Accounting 251

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) A major weakness of flexible budgets is that: A) they ignore fixed costs. B) they are valid for only a single level of activity. C) they compare actual costs at one level of activity to budgeted costs at a different level of

activity. D) none of these is a major weakness of flexible budgets.

2) Comparing actual results to a budget based on the actual activity for the period is possible with the use of a:

A) master budget. B) monthly budget. C) rolling budget. D) flexible budget.

3) A static planning budget is: A) used only for fixed costs. B) used when the mix of products does not change. C) a budget that ignores inflation. D) a budget for a single level of activity.

Bobe Air uses two measures of activity, flights and passengers, in the cost formulas in its budgets and performance reports. The cost formula for plane operating costs is $44,580 per month plus $2,390 per flight plus $8 per passenger. The company expected its activity in May to be 68 flights and 211 passengers, but the actual activity was 71 flights and 210 passengers. The actual cost for plane operating costs in May was $215,140.

4) The plane operating costs in the planning budget for May would be closest to: A) $206,050 B) $215,140 C) $215,950 D) $208,788

5) Hoppy Corporation compares monthly operating results to a static budget prepared at the beginning of the month. When the actual level of activity is less than budgeted, which of the following would be true?

A) Fixed costs would show unfavorable variances. B) Variable costs would show favorable variances. C) Variable costs would show unfavorable variances. D) Fixed costs would show favorable variances.




6) Which of the following comparisons best isolates the impact that changes in operating efficiency have on performance?

A) static planning budget and actual results B) master budget and static planning budget C) