  2-2

AACSB:  Analytic skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

 

10) Which of the following costs is a fixed cost?

  1. A) cost of dairy ingredients used to produce ice cream
  2. B) depreciation expense on factory building
  3. C) fuel used by delivery trucks
  4. D) labor wages of workers who mix dairy ingredients to make ice cream

Answer:  B

Diff: 2

LO:  2-2

AACSB:  Analytic skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

 

11) An increase in total variable costs usually indicates that ________.

  1. A) the cost-driver activity level is decreasing
  2. B) the cost-driver activity level is increasing
  3. C) variable costs per unit is decreasing
  4. D) fixed costs per unit is increasing

Answer:  B

Diff: 2

LO:  2-2

AACSB:  Analytic skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

 

 

12) The relevant range applies to ________.

  1. A) variable costs only
  2. B) fixed costs only
  3. C) fixed costs and variable costs
  4. D) none of the above

Answer:  C

Diff: 2

LO:  2-2

AACSB:  Reflective thinking skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

 

13) Total fixed costs increase when the cost-driver level increases in the relevant range.

Answer:  FALSE

Diff: 1

LO:  2-2

AACSB:  Reflective thinking skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

14) The relevant range is the limit of cost-driver level within which a specific relationship between costs and the cost driver is valid.

Answer:  TRUE

Diff: 1

LO:  2-2

AACSB:  Reflective thinking skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

 

15) Total variable costs increase when the cost-driver level increases in the relevant range.

Answer:  TRUE

Diff: 2

LO:  2-2

AACSB:  Reflective thinking skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

 

16) Variable costs per unit of the cost driver increase when the cost-driver level increases in the relevant range.

Answer:  FALSE

Diff: 2

LO:  2-2

AACSB:  Reflective thinking skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

 

 

2.3   Questions

 

1) Two types of costs that each combine fixed cost and variable cost behaviors are ________ and ________.

  1. A) capacity costs; incremental costs
  2. B) semi-fixed costs; semivariable costs
  3. C) composite costs; average costs
  4. D) step costs; mixed costs

Answer:  D

Diff: 2

LO:  2-3

AACSB:  Reflective thinking skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

 

2) If an individual chunk of step costs applies to a large range of cost-driver activity, the step costs are treated as ________ within that range.

  1. A) variable costs
  2. B) mixed costs
  3. C) fixed costs
  4. D) semivariable costs

Answer:  C

Diff: 2

LO:  2-3

AACSB:  Reflective thinking skills

Learning Outcome:  None

3) If individual cost steps are uniform and the decision being made spans a number of steps, the step costs are treated as a ________.

  1. A) fixed cost
  2. B) mixed cost
  3. C) incremental cost
  4. D) variable cost

Answer:  D

Diff: 2

LO:  2-3

AACSB:  Reflective thinking skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

 

4) With mixed costs, the ________ element is unchanged over the relevant range and the ________ element varies proportionately with cost-driver activity.

  1. A) variable cost; fixed cost
  2. B) fixed cost; variable cost
  3. C) fixed cost; step cost
  4. D) step cost; variable cost

Answer:  B

Diff: 2

LO:  2-3

AACSB:  Reflective thinking skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

 

5) With mixed costs, the fixed cost element is viewed as the ________ and the variable cost element is viewed as the ________.

  1. A) step cost; cost of capacity
  2. B) cost of capacity; incremental cost of using capacity
  3. C) variable cost; cost of capacity
  4. D) step cost; mixed cost

Answer:  B

Diff: 2

LO:  2-3

AACSB:  Reflective thinking skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

 

6) Costs that change abruptly at different levels of activity because the resources are available only in indivisible chunks are called ________.

  1. A) mixed costs
  2. B) variable costs
  3. C) fixed costs
  4. D) step costs

Answer:  D

Diff: 1

LO:  2-3

AACSB:  Reflective thinking skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

7) In a small construction firm, a crew supervisor is added for every ten workers employed. The salaries of the crew supervisors are a ________.

  1. A) variable cost
  2. B) mixed cost
  3. C) step cost
  4. D) fixed cost

Answer:  C

Diff: 2

LO:  2-3

AACSB:  Analytic skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

 

 

8) Which example is NOT a step cost?

  1. A) When oil and gas exploration activity reaches a certain level in a given area, a company leases an additional rig. The lease cost of the rigs is a step cost.
  2. B) When ten nurses are added to a shift, a nursing supervisor is also added to the shift. The salaries of the nursing supervisors are a step cost.
  3. C) When a telemarketing company adds ten workers to a shift, a supervisor is also added to the shift. The salaries of the supervisors are a step cost.
  4. D) When a manufacturing company ceases production, a skeleton crew of maintenance workers continues to work, but the rest are terminated. When production resumes, maintenance workers are rehired in direct proportion to the amount of production. The wages of the maintenance workers are a step cost.

Answer:  D

Diff: 2

LO:  2-3

AACSB:  Analytic skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

 

9) A compensation plan where the sales force is paid salary plus commission is a ________.

  1. A) purely variable cost
  2. B) mixed cost
  3. C) step cost
  4. D) fixed cost

Answer:  B

Diff: 1

LO:  2-3

AACSB:  Analytic skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

 

10) Step costs change abruptly at different levels of cost-driver activity.

Answer:  TRUE

Diff: 1

LO:  2-3

AACSB:  Reflective thinking skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

 

11) Mixed costs are composed of only fixed costs.

Answer:  FALSE

Diff: 1

LO:  2-3

AACSB:  Reflective thinking skills

Learning Outcome:  Define and distinguish between variable, fixed and mixed costs

 

2.4   Questions

 

1) A cost-volume-profit graph has a line for ________ and a line for ________.

  1. A) revenues; variable costs only
  2. B) revenues; fixed costs only
  3. C) revenues; total costs
  4. D) net profit; net loss

Answer:  C

Diff: 2

LO:  2-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

2) The break-even point on the cost-volume-profit graph is where the ________.

  1. A) total cost line intersects the net profit line
  2. B) total cost line intersects the net loss line
  3. C) revenue line intersects the total cost line
  4. D) revenue line intersects the variable cost line

Answer:  C

Diff: 2

LO:  2-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

3) On a cost-volume-profit graph, the vertical distance between the Revenue line and the Total Cost line represents ________ or ________.

  1. A) mixed cost; step cost
  2. B) variable cost; fixed cost
  3. C) net profit; net loss
  4. D) step cost; fixed cost

Answer:  C

Diff: 2

LO:  2-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

4) To construct the Total Cost line on a cost-volume-profit graph, plot ________ and then plot ________.

  1. A) mixed costs; step costs
  2. B) step costs; mixed costs
  3. C) fixed costs; variable costs
  4. D) fixed costs; fixed costs plus variable costs

Answer:  D

Diff: 2

LO:  2-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

5) On a cost-volume-profit graph, when the Total Cost line is higher than the Total Revenue line, the difference represents ________.

  1. A) net income
  2. B) a positive return on the investment
  3. C) a net loss
  4. D) not enough information is presented

Answer:  C

Diff: 2

LO:  2-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

6) It is misleading to call a cost-volume-profit graph a break-even graph. Why?

  1. A) The graph reveals more information than the break-even point.
  2. B) The graph does not show the break-even point.
  3. C) The main purpose of the graph is to show the cost drivers for different activity levels.
  4. D) The main purpose of the graph is to show the margin of safety.

Answer:  A

Diff: 2

LO:  2-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

7) If a company faces declining sales over time, it must restructure its costs to break-even at a lower volume. In order to carry this out, what costs can be reduced?

  1. A) variable costs only
  2. B) fixed costs only
  3. C) variable and fixed costs
  4. D) step costs only

Answer:  C

Diff: 2

LO:  2-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

8) On a cost-volume-profit graph, the net profit area is found ________.

  1. A) at the break-even point
  2. B) to the right of the break-even point
  3. C) to the left of the break-even point
  4. D) to the right of the intersection of the y-axis and x-axis

Answer:  B

Diff: 2

LO:  2-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

9) On a cost-volume-profit graph, at the point where the Total Revenue line intersects the Total Cost line, ________.

  1. A) net income is positive
  2. B) net income is negative
  3. C) net income is zero
  4. D) not enough information is given

Answer:  C

Diff: 2

LO:  2-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

10) The horizontal axis on the cost-volume-profit graph is the ________.

  1. A) dollars of cost
  2. B) sales volume in units
  3. C) dollars of revenue
  4. D) net income

Answer:  B

Diff: 1

LO:  2-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

11) The vertical axis on the cost-volume-profit graph is the ________.

  1. A) dollars of net profit
  2. B) sales volume in units
  3. C) margin of safety
  4. D) dollars of cost and revenue

Answer:  D

Diff: 1

LO:  2-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

12) Which of the following is NOT an underlying assumption of cost-volume-profit analysis?

  1. A) We can classify expenses into fixed and variable categories.
  2. B) In multiproduct companies, sales mix will be constant.
  3. C) Revenues and expenses are linear over the relevant range.
  4. D) The inventory level changes significantly during the period.

Answer:  D

Diff: 1

LO:  2-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

 

13) The break-even point is located at the intersection of the total revenue line and the total costs line on a cost-volume-profit graph.

Answer:  TRUE

Diff: 2

LO:  2-4

AACSB:  Analytic skills

Learning Outcome:  None

14) The CVP graph shows how costs behave over different relevant ranges.

Answer:  FALSE

Diff: 2

LO:  2-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

15) The horizontal axis on the CVP graph is the dollars of cost and revenue.

Answer:  FALSE

Diff: 1

LO:  2-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

16) The CVP graph uses the assumption that costs are linear over the relevant range.

Answer:  TRUE

Diff: 1

LO:  2-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

17) An assumption of the CVP analysis is that changes in efficiency are expected.

Answer:  FALSE

Diff: 1

LO:  2-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

18) The sales mix is the relative proportions or combinations of quantities of different products that constitute total sales.

Answer:  TRUE

Diff: 1

LO:  2-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

 

19) An assumption of the CVP analysis is that the sales mix can fluctuate.

Answer:  FALSE

Diff: 1

LO:  2-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

20) The break-even point is the level of revenue at which revenue equals fixed costs.

Answer:  FALSE

Diff: 1

LO:  2-4

AACSB:  Reflective thinking skills

Learning Outcome:  Perform fundamental CVP calculations

2.5   Questions

 

1) Herman Loebl Company, a producer of salsa, has the following information:

 

Income tax rate                                          30%

Selling price per unit                             $8.00

Variable cost per unit                            $3.00

Total fixed costs                            $90,000.00

 

The contribution margin per unit is ________.

  1. A) $2.00
  2. B) $3.00
  3. C) $5.00
  4. D) $8.00

Answer:  C

Diff: 1

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

2) Kaprelian Company sells desks at $480 per desk. The variable costs are $300 per desk. Total fixed costs for the period are $400,000. The contribution margin ratio is ________.

  1. A) 22.5%
  2. B) 37.5%
  3. C) 40.6%
  4. D) 62.5%

Answer:  B

Diff: 1

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

 

3) Gnat Company, a producer of electronic devices, has the following information:

 

Selling price per unit                             $5.00

Variable cost per unit                            $3.00

Total fixed costs                            $90,000.00

 

The contribution-margin ratio is ________.

  1. A) 30%
  2. B) 40%
  3. C) 60%
  4. D) 100%

Answer:  B

Diff: 1

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

4) Suppose a hotel has annual fixed costs applicable to its rooms of $2.0 million for its 300-room hotel. Average daily room rents are $50 per room and average variable costs are $10 for each room rented. It operates 365 days per year. If the hotel is completely full throughout the year, what is net income for one year?

  1. A) $1,280,000
  2. B) $2,380,000
  3. C) $3,180,000
  4. D) $4,380,000

Answer:  B

Diff: 3

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

5) Beckham Company has the following information available:

 

Selling price per unit                              $100

Variable cost per unit                               $55

Fixed costs per year                        $400,000

Expected sales per year           20,000 units

 

What is the expected operating income for a year?

  1. A) $480,000
  2. B) $500,000
  3. C) $680,000
  4. D) $700,000

Answer:  B

Diff: 1

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

6) Suppose a Super 9 Hotel has annual fixed costs applicable to its rooms of $1.0 million for its 300-room hotel. Average daily room rents are $60 per room and average variable costs are $10 for each room rented. It operates 365 days per year. If the hotel is one-half full throughout the entire year, what is the amount of net income for one year?

  1. A) $1,737,500
  2. B) $4,475,000
  3. C) $5,475,000
  4. D) $5,570,000

Answer:  A

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

7) Step Company has total variable costs of 80% of total revenues and fixed costs of $20 million per year. What is the break-even point expressed in total revenue dollars?

  1. A) $10 million
  2. B) $12.5 million
  3. C) $20 million
  4. D) $100 million

Answer:  D

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

8) Cornwell Company, a producer of electronic components, has the following information:

 

Income tax rate                                           30%

Selling price per unit                              $8.00

Variable cost per unit                             $3.00

Total fixed costs                           $120,000.00

 

The break-even point in dollars is ________.

  1. A) $150,000
  2. B) $180,000
  3. C) $192,000
  4. D) $320,000

Answer:  C

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

 

9) Christian Corporation sells desks at $480 per desk. The variable costs are $300 per desk. Total fixed costs for the period are $540,000. The break-even point in desks is ________.

  1. A) 1,125
  2. B) 1,800
  3. C) 3,000
  4. D) 4,230

Answer:  C

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

10) Abbott Company sells desks at $480 per desk. The variable costs are $372 per desk. Total fixed costs for the period are $456,840. The break-even volume in dollars is ________.

  1. A) $456,840
  2. B) $589,471
  3. C) $1,573,560
  4. D) $2,030,400

Answer:  D

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

11) Murphy Company produces dolls. Each doll sells for $20.00. Variable costs per unit are $14.00 and total fixed costs for the period are $435,000. What is the break-even point in units?

  1. A) 21,750
  2. B) 31,071
  3. C) 51,176
  4. D) 72,500

Answer:  D

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

12) Johnson Company produces dolls. Each doll sells for $20.00. Variable costs per unit are $14.00 and total fixed costs for the period are $300,000. What is the break-even volume in dollars?

  1. A) $50,000
  2. B) $621,429
  3. C) $1,000,000
  4. D) $1,450,000

Answer:  C

Diff: 1

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

13) Jensen Company produces dolls. Each doll sells for $20.00. Variable costs are $14.00 per unit. If the break-even volume in dollars is $1,446,000, then the total fixed costs for the period are ________.

  1. A) $361,500
  2. B) $433,800
  3. C) $516,425
  4. D) $1,446,000

Answer:  B

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

14) Assume the sales price is $34 per unit and the variable cost is $19 per unit. The break-even point is 12,000 units. What are total fixed costs?

  1. A) $180,000
  2. B) $190,000
  3. C) $340,000
  4. D) $530,000

Answer:  A

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

15) Assume the sales price is $100 per unit and the variable cost is $75 per unit. Total fixed costs are $150,000. Then the break-even volume in dollar sales is ________.

  1. A) $1,500
  2. B) $150,000
  3. C) $200,000
  4. D) $600,000

Answer:  D

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

16) Assume the sales price is $100 per unit and the total fixed costs are $75,000. The break-even volume in dollar sales is $250,000. What is the variable cost per unit?

  1. A) $30
  2. B) $70
  3. C) $100
  4. D) $125

Answer:  B

Diff: 3

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

17) Suppose Sunnyside Hotel has annual fixed costs applicable to its rooms of $1.0 million for its 300-room hotel. Average daily room rents are $60 per room, and average variable costs are $10 for each room rented. It operates 365 days per year. What is the break-even point in number of rooms rented?

  1. A) 20,000
  2. B) 30,000
  3. C) 100,000
  4. D) 120,000

Answer:  A

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

18) Suppose Shady Lane Hotel has annual fixed costs applicable to its rooms of $1.0 million for its 300-room hotel. Average daily room rents are $60 per room and average variable costs are $10 for each room rented. It operates 365 days per year. What percent of occupancy is needed to breakeven?

  1. A) 3.65%
  2. B) 18.3%
  3. C) 27.4%
  4. D) 34.3%

Answer:  B

Diff: 3

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

19) Sharpie Company has variable costs of 75% of total revenues and fixed costs of $40 million per year. What is the break-even point in dollars?

  1. A) $40 million
  2. B) $53.33 million
  3. C) $100 million
  4. D) $160 million

Answer:  D

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

 

20) The sales price is $30 per unit, the contribution margin is $8 per unit and total fixed costs are $32,000. What is the break-even point in units?

  1. A) 857
  2. B) 1,200
  3. C) 2,000
  4. D) 4,000

Answer:  D

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

21) If the total amount of fixed costs increases, what is the effect on the break-even point? (Assume no other changes.)

  1. A) The break-even point increases.
  2. B) The break-even point decreases.
  3. C) The break-even point remains the same.
  4. D) The break-even point is zero.

Answer:  A

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company’s profits

 

22) If the variable cost per unit increases, what is the effect on the break-even point? (Assume no other changes.)

  1. A) The break-even point increases.
  2. B) The break-even point decreases.
  3. C) The break-even point remains the same.
  4. D) The break-even point is zero.

Answer:  A

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company’s profits

 

23) If the selling price per unit increases, what is the effect on the break-even point? (Assume no other changes.)

  1. A) The break-even point increases.
  2. B) The break-even point decreases.
  3. C) The break-even point remains the same.
  4. D) The break-even point is zero.

Answer:  B

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company’s profits

 

24) Which action will decrease a company’s break-even point?

  1. A) reducing total fixed costs
  2. B) decreasing contribution margin per unit
  3. C) increasing variable cost per unit
  4. D) decreasing the selling price per unit

Answer:  A

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company’s profits

 

25) Assume Mussa Company has the following information available:

 

Selling price per unit                                          $100

Variable cost per unit                                            $45

Fixed costs per year                                     $420,000

Expected sales per year (units)                     20,000

 

If fixed costs increase by $200,000, what is the expected operating income?

  1. A) $280,000
  2. B) $480,000
  3. C) $680,000
  4. D) $1,380,000

Answer:  B

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company’s profits

 

26) Assume Hull Company has the following information available:

 

Selling price per unit                                          $100

Variable cost per unit                                            $40

Fixed costs per year                                     $400,000

Expected sales per year (units)                     20,000

 

If fixed costs increase by $200,000, what is the break-even point in units?

  1. A) 6,667
  2. B) 10,000
  3. C) 12,000
  4. D) 13,000

Answer:  B

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company’s profits

 

27) The following information is available for Trump Corporation:

 

Total fixed costs                                $300,000

Variable costs per unit                            $100

Selling price per unit                               $200

 

If total fixed costs increased to $600,000, then the break-even volume in dollars would increase by ________.

  1. A) 10.0%
  2. B) 50.0%
  3. C) 100%
  4. D) 200%

Answer:  C

Diff: 3

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company’s profits

 

28) Assume Unicorn Company has the following information available:

 

Selling price per unit                               $100

Variable cost per unit                                 $45

Fixed costs per year                          $420,000

Expected sales per year            20,000 units

 

If variable costs increase to $65 per unit, what is the expected net income for one year?

  1. A) $280,000
  2. B) $700,000
  3. C) $880,000
  4. D) $1,580,000

Answer:  A

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company’s profits

 

29) Assume fixed costs are constant and contribution margin per unit is reduced by 50 percent. What will happen to the break-even point in units?

  1. A) It will decrease 50 percent.
  2. B) It will increase 100 percent.
  3. C) It will be the same.
  4. D) It will increase 50 percent.

Answer:  B

Diff: 3

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company’s profits

 

30) If the contribution margin per unit increases, what is the effect on the break-even point? (Assume no other changes.)

  1. A) The break-even point increases.
  2. B) The break-even point decreases.
  3. C) The break-even point remains the same.
  4. D) The break-even point will be zero.

Answer:  B

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company’s profits

 

31) Xerox Company has the following information available:

 

Selling price per unit                                          $100

Variable cost per unit                                            $45

Fixed costs per year                                     $420,000

Expected sales per year (units)                     20,000

 

If variable costs increase to $65 per unit, what is the break-even point in units?

  1. A) 12,000
  2. B) 13,000
  3. C) 20,000
  4. D) none of the above

Answer:  A

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company’s profits

 

32) The break-even point may be reduced by reducing total fixed costs and holding everything else constant.

Answer:  TRUE

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company’s profits

 

33) The break-even point may be reduced by increasing the per unit variable cost.

Answer:  FALSE

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company’s profits

 

34) An increase in the sales price per unit will cause a decrease in the break-even point.

Answer:  TRUE

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company’s profits

 

 

35) The break-even point is when enough units are sold that total contribution margin equals total variable costs.

Answer:  FALSE

Diff: 1

LO:  2-5

AACSB:  Reflective thinking skills

Learning Outcome:  Perform fundamental CVP calculations

36) Wehr Corporation produces one product. Total fixed costs are $600,000.

The unit selling price is $60.00 and the unit variable cost is $45.00.

 

Required:

  1. A) Compute the contribution margin per unit.
  2. B) Compute the contribution-margin ratio.
  3. C) Compute the break-even point in units.
  4. D) Compute the break-even point in dollars.

Answer:

  1. A) $60.00 – $45.00 = $15.00
  2. B) $15.00/$60.00 = 0.25
  3. C) $600,000/$15.00 = 40,000 units
  4. D) 40,000 × $60 = $2,400,000

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

 

37) Stefanko Manufacturing has prepared the following income statement:

 

Sales                                                     $450,000

Cost of goods sold                              200,000

Gross margin                                      250,000

Operating expenses                           196,000

Operating income                              $54,000

 

According to company records, $100,000 of Cost of Goods Sold and $100,000 of Operating Expenses are fixed.

 

Required:

  1. A) Compute the contribution margin.
  2. B) Compute the contribution margin ratio.
  3. C) Compute the break-even point in sales dollars.

Answer:

  1. A) Fixed costs = $100,000 + $100,000 = $200,000

Variable costs = $100,000 + $96,000 = $196,000

Contribution Margin = $450,000 – $196,000 = $254,000

  1. B) $254,000/$450,000 = 56.44%
  2. C) $200,000/0.5644 = $354,359

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

38) Bruder Company produces one type of product. Total fixed costs are $100,000. Unit variable costs are $6.00. The break-even point is 25,000 units. Planned unit sales are 30,000.

 

Required:

  1. A) Compute the selling price per unit.
  2. B) Compute the contribution-margin ratio.
  3. C) Compute the break-even point in dollars.

Answer:

  1. A) = 25,000

(X – 6)25,000 = 100,000

X = $10

  1. B) ($10 – $6)/$10 = 0.40
  2. C) 25,000 × $10 = $250,000

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

 

39) Franklin Company produces only one product. The selling price is $100 per unit and the variable cost is $60 per unit. Total fixed costs are $120,000.

 

Required:

  1. A) Compute break-even point in units.
  2. B) Compute break-even point in dollars.

Answer:  A) $120,000/($100 – $60) = 3,000 units

  1. B) 3,000 units × $100 = $300,000

Diff: 2

LO:  2-5

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

2.6   Questions

 

1) What is the margin of safety in dollars?

  1. A) planned net income minus actual net income
  2. B) planned revenue minus actual expenses
  3. C) actual revenue in dollars minus planned revenue in dollars
  4. D) planned sales in dollars minus break-even sales in dollars

Answer:  D

Diff: 2

LO:  2-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

2) The county government released $100,000 as an appropriation for a counseling program for at-risk teenagers. The program should run one year and the variable costs for the program are $400 per teenager per year. Within the relevant range of 50 to 150 teenagers, the fixed costs for the program are $60,000. How many teenagers can the program serve?

  1. A) 50
  2. B) 100
  3. C) 150
  4. D) 250

Answer:  B

Diff: 3

LO:  2-6

AACSB:  Reflective thinking skills

Learning Outcome:  Perform fundamental CVP calculations

 

 

3) Assume the following information for Janice Company:

 

Selling price per unit                      $100

Variable costs per unit                      $80

Total fixed costs                          $80,000

 

If fixed costs increased by 10% and management wanted to maintain the original break-even point, then the selling price per unit would have to be increased to ________.

  1. A) $101.00
  2. B) $102.40
  3. C) $102.00
  4. D) $103.00

Answer:  C

Diff: 3

LO:  2-6

AACSB:  Analytic skills

Learning Outcome:  Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company’s profits

 

4) What does the margin of safety in units measure?

  1. A) how far fixed costs can rise before an operating loss occurs
  2. B) how far variable costs can rise before an operating loss occurs
  3. C) how far total costs can rise before an operating loss occurs
  4. D) how far sales can fall before an operating loss occurs

Answer:  D

Diff: 3

LO:  2-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

5) Falls Company has budgeted sales of $120,000 based on 80,000 units. The margin of safety is $1,000. What is the break-even point in dollars?

  1. A) $81,000
  2. B) $119,000
  3. C) $120,000
  4. D) $121,000

Answer:  B

Diff: 3

LO:  2-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

 

6) Winston Company has variable costs of $5 per unit and a selling price of $10 per unit. Fixed costs are $100,000. Planned unit sales for 2015 are 25,000 units. Actual unit sales for 2014 were 22,000 units. What is the margin of safety in units for 2015?

  1. A) 2,000 units
  2. B) 3,000 units
  3. C) 5,000 units
  4. D) 7,000 units

Answer:  C

Diff: 3

LO:  2-6

AACSB:  Analytic skills

Learning Outcome:  None

 

7) Worbel Company has variable costs of $5 per unit and a selling price of $10 per unit. Fixed costs are $100,000. Planned unit sales for 2015 are 25,000 units. Actual unit sales for 2014 were 22,000. What is the margin of safety in dollars for 2015?

  1. A) $5,000
  2. B) $20,000
  3. C) $30,000
  4. D) $50,000

Answer:  D

Diff: 3

LO:  2-6

AACSB:  Analytic skills

Learning Outcome:  None

 

8) Wetzel Company has variable costs of $5 per unit and a selling price of $10 per unit. Fixed costs are $200,000. Planned unit sales for 2015 are 45,000 units. Actual unit sales for 2014 were 42,000. What is the margin of safety in units for 2015?

  1. A) 2,000 units
  2. B) 3,000 units
  3. C) 5,000 units
  4. D) 7,000 units

Answer:  C

Diff: 3

LO:  2-6

AACSB:  Analytic skills

Learning Outcome:  None

 

9) Operating leverage is the sensitivity of a firm’s ________ to changes in ________.

  1. A) sales volume; the cost structure
  2. B) margin of safety; ratio of fixed costs to variable costs
  3. C) sales volume; the cost driver levels
  4. D) net income; sales volume

Answer:  D

Diff: 2

LO:  2-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

10) The degree of operating leverage for a firm equals the ratio of ________ to ________.

  1. A) fixed costs; variable costs
  2. B) variable costs; fixed costs
  3. C) fixed costs: operating profit
  4. D) contribution margin; net income

Answer:  D

Diff: 2

LO:  2-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

11) The degree of operating leverage for Geesling Company is 8.0 at 80,000 units of sales. At 80,000 units of sales, the net profit is $10,000. If the sales volume increases to 90,000 units, what is the net profit?

  1. A) $12,000
  2. B) $20,000
  3. C) $22,222
  4. D) $80,000

Answer:  B

Diff: 3

LO:  2-6

AACSB:  Analytic skills

Learning Outcome:  None

 

12) The degree of operating leverage for Murphy Company is 8.0 at 80,000 units of sales. At 80,000 units of sales, the net profit is $10,000. If the sales volume decreases to 72,000 units, what is the net profit?

  1. A) $2,000
  2. B) $8,000
  3. C) $10,000
  4. D) $18,000

Answer:  A

Diff: 3

LO:  2-6

AACSB:  Analytic skills

Learning Outcome:  None

 

13) Gokey Company has a contribution-margin ratio of 0.30. Targeted net income is $76,800 and targeted sales volume in dollars is $480,000. What are total fixed costs?

  1. A) $23,000
  2. B) $44,160
  3. C) $67,200
  4. D) $144,000

Answer:  C

Diff: 3

LO:  2-6

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

14) Key Company has a targeted sales volume of 62,300 units. Total fixed costs are $31,200. The contribution margin per unit is $1.20. What is targeted net income?

  1. A) $31,200
  2. B) $37,440
  3. C) $43,560
  4. D) $74,760

Answer:  C

Diff: 2

LO:  2-6

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

15) Goy Company has a break-even point of 88,000 units. The contribution margin per unit is $9.60. The desired target profit is $18,096. How many units must be sold to achieve the desired profit?

  1. A) 1,885 units
  2. B) 88,000 units
  3. C) 89,885 units
  4. D) 106,096 units

Answer:  C

Diff: 2

LO:  2-6

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

16) Assume the following facts:

 

Sales price                                 $180 per unit

Variable cost                             $100 per unit

Total fixed costs                                 $39,600

Targeted net income                         $52,800

 

How many units must be sold to achieve the targeted net income?

  1. A) 513
  2. B) 629
  3. C) 963
  4. D) 1,155

Answer:  D

Diff: 2

LO:  2-6

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

17) Helium Company has the following information available:

 

Selling price per unit                             $5.00

Variable cost per unit                            $3.50

Total fixed costs                            $90,000.00

Targeted net income                    $30,000.00

 

How many units must be sold to achieve the targeted net income?

  1. A) 10,000 units
  2. B) 27,000 units
  3. C) 45,000 units
  4. D) 80,000 units

Answer:  D

Diff: 2

LO:  2-6

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

18) The following information is available for Kinsner Corporation:

 

Total fixed costs                                $313,500

Variable costs per unit                              $99

Selling price per unit                               $154

 

If management has a targeted net income of $46,200, then the number of units that must be sold is ________.

  1. A) 2,036 units
  2. B) 2,336 units
  3. C) 5,700 units
  4. D) 6,540 units

Answer:  D

Diff: 2

LO:  2-6

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

19) The following information is available for Kismer Corporation:

 

Total fixed costs                               $313,500

Variable costs per unit                              $90

Selling price per unit                              $150

 

If management has a targeted net income of $59,400, then sales revenue should be ________.

  1. A) $239,721
  2. B) $580,067
  3. C) $671,220
  4. D) $932,250

Answer:  D

Diff: 2

LO:  2-6

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

20) Berea Company expects to sell 19,000 units. Total fixed costs are $84,000 and the contribution margin per unit is $6.00. Berea’s tax rate is 40%. What is the margin of safety in units?

  1. A) 3,000 units
  2. B) 5,000 units
  3. C) 7,500 units
  4. D) 14,000 units

Answer:  B

Diff: 2

LO:  2-6

AACSB:  Analytic skills

Learning Outcome:  None

 

21) Yemen Company has the following information available:

 

Selling price per unit                                      $100

Variable cost per unit                                       $45

Fixed costs per year                                $420,000

Expected sales per year (units)                20,000

 

If variable costs increase to $65 per unit and fixed costs increase by $200,000, what is the break-even point in units?

  1. A) 11,273
  2. B) 12,000
  3. C) 20,000
  4. D) 17,714

Answer:  D

Diff: 3

LO:  2-6

AACSB:  Analytic skills

Learning Outcome:  Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company’s profits

 

22) In companies with high operating leverage, small changes in sales volume result in large changes in net income.

Answer:  TRUE

Diff: 2

LO:  2-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

23) Companies with high levels of operating leverage are less risky than companies with low levels of operating leverage.

Answer:  FALSE

Diff: 2

LO:  2-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

24) A small margin of safety may indicate a risky situation.

Answer:  TRUE

Diff: 2

LO:  2-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

25) The Eastman Family Restaurant is open 24 hours per day. Fixed costs are $24,000 per month. Variable costs are estimated at $9.60 per meal. The average revenue is $12 per meal. The restaurant wished to earn a profit before taxes of $6,000 per month.

 

Required:

  1. A) Compute the number of meals that must be served to earn a profit before taxes of $6,000 per month.
  2. B) Assume that fixed costs increase to $30,000 per month. How many additional meals must be served to earn a profit before taxes of $6,000 per month?

Answer:

  1. A) ($24,000 + $6,000)/($12.00 – $9.60) = 12,500 meals
  2. B) ($30,000 – $24,000)/($12.00 – $9.60) = 2,500 meals

Diff: 3

LO:  2-6

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

26) Sole Company manufactures running shoes. The selling price is $80 per pair (unit) and variable costs are $60 per pair (unit). The sales volume of $776,000 generates $100,750 of net income before taxes.

 

Required:

  1. A) Compute total fixed costs.
  2. B) Compute total variable costs.
  3. C) Compute the break-even point in units.
  4. D) Compute the quantity of units above the break-even point to reach targeted net income before taxes.

Answer:

  1. A) $776,000/$80= 9,700 units

Variable costs= $60 × 9,700 = $582,000

Fixed costs= $776,000 – $582,000 – $100,750 = $93,250

  1. B) 9,700 × $60 = $582,000
  2. C) $93,250/ ($80 – $60) = 4,662.5 = 4,663 units
  3. D) 9,700 – 4,663 = 5,038 units

Diff: 2

LO:  2-6

AACSB:  Analytic skills

Learning Outcome:  Perform fundamental CVP calculations

 

2.7   Questions

 

1) Nealy Company has the following information available:

 

Revenue                                               $500,000

Variable production costs              $100,000

Fixed production costs                    $100,000

Variable selling costs                         $50,000

Fixed selling costs                               $50,000

 

What is the contribution margin?

  1. A) $300,000
  2. B) $350,000
  3. C) $400,000
  4. D) $450,000

Answer:  B

Diff: 2

LO:  2-7

AACSB:  Analytic skills

Learning Outcome:  None

 

2) Henricks Company has the following information available:

 

Revenue                                              $500,000

Variable production costs             $100,000

Fixed production costs                   $100,000

Variable selling costs                        $50,000

Fixed selling costs                              $50,000

 

What is the gross margin and net income?

  1. A) $200,000; $200,000
  2. B) $250,000; $150,000
  3. C) $300,000; $200,000
  4. D) $400,000: $200,000

Answer:  C

Diff: 2

LO:  2-7

AACSB:  Analytic skills

Learning Outcome:  None

 

 

3) ________ is the excess of sales over the cost of goods sold.

  1. A) Gross margin
  2. B) Contribution-margin ratio
  3. C) Variable-cost ratio
  4. D) Contribution margin

Answer:  A

Diff: 1

LO:  2-7

AACSB:  Reflective thinking skills

Learning Outcome:  None

4) Contribution margin is equal to ________.

  1. A) sales minus variable costs
  2. B) sales minus fixed costs
  3. C) sales minus variable production costs
  4. D) sales minus production costs

Answer:  A

Diff: 1

LO:  2-7

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

5) The following information is available for a company:

 

Sales                                                                               $1,000,000

Variable Selling Expenses                                               23,000

Fixed Selling Expenses                                                     33,000

Variable Administrative Expenses                               39,000

Fixed Administrative Expenses                                     10,000

Variable Cost of Goods Sold                                         300,000

Fixed Cost of Goods Sold                                               100,000

 

What is the contribution margin for this company?

  1. A) $500,000
  2. B) $600,000
  3. C) $638,000
  4. D) $700,000

Answer:  C

Diff: 2

LO:  2-7

AACSB:  Analytic skills

Learning Outcome:  None

 

 

6) The following information for Zippy Company is:

 

Sales                                                                             $1,000,000

Variable Selling Expenses                                             23,000

Fixed Selling Expenses                                                   33,000

Variable Administrative Expenses                             39,000

Fixed Administrative Expenses                                   10,000

Variable Cost of Goods Sold                                       300,000

Fixed Cost of Goods Sold                                             100,000

 

What is the gross margin for this company?

  1. A) $500,000
  2. B) $548,000
  3. C) $578,000
  4. D) $600,000

Answer:  D

Diff: 2

LO:  2-7

AACSB:  Analytic skills

Learning Outcome:  None

7) The following information is available for Company ZZ:

 

Sales                                                                             $1,000,000

Variable Selling Expenses                                             22,000

Fixed Selling Expenses                                                   33,000

Variable Administrative Expenses                             30,000

Fixed Administrative Expenses                                   10,000

Variable Cost of Goods Sold                                       400,000

Fixed Cost of Goods Sold                                             100,000

 

If sales increase to $1,500,000, what is operating income?

  1. A) $405,000
  2. B) $500,000
  3. C) $548,000
  4. D) $679,000

Answer:  D

Diff: 3

LO:  2-7

AACSB:  Analytic skills

Learning Outcome:  None

 

8) Gross margin is the same as contribution margin for most companies.

Answer:  FALSE

Diff: 2

LO:  2-7

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

9) Gross margin focuses on sales in relation to variable costs.

Answer:  FALSE

Diff: 1

LO:  2-7

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

10) Cost of goods sold is the cost of the merchandise that a company acquires or produces and then sells.

Answer:  TRUE

Diff: 1

LO:  2-7

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

11) Selling expenses are found in the cost of goods sold.

Answer:  FALSE

Diff: 1

LO:  2-7

AACSB:  Reflective thinking skills

Learning Outcome:  None

2.8   Questions

 

1) Which statement is FALSE?

  1. A) Each different sales-mix of products has a different break-even point.
  2. B) Changes in the sales-mix of products sold affects a company’s net operating profit.
  3. C) Changes in the sales-mix of products sold affects a company’s contribution margin.
  4. D) If the sales-mix of products sold changes, the break-even point does not change.

Answer:  D

Diff: 2

LO:  2-8

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

2) ________ is the relative proportions or combinations of quantities of different products that comprise total sales.

  1. A) Sales mix
  2. B) Constant mix
  3. C) Fluctuating mix
  4. D) Variable cost ratio

Answer:  A

Diff: 1

LO:  2-8

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

 

3) Assume the following facts for two products, Zip and Zap:

 

Zip                     Zap

Sales mix                                         3 units               1 unit

Selling price per unit                    $21.00               $28.00

Variable costs per unit                 $14.00               $16.00

 

If total fixed costs are $132,000, the break-even point in units would be ________.

  1. A) 4,000 units of Zip and 12,000 units of Zap
  2. B) 1,200 units of Zip and 400 units of Zap
  3. C) 12,000 units of Zip and 4,000 units of Zap
  4. D) 8,400 units of Zip and 2,800 units of Zap

Answer:  C

Diff: 3

LO:  2-8

AACSB:  Analytic skills

Learning Outcome:  None

4) Assume the following information for two products, Hawaii Fantasy and Hawaii Joy.

 

Hawaii Fantasy             Hawaii Joy

Sales mix                                     2 units                               1 unit

Selling price per unit                $15                                     $100

Variable cost per unit               $10                                     $40

 

Fixed expenses total $490,000 per year. What is the breakeven point in units for each product?

  1. A) 4,575 units of Hawaii Fantasy and 18,300 units of Hawaii Joy
  2. B) 7,000 units of Hawaii Fantasy and 14,000 units of Hawaii Joy
  3. C) 18,300 units of Hawaii Fantasy and 4,575 units of Hawaii Joy
  4. D) 14,000 units of Hawaii Fantasy and 7,000 units of Hawaii Joy

Answer:  D

Diff: 3

LO:  2-8

AACSB:  Analytic skills

Learning Outcome:  None

 

5) If the proportions of different products sold in a sales mix change, the ________.

  1. A) contribution margin per unit for each product increases
  2. B) break-even point will change
  3. C) contribution margin per unit for each product decreases
  4. D) net income will not change

Answer:  B

Diff: 2

LO:  2-8

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

 

6) Nearly all companies sell more than one product, and thus, they must be concerned with sales mix.

Answer:  TRUE

Diff: 1

LO:  2-8

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

7) The contribution margin per unit of a given product guides managers when deciding which product to emphasize in a sales mix.

Answer:  TRUE

Diff: 2

LO:  2-8

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

8) Lakers Company produces two products. The following information is available:

 

Product X                 Product Y

Selling price per unit                $46                             $36

Variable cost per unit               $38                             $24

 

Total fixed costs are $234,000. Lakers plans to sell 21,000 units of Product X and 7,000 units of Product Y.

 

Required:

  1. A) Compute the contribution margin for each product.
  2. B) What is the expected net income?
  3. C) Assume the sales mix is 3 units of Product X for every 1 unit of Product Y.

What is the break-even point in units for each product?

  1. D) Assume the sales mix is 3 units of Product X for every 2 units of Product Y.

What is the break-even point in units for each product?

Answer:

  1. A) Product X: Contribution margin = $46 – $38 = $8

Product Y: Contribution margin = $36 – $24 = $12

  1. B) Contribution margin ($8 × 21,000) + ($12 × 7,000) = $252,000

Net income = $252,000 – $234,000 = $18,000

  1. C) ($8 × 3)Z + ($12 × 1)Z – $234,000 = 0

$24Z + $12Z = $234,000

Z = 6,500 units

Product X: 6,500 × 3 = 19,500 units

Product Y: 6,500 units

  1. D) ($8 × 3)Z + ($12 × 2)Z – $234,000 = 0

$24Z + $24Z = $234,000

Z = 4,875 units

Product X: 4,875 × 3 = 14,625 units

Product Y: 4,875 × 2 = 9,750 units

Diff: 3

LO:  2-8

AACSB:  Analytic skills

Learning Outcome:  None

 

2.9   Questions

 

1) Seidner Company has the following information available:

 

Total fixed costs                                                  $80,000

Targeted after-tax net income                         $18,000

Contribution margin per unit                             $2.00

Tax rate                                                                        40%

 

How many units must be sold to achieve the targeted after-tax net income?

  1. A) 45,400
  2. B) 49,000
  3. C) 55,000
  4. D) 62,500

Answer:  C

Diff: 3

LO:  2-9

AACSB:  Analytic skills

Learning Outcome:  None

 

2) The Todd Dolhun Company has the following information available:

 

Targeted after-tax net income                      $120,000

Total fixed costs                                               $300,000

Contribution margin per unit                                  $2

Tax rate                                                                        40%

 

How many units should be sold to achieve the targeted after-tax net income?

  1. A) 180,000
  2. B) 210,000
  3. C) 250,000
  4. D) 300,000

Answer:  C

Diff: 3

LO:  2-9

AACSB:  Analytic skills

Learning Outcome:  None

 

3) The Troy Company has the following information available:

 

Total fixed costs                                       $400,000

Expected sales (units)                               100,000

Contribution margin per unit                     $7.50

Tax rate                                                                30%

 

What is the after-tax net income?

  1. A) $245,000
  2. B) $280,000
  3. C) $350,000
  4. D) $400,000

Answer:  A

Diff: 3

LO:  2-9

AACSB:  Analytic skills

Learning Outcome:  None

 

4) Assume the following information for Rodney Company:

 

Selling price per unit                              $100

Variable cost per unit                               $80

Total fixed costs                                 $80,000

After-tax net income                         $24,000

Tax rate                                                        40%

 

To achieve the targeted after-tax net income, what amount of sales in dollars is necessary?

  1. A) $400,000
  2. B) $520,000
  3. C) $600,000
  4. D) $660,000

Answer:  C

Diff: 3

LO:  2-9

AACSB:  Analytic skills

Learning Outcome:  None

 

5) Assume the following information for Richard Company:

 

Selling price per unit                              $100

Variable cost per unit                                $80

Total fixed costs                                  $80,000

After-tax net income                          $40,800

Tax rate                                                        40%

 

How many units must be sold to achieve the after-tax net income?

  1. A) 6,040
  2. B) 7,400
  3. C) 7,770
  4. D) 7,800

Answer:  B

Diff: 3

LO:  2-9

AACSB:  Analytic skills

Learning Outcome:  None

 

6) Benjamin Company has the following information available:

 

Income tax rate                                          30%

Selling price per unit                             $5.00

Variable cost per unit                            $3.00

Total fixed costs                            $90,000.00

 

If Benjamin Company wants a targeted after-tax net income of $14,000, how many units must be sold?

  1. A) 45,000
  2. B) 52,000
  3. C) 55,000
  4. D) 60,000

Answer:  C

Diff: 3

LO:  2-9

AACSB:  Analytic skills

Learning Outcome:  None

 

7) John Company has the following information:

 

Income tax rate                                                  40%

Selling price per unit                                     $7.50

Variable cost per unit                                    $2.50

Total fixed costs                                       $100,000

Target after-tax net income                     $42,000

 

Assume the tax rate decreases to 30%. How many fewer units can be sold to retain the same after-tax net income of $42,000?

  1. A) 1,000
  2. B) 2,000
  3. C) 32,000
  4. D) 34,000

Answer:  B

Diff: 3

LO:  2-9

AACSB:  Analytic skills

Learning Outcome:  None

 

8) Atkinson Company wishes to earn after-tax net income of $18,000. Total fixed costs are $84,000 and the contribution margin is $6.00 per unit. Atkinson’s tax rate is 40%. The number of units that must be sold to earn the targeted net income is ________.

  1. A) 14,000
  2. B) 17,000
  3. C) 19,000
  4. D) 21,500

Answer:  C

Diff: 3

LO:  2-9

AACSB:  Analytic skills

Learning Outcome:  None

 

9) A change in the tax rate will not affect the break-even point.

Answer:  TRUE

Diff: 2

LO:  2-9

AACSB:  Analytic skills

Learning Outcome:  None

 

10) The Wolter Company has provided the following information:

 

Income tax rate                                          50%

Selling price per unit                             $6.60

Variable cost per unit                            $5.00

Total fixed costs                            $46,000.00

 

Required:

  1. A) Compute the break-even point in units.
  2. B) Compute the sales volume in units necessary to generate an after-tax net income of $10,000.
  3. C) Compute the sales volume in units necessary to generate an after-tax net income of $20,000.

Answer:

  1. A) $46,000 / ($6.60 – $5.00) = 28,750 units
  2. B) $10,000/ 0.50 = $20,000

($20,000 + $46,000) / ($1.60) = 41,250 units

  1. C) $20,000/ 0.50 = $40,000

($40,000 + $46,000)/($1.60) = 53,750 units

Diff: 3

LO:  2-9

AACSB:  Analytic skills

Learning Outcome:  None

 

11) Lorna Corporation has determined the contribution margin ratio is 35% and the income tax rate is 40%.

 

Required:

  1. A) Assume break-even volume in dollars is $1,500,000. What are total fixed costs?
  2. B) Assume Lorna Corporation wants after-tax net income of $300,000. What volume of sales in dollars is necessary to achieve this net income?

Answer:

  1. A) $1,500,000 × 0.35 = $525,000
  2. B) $300,000/ 0.6= $500,000

($500,000 + $525,000)/0.35 = $2,928,571.4

Diff: 3

LO:  2-9

AACSB:  Analytic skills

Learning Outcome:  None

 

Introduction to Management Accounting, 16e (Horngren)

Chapter 8   Flexible Budgets and Variance Analysis

 

8.1   Questions

 

1) An example of a favorable variance is ________.

  1. A) actual revenues are less than expected revenues
  2. B) actual expenses are less than expected expenses
  3. C) actual material prices are greater than expected material prices
  4. D) expected labor costs are less than actual labor costs

Answer:  B

Diff: 2

LO:  8-1

AACSB:  Analytic skills

Learning Outcome:  Discuss standard costing and variance analysis

 

2) Spending less than budgeted for maintenance costs will result in a(n) ________ variance. When actual revenues exceed budgeted revenues, this results in a(n) ________ variance.

  1. A) unfavorable; unfavorable
  2. B) unfavorable; favorable
  3. C) favorable; unfavorable
  4. D) favorable; favorable

Answer:  D

Diff: 2

LO:  8-1

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss standard costing and variance analysis

 

3) Unfavorable variances ________ represent bad decisions made by managers.

  1. A) always
  2. B) sometimes
  3. C) never
  4. D) none of the above

Answer:  B

Diff: 1

LO:  8-1

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss standard costing and variance analysis

 

4) If actual expenses are less than expected expenses, the expense variance will be unfavorable.

Answer:  FALSE

Diff: 2

LO:  8-1

AACSB:  Analytic skills

Learning Outcome:  Discuss standard costing and variance analysis

 

 

5) A favorable expense variance is when budgeted expenses are less than actual expenses.

Answer:  FALSE

Diff: 2

LO:  8-1

AACSB:  Analytic skills

Learning Outcome:  Discuss standard costing and variance analysis

8.2   Questions

 

1) A budget prepared for one expected level of activity is called a ________.

  1. A) flexible budget
  2. B) static budget
  3. C) variable budget
  4. D) rolling budget

Answer:  B

Diff: 1

LO:  8-2

AACSB:  Reflective thinking skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

2) A budget prepared for different levels of activity is called a ________.

  1. A) rolling budget
  2. B) operating budget
  3. C) flexible budget
  4. D) static budget

Answer:  C

Diff: 1

LO:  8-2

AACSB:  Reflective thinking skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

3) The static budget is based on the ________ level of output and the flexible budget is based on the ________ level of output.

  1. A) actual; expected
  2. B) expected; actual
  3. C) expected; planned
  4. D) actual; projected

Answer:  B

Diff: 2

LO:  8-2

AACSB:  Reflective thinking skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

 

4) A static budget is prepared for one expected level of activity.

Answer:  TRUE

Diff: 1

LO:  8-2

AACSB:  Reflective thinking skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

5) A static budget has multiple levels of activity.

Answer:  FALSE

Diff: 1

LO:  8-2

AACSB:  Reflective thinking skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

6) A flexible budget is different from a variable budget.

Answer:  FALSE

Diff: 1

LO:  8-2

AACSB:  Reflective thinking skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

7) A flexible budget adjusts for changes in sales volume and other cost-drivers.

Answer:  TRUE

Diff: 1

LO:  8-2

AACSB:  Reflective thinking skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

8.3   Questions

 

1) To calculate the numbers in a flexible budget, managers use ________.

  1. A) cost functions developed from regression analysis
  2. B) flexible budget formulas
  3. C) cost functions obtained from the high-low method
  4. D) all of the above

Answer:  D

Diff: 2

LO:  8-3

AACSB:  Reflective thinking skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

 

2) When preparing a flexible budget income statement, ________ costs are constant at different levels of activity.

  1. A) variable
  2. B) step
  3. C) contributed
  4. D) fixed

Answer:  D

Diff: 2

LO:  8-3

AACSB:  Reflective thinking skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

3) Which of the following statements is FALSE?

  1. A) Flexible budgets are prepared for a range of activity.
  2. B) Flexible budgets are matched to actual levels of activity.
  3. C) A flexible budget is also called a variable budget.
  4. D) Flexible budgets are based on different assumptions about cost behavior than those used for static budgets.

Answer:  D

Diff: 2

LO:  8-3

AACSB:  Reflective thinking skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

4) Oroz Company had the following information available:

 

Expected Costs and Selling Price Based on 5,000 units:

Variable manufacturing costs per unit                                               $32

Fixed manufacturing costs per unit                                                     $20

Selling price per unit                                                                                 $70

 

Expected production level                                                        5,000 units

 

In the flexible budget at 10,000 units, what is the total manufacturing cost?

  1. A) $250,000
  2. B) $420,000
  3. C) $520,000
  4. D) $700,000

Answer:  B

Diff: 2

LO:  8-3

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

 

5) Perez Company had the following information available:

 

Expected Costs and Selling Price Based on 5,000 Units:

Variable manufacturing costs per unit                                               $32

Fixed manufacturing costs per unit                                                     $20

Selling price per unit                                                                                 $70

 

Expected production level                                                        5,000 units

 

In the flexible budget at 15,000 units, what is the total manufacturing cost?

  1. A) $480,000
  2. B) $580,000
  3. C) $680,000
  4. D) $780,000

Answer:  B

Diff: 2

LO:  8-3

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

6) Huntsman Company’s variable selling and administrative expenses are $48,000 at a production level of 6,000 units. If the production level is 8,000 units, what are the variable selling administrative expenses?

  1. A) $48,000
  2. B) $56,000
  3. C) $64,000
  4. D) $80,000

Answer:  C

Diff: 1

LO:  8-3

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

7) Which of the following is used to develop flexible budgets?

  1. A) fixed overhead variances
  2. B) static budget variances
  3. C) flexible budget variances
  4. D) cost functions

Answer:  D

Diff: 1

LO:  8-3

AACSB:  Reflective thinking skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

 

8) A company that has an activity-based costing system with multiple cost drivers will prepare a(n) ________ budget.

  1. A) financial planning
  2. B) short-range planning
  3. C) activity-based flexible
  4. D) strategic

Answer:  C

Diff: 2

LO:  8-3

AACSB:  Reflective thinking skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

9) When should a company use an activity-based flexible budget with multiple cost drivers instead of a simple flexible budget with one cost driver?

  1. A) when a significant portion of costs vary with only one cost driver
  2. B) when a significant portion of costs vary with the number of units of output
  3. C) when a significant portion of costs vary with the number of units of sales
  4. D) when a significant portion of costs vary with cost drivers other than units of output

Answer:  D

Diff: 2

LO:  8-3

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

10) Perez Company uses activity-based costing. The company is trying to estimate the costs of the processing activity in the factory. The company has developed the following flexible budget formula:

 

Y = $10.50X + $13,000

Where: Y = Total processing cost per quarter and X = Number of machine hours

 

If 10,000 machine hours are used next quarter, total variable costs are ________ and total fixed costs are ________.

  1. A) $105,000; $13,000
  2. B) $105,000; $130,000,000
  3. C) $113,000; $130,000,000
  4. D) $10.50; $13,000

Answer:  A

Diff: 2

LO:  8-3

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

11) Garcia Company planned to produce 12,000 units. This level of activity required 40 setups at a cost of $18,000 plus $500 per setup. Actual production was 10,000 units, requiring 15 setups. Actual setup cost was $26,000. What is the static budget amount for total setup costs?

  1. A) $21,000
  2. B) $25,500
  3. C) $26,000
  4. D) $38,000

Answer:  D

Diff: 2

LO:  8-3

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

12) Sanchez Company planned to produce 12,000 units. This level of activity required 20 setups at a cost of $22,000 plus $500 per setup. Actual production was 10,000 units, requiring 15 setups. Actual setup cost was $26,000. At 10,000 units, what is the flexible budget amount for total setup costs?

  1. A) $7,500
  2. B) $22,000
  3. C) $26,000
  4. D) $29,500

Answer:  D

Diff: 2

LO:  8-3

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

13) Fill in the blanks to complete the flexible budget for Mammoth Company. Assume the different levels of output are in the relevant range.

____________________________________________________________

Budget                                    Various Levels of Output

Formula

Per Unit

Units                                                           3,000                          4,000                         5,000

Sales                                                   $25                        _____                         _____                       _____

Variable costs:

Manufacturing                           _____                        _____                     $32,000                       _____

Administrative                          $2.625                        _____                         _____                       _____

 

Fixed costs:

Manufacturing                                                               _____                         _____                    $25,000

Administrative                                                           $12,500                         _____                       _____

 

Operating income                                                         _____                         _____                       _____

Answer:                                                    3,000                               4,000                             5,000

Sales                                                      $75,000                        $100,000                      $125,000

Variable costs:

Manufacturing                                     24,000                            32,000                           40,000

Administrative                                       7,875                            10,500                           13,125

Fixed costs:

Manufacturing                                     25,000                            25,000                           25,000

Administrative                                     12,500                            12,500                           12,500

Operating income                               $5,625                          $20,000                         $34,375

Diff: 2

LO:  8-3

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

14) Use the following data to prepare a flexible budget for possible production levels of 5,000, 5,500 and 6,000 units. Assume all levels of production are in the same relevant range.

 

Sales price                                  $12.00 per unit

Variable costs:

Manufacturing                            $6.00 per unit

Administrative                            $1.50 per unit

Selling                                            $0.50 per unit

 

Fixed costs(at 5,000 units):

Manufacturing                                          $15,000

Administrative                                            $5,000

Answer:  Units                                        5,000                      5,500                      6,000

Sales                                                       $60,000                 $66,000                 $72,000

Variable costs:

Manufacturing                                      30,000                    33,000                   36,000

Administrative                                        7,500                      8,250                      9,000

Selling                                                        2,500                      2,750                      3,000

Contribution margin                           20,000                    22,000                   24,000

Fixed costs:

Manufacturing                                      15,000                    15,000                   15,000

Administrative                                        5,000                      5,000                      5,000

Operating income                                        $0                    $2,000                   $4,000

Diff: 2

LO:  8-3

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

8.4   Questions

 

1) The activity-level variance for fixed costs equals zero when ________.

  1. A) the actual level of output equals the static budget level of output
  2. B) the actual level of output is greater than the static budget level of output
  3. C) the actual level of output is less than the static budget level of output
  4. D) all of the above

Answer:  D

Diff: 3

LO:  8-4

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

 

2) In the relevant range, the sales-activity variance for fixed costs is always ________.

  1. A) greater than the flexible budget variance
  2. B) less than the flexible budget variance
  3. C) greater than the static budget variance
  4. D) zero

Answer:  D

Diff: 3

LO:  8-4

AACSB:  Reflective thinking skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

3) The static budget variance is the difference between the ________ and the ________.

  1. A) amounts for the flexible budget; amounts for the static budget
  2. B) flexible budget variance; activity level variance
  3. C) actual results; amounts for the static budget
  4. D) actual results; amounts for the flexible budget

Answer:  C

Diff: 2

LO:  8-4

AACSB:  Reflective thinking skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

4) The static budget variance is equal to the sum of ________ and ________.

  1. A) direct materials variance; direct labor variance
  2. B) fixed overhead variance; variable overhead variance
  3. C) flexible budget variance; activity-level variance
  4. D) direct materials price variance; direct materials quantity variance

Answer:  C

Diff: 2

LO:  8-4

AACSB:  Reflective thinking skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

 

5) Kilsdonk Company has the following information available:

 

Budgeted cost of direct materials at 900,000 units                        $900,000

Budgeted cost of direct materials at 820,000 units                        $820,000

Actual cost of direct materials at 820,000 units                             $840,000

Actual level of output(units)                                                                   820,000

Planned level of output(units)                                                               900,000

 

The cost driver of product costs is units of output. What is the static budget variance for direct material costs?

  1. A) $20,000 Unfavorable
  2. B) $20,000 Favorable
  3. C) $60,000 Favorable
  4. D) $60,000 Unfavorable

Answer:  C

Diff: 2

LO:  8-4

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

6) Margaret Duffy Company has the following information available:

 

Budgeted cost of direct materials at 900,000 units                        $900,000

Budgeted cost of direct materials at 820,000 units                        $820,000

Actual cost of direct materials at 820,000 units                             $840,000

Actual level of output(units)                                                                   820,000

Planned level of output(units)                                                               900,000

 

The cost driver of product costs is units of output. What is the flexible budget variance for direct material costs?

  1. A) $20,000 Unfavorable
  2. B) $20,000 Favorable
  3. C) $60,000 Favorable
  4. D) $60,000 Unfavorable

Answer:  A

Diff: 2

LO:  8-4

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

 

7) Corrao Company had a static budgeted operating income of $8.6 million. Actual operating income was $6.4 million. The flexible budget operating income at the actual level of output is $7,000,000. What is the static-budget variance of operating income?

  1. A) $1.6 million Favorable
  2. B) $1.6 million Unfavorable
  3. C) $2.2 million Favorable
  4. D) $2.2 million Unfavorable

Answer:  D

Diff: 2

LO:  8-4

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

8) For the current year, LeBombard Company’s static budget sales were $225,000. Actual sales for the current year were $220,000. Actual sales last year were $219,000. Expected sales last year were $225,000. What is the static budget variance for sales in the current year?

  1. A) $5,000 Favorable
  2. B) $5,000 Unfavorable
  3. C) $6,000 Favorable
  4. D) $6,000 Unfavorable

Answer:  B

Diff: 2

LO:  8-4

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

9) Differences between the actual results and the flexible budget at the actual level of output achieved are ________ variances.

  1. A) static budget
  2. B) activity budget
  3. C) flexible budget
  4. D) operating budget

Answer:  C

Diff: 2

LO:  8-4

AACSB:  Reflective thinking skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

 

10) Conner Company has the following information:

 

Actual operating loss at 5,000 units                                           $(11,000)

Budgeted operating income at 5,000 units                                    $5,000

Budgeted operating income at 10,000 units                               $12,000

Planned level of operations                                                     10,000 units

Actual level of operations                                                          5,000 units

 

Assume units of output are the cost driver for product costs. What is the static budget variance for operating income?

  1. A) $11,000 Unfavorable
  2. B) $12,000 Unfavorable
  3. C) $23,000 Unfavorable
  4. D) $23,000 Favorable

Answer:  C

Diff: 2

LO:  8-4

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

11) Potter Company has the following information:

 

Actual operating loss at 5,000 units                                           $(11,000)

Budgeted operating income at 5,000 units                                    $5,000

Budgeted operating income at 10,000 units                               $12,000

Planned level of operations                                                     10,000 units

Actual level of operations                                                          5,000 units

 

Assume the cost driver of product costs is units of production. What is the flexible budget variance for operating income?

  1. A) $5,000 Unfavorable
  2. B) $11,000 Unfavorable
  3. C) $16,000 Unfavorable
  4. D) $16,000 Favorable

Answer:  C

Diff: 2

LO:  8-4

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

12) Assume sales are the cost driver for product costs. The difference between the static budget amount for sales and the flexible budget amount for sales at the actual level of sales is called the ________. The difference between the flexible budget amount for sales at the actual level of sales and the actual amount for sales is called the ________.

  1. A) static variance; flexible budget variance
  2. B) master variance; flexible budget variance
  3. C) quantity variance; static budget variance
  4. D) sales activity variance; flexible budget variance

Answer:  D

Diff: 2

LO:  8-4

AACSB:  Reflective thinking skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

13) Differences between actual results and the static budget at the original planned level of output are ________ variances.

  1. A) flexible budget
  2. B) financial budget
  3. C) operating budget
  4. D) static budget

Answer:  D

Diff: 2

LO:  8-4

AACSB:  Reflective thinking skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

14) Flexible budget variances are the deviations of actual results from the ________.

  1. A) flexible budget amounts for the achieved level of activity
  2. B) flexible budget amounts for the static level of activity
  3. C) static budget amounts for the expected level of activity
  4. D) static budget amounts for last year’s level of activity

Answer:  A

Diff: 2

LO:  8-4

AACSB:  Reflective thinking skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

15) The amount of actual operating income may differ from the static budget amount for operating income because ________.

  1. A) actual output levels were not the same as in the static budget
  2. B) actual variable costs were higher than expected variable costs
  3. C) actual fixed costs were higher than expected fixed costs
  4. D) all of the above

Answer:  D

Diff: 2

LO:  8-4

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

16) Which is NOT a reason for a static budget variance?

  1. A) Actual sales volume was higher than projected sales volume.
  2. B) Actual variable costs were higher than static budget variable costs.
  3. C) Actual fixed costs were higher than static budget fixed costs.
  4. D) Actual sales volume in current period was higher than projected sales volume in last period.

Answer:  D

Diff: 2

LO:  8-4

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

17) If sales are the cost driver, unfavorable flexible budget variances result from ________.

  1. A) actual costs exceeding planned costs
  2. B) planned costs exceeding actual costs
  3. C) actual sales exceeding planned sales
  4. D) planned sales exceeding actual sales

Answer:  A

Diff: 2

LO:  8-4

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

18) Flexible budget variances are the difference between the actual results and ________.

  1. A) the static budget for the planned level of output
  2. B) the flexible budget for the planned level of output
  3. C) the flexible budget for the actual level of output
  4. D) the master budget for the planned level of output

Answer:  C

Diff: 2

LO:  8-4

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

19) The following data are for Pablo Corporation:

 

Flexible Budget for

Actual               Static Budget             Actual Sales Activity

Units                                                           18,000                           16,000                                         18,000

Sales                                                       $360,000                       $320,000                                    $360,000

Variable costs                                        234,000                         192,000                                       216,000

Contribution margin                        $126,000                       $128,000                                    $144,000

Fixed costs                                                76,000                           80,000                                         80,000

Operating income                                $50,000                         $48,000                                       $64,000

 

The flexible budget variance for operating income is ________.

  1. A) $2,000 Favorable
  2. B) $2,000 Unfavorable
  3. C) $14,000 Favorable
  4. D) $14,000 Unfavorable

Answer:  D

Diff: 2

LO:  8-4

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

20) The following data are for California Closets:

 

Flexible Budget for

Actual               Static Budget              Actual Sales Activity

Units                                                           18,000                           16,000                                          18,000

Sales                                                       $360,000                       $320,000                                     $360,000

Variable costs                                        234,000                         192,000                                       216,000

Contribution margin                        $126,000                       $128,000                                     $144,000

Fixed costs                                                76,000                           80,000                                          80,000

Operating income                                $50,000                         $48,000                                       $64,000

 

The sales activity variance for operating income is ________.

  1. A) $14,000 Favorable
  2. B) $14,000 Unfavorable
  3. C) $16,000 Favorable
  4. D) $16,000 Unfavorable

Answer:  C

Diff: 2

LO:  8-4

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

21) The following data are for Sandy Corporation:

 

Flexible Budget for

Actual                 Static Budget               Actual Sales Activity

Units                                                       18,000                             16,000                                           18,000

Sales                                                   $360,000                         $320,000                                      $360,000

Variable costs                                    234,000                           192,000                                         216,000

Contribution margin                    $126,000                         $128,000                                      $144,000

Fixed costs                                            76,000                             80,000                                           80,000

Operating income                            $50,000                           $48,000                                         $64,000

 

The static budget variance for operating income is ________.

  1. A) $2,000 Favorable
  2. B) $2,000 Unfavorable
  3. C) $16,000 Favorable
  4. D) $16,000 Unfavorable

Answer:  A

Diff: 2

LO:  8-4

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

22) If the flexible budget variance was $6,000 Favorable and the sales activity variance was $3,000 Favorable, then the static budget variance was ________.

  1. A) $3,000 Favorable
  2. B) $3,000 Unfavorable
  3. C) $9,000 Favorable
  4. D) $9,000 Unfavorable

Answer:  C

Diff: 2

LO:  8-4

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

23) Who is usually responsible for sales activity variances for income?

  1. A) operating managers in factory
  2. B) marketing managers
  3. C) research and development function
  4. D) product design function

Answer:  B

Diff: 2

LO:  8-4

AACSB:  Reflective thinking skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

24) If the sales activity variance was $8,000 Favorable and the static budget variance was $10,000 Favorable, then the flexible budget variance was ________.

  1. A) $2,000 Favorable
  2. B) $2,000 Unfavorable
  3. C) $18,000 Favorable
  4. D) $18,000 Unfavorable

Answer:  A

Diff: 2

LO:  8-4

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

25) The sales activity variance for ________ will always be zero.

  1. A) sales
  2. B) contribution margin
  3. C) variable costs
  4. D) fixed costs

Answer:  D

Diff: 2

LO:  8-4

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

26) Brad Company planned to produce 12,000 units. This level of production required 20 setups at a cost of $18,000 plus $500 per setup. Actual production was 10,000 units, requiring 15 setups. Actual setup cost was $26,000. What is the static budget variance for setup costs?

  1. A) $2,000 Favorable
  2. B) $2,000 Unfavorable
  3. C) $2,500 Favorable
  4. D) $2,500 Unfavorable

Answer:  A

Diff: 2

LO:  8-4

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

27) Leshan Company planned to produce 12,000 units. This level of production required 20 setups at a cost of $18,000 plus $500 per setup. Actual production was 10,000 units, requiring 15 setups. Actual setup cost was $26,000. What is the flexible budget variance for setup costs?

  1. A) $500 Favorable
  2. B) $500 Unfavorable
  3. C) $2,000 Favorable
  4. D) $2,000 Unfavorable

Answer:  B

Diff: 3

LO:  8-4

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

28) Which statement would NOT be a reason for a flexible budget variance?

  1. A) Material prices were different than expected.
  2. B) Labor prices were different than expected.
  3. C) Actual volume of activity was different than expected.
  4. D) Amount of labor used per unit of output was different than expected.

Answer:  C

Diff: 3

LO:  8-4

AACSB:  Analytic skills

Learning Outcome:  Discuss standard costing and variance analysis

 

29) Total static budget variances are equal to the sum of activity-level variances and flexible budget variances.

Answer:  TRUE

Diff: 3

LO:  8-4

AACSB:  Reflective thinking skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

30) The static budget variance is the difference between actual results and the static budget for the original planned level of output.

Answer:  TRUE

Diff: 2

LO:  8-4

AACSB:  Reflective thinking skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

31) If the total sales-activity variance and the static-budget variance are equal, there is no flexible budget variance.

Answer:  TRUE

Diff: 2

LO:  8-4

AACSB:  Reflective thinking skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

32) The following data are for the month of January for the Soloway Company. Assume the cost driver is the number of units sold.

 

Static budget data:

Sales of 9,000 pairs at $90 per pair

Variable costs of $69 per pair

Total fixed costs $108,000

 

Actual results:

Sales of 9,600 pairs at $87 per pair

Variable costs of $72 per pair

Total fixed costs $109,200

 

Required:

  1. A) What is the static budget operating income?
  2. B) What is the sales activity variance for operating income?
  3. C) What is the flexible budget variance for operating income?

Answer:

Actual                   Flexible Budget               Static Budget

Sales                                                    $835,200                               $864,000                       $810,000

Variable costs                                      691,200                                 662,400                         621,000

Fixed costs                                           109,200                                 108,000                         108,000

Operating income                              $34,800                                 $93,600                         $81,000

 

  1. A) $81,000
  2. B) $12,600 Favorable
  3. C) $58,800 Unfavorable

Diff: 2

LO:  8-4

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

 

33) Sunday Corporation prepared the following performance report for variable overhead costs for the last quarter of the year. Machine hours are the cost driver for all overhead costs.

 

Cost Driver(Machine Hours)

Variable Overhead Costs:

Actual

38,000

Static

Budget

35,000

Variances
Utilities $15,700 $14,000 $1,700 U
Indirect Labor 86,500 80,500 6,000 U
Supplies 26,000 21,000 5,000 U
Maintenance 44,900 42,000 2,900 U
Total Variable Overhead Costs $173,100 $157,500 $15,600 U

 

The cost formulas used for the variable overhead costs are:

 

Variable Overhead Costs Cost Formula
Utilities

Indirect Labor

Supplies

Maintenance

$0.40 per machine hour

$2.30 per machine hour

$0.60 per machine hour

$1.20 per machine hour

 

Your boss called you into the office and reprimanded you for the unfavorable variances. The boss says you are fired unless you can explain why the variances are all unfavorable.

 

Required:

Calculate the flexible budget variances and the activity-level variances for each cost.

Answer:

  Actual Flexible Budget Variances Flexible Budget Activity Level Variances Static Budget
Utilities $15,700 $500 U $15,200 $1,200 U $14,000
Indirect Labor 86,500 900 F 87,400 6,900 U 80,500
Supplies 26,000 3,200 U 22,800 1,800 U 21,000
Maintenance 44,900 700 F 45,600 3,600 U 42,000
Total $173,100 $2,100 U $171,000 $13,500 U $157,500

 

Diff: 3

LO:  8-4

AACSB:  Analytic skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

 

 

34) Differentiate between a static budget variance and a flexible budget variance.

Answer:  A static budget variance is the difference between the originally planned (static) amount and the actual amount. In the case of sales, the static budget variance for sales is the difference between sales at the planned level of operations and sales at the actual level of operations.

A flexible budget variance is the difference between the actual amount and the amount that is expected for the actual level of output achieved. In the case of sales, the flexible budget variance is the difference between sales at the actual level of operations and expected sales at the actual level of operations.

Diff: 3

LO:  8-4

AACSB:  Reflective thinking skills

Learning Outcome:  Prepare a flexible budget and discuss the interpretation and use of flexible budgets

8.5   Questions

 

1) One variance often influences another variance. If the direct materials price variance is favorable, then it is possible that this variance will cause ________.

  1. A) the direct materials quantity variance to be unfavorable
  2. B) the direct labor price variance to be unfavorable
  3. C) the direct labor price variance to be favorable
  4. D) the direct materials quantity variance to be favorable

Answer:  A

Diff: 2

LO:  8-5

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss standard costing and variance analysis

 

2) Which of the following is NOT an example of efficient performance?

  1. A) Direct labor hours used per unit were less than expected.
  2. B) Direct material used per unit was less than expected.
  3. C) More outputs were achieved with less inputs than predicted.
  4. D) More outputs were produced than expected.

Answer:  D

Diff: 2

LO:  8-5

AACSB:  Analytic skills

Learning Outcome:  Discuss standard costing and variance analysis

 

3) Purple Rain Company planned to sell 35,000 units. Actual sales were 30,000 units. Based on this information, Blue Company was ________.

  1. A) efficient
  2. B) inefficient
  3. C) effective
  4. D) ineffective

Answer:  D

Diff: 1

LO:  8-5

AACSB:  Analytic skills

Learning Outcome:  Discuss standard costing and variance analysis

 

4) Yellow Cake Company planned to produce and sell 900 units at a total cost of $180,000. Actual production and sales were 900 units at a cost of $170,000. The company was ________.

  1. A) efficient and ineffective
  2. B) inefficient and ineffective
  3. C) inefficient and effective
  4. D) efficient and effective

Answer:  D

Diff: 1

LO:  8-5

AACSB:  Analytic skills

Learning Outcome:  Discuss standard costing and variance analysis

5) ________ is the degree to which an organization minimizes the ________ used to achieve an objective.

  1. A) Efficiency; costs
  2. B) Efficiency; resources
  3. C) Effectiveness; resources
  4. D) Effectiveness; costs

Answer:  B

Diff: 2

LO:  8-5

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss standard costing and variance analysis

 

6) When a firm meets a sales goal, it is said to be ________. When a firm incurs more direct material costs to manufacture products than expected, the firm is said to be ________.

  1. A) effective; ineffective
  2. B) efficient; inefficient
  3. C) effective; inefficient
  4. D) efficient; ineffective

Answer:  C

Diff: 2

LO:  8-5

AACSB:  Analytic skills

Learning Outcome:  Discuss standard costing and variance analysis

 

7) A favorable materials price variance can affect all of the following variances except ________.

  1. A) labor rate variance
  2. B) labor efficiency variance
  3. C) materials quantity variance
  4. D) flexible budget variance for direct materials

Answer:  A

Diff: 2

LO:  8-5

AACSB:  Analytic skills

Learning Outcome:  Discuss standard costing and variance analysis

 

 

8) Which of the following statements about perfection standards is TRUE?

  1. A) It is generally believed that they have a negative influence on employee morale.
  2. B) They are expressions of the most efficient performance possible.
  3. C) They usually result in unfavorable variances.
  4. D) All of the above

Answer:  D

Diff: 2

LO:  8-5

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss standard costing and variance analysis

9) Variances should be investigated if they ________.

  1. A) are favorable
  2. B) are unfavorable
  3. C) are smaller than the variances in the prior period
  4. D) exceed certain dollar amounts or percentage deviations from the budget

Answer:  D

Diff: 2

LO:  8-5

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss standard costing and variance analysis

 

10) Favorable variances do not require investigation.

Answer:  FALSE

Diff: 2

LO:  8-5

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss standard costing and variance analysis

 

11) Favorable flexible budget variances are always good news.

Answer:  FALSE

Diff: 2

LO:  8-5

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss standard costing and variance analysis

 

12) Sales-activity variances measure how efficient managers have been in meeting the planned sales goal.

Answer:  FALSE

Diff: 2

LO:  8-5

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss standard costing and variance analysis

 

 

13) Perfection standards and ideal standards are different.

Answer:  FALSE

Diff: 2

LO:  8-5

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss standard costing and variance analysis

 

14) Ideal standards make no provision for waste, spoilage and machine breakdowns.

Answer:  TRUE

Diff: 2

LO:  8-5

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss standard costing and variance analysis

 

15) Ideal standards have an adverse effect on employee motivation.

Answer:  TRUE

Diff: 2

LO:  8-5

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss standard costing and variance analysis

16) As the terms are used in the budgeting process, it is possible for a company to be efficient at the same time it is ineffective.

Answer:  TRUE

Diff: 2

LO:  8-5

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss standard costing and variance analysis

 

17) Efficiency is the degree to which a goal or objective is met.

Answer:  FALSE

Diff: 1

LO:  8-5

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss standard costing and variance analysis

 

18) Currently attainable standards do not make allowances for spoilage and waste.

Answer:  FALSE

Diff: 2

LO:  8-5

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss standard costing and variance analysis

 

 

19) Currently attainable standards are levels of performance that can be achieved by realistic levels of effort.

Answer:  TRUE

Diff: 2

LO:  8-5

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss standard costing and variance analysis

 

20) The unfavorable variances resulting from ideal standards are intended to constantly remind personnel of the continuous need for improvement.

Answer:  TRUE

Diff: 2

LO:  8-5

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss standard costing and variance analysis

 

21) One of the first questions a manager should consider when explaining a large variance is whether expectations are valid.

Answer:  TRUE

Diff: 2

LO:  8-5

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss standard costing and variance analysis

 

22) In most companies, variances are investigated only if they exceed a minimum dollar amount or percentage deviation from budgeted amounts.

Answer:  TRUE

Diff: 2

LO:  8-5

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss standard costing and variance analysis

 

8.6   Questions

 

1) The following information is available for Munter Manufacturing Company.

— Direct materials price standard is $3.25 per pound.

— Direct materials quantity standard is six pounds per finished unit.

— Budgeted production is 25,000 finished units.

— 175,000 pounds of direct materials were purchased for $525,000.

— 175,000 pounds of direct materials were used in production.

— 25,600 finished units of product were produced.

 

What is the direct materials price variance?

  1. A) $43,750 Unfavorable
  2. B) $43,750 Favorable
  3. C) $350,000 Unfavorable
  4. D) $350,000 Favorable

Answer:  B

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

2) The following information is available for Maher Manufacturing Company.

— Direct materials price standard is $3.25 per pound.

— Direct materials quantity standard is six pounds per finished unit.

— Budgeted production is 25,000 finished units.

— 175,000 pounds of direct materials were purchased for $525,000.

— 175,000 pounds of direct materials were used in production.

— 25,600 finished units of product were produced.

 

What is the direct materials quantity variance?

  1. A) $21,400 Unfavorable
  2. B) $21,400 Favorable
  3. C) $69,550 Unfavorable
  4. D) $69,550 Favorable

Answer:  C

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

3) The following information is presented for the Marathon Manufacturing Company.

— Direct labor rate standard is $11.55.

— Direct labor efficiency standard is 2.5 hours per unit.

— Budgeted production is 1,200 units.

— Production required 2,910 direct labor hours at a cost of $33,174.

— Actual production is 1,150 units.

What is the direct labor price variance?

  1. A) $172.50 Favorable
  2. B) $180.00 Unfavorable
  3. C) $436.50 Favorable
  4. D) $435.50 Unfavorable

Answer:  C

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

4) The direct materials price variance reflects the effects of ________.

  1. A) changing input prices, holding the quality of outputs constant
  2. B) changing input quantities, holding the input price constant
  3. C) changing input prices, holding the quantity of inputs constant
  4. D) changing input quantities, while changing the input price

Answer:  C

Diff: 2

LO:  8-6

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

5) The following information is presented for the Maybeel Manufacturing Company.

— Direct labor rate standard is $11.55.

— Direct labor efficiency standard is 2.5 hours per unit.

— Budgeted production is 1,200 units.

— Production required 2,910 direct labor hours at a cost of $33,174.

— Actual production is 1,150 units.

What is the direct labor efficiency variance?

  1. A) $404.25 Favorable
  2. B) $404.25 Unfavorable
  3. C) $1,039.50 Favorable
  4. D) $1,039.50 Unfavorable

Answer:  B

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

6) Johnsen Company reported a flexible budget variance for direct labor of $8,000 Favorable for the current year. If the direct labor price variance was $2,000 Unfavorable, what was the direct labor efficiency variance?

  1. A) $6,000 Unfavorable
  2. B) $6,000 Favorable
  3. C) $10,000 Favorable
  4. D) $10,000 Unfavorable

Answer:  C

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

7) Christian Company reported a flexible budget variance for direct materials costs of $10,000 Favorable for the current year. If the direct materials price variance was $2,000 Favorable, what was the direct materials quantity variance?

  1. A) $8,000 Unfavorable
  2. B) $8,000 Favorable
  3. C) $12,000 Favorable
  4. D) $12,000 Unfavorable

Answer:  B

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

8) A company has the following information available about one of its products:

 

Standard price per pound of input                                       $25

Actual price per pound of input                                            $24

Standard inputs per unit of output                           3 pounds

Actual units of output                                                           2,770

Direct Materials Quantity Variance                                $250 F

 

How many pounds of material were used?

  1. A) $8,300
  2. B) $8,310
  3. C) $8,320
  4. D) $8,330

Answer:  A

Diff: 3

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

9) A company has the following information available about one of its products:

 

Standard price per pound of input                                           ?

Actual price per pound of input                                           $27

Standard inputs per unit of output                           3 pounds

Actual units of output                                                           3,000

Direct Materials Price Variance                                 $18,000 F

Actual pounds of input used                                              9,000

 

What is the standard price per pound of input?

  1. A) $25
  2. B) $27
  3. C) $29
  4. D) $33

Answer:  C

Diff: 3

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

10) Beckowski Company had the following information available for its specialty product:

 

Standards for one unit of product:

Direct Materials: 5 pounds at $2 per pound

Direct Labor: 0.50 hour at $16 per hour

 

Materials and Labor Used to produce 8,500 units:

Direct Materials: 46,000 pounds at ? per pound

Direct Labor: 4,000 hours at $16.80 per hour

 

If the Direct Materials Price Variance is $4,600 Unfavorable, what is the actual cost per pound of direct materials used?

  1. A) $1.80
  2. B) $1.90
  3. C) $2.00
  4. D) $2.10

Answer:  D

Diff: 3

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

11) Parrish Company had the following information available for its specialty product:

 

Standards for one unit of product:

Direct Materials: 5 pounds at $2 per pound

Direct Labor: 0.50 hour at $16 per hour

 

Materials and Labor Used to produce 8,500 units:

Direct Materials: ? pounds at $2.10 per pound

Direct Labor: 4,000 hours at $16.80 per hour

 

If the Direct Materials Quantity Variance is $7,000 Unfavorable, what is the actual quantity of direct materials used?

  1. A) 7,000
  2. B) 42,500
  3. C) 46,000
  4. D) 47,000

Answer:  C

Diff: 3

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

12) Cornell Company had the following information available for its specialty product:

 

Standards for one unit of product:

Direct Materials: 5 pounds at $2 per pound

Direct Labor: 0.50 hour at $16 per hour

 

Materials and Labor Used to produce 8,500 units:

Direct Materials: 46,000 pounds at $3 per pound

Direct Labor: 4,000 hours at ? per hour

 

If the Direct Labor Price Variance is $4,600 Unfavorable, what is the actual labor rate per hour?

  1. A) $16.00
  2. B) $16.50
  3. C) $17.10
  4. D) $17.15

Answer:  D

Diff: 3

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

13) Gollerowski Company had the following information available for its specialty product:

 

Standards for one unit of product:

Direct Materials: 5 pounds at $2 per pound

Direct Labor: 0.50 hour at $16 per hour

 

Materials and Labor Used to produce 8,500 units:

Direct Materials: 46,000 pounds at 4 per pound

Direct Labor: ? hours at $17 per hour

 

If the Direct Labor Efficiency Variance is $4,000 Unfavorable, what are the actual number of hours worked?

  1. A) $4,000
  2. B) $4,250
  3. C) $4,400
  4. D) $4,500

Answer:  D

Diff: 3

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

14) The quantity variance for direct materials can be computed by multiplying the standard price by the difference between the ________.

  1. A) standard inputs allowed and expected inputs allowed at actual output
  2. B) quantity of inputs actually used and the quantity of inputs that should have been used for the expected output
  3. C) standard inputs allowed and expected inputs allowed for expected output
  4. D) quantity of inputs actually used and the quantity of inputs that should have been used for actual output

Answer:  D

Diff: 2

LO:  8-6

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

15) Rate variances are the same as ________ variances. Efficiency variances are the same as ________ variances.

  1. A) spending; effective
  2. B) activity; static
  3. C) usage; quantity
  4. D) price; quantity

Answer:  D

Diff: 1

LO:  8-6

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

16) A ________ is most likely to be held accountable for price variances for direct materials.

  1. A) machine operator
  2. B) production supervisor
  3. C) purchasing manager
  4. D) marketing director

Answer:  C

Diff: 1

LO:  8-6

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

17) In which of the following scenarios can Eastman Company NOT have favorable flexible budget variance for direct materials?: When direct material price variance is ________, and when direct material quantity variance is ________,

  1. A) favorable; unfavorable
  2. B) unfavorable; favorable
  3. C) unfavorable; unfavorable
  4. D) favorable; favorable

Answer:  C

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

18) If the direct labor price variance is $800 Favorable and the direct labor usage variance is $700 Unfavorable, then ________.

  1. A) the flexible budget variance for direct labor is $100 Favorable
  2. B) actual total wages paid were $800 more than expected
  3. C) actual labor hours were less than expected
  4. D) actual material prices were less than expected

Answer:  A

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

19) The following information is for Brankov Corporation:

 

Direct Materials (measured in pounds)

Standard price per unit of input                                            $20

Actual price per unit of input                                                 $18

Standard inputs per unit of output                           3 pounds

Actual units of input                                             8,300 pounds

Actual units of output                                                2,770 units

 

What is the flexible budget variance for direct materials?

  1. A) $16,400 Favorable
  2. B) $16,400 Unfavorable
  3. C) $16,800 Favorable
  4. D) $16,800 Unfavorable

Answer:  C

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

20) Barber Company produces 2,500 units. Each unit was expected to require 2 labor hours at a cost of $10 per hour. Total labor cost was $52,250 for 4,750 hours worked. Direct labor is measured in labor hours. What is the direct labor price variance?

  1. A) $2,500 Favorable
  2. B) $2,500 Unfavorable
  3. C) $4,750 Favorable
  4. D) $4,750 Unfavorable

Answer:  D

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

21) Butters Company produces 2,500 units. Each unit was expected to require 2 labor hours at a cost of $10 per hour. Total labor cost was $52,250 for 4,750 hours worked. Direct labor is measured in labor hours. What is the direct labor quantity variance?

  1. A) $2,500 Favorable
  2. B) $2,500 Unfavorable
  3. C) $2,750 Favorable
  4. D) $2,750 Unfavorable

Answer:  A

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

22) Ivanovich Company produces 2,500 units. Each unit was expected to require 2 labor hours at a cost of $10 per hour. Total labor cost was $52,250 for 4,750 hours worked. Direct labor is measured in labor hours. What is the flexible budget variance for direct labor?

  1. A) $2,250 Favorable
  2. B) $2,250 Unfavorable
  3. C) $7,500 Favorable
  4. D) $7,500 Unfavorable

Answer:  B

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

23) The Cheeseman Company makes tables and the following standards have been developed:

 

Standard Inputs Expected                   Standard Price Expected

                                                  For Each Unit of Output                                  Per Unit of Input

Direct Materials                                            10 pounds                                        $4 per pound

Direct Labor                                                         3 hours                                         $16 per hour

 

Production of 230 tables was expected in July, but 250 tables were actually completed. Direct materials purchased and used were 2,200 pounds at an actual price of $4.50 per pound. Direct labor cost for the month was $10,620, and the actual pay per hour was $18.00. What is the direct material price variance for July?

  1. A) $800 Favorable
  2. B) $800 Unfavorable
  3. C) $1,100 Favorable
  4. D) $1,100 Unfavorable

Answer:  D

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

24) The Cornell Company makes tables for which the following standards have been developed:

 

Standard Inputs Expected                   Standard Price Expected

                                                  For Each Unit of Output                                  Per Unit of Input

Direct Materials                                            10 pounds                                        $4 per pound

Direct Labor                                                         3 hours                                         $16 per hour

 

Production of 200 tables was expected in July, but 220 tables were actually completed. Direct materials purchased and used were 2,000 pounds at an actual price of $4.40 per pound. Direct labor cost for the month was $10,620, and the actual pay per hour was $18.00. What is the direct material quantity variance for July?

  1. A) $800 Favorable
  2. B) $800 Unfavorable
  3. C) $880 Favorable
  4. D) $880 Unfavorable

Answer:  A

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

25) The Matthew Company makes tables for which the following standards have been developed:

 

Standard Inputs Expected                   Standard Price Expected

                                                  For Each Unit of Output                                  Per Unit of Input

Direct Materials                                            17 pounds                                  $5.20 per pound

Direct Labor                                                         3 hours                                         $16 per hour

 

Production of 200 tables was expected in May, but 220 tables were actually completed. Direct materials purchased and used were 2,100 pounds at an actual price of $4.40 per pound. Direct labor cost for the month was $10,620, and the actual pay per hour was $18.00. What is the direct labor price variance for the month of May?

  1. A) $1,180 Favorable
  2. B) $1,180 Unfavorable
  3. C) $1,200 Favorable
  4. D) $1,200 Unfavorable

Answer:  B

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

26) The Quinn Company makes tables for which the following standards have been developed:

 

Standard Inputs Expected                   Standard Price Expected

                                                  For Each Unit of Output                                  Per Unit of Input

Direct Materials                                            10 pounds                                        $4 per pound

Direct Labor                                                         3 hours                                         $16 per hour

 

Production of 200 tables was expected in June, but 220 tables were actually completed. Direct materials purchased and used were 2,100 pounds at an actual price of $4.40 per pound. Direct labor cost for the month was $10,620, and the actual pay per hour was $18.00. What is the direct labor quantity variance for the month of June?

  1. A) $1,120 Favorable
  2. B) $1,120 Unfavorable
  3. C) $1,260 Favorable
  4. D) $1,260 Unfavorable

Answer:  A

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

27) The Brucker Company makes mugs for which the following standards have been developed:

 

Standard Inputs Expected                           Standard Price Expected

                                              For Each Unit of Output                                          Per Unit of Input

Direct Materials                                            5 ounces                                                 $2 per ounce

Direct Labor                                                  1.5 hours                                                    $8 per hour

 

Production of 400 mugs was expected in July, but 440 mugs were actually completed. Direct materials purchased and used were 2,100 ounces at an actual price of $2.30 per ounce. Direct labor cost for the month was $5,310, and the actual pay per hour was $9.00. What is the direct material price variance for July?

  1. A) $400 Favorable
  2. B) $400 Unfavorable
  3. C) $630 Favorable
  4. D) $630 Unfavorable

Answer:  D

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

28) The Savage Company makes mugs for which the following standards have been developed:

 

Standard Inputs Expected                           Standard Price Expected

                                              For Each Unit of Output                                          Per Unit of Input

Direct Materials                                            5 ounces                                                 $2 per ounce

Direct Labor                                                  1.5 hours                                                    $8 per hour

 

Production of 400 mugs was expected in July, but 440 mugs were actually completed. Direct materials purchased and used were 2,100 ounces at an actual price of $2.20 per ounce. Direct labor cost for the month was $5,310, and the actual pay per hour was $9.00. What is the direct material quantity variance for July?

  1. A) $200 Favorable
  2. B) $200 Unfavorable
  3. C) $220 Favorable
  4. D) $220 Unfavorable

Answer:  A

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

29) The Tulip Company makes mugs for which the following standards have been developed:

 

Standard Inputs Expected                           Standard Price Expected

                                              For Each Unit of Output                                          Per Unit of Input

Direct Materials                                            5 ounces                                                 $2 per ounce

Direct Labor                                                  2.5 hours                                                    $8 per hour

 

Production of 400 mugs was expected in August, but 440 mugs were actually completed. Direct materials purchased and used were 2,100 ounces at an actual price of $2.20 per ounce. Direct labor cost for the month was $5,310, and the actual pay per hour was $9.00. What is the direct labor price variance for August?

  1. A) $420 Favorable
  2. B) $420 Unfavorable
  3. C) $590 Favorable
  4. D) $590 Unfavorable

Answer:  D

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

30) The Banks Company makes mugs for which the following standards have been developed:

 

Standard Inputs Expected                           Standard Price Expected

                                              For Each Unit of Output                                          Per Unit of Input

Direct Materials                                            5 ounces                                                 $2 per ounce

Direct Labor                                                  1.5 hours                                                    $8 per hour

 

Production of 400 mugs was expected in July, but 440 mugs were actually completed. Direct materials purchased and used were 2,100 ounces at an actual price of $2.30 per ounce. Direct labor cost for the month was $5,310, and the actual pay per hour was $9.00. What is the direct labor quantity variance for July?

  1. A) $560 Favorable
  2. B) $560 Unfavorable
  3. C) $630 Favorable
  4. D) $630 Unfavorable

Answer:  A

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

31) In a manufacturing area of a firm, poor product design and problems with the quality of materials will, more than likely, result in a(n) ________ variance or ________ variance.

  1. A) unfavorable material efficiency; unfavorable labor usage
  2. B) favorable material efficiency; unfavorable labor price
  3. C) unfavorable material price; unfavorable labor rate
  4. D) unfavorable material price; unfavorable labor usage

Answer:  A

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

32) One cause of a flexible budget variance for direct labor may be a difference between standard and actual hourly wage rates for factory workers.

Answer:  TRUE

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

 

33) A quantity variance for direct materials measures the deviation between the quantity of inputs that should have been used to achieve the actual output and the actual quantity of inputs used to achieve the actual output.

Answer:  TRUE

Diff: 2

LO:  8-6

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

34) The direct materials price variance is based on the standard quantity of inputs allowed for the actual output.

Answer:  FALSE

Diff: 2

LO:  8-6

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

35) The flexible budget variance for direct labor can be broken down into a price variance and an effectiveness variance.

Answer:  FALSE

Diff: 2

LO:  8-6

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

36) The quantity variance and efficiency variance for direct labor are different types of variances.

Answer:  FALSE

Diff: 1

LO:  8-6

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

37) The flexible budget variance for direct labor equals the labor price variance plus the labor quantity variance.

Answer:  TRUE

Diff: 2

LO:  8-6

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

38) A favorable materials price variance may lead to an unfavorable materials usage variance.

Answer:  TRUE

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

39)                                                                                             Direct Material                        Direct Labor

Std. price per unit of input                                                      $12 per foot                        $14 per hour

Actual price per unit of input                                                 $14 per foot                        $13 per hour

Std. inputs allowed per unit of output                                             5 feet                                  3 hours

Actual units of input                                                                     2,500 feet                          1,550 hours

 

Actual units of output                                                                   600 units

 

Required:

Compute the price and quantity variances for direct materials and direct labor.

Answer:  Direct material:

Price variance: ($14 – $12) × 2,500 = $5,000 Unfavorable

Quantity variance: [2,500 – (600 × 5)] × $12 = $6,000 Favorable

Direct labor:

Price variance: ($13 – $14) × 1,550 = $1,550 Favorable

Quantity variance: [1,550 – (600 × 3)] × $14 = $3,500 Favorable

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

40) The following data was obtained for a company that makes statues:

 

Standard Inputs Expected                                           Standard Price

                                                         For Each Unit of Output                                        Per Unit of Input

Direct material                                                        5 pounds                                            $12 per pound

Direct labor                                                               1.5 hours                                               $12 per hour

 

During the month of July, the company actually produced 1,000 statutes, which is 100 units less than expected. Direct material purchased and used amounted to 5,500 pounds at a cost of $12.50 per pound. Actual direct labor was 1,450 hours at an actual cost of $13.00 per hour.

 

Required:

  1. A) Compute the price and quantity variances for direct materials.
  2. B) Compute the price and quantity variances for direct labor.

Answer:  A) Price variance = ($12.50 – $12.00) × 5,500 = $2,750 Unfavorable

Quantity variance = (5,500 – 5,000) × $12 = $6,000 Unfavorable

  1. B) Price variance = ($13.00 – $12.00) × 1,450 = $1,450 Unfavorable

Quantity variance = (1,450 – 1,500) × $12.00 = $600 Favorable

Diff: 2

LO:  8-6

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

 

41) What are some common causes of unfavorable quantity variances for direct labor?

Answer:  Some common causes are poor quality of material, untrained workers, poor workmanship, changes in production method, new workers, machine breakdowns, faulty product designs, and inefficient machines.

Diff: 2

LO:  8-6

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

8.7   Questions

 

1) Variable overhead efficiency variances are unfavorable when ________.

  1. A) the actual cost-driver activity exceeds the standard activity allowed for the actual output
  2. B) the actual cost-driver activity is less than the standard activity allowed for the actual output
  3. C) the actual cost-driver activity exceeds the standard activity allowed for the static budget output
  4. D) the actual cost-driver activity is less than the standard activity allowed for the static budget output

Answer:  A

Diff: 3

LO:  8-7

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

2) Simmons Company has the following information available for variable overhead costs. Direct labor hours are the cost driver for variable overhead costs.

 

Actual variable overhead costs                                        $4,700

Standard variable overhead costs                    $1.20 per hour

Actual direct labor hours                                         3,750 hours

Standard direct labor hours per unit                            5 hours

Units produced                                                                           700

 

What is the variable overhead spending variance?

  1. A) $200 Favorable
  2. B) $200 Unfavorable
  3. C) $500 Favorable
  4. D) $500 Unfavorable

Answer:  B

Diff: 3

LO:  8-7

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

3) Dooley Company has the following information available for variable overhead costs. Direct labor hours are the cost driver for variable overhead costs.

 

Actual variable overhead costs                                        $4,700

Standard variable overhead costs                   $1.20 per hour

Actual direct labor hours                                         3,750 hours

Standard direct labor hours per unit                           5 hours

Units produced                                                                          700

 

What is the variable overhead efficiency variance?

  1. A) $300 Favorable
  2. B) $300 Unfavorable
  3. C) $500 Favorable
  4. D) $500 Unfavorable

Answer:  B

Diff: 3

LO:  8-7

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

4) Indian Company has the following information available for variable overhead costs. Direct labor hours are the cost driver for variable overhead costs.

 

Actual variable overhead costs                                        $5,120

Standard variable overhead costs                   $3.00 per hour

Actual direct labor hours                                         2,000 hours

Standard direct labor hours per unit                           3 hours

Units produced                                                                       1,000

 

What is the variable overhead spending variance?

  1. A) $880 Favorable
  2. B) $1,000 Unfavorable
  3. C) $3,880 Favorable
  4. D) $3,880 Unfavorable

Answer:  A

Diff: 3

LO:  8-7

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

5) Switsdorf Company has the following information available for variable overhead costs. Direct labor hours are the cost driver for variable overhead costs.

 

Actual variable overhead costs                                        $5,120

Standard variable overhead costs                    $3.00 per hour

Actual direct labor hours                                         2,000 hours

Standard direct labor hours per unit                            3 hours

Units produced                                                                       1,000

 

What is the variable overhead efficiency variance?

  1. A) $1,000 Favorable
  2. B) $2,000 Unfavorable
  3. C) $2,000 Favorable
  4. D) $3,000 Favorable

Answer:  D

Diff: 3

LO:  8-7

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

6) At 60,000 machine hours, Norwall Company’s static budget for variable overhead costs is $180,000. At 60,000 machine hours, the company’s static budget for fixed overhead costs is $300,000. Machine hours are the cost driver of all overhead costs. The static budget is based on 60,000 machine hours. At 60,000 machine hours, the company produces 40,000 units. The following data is available:

 

Actual units produced and sold                                      42,000

Actual machine hours                                                        64,000

Actual variable overhead costs                                   $185,600

Actual fixed overhead costs                                         $302,400

 

What is the variable overhead spending variance?

  1. A) $6,400 Unfavorable
  2. B) $6,400 Favorable
  3. C) $1,000 Favorable
  4. D) $1,000 Unfavorable

Answer:  B

Diff: 3

LO:  8-7

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

7) The flexible budget variance for variable overhead costs is composed of a(n) ________ variance and a(n) ________ variance.

  1. A) efficiency; effective
  2. B) spending; rate
  3. C) quantity; efficiency
  4. D) spending; efficiency

Answer:  D

Diff: 2

LO:  8-7

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

8) The variable overhead efficiency variance depends on whether the quantity of the cost driver used is more or less than ________.

  1. A) the standard amount of output for the expected amount of output
  2. B) the quantity allowed for the expected amount of output
  3. C) the quantity allowed for the static budget amount of output
  4. D) the standard quantity allowed for the actual output

Answer:  D

Diff: 2

LO:  8-7

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

9) The variable overhead spending variance combines ________ and ________ effects.

  1. A) price; quantity
  2. B) price; efficiency
  3. C) efficiency; sales activity
  4. D) rate; sales activity

Answer:  A

Diff: 2

LO:  8-7

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

10) Variable overhead efficiency variances are unfavorable when actual cost driver activity exceeds the ________.

  1. A) standard cost-driver activity allowed for the actual output
  2. B) activity allowed for the expected output
  3. C) activity allowed for the planned output
  4. D) activity allowed for last period’s output

Answer:  A

Diff: 2

LO:  8-7

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

11) The variable overhead spending variance is the difference between the actual variable overhead cost and the amount of variable overhead cost budgeted for the actual level of cost driver activity.

Answer:  TRUE

Diff: 2

LO:  8-7

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

12) The variable overhead efficiency variance indicates to management how much variable overhead cost it may waste by not controlling the use of cost-driver activity.

Answer:  TRUE

Diff: 2

LO:  8-7

AACSB:  Reflective thinking skills

 

13)

Answer:  Spending variance = $20,570 – (2,450 × $8) = $970 Unfavorable

Efficiency variance = [2,450 – (500 × 5)] × $8 = $400 Favorable

variances

Diff: 2

LO:  8-7

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

8.8   Questions

 

1) For fixed overhead costs, the spending variance is ________ equal to the flexible-budget variance.

  1. A) always
  2. B) sometimes
  3. C) never
  4. D) indeterminate

Answer:  A

Diff: 2

LO:  8-8

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

 

2) Wendel Company has actual fixed overhead costs of $14,700. Fixed overhead costs based on the flexible budget and the actual use of the cost driver are $14,400. Actual variable overhead costs are $14,500. What is the flexible-budget variance for fixed overhead costs?

  1. A) $300 Favorable
  2. B) $300 Unfavorable
  3. C) $100 Favorable
  4. D) $100 Unfavorable

Answer:  B

Diff: 3

LO:  8-8

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

3) Wetzel Company has actual fixed overhead costs of $14,500. Fixed overhead costs based on the flexible budget and the standard use of the cost driver are $14,400. Actual variable overhead costs are $14,700. Flexible budget costs for variable overhead costs are $15,000. What is the flexible-budget variance for fixed overhead costs?

  1. A) $100 Favorable
  2. B) $100 Unfavorable
  3. C) $300 Favorable
  4. D) $300 Unfavorable

Answer:  B

Diff: 3

LO:  8-8

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

4) The efficiency variance for fixed overhead costs ________.

  1. A) is greater than the flexible budget variance for fixed overhead costs
  2. B) is greater than the spending variance for fixed overhead costs
  3. C) is greater than the flexible budget variance for variable overhead costs
  4. D) does not exist

Answer:  D

Diff: 2

LO:  8-8

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

 

5) At 60,000 machine hours, Clark Company’s static budget for variable overhead costs is $180,000. At 60,000 machine hours, the company’s static budget for fixed overhead costs is $300,000. Machine hours are the cost driver of all overhead costs. The static budget is based on 60,000 machine hours. At 60,000 machine hours, the company produces 40,000 units. The following data is available:

 

Actual units produced and sold                                      42,000

Actual machine hours                                                        64,000

Actual variable overhead costs                                   $185,600

Actual fixed overhead costs                                         $302,400

 

What is the fixed overhead spending variance?

  1. A) $2,400 Unfavorable
  2. B) $2,400 Favorable
  3. C) $1,000 Favorable
  4. D) $1,000 Unfavorable

Answer:  A

Diff: 3

LO:  8-8

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

6) The flexible budget variance for fixed overhead costs equals the ________ variance.

  1. A) efficiency
  2. B) spending
  3. C) static budget
  4. D) operating budget

Answer:  B

Diff: 2

LO:  8-8

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

 

7) Sloth Company reports the following information for the last year of operations:

 

Actual fixed overhead costs(7,000 units)                    $77,000

Budgeted fixed overhead costs(10,000 units)              80,000

Planned level of operations(in units)                             10,000

Actual level of operations(in units)                                   7,000

 

What is the fixed overhead spending variance?

  1. A) $3,000 Favorable
  2. B) $21,000 Unfavorable
  3. C) $24,000 Unfavorable
  4. D) $30,000 Favorable

Answer:  A

Diff: 2

LO:  8-8

AACSB:  Analytic skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

8) In the relevant range, fixed overhead costs do not vary with cost driver activity.

Answer:  TRUE

Diff: 2

LO:  8-8

AACSB:  Reflective thinking skills

Learning Outcome:  Discuss and calculate the direct material, direct labor and overhead variances

 

Introduction to Management Accounting, 16e (Horngren)

Chapter 16   Understanding Corporate Annual Reports: Basic Financial Statements

 

16.1   Questions

 

1) Which of the following assets is NOT classified as a short-term investment?

  1. A) corporate stocks
  2. B) corporate bonds
  3. C) debt securities issued by governments
  4. D) checking account balance

Answer:  D

Diff: 2

LO:  16-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

2) The net amount a company expects to collects on Accounts Receivable is equal to ________.

  1. A) gross Accounts Receivable
  2. B) Allowance for Doubtful Accounts
  3. C) gross Accounts Receivable minus Allowance for Doubtful Accounts
  4. D) gross Accounts Receivable plus Allowance for Doubtful Accounts

Answer:  C

Diff: 2

LO:  16-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

3) Manufacturers have several inventory accounts that do NOT include ________.

  1. A) Finished Goods Inventory
  2. B) Raw Materials Inventory
  3. C) Work in Process Inventory
  4. D) Construction in Process Inventory

Answer:  D

Diff: 2

LO:  16-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

 

4) A unit of ending inventory has a cost of $100 per unit. The selling price per unit is $200. The replacement cost per unit is $90. What value is reported for this inventory on the balance sheet?

  1. A) $90
  2. B) $100
  3. C) $110
  4. D) $200

Answer:  A

Diff: 2

LO:  16-1

AACSB:  Analytic skills

Learning Outcome:  None

5) Details about Property, Plant and Equipment, such as the age of plant assets and the types of plant assets, are typically reported ________.

  1. A) on the balance sheet
  2. B) on the income statement
  3. C) on the statement of cash flows
  4. D) in a footnote

Answer:  D

Diff: 2

LO:  16-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

6) Leasehold Improvements do NOT include ________.

  1. A) painting and decorating of leased property
  2. B) security systems added to leased property
  3. C) bookcases built into walls of leased property
  4. D) furniture used at leased property

Answer:  D

Diff: 2

LO:  16-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

7) Companies do not amortize indefinite-life intangible assets. What do companies do each year for these assets?

  1. A) only report them on the balance sheet
  2. B) only apply an impairment test annually
  3. C) only report them on the statement of stockholders’ equity
  4. D) A and B

Answer:  D

Diff: 2

LO:  16-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

 

8) Current assets are expected to be converted to cash or sold or consumed within ________.

  1. A) one year or operating cycle if longer than one month
  2. B) one year or operating cycle if longer than one year
  3. C) one year or operating cycle if shorter than one year
  4. D) one fiscal year

Answer:  B

Diff: 1

LO:  16-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

9) Which of the following is NOT a current asset?

  1. A) Inventories
  2. B) Prepaid Insurance
  3. C) Supplies
  4. D) Land

Answer:  D

Diff: 1

LO:  16-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

10) On a classified balance sheet, the Equipment account is reduced by ________.

  1. A) Allowance for Bad Debts
  2. B) Allowance for Doubtful Accounts
  3. C) Accumulated Depreciation
  4. D) Depreciation Expense

Answer:  C

Diff: 2

LO:  16-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

11) The purpose of depreciation is to ________.

  1. A) establish the current replacement cost of a fixed asset
  2. B) accumulate funds to replace a fixed asset
  3. C) set aside cash to replace a fixed asset
  4. D) allocate the original cost of a fixed asset to the periods that benefit from the use of the fixed asset

Answer:  D

Diff: 2

LO:  16-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

 

12) Which of the following is NOT a tangible asset?

  1. A) inventories
  2. B) land
  3. C) equipment
  4. D) goodwill

Answer:  D

Diff: 2

LO:  16-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

13) Intangible assets are ________.

  1. A) assets with a physical presence
  2. B) assets that can be seen and touched
  3. C) rights to expected future benefits
  4. D) assets with definite lives only

Answer:  C

Diff: 2

LO:  16-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

14) The amortization of intangible assets applies to ________.

  1. A) Research and Development Costs
  2. B) Goodwill
  3. C) intangible assets with definite lives
  4. D) intangible assets with indefinite lives

Answer:  C

Diff: 2

LO:  16-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

15) Goodwill remains on a company’s books until ________.

  1. A) accountants amortize it
  2. B) accountants depreciate it
  3. C) management sells it
  4. D) management determines its value is impaired

Answer:  D

Diff: 2

LO:  16-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

 

16) Accounts receivable is a current asset.

Answer:  TRUE

Diff: 1

LO:  16-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

17) A company’s operating cycle can be longer than one year.

Answer:  TRUE

Diff: 1

LO:  16-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

18) The Allowance for Bad Debts account is added to the Accounts Receivable account on the balance sheet.

Answer:  FALSE

Diff: 2

LO:  16-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

19) Land is not depreciated.

Answer:  TRUE

Diff: 1

LO:  16-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

20) Freight and installation costs are added to the cost of equipment.

Answer:  TRUE

Diff: 1

LO:  16-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

21) Leasehold improvements are amortized annually.

Answer:  TRUE

Diff: 1

LO:  16-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

 

22) Some intangible assets are depreciated.

Answer:  FALSE

Diff: 1

LO:  16-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

23) Research and development costs are expensed when incurred for financial statement purposes.

Answer:  TRUE

Diff: 1

LO:  16-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

24) Goodwill is amortized for financial statement purposes.

Answer:  FALSE

Diff: 2

LO:  16-1

AACSB:  Reflective thinking skills

Learning Outcome:  None

16.2   Questions

 

1) Deferred tax liabilities are ________.

  1. A) expected increases in future income taxes due to past transactions
  2. B) expected decreases in future income taxes due to past transactions
  3. C) expected increases in future income taxes due to future transactions
  4. D) expected decreases in future income taxes due to future transactions

Answer:  A

Diff: 2

LO:  16-2

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

2) How should Unearned Rent Revenue be classified on a balance sheet at December 31, 2013? The rental contract covers the period, January 1, 2013 through December 31, 2015.

  1. A) current liability only
  2. B) long-term liability only
  3. C) current and long-term liability
  4. D) current asset only

Answer:  C

Diff: 2

LO:  16-2

AACSB:  Analytic skills

Learning Outcome:  None

 

 

3) An example of secured bonds is ________.

  1. A) debentures
  2. B) zero coupon bonds
  3. C) mortgage bonds
  4. D) serial bonds

Answer:  C

Diff: 2

LO:  16-2

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

4) It is December 31, 2014. A Note Payable is due in five annual installments beginning on December 31, 2015. On the balance sheet dated December 31, 2014, the Note Payable is classified as ________.

  1. A) current liability only
  2. B) long-term liability only
  3. C) current and long-term liability
  4. D) owners’ equity

Answer:  C

Diff: 3

LO:  16-2

AACSB:  Analytic skills

Learning Outcome:  None

5) Current liabilities are debts due within the ________ year or within the normal operating cycle if ________.

  1. A) past; longer than a year
  2. B) next; longer than a year
  3. C) past; shorter than a year
  4. D) next; shorter than a year

Answer:  B

Diff: 2

LO:  16-2

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

6) Unsecured debt holders are creditors who have ________.

  1. A) a specific claim against particular assets
  2. B) a specific claim against fixed assets only
  3. C) a general claim against fixed assets only
  4. D) a general claim against total assets

Answer:  D

Diff: 2

LO:  16-2

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

 

7) Assume you are preparing a balance sheet dated December 31, 2014. Which of the following is NOT a long-term liability?

  1. A) bonds payable due June 30, 2016
  2. B) bonds payable due June 30, 2015
  3. C) bonds payable due December 31, 2016
  4. D) bonds payable due December 31, 2020

Answer:  B

Diff: 2

LO:  16-2

AACSB:  Analytic skills

Learning Outcome:  None

 

8) Convertible bonds allow a bondholder to exchange ________.

  1. A) unsecured bonds for secured bonds
  2. B) unsubordinated bonds for subordinated bonds
  3. C) common stock for bonds
  4. D) bonds for mortgage bonds

Answer:  C

Diff: 2

LO:  16-2

AACSB:  Analytic skills

Learning Outcome:  None

 

9) The account Unearned Revenue is a revenue account.

Answer:  FALSE

Diff: 1

LO:  16-2

AACSB:  Reflective thinking skills

Learning Outcome:  None

10) Accounts payable, wages payable and income taxes payable are all considered to be current liabilities.

Answer:  TRUE

Diff: 1

LO:  16-2

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

11) Accrued interest payable is a long-term liability because it relates to a long-term bond payable.

Answer:  FALSE

Diff: 1

LO:  16-2

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

 

12) Working capital is equal to current assets plus current liabilities.

Answer:  FALSE

Diff: 1

LO:  16-2

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

16.3   Questions

 

1) Which of the following items is NOT a component of stockholders’ equity?

  1. A) paid-in capital
  2. B) retained earnings
  3. C) accumulated other comprehensive income
  4. D) deferred income tax liabilities

Answer:  D

Diff: 2

LO:  16-3

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

2) Damon Company sold 10,000 shares of $1 par value common stock. The selling price was $9.00 per share. After the sale, what is the capital in excess of par value?

  1. A) $80,000
  2. B) $90,000
  3. C) $100,000
  4. D) $110,000

Answer:  A

Diff: 2

LO:  16-3

AACSB:  Analytic skills

Learning Outcome:  None

3) What is Other Comprehensive Income?

  1. A) unrealized gains and loss that are reported on the Statement of Retained Earnings
  2. B) unrealized gains and losses that are reported on the traditional Income Statement
  3. C) unrealized gains and losses that are reported on the Balance Sheet
  4. D) unrealized gains and losses that are not reported on the financial statements

Answer:  C

Diff: 2

LO:  16-3

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

 

4) Preferred stock has priority over common stock in ________.

  1. A) voting rights
  2. B) distribution of assets in liquidation
  3. C) payment of dividends
  4. D) B and C

Answer:  D

Diff: 2

LO:  16-3

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

5) Treasury stock is shown on the balance sheets as a deduction from ________.

  1. A) total assets
  2. B) total liabilities
  3. C) total current assets
  4. D) total stockholders’ equity

Answer:  D

Diff: 2

LO:  16-3

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

6) Johnson Company’s capital stock is currently trading for $22 per share. The following accounts appear on the balance sheet:

 

Common stock, $6.00 par value per share, 10,000 shares issued       $60,000

Paid in capital in excess of par value                                                        $200,000

 

The only transaction affecting the accounts was one issue of the company’s common stock. What was the original selling price of the common stock?

  1. A) $6.00 per share
  2. B) $20.00 per share
  3. C) $22.00 per share
  4. D) $26.00 per share

Answer:  D

Diff: 2

LO:  16-3

AACSB:  Analytic skills

Learning Outcome:  None

 

7) Joe Anthony Company recently issued 20,000 shares of $1.00 par value common stock for $40,000. This transaction will increase the ________.

  1. A) Common stock account by $20,000
  2. B) Common stock account by $40,000
  3. C) Paid in capital in excess of par account by $40,000
  4. D) Retained earnings account by $40,000

Answer:  A

Diff: 2

LO:  16-3

AACSB:  Analytic skills

Learning Outcome:  None

 

8) Treasury stock is ________.

  1. A) unissued shares of stock
  2. B) the number of shares of stock that cannot be sold in the future
  3. C) shares of stock held in other companies for investment purposes
  4. D) shares of stock already issued that are later repurchased by the corporation that originally issued them

Answer:  D

Diff: 2

LO:  16-3

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

9) The limited liability of stockholders in a corporation means that ________.

  1. A) the company’s creditors cannot seek payment from the stockholders as individuals if the corporation cannot pay its debt
  2. B) the company’s creditors cannot receive more than the face value of their debt
  3. C) the short-term creditors have to be paid before the long-term creditors
  4. D) the long-term creditors have to be paid before the short-term creditors

Answer:  A

Diff: 2

LO:  16-3

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

10) Treasury stock is a deduction from total stockholders’ equity.

Answer:  TRUE

Diff: 1

LO:  16-3

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

11) Par value is the value that is printed on the face of the stock certificate.

Answer:  TRUE

Diff: 1

LO:  16-3

AACSB:  Reflective thinking skills

Learning Outcome:  None

12) Preferred stockholders receive cash dividends before common stockholders.

Answer:  TRUE

Diff: 1

LO:  16-3

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

13) A company’s treasury stock is outstanding but not issued.

Answer:  FALSE

Diff: 1

LO:  16-3

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

 

14) The following balances are available for Thompson Company on December 31, 2015:

 

Accumulated depreciation                             $21,800

Accounts payable                                                 11,200

Accounts receivable                                               9,800

Additional paid-in capital                                24,000

Common stock                                                        6,000

Cash                                                                            7,400

Fixed assets                                                            89,400

Interest payable                                                       2,400

Inventory                                                                 13,600

Long-term notes payable                                   28,000

Prepaid rent                                                              2,500

Retained earnings                                                           ?

Wages payable                                                        6,400

 

Required:

Prepare a classified balance sheet at December 31, 2015.

 

Answer:                                     Thompson Company

Balance Sheet

December 31, 2015

Current Assets:

Cash                                                                                         $7,400

Accounts Receivable                                                              9,800

Inventory                                                                                 13,600

Prepaid rent                                                                              2,500

Total current assets                                                                                                         $33,300

Noncurrent Assets:

Fixed assets                                                                          $89,400

Less: Accumulated Depreciation                                  (21,800)

Total long-term assets                                                                                                       67,600

Total assets                                                                                                                      $100,900

 

Current Liabilities:

Accounts payable                                                              $11,200

Interest payable                                                                       2,400

Wages payable                                                                        6,400

Total current liabilities                                                                                                   $20,000

Noncurrent Liabilities:

Long-term notes payable                                                                                                 28,000

Total liabilities                                                                                                                  $48,000

Stockholders’ Equity:

Common stock                                                                      $6,000

Additional paid-in capital                                                24,000

Retained earnings                                                                22,900

Total stockholders’ equity                                                                                                52,900

Total liabilities and stockholders’ equity                                                               $100,900

Diff: 2

LO:  16-3

AACSB:  Analytic skills

Learning Outcome:  None

 

 

15) The balances on December 31, 2015 are available for Jennifer Company:

 

Accounts payable                                                       $2,550

Accounts receivable                                                     3,550

Accumulated depreciation                                        6,250

Retained earnings, December 31, 2014                          ?

Cash                                                                                  2,300

Cost of goods sold                                                      52,300

Depreciation expense                                                  2,500

Dividends declared                                                      8,800

Equipment                                                                    29,000

Income tax expense                                                   10,700

Interest expense                                                             1,150

Inventory                                                                         6,250

Long-term notes payable                                         11,500

Paid-in capital                                                               4,450

Prepaid rent                                                                       350

Rent expense                                                                  4,000

Sales                                                                             118,600

Wage expense                                                              31,900

Wages payable                                                              3,000

 

Required:

Prepare a classified balance sheet at December 31, 2015.

 

Answer:                                      Jennifer Company

Balance Sheet

December 31, 2015

Current Assets:

Cash                                                                                         $2,300

Accounts Receivable                                                              3,550

Inventory                                                                                   6,250

Prepaid rent                                                                                 350

Total current assets                                                                                           $12,450

Noncurrent Assets:

Equipment                                                                           $29,000

Less: Accumulated Depreciation                                    (6,250)

Total long-term assets                                                                                         22,750

Total assets                                                                                                          $35,200

 

Current Liabilities:

Accounts payable                                                                 $2,550

Wages payable                                                                        3,000

Total current liabilities                                                                                       $5,550

Noncurrent Liabilities:

Long-term notes payable                                                                                   11,500

Total liabilities                                                                                                    $17,050

Stockholders’ Equity:

Paid-in capital                                                                         4,450

Retained earnings                                                                13,700

Total stockholders’ equity                                                                                  18,150

Total liabilities and stockholders’ equity                                                    $35,200

Diff: 2

LO:  16-3

AACSB:  Analytic skills

Learning Outcome:  None

 

 

16) The following information is available for Anderson Company at December 31, 2016:

 

Additional paid-in capital, common                                        $490,000

Common stock, $5 par value, 40,000 shares issued                200,000

Dividends payable                                                                            415,000

Long-term investment in Jacobs Company                            1,400,000

Marketable securities                                                                        610,000

Retained earnings                                                                              242,000

Treasury stock, common, 8,000 shares                                       176,000

 

Required:

Prepare the stockholders’ equity section of a classified balance sheet at December 31, 2016. Assume 400,000 shares of common stock are authorized to be issued.

Answer:  Common stock, $5 par value, 400,000 shares authorized,

40,000 shares issued, 32,000 shares outstanding                    $200,000

Additional paid-in capital, common                                             490,000

Retained earnings                                                                                242,000

Total stockholders’ equity                                                                 932,000

Less: Treasury stock, common, 8,000 shares                            (176,000)

Total stockholders’ equity                                                               $756,000

Diff: 2

LO:  16-3

AACSB:  Analytic skills

Learning Outcome:  None

16.4   Questions

 

1) What is gross margin?

  1. A) sales minus operating expenses
  2. B) sales minus other expenses
  3. C) sales minus cost of goods sold
  4. D) sales plus other income

Answer:  C

Diff: 2

LO:  16-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

2) What is earnings per share?

  1. A) net income divided by weighted average number of preferred shares outstanding
  2. B) net income divided by weighted average number of common shares outstanding
  3. C) net income plus the weighted average number of common and preferred shares outstanding
  4. D) net income plus the weighted average number of bonds outstanding

Answer:  B

Diff: 2

LO:  16-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

3) When calculating diluted earnings per share, which of the following items is NOT considered?

  1. A) number of common shares outstanding
  2. B) additional common shares from conversion of convertible securities
  3. C) additional common shares from exercise of stock options
  4. D) number of common shares authorized to be issued

Answer:  D

Diff: 2

LO:  16-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

4) A multiple step income statement has several measures of profit that do NOT include ________.

  1. A) operating income
  2. B) gross margin
  3. C) income before taxes
  4. D) cost of sales

Answer:  D

Diff: 2

LO:  16-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

5) ________ summarizes the results of the basic operating activities of a company.

  1. A) Gross margin
  2. B) Gross profit
  3. C) Net profit
  4. D) Operating income

Answer:  D

Diff: 1

LO:  16-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

6) A nonoperating item on a multiple-step income statement that reflects financial decisions is ________.

  1. A) gain from sale of inventory
  2. B) interest expense
  3. C) income tax expense
  4. D) operating profit

Answer:  B

Diff: 2

LO:  16-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

 

7) Nonoperating items on a multiple-step income statement do NOT include ________.

  1. A) interest income
  2. B) interest expense
  3. C) gain from disposal of a fixed asset
  4. D) selling expenses

Answer:  D

Diff: 2

LO:  16-4

AACSB:  Analytic skills

Learning Outcome:  None

8) Sanders Company had the following data for the year ending December 31, 2014:

 

Cash                                                 $6,000

Depreciation expense                  40,000

Prepaid rent                                      1,400

Cost of goods sold                        69,000

Sales                                               200,000

Dividends paid                               3,000

Rent expense                                    3,600

Wage expense                                81,000

 

What is the net income for the year ending December 31, 2014?

  1. A) $400
  2. B) $3,400
  3. C) $6,000
  4. D) $6,400

Answer:  D

Diff: 2

LO:  16-4

AACSB:  Analytic skills

Learning Outcome:  None

 

 

9) Selected items from the financial statements for Lorna Company are listed below:

 

Paid in capital, December 31, 2014                                            $100,000

Retained earnings, December 31, 2014                                       $75,000

Common stock dividends declared in 2014                              $75,000

Net income for the year ended December 31, 2014               $100,000

 

Lorna Company has 5,000 common shares outstanding during the year. What are the earnings per share for the year ended December 31, 2014?

  1. A) $12.00
  2. B) $15.00
  3. C) $20.00
  4. D) $25.00

Answer:  C

Diff: 2

LO:  16-4

AACSB:  Analytic skills

Learning Outcome:  None

 

10) Gross profit equals sales minus cost of goods sold.

Answer:  TRUE

Diff: 1

LO:  16-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

11) Nonoperating items on a multiple-step income statement include interest expense and interest income.

Answer:  TRUE

Diff: 2

LO:  16-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

12) The inventory method a company uses does not affect its income statement.

Answer:  FALSE

Diff: 1

LO:  16-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

13) Operating income summarizes the results of basic operating activities of a company.

Answer:  TRUE

Diff: 1

LO:  16-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

14) The last line item on an income statement is earnings per share.

Answer:  TRUE

Diff: 1

LO:  16-4

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

 

15) The balances on December 31, 2015 are available for Matthew Company:

 

Accounts payable                                                       $2,550

Accounts receivable                                                     3,550

Accumulated depreciation                                        6,250

Retained earnings, December 31, 2014                  6,450

Cash                                                                                  2,300

Cost of goods sold                                                      52,300

Depreciation expense                                                  2,500

Dividends declared                                                      8,800

Equipment                                                                    29,000

Income tax expense                                                   10,700

Interest expense                                                             1,150

Inventory                                                                         6,250

Long-term notes payable                                         11,500

Paid-in capital                                                               4,450

Prepaid rent                                                                       350

Rent expense                                                                  4,000

Sales                                                                             120,000

Wage expense                                                              41,900

Wages payable                                                              3,000

 

Required:

Prepare a multiple-step income statement for the year ended December 31, 2015.

Answer:                                             Matthew Company

Income Statement

For the year ended December 31, 2015

 

Sales                                                                                                                     $120,000

Less: Cost of goods sold                                                                                     52,300

Gross profit                                                                                                            67,700

Operating expenses:

Wage expense                                                     $41,900

Depreciation expense                                            2,500

Rent expense                                                            4,000

Total operating expenses                                                                                   48,400

Operating income                                                                                                19,300

Other expense: Interest expense                                                                      (1,150)

Income before taxes                                                                                             18,150

Income tax expense                                                                                             10,700

Net income                                                                                                             $7,450

Diff: 2

LO:  16-4

AACSB:  Analytic skills

Learning Outcome:  None

 

16) Wheel Company has the following balances at December 31, 2015:

 

Retained earnings, December 31, 2014                       $30,000

Cost of goods sold                                                                56,000

Depreciation expense                                                            1,450

Dividends                                                                                 8,000

Income tax expense                                                               2,000

Interest expense                                                                      1,050

Rent expense                                                                            1,700

Sales                                                                                         68,000

Wage expense                                                                          6,800

 

Required:

Prepare a multiple-step income statement for the year ended December 31, 2015.

Answer:                                                Wheel Company

Income Statement

For the year ended December 31, 2015

 

Sales                                                                                                                       $68,000

Less: Cost of goods sold                                                                                     56,000

Gross profit                                                                                                            12,000

Operating expenses:

Wage expense                                                        $6,800

Depreciation expense                                            1,450

Rent expense                                                            1,700

Total operating expenses                                                                                     9,950

Operating income                                                                                                   2,050

Other expense: Interest expense                                                                      (1,050)

Income before taxes                                                                                                1,000

Income tax expense                                                                                                2,000

Net loss                                                                                                                 $(1,000)

Diff: 2

LO:  16-4

AACSB:  Analytic skills

Learning Outcome:  None

 

16.5   Questions

 

1) The statement of changes in stockholders’ equity shows the changes in ________.

  1. A) retained earnings only
  2. B) dividends only
  3. C) each of the stockholders’ equity accounts
  4. D) fixed assets only

Answer:  C

Diff: 2

LO:  16-5

AACSB:  Reflective thinking skills

Learning Outcome:  None

2) Mary Company had the following data available:

 

Paid-in capital, December 31, 2014                                              $43,000

Retained earnings, December 31, 2014                                        $27,000

Net income for the year ended December 31, 2015                  $35,400

Dividends declared in 2015                                                            $20,000

 

What is the balance in Retained Earnings on December 31, 2015?

  1. A) $23,400
  2. B) $42,400
  3. C) $52,400
  4. D) $66,400

Answer:  B

Diff: 2

LO:  16-5

AACSB:  Analytic skills

Learning Outcome:  None

 

3) Michael Company had the following data:

 

Retained earnings, January 1, 2015                              $45,000

Depreciation expense for 2015                                         $7,000

Cost of goods sold for 2015                                           $102,000

Paid-in capital, January 1, 2015                                    $26,000

Rent expense for 2015                                                       $12,000

Sales for 2015                                                                    $194,000

Dividends declared in 2015                                            $15,000

Wage expense for 2015                                                     $40,000

Prepaid rent, January 1, 2015                                           $2,000

 

What is the balance in Retained Earnings on December 31, 2015?

  1. A) $61,000
  2. B) $63,000
  3. C) $65,000
  4. D) $74,000

Answer:  B

Diff: 2

LO:  16-5

AACSB:  Analytic skills

Learning Outcome:  None

 

4) The ending retained earnings balance of Brothers Company is $700,000. During the current year, net income is $370,000 and dividends declared are $150,000. What is the beginning balance in retained earnings?

  1. A) $480,000
  2. B) $580,000
  3. C) $800,000
  4. D) $1,060,000

Answer:  A

Diff: 2

LO:  16-5

AACSB:  Analytic skills

Learning Outcome:  None

 

5) Dividends paid are reported on the Retained Earnings Statement.

Answer:  FALSE

Diff: 1

LO:  16-5

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

6) Cash dividends declared are an addition to Retained Earnings on the Retained Earnings Statement.

Answer:  FALSE

Diff: 1

LO:  16-5

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

7) Cash dividends are reported as an expense on the Income Statement.

Answer:  FALSE

Diff: 1

LO:  16-5

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

16.6   Questions

 

1) Cash receipts of interest income are reported in the ________ section of the statement of cash flows. The direct method is used.

  1. A) operating activities
  2. B) investing activities
  3. C) financing activities
  4. D) noncash investing and financing activities

Answer:  A

Diff: 2

LO:  16-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

2) Cash payments for interest expense are reported in the ________ section of the statement of cash flows. The direct method is used.

  1. A) operating activities
  2. B) investing activities
  3. C) financing activities
  4. D) noncash investing and financing activities

Answer:  A

Diff: 2

LO:  16-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

3) A payment on bonds payable will be reported in the ________ section of the statement of cash flows.

  1. A) operating activities only
  2. B) investing activities
  3. C) financing activities
  4. D) noncash investing and financing activities

Answer:  C

Diff: 2

LO:  16-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

4) Which of the following events do NOT affect cash flows from operating activities? Assume the direct method is used.

  1. A) cash sale of merchandise inventory
  2. B) cash purchase of equipment
  3. C) cash purchase of inventory
  4. D) cash paid for employees’ wages

Answer:  B

Diff: 2

LO:  16-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

5) The cash paid to settle a long-term note payable is included in the ________ section of the statement of cash flows.

  1. A) operating
  2. B) investing
  3. C) financing
  4. D) noncash

Answer:  C

Diff: 2

LO:  16-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

6) The cash paid for taxes is included in the ________ section of the statement of cash flows. Assume the direct method is used.

  1. A) operating
  2. B) investing
  3. C) financing
  4. D) noncash

Answer:  A

Diff: 2

LO:  16-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

7) The cash paid for employees’ wages is included in the ________ section of the statement of cash flows. Assume the direct method is used.

  1. A) operating
  2. B) financing
  3. C) investing
  4. D) noncash

Answer:  A

Diff: 2

LO:  16-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

8) The cash paid to purchase equipment is included in the ________ section of the statement of cash flows.

  1. A) operating
  2. B) investing
  3. C) financing
  4. D) noncash

Answer:  B

Diff: 2

LO:  16-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

9) Cash collections from customers are included in the ________ section of the statement of cash flows. Assume the direct method is used.

  1. A) operating
  2. B) investing
  3. C) financing
  4. D) noncash

Answer:  A

Diff: 2

LO:  16-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

10) The cash paid for dividends is included in the ________ section of the statement of cash flows.

  1. A) operating
  2. B) investing
  3. C) financing
  4. D) noncash

Answer:  C

Diff: 2

LO:  16-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

11) The cash received from the sale of common stock is included in the ________ section of the statement of cash flows.

  1. A) operating
  2. B) investing
  3. C) financing
  4. D) noncash

Answer:  C

Diff: 2

LO:  16-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

12) The cash received from the sale of land is included in the ________ section of the statement of cash flows.

  1. A) operating
  2. B) investing
  3. C) financing
  4. D) noncash

Answer:  B

Diff: 2

LO:  16-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

13) The cash received from the sale of bonds payable is included in the ________ section of the statement of cash flows.

  1. A) operating
  2. B) investing
  3. C) financing
  4. D) noncash

Answer:  C

Diff: 2

LO:  16-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

14) The cash payment for the maturity value of bonds payable is included in the ________ section of the statement of cash flows.

  1. A) operating
  2. B) investing
  3. C) financing
  4. D) noncash

Answer:  C

Diff: 2

LO:  16-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

15) An example of an operating activity on the statement of cash flows is federal taxes paid. Assume the direct method is used.

Answer:  TRUE

Diff: 2

LO:  16-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

16) An example of an operating activity on the statement of cash flows is cash dividends received on investments. Assume the direct method is used.

Answer:  TRUE

Diff: 2

LO:  16-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

17) An example of a financing activity on the statement of cash flows is the payment of cash dividends.

Answer:  TRUE

Diff: 1

LO:  16-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

18) An example of a noncash transaction on the statement of cash flows is the purchase of equipment with a long-term note payable.

Answer:  TRUE

Diff: 2

LO:  16-6

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

19) The sections of the statement of cash flows are listed below:

 

Sections of Statement of Cash Flows

O = Operating activities

I = Investing activities

F = Financing activities

Required:

For each of the following items, identify the section of the statement of cash flows you would find the item. Assume the direct method is used.

 

_____ 1. Paid taxes of $15,000.

_____ 2. Borrowed $35,000 from the bank on a long-term note payable.

_____ 3. Collected $690,000 from customers.

_____ 4. Received $40,000 in dividend income.

_____ 5. Paid $12,000 to suppliers for inventory.

_____ 6. Issued common stock for $170,000 cash.

_____ 7. Purchased $120,000 in long-term securities for cash.

_____ 8. Paid $18,000 dividend on common stock.

_____ 9. Purchased land for $345,000 cash.

_____ 10. Sold long-term securities for cash. No gain or loss on sale.

_____ 11. Paid $210,000 on long-term debt.

_____ 12. Received $31,000 cash on sale of equipment. No gain or loss on sale.

Answer:

  1. O
  2. F
  3. O
  4. O
  5. O
  6. F
  7. I
  8. F
  9. I
  10. I
  11. F
  12. I

Diff: 2

LO:  16-6

AACSB:  Analytic skills

Learning Outcome:  None

 

16.7   Questions

 

1) Georgia Company has the following data available:

 

December                         December

31, 2011                            31, 2012

Fixed Assets                                                  $125                                   $125

Accumulated Depreciation                      $110                                   $117

Long-term debt                                             $125                                       $5

Common stock                                             $300                                   $400

Retained earnings                                       $100                                   $120

 

No dividends were declared or paid for the year ending December 31, 2012. What is the net cash flow from financing activities for the year ended December 31, 2012?

  1. A) $20 cash inflow
  2. B) $20 cash outflow
  3. C) $100 cash inflow
  4. D) $120 cash outflow

Answer:  B

Diff: 2

LO:  16-7

AACSB:  Analytic skills

Learning Outcome:  None

 

2) Michigan Company has the following data available:

 

December                         December

31, 2011                            31, 2012

Fixed Assets                                                  $125                                   $125

Accumulated Depreciation                      $110                                   $117

Long-term debt                                             $125                                       $5

Common stock                                             $300                                   $400

Retained earnings                                       $100                                   $120

 

Dividends of $20 were declared on December 1, 2012. What is the net income for the year ended December 31, 2012?

  1. A) $10
  2. B) $20
  3. C) $30
  4. D) $40

Answer:  D

Diff: 2

LO:  16-7

AACSB:  Analytic skills

Learning Outcome:  None

 

3) Wisconsin Company reported selected accounts as follows:

 

December 31, 2014                December 31, 2015

Accounts payable                                  $20,000                                     $30,000

Bonds payable                                        $40,000                                     $28,000

Common stock                                        $20,000                                     $24,000

 

Dividends of $8,800 were declared and paid by December 31, 2015. What was the net cash flow from financing activities for the year ended December 31, 2015?

  1. A) $6,800 cash outflow
  2. B) $16,800 cash outflow
  3. C) $6,800 cash inflow
  4. D) $16,800 cash inflow

Answer:  B

Diff: 2

LO:  16-7

AACSB:  Analytic skills

Learning Outcome:  None

 

4) Old equipment having a book value of $12,000 was sold for $20,000 cash. New equipment was purchased for $25,000 cash. Additional equipment was acquired in exchange for a $17,000 long-term note payable. The net cash flow from investing activities was ________.

  1. A) $5,000 cash outflow
  2. B) $22,000 cash outflow
  3. C) $25,000 cash outflow
  4. D) $42,000 cash outflow

Answer:  A

Diff: 2

LO:  16-7

AACSB:  Analytic skills

Learning Outcome:  None

 

 

5) California Company reports the following information:

 

12/31/14                       12/31/15

Fixed Assets                                                               $330                              $581

Less: Accumulated Depreciation                        (110)                              (127)

Net Fixed Assets                                                       $220                              $454

 

Depreciation expense for the year ending December 31, 2015 is $17. No fixed assets were sold during 2015. What is the net cash flow from investing activities for the year ending December 31, 2015?

  1. A) $17 cash inflow
  2. B) $251 cash inflow
  3. C) $251 cash outflow
  4. D) $268 cash outflow

Answer:  C

Diff: 2

LO:  16-7

AACSB:  Analytic skills

Learning Outcome:  None

6) Utah Corporation reports the following data:

 

12/31/14                        12/31/15

Fixed Assets                                                              $330                               $581

Less: Accumulated Depreciation                       (110)                               (127)

Net Fixed Assets                                                      $220                               $454

 

Depreciation expense for the year ending December 31, 2015 is $27. The company sold a fixed asset for $10 cash on December 1, 2015. The cost of the fixed asset sold was $20 and the accumulated depreciation on the fixed asset sold was $10. What is the net cash flow from investing activities for the year ending December 31, 2015?

  1. A) $241 cash outflow
  2. B) $251 cash outflow
  3. C) $261 cash outflow
  4. D) $271 cash outflow

Answer:  C

Diff: 2

LO:  16-7

AACSB:  Analytic skills

Learning Outcome:  None

 

 

7) Nebraska Company gave a long-term note payable in the amount of $285,000 to acquire a new piece of land. This transaction will be reported on the statement of cash flows as a ________.

  1. A) investing activity
  2. B) financing activity
  3. C) investing and financing activity
  4. D) noncash investing and financing transaction

Answer:  D

Diff: 2

LO:  16-7

AACSB:  Analytic skills

Learning Outcome:  None

 

8) An example of a financing activity on the statement of cash flows is the conversion of debt to common stock.

Answer:  FALSE

Diff: 2

LO:  16-7

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

9) An example of an investing activity on the statement of cash flows is the purchase of equipment for cash.

Answer:  TRUE

Diff: 2

LO:  16-7

AACSB:  Reflective thinking skills

Learning Outcome:  None

10) Wyoming Company had the following information for the year ended December 31, 2015 and December 31, 2016.

 

December 31, 2016            December 31, 2015

Equipment                                                         $186,000                               $156,000

Accumulated depreciation                               62,000                                    54,000

 

Depreciation expense for the year ended December 31, 2016 was $18,000. Equipment that cost $20,000 was sold at a $3,000 loss. The equipment had accumulated depreciation of $10,000.

 

Required:

Prepare the investing section of the statement of cash flows for the year ended December 31, 2016.

Answer:  Cash flows from investing activities:

Purchase of fixed assets                                                $(50,000)

Proceeds from sale of fixed asset                                       7,000

Net cash used for investing activities                       $(43,000)

Diff: 3

LO:  16-7

AACSB:  Analytic skills

Learning Outcome:  None

 

16.8   Questions

 

1) For the year ending December 31, 2014, Martha Company reports net income of $23,000 and depreciation expense of $7,000. The income tax expense for the year ending December 31, 2014 is $20,000. The following data is available:

 

December 31, 2013            December 31, 2014

Cash                                                                       $25,000                                  $16,000

Accounts Receivable                                         $25,000                                  $45,000

Inventories                                                            $60,000                               $100,000

Fixed Assets                                                       $330,000                               $581,000

Accumulated Depreciation                           $110,000                               $101,000

Accounts Payable                                                 $6,000                                  $74,000

Wages Payable                                                      $4,000                                  $25,000

 

What is the net cash provided (used) by operating activities for the year ended December 31, 2014? Assume the indirect method is used.

  1. A) $(20,000)
  2. B) $23,000
  3. C) $59,000
  4. D) $69,000

Answer:  C

Diff: 2

LO:  16-8

AACSB:  Analytic skills

Learning Outcome:  None

 

2) For the year ending December 31, 2014, Harkins Company reports net income of $35,000 and depreciation expense of $12,000. The income tax expense for the year ending December 31, 2014 is $20,000. The following data is available:

 

December 31, 2013            December 31, 2014

Cash                                                                       $35,000                                 $16,000

Accounts Receivable                                         $35,000                                 $45,000

Inventories                                                           $70,000                               $100,000

Fixed Assets                                                      $440,000                               $581,000

Accumulated Depreciation                          $120,000                               $101,000

Accounts Payable                                                $6,000                                 $74,000

Wages Payable                                                      $4,000                                 $25,000

 

What is the net cash provided by operating activities for the year ended December 31, 2014? Assume the indirect method is used.

  1. A) $5,000
  2. B) $26,000
  3. C) $73,000
  4. D) $96,000

Answer:  D

Diff: 2

LO:  16-8

AACSB:  Analytic skills

Learning Outcome:  None

 

3) Listed below are selected accounts for Dentice Corporation:

 

December 31, 2013            December 31, 2014

Accounts Receivable                                         $20,000                                 $40,000

Inventory                                                              $70,000                                 $30,000

Accounts Payable                                              $20,000                                 $88,000

Wages payable                                                    $22,000                                   $1,000

 

For the year ended December 31, 2014, net income was $50,000 and depreciation expense was $0. The net cash provided by operating activities for the year ending December 31, 2014 was ________. Assume the indirect method is used.

  1. A) $70,000
  2. B) $90,000
  3. C) $108,000
  4. D) $117,000

Answer:  D

Diff: 2

LO:  16-8

AACSB:  Analytic skills

Learning Outcome:  None

 

4) When calculating the net cash provided by operating activities, which procedure should NOT be carried out? Assume the indirect method is used.

  1. A) add depreciation expense
  2. B) subtract a decrease in accounts payable
  3. C) subtract a decrease in prepaid expenses
  4. D) add a decrease in inventories

Answer:  C

Diff: 2

LO:  16-8

AACSB:  Analytic skills

Learning Outcome:  None

 

5) A gain on the sale of a fixed asset is reported on the statement of cash flows ________.

  1. A) as a deduction to net income under operating activities for the indirect method
  2. B) as a deduction to the cash proceeds received from the sale of fixed assets under investing activities
  3. C) as a noncash transaction
  4. D) as a cash inflow under financing activities

Answer:  A

Diff: 2

LO:  16-8

AACSB:  Analytic skills

Learning Outcome:  None

 

6) Lantern Company reported sales of $200,000, an increase in accounts receivable of $5,000, and a decrease in cash of $20,000. How much cash was collected from customers?

  1. A) $185,000
  2. B) $195,000
  3. C) $200,000
  4. D) $220,000

Answer:  B

Diff: 2

LO:  16-8

AACSB:  Analytic skills

Learning Outcome:  None

 

7) Beth Company reported sales on account of $250,000, an increase in inventory of $70,000, and a decrease in accounts receivable of $20,000. How much cash was collected from customers?

  1. A) $180,000
  2. B) $230,000
  3. C) $270,000
  4. D) $320,000

Answer:  C

Diff: 2

LO:  16-8

AACSB:  Analytic skills

Learning Outcome:  None

 

8) John Company reported cost of goods sold of $910,000, an increase in inventory of $100,000, and an increase in accounts payable of $40,000. How much cash was paid to suppliers?

  1. A) $770,000
  2. B) $810,000
  3. C) $970,000
  4. D) $1,050,000

Answer:  C

Diff: 2

LO:  16-8

AACSB:  Analytic skills

Learning Outcome:  None

 

9) Jerome Company reported cost of goods sold of $700,000, a decrease in inventory of $60,000, and an increase in accounts payable of $30,000. How much cash was paid to suppliers?

  1. A) $605,000
  2. B) $610,000
  3. C) $725,000
  4. D) $795,000

Answer:  B

Diff: 2

LO:  16-8

AACSB:  Analytic skills

Learning Outcome:  None

 

10) The wages expense of Florida Corporation was $45,000 as per its income statement. Beginning wages payable was $6,000. Ending wages payable was $3,000. The cash paid to employees was ________.

  1. A) $42,000
  2. B) $45,000
  3. C) $48,000
  4. D) $50,000

Answer:  C

Diff: 2

LO:  16-8

AACSB:  Analytic skills

Learning Outcome:  None

 

11) Baldwin Company’s income statement reported income tax expense of $18,000. Income tax payable at the beginning of the year was $5,000. Income tax payable at the end of the year was $4,000. The cash paid for taxes was ________.

  1. A) $15,000
  2. B) $17,000
  3. C) $19,000
  4. D) $22,000

Answer:  C

Diff: 2

LO:  16-8

AACSB:  Analytic skills

Learning Outcome:  None

12) Benson Company’s income statement showed rent expense of $16,000. The beginning balance in Prepaid Rent was $5,000. The ending balance in Prepaid Rent was $3,000. The cash paid for rent was ________.

  1. A) $14,000
  2. B) $16,000
  3. C) $19,000
  4. D) $24,000

Answer:  A

Diff: 2

LO:  16-8

AACSB:  Analytic skills

Learning Outcome:  None

 

13) When reconciling net income to net cash provided by operating activities, a(n) ________ is a deduction from net income.

  1. A) decrease in inventories
  2. B) increase in unearned revenues
  3. C) decrease in prepaid rent
  4. D) decrease in accounts payable

Answer:  D

Diff: 2

LO:  16-8

AACSB:  Analytic skills

Learning Outcome:  None

 

14) When reconciling net income to net cash provided by operating activities, a(n) ________ is an addition to net income.

  1. A) increase in inventories
  2. B) increase in accounts receivable
  3. C) increase in wages payable
  4. D) decrease in taxes payable

Answer:  C

Diff: 2

LO:  16-8

AACSB:  Analytic skills

Learning Outcome:  None

 

15) The indirect and direct methods of preparing the statement of cash flows show the same amount of net cash provided by operating activities.

Answer:  TRUE

Diff: 2

LO:  16-8

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

 

16) The indirect method of preparing the statement of cash flows is the most popular method in the United States.

Answer:  TRUE

Diff: 1

LO:  16-8

AACSB:  Reflective thinking skills

Learning Outcome:  None

17) The direct method of preparing the operating activities section of the statement of cash flows begins with net income.

Answer:  FALSE

Diff: 2

LO:  16-8

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

18) Under the direct method of preparing the statement of cash flows, the cash collected from customers is determined for the operating activities section.

Answer:  TRUE

Diff: 2

LO:  16-8

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

19) When using the direct method of preparing the statement of cash flows, depreciation expense is added to net income.

Answer:  FALSE

Diff: 2

LO:  16-8

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

20) Analysts focus on free cash flow from the statement of cash flows.

Answer:  TRUE

Diff: 2

LO:  16-8

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

21) Free cash flow equals net cash from operating activities minus capital expenditures.

Answer:  TRUE

Diff: 2

LO:  16-8

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

 

22) For the year ended December 31, 2015, the following information is available for the Kansas Company:

 

Sales                                                                                                                   $891,000

Cost of goods sold                                  662,000

Depreciation expense                              16,000

Amortization expense                               3,000

Wage expense                                            91,000

Rent expense                                                4,000

Loss on sale of fixed assets                      2,000

Interest expense                                        13,000

Income tax expense                                 38,000

Total expenses                                                                                                  829,000

Net income                                                                                                         $62,000

 

December 31, 2014                      December 31, 2015

Cash                                                           $10,000                                           $12,800

Accounts receivable                              $10,000                                           $19,200

Inventory                                                  $20,000                                           $14,100

Prepaid rent                                               $2,000                                             $1,700

Accounts payable                                  $22,000                                           $24,400

Wages payable                                        $12,000                                           $11,300

Taxes payable                                            $2,000                                             $3,100

 

Required:

Prepare the operating activities section of the statement of cash flows for the year ending December 31, 2015. Use the indirect method.

Answer:  Net income                                                         $62,000

Add: depreciation expense                                                16,000

Add: amortization expense                                                 3,000

Add: loss on sale of fixed assets                                         2,000

Less: Increase in accounts receivable                             (9,200)

Add: Decrease in inventory                                                 5,900

Add: Decrease in prepaid rent                                               300

Add: Increase in accounts payable                                    2,400

Add: Increase in taxes payable                                           1,100

Less: Decrease in wages payable                                        (700)

Net cash provided by operating activities                  $82,800

Diff: 3

LO:  16-8

AACSB:  Analytic skills

Learning Outcome:  None

 

23) Maryland Company had net income of $21,850 for the year ended December 31, 2015. Additional information from the income statement follows:

 

Depreciation expense                  $8,400

Interest expense                               3,900

Income tax expense                        5,700

 

The company also reported the following balances:

December                     December

31, 2014                        31, 2015

Accounts receivable                          $10,000                         $11,800

Accounts payable                              $20,000                         $23,200

Income taxes payable                       $22,000                         $21,300

Inventory                                              $30,000                         $25,000

 

Required:

Prepare the operating activities section of the statement of cash flows for the year ended December 31, 2015. Use the indirect method.

Answer:  Net income                                                        $21,850

Add: Depreciation expense                                                 8,400

Add: Decrease in inventory                                                 5,000

Add: Increase in accounts payable                                   3,200

Less: Increase in accounts receivable                            (1,800)

Less: Decrease in income tax payable                              (700)

Net cash provided by operating activities                 $35,950

Diff: 3

LO:  16-8

AACSB:  Analytic skills

Learning Outcome:  None

 

 

24) The income statement and comparative balance sheets for Sterling Company are presented below:

Sterling Company

Income Statement

For the Year Ended December 31, 2015

 

Sales                                                                                                                                     $586,000

Cost of goods sold                                                311,000

Depreciation expense                                            14,000

Amortization expense                                             3,000

Wage expense                                                          88,000

Rent expense                                                            24,000

Loss on sale of fixed assets                                    2,600

Interest expense                                                         4,900

Income tax expense                                               56,000

Total expenses                                                      503,500

Net income                                                                                                                           $82,500

 

December 31, 2014                          December 31, 2015

Cash                                                                         $16,300                                               $19,900

Accounts receivable                                               27,900                                                 36,300

Inventory                                                                   53,900                                                 48,200

Prepaid rent                                                                1,800                                                    2,000

Land                                                                           22,000                                                 32,000

Fixed assets                                                            118,000                                               130,000

Accumulated depreciation                               (39,000)                                               (46,000)

Patent                                                                         11,000                                                 12,000

Total assets                                                          $211,900                                             $234,400

Accounts payable                                                   21,100                                                 27,700

Wages payable                                                          5,700                                                    6,200

Interest payable                                                            400                                                    1,600

Taxes payable                                                            7,900                                                    6,800

Bonds payable, due 2020                                     36,000                                                 44,000

Common stock                                                        32,000                                                 35,000

Retained earnings                                                108,800                                               113,100

Total liabilities and

Stockholders’ equity                                          $211,900                                             $234,400

 

Required:

Prepare a statement of cash flows using the indirect method for the year ended December 31, 2015. No land was sold in 2015. Land was purchased using bonds payable for $8,000 and cash for $2,000. A fixed asset was sold in 2015 for $4,100. Purchases of fixed assets and patents were for cash.

 

 

Answer:                              Sterling Company

Statement of Cash Flows

For the year ended December 31, 2015

Cash flows from operating activities:

Net income                                                                                           $82,500

Add: depreciation expense                                                                14,000

Add: amortization expense                                                                 3,000

Add: loss on sale of fixed assets                                                         2,600

Less: Increase in accounts receivable                                             (8,400)

Add: Decrease in inventory                                                                 5,700

Less: Increase in prepaid rent                                                              (200)

Add: Increase in accounts payable                                                   6,600

Less: Decrease in taxes payable                                                       (1,100)

Add: Increase in wages payable                                                            500

Add: Increase in interest payable                                                      1,200

Net cash provided by operating activities                               $106,400

 

Cash flows from investing activities:

Proceeds from sale of fixed asset                                                     $4,100

Purchase of fixed asset                                                                     (25,700)

Purchase land for cash                                                                       (2,000)

Purchase of patent                                                                               (4,000)

Net cash used by investing activities                                          (27,600)

 

Cash flows from financing activities:

Issued common stock                                                                            3,000

Paid dividends                                                                                   (78,200)

Net cash used by financing activities                                          (75,200)

Increase in cash                                                                                    $3,600

 

Schedule of noncash transactions:

Issued long-term bonds payable to acquire land    $8,000

Diff: 3

LO:  16-8

AACSB:  Analytic skills

Learning Outcome:  None

 

 

16.9   Questions

 

1) Why do accountants add Depreciation Expense to net income when determining net cash provided by operating activities? Assume the indirect method is used.

  1. A) because depreciation expense is a source of cash
  2. B) because depreciation expense requires the outflow of cash
  3. C) because depreciation expense is an investing activity that should be reported in the investing section of the cash flow statement
  4. D) because it cancels the earlier deduction when calculating net income

Answer:  D

Diff: 2

LO:  16-9

AACSB:  Analytic skills

Learning Outcome:  None

 

2) Which of the following statements about depreciation is FALSE?

  1. A) Depreciation does not generate cash.
  2. B) Depreciation is an allocation of the original cost of an asset to the periods in which the asset is used.
  3. C) Depreciation does not entail an outflow of cash.
  4. D) Depreciation is a means of setting aside cash for the replacement of an asset.

Answer:  D

Diff: 2

LO:  16-9

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

16.10   Questions

 

1) On January 1, 2014, a company had 100 units of inventory. A company acquired 100 units of inventory on January 31, 2014 and 100 units on December 1, 2014. The company sold 100 units on December 31, 2014, which was the company’s only sale. Under FIFO, the cost of goods sold would come from ________.

  1. A) the purchase cost of beginning inventory
  2. B) the purchase cost on January 31, 2014
  3. C) the purchase cost on December 1, 2014
  4. D) an average of the cost over the two purchase dates

Answer:  A

Diff: 2

LO:  16-10

AACSB:  Analytic skills

Learning Outcome:  None

 

2) LIFO uses the ________ costs to measure the ending inventory.

  1. A) latest
  2. B) earliest
  3. C) average
  4. D) weighted-average

Answer:  B

Diff: 2

LO:  16-10

AACSB:  Analytic skills

Learning Outcome:  None

 

3) LIFO uses the ________ costs to measure the cost of goods sold.

  1. A) latest
  2. B) earliest
  3. C) average
  4. D) weighted-average

Answer:  A

Diff: 2

LO:  16-10

AACSB:  Analytic skills

Learning Outcome:  None

 

4) FIFO provides inventory valuations that approximate the actual ________ of inventory at the balance sheet date.

  1. A) cost
  2. B) market value
  3. C) average cost
  4. D) sales value

Answer:  B

Diff: 2

LO:  16-10

AACSB:  Analytic skills

Learning Outcome:  None

 

5) In periods of inflation, FIFO leads to ________ gross profit than LIFO.

  1. A) lower
  2. B) the same
  3. C) higher
  4. D) not enough information

Answer:  C

Diff: 2

LO:  16-10

AACSB:  Analytic skills

Learning Outcome:  None

 

6) In periods of inflation, the ________ method of inventory valuation provides a more realistic net income.

  1. A) LIFO
  2. B) FIFO
  3. C) average cost
  4. D) weighted-average cost

Answer:  A

Diff: 2

LO:  16-10

AACSB:  Analytic skills

Learning Outcome:  None

 

7) During a period of inflation, the LIFO method reports a larger cost of goods sold amount than FIFO.

Answer:  TRUE

Diff: 2

LO:  16-10

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

8) During a period of inflation, the LIFO method reports a lower ending inventory amount than FIFO.

Answer:  TRUE

Diff: 2

LO:  16-10

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

9) The LIFO method reports the latest costs for ending inventory.

Answer:  FALSE

Diff: 2

LO:  16-10

AACSB:  Reflective thinking skills

Learning Outcome:  None

 

10) In a period of inflation, LIFO results in a higher net income than FIFO.

Answer:  FALSE

Diff: 2

LO:  16-10

AACSB:  Reflective thinking skills

Learning Outcome:  None

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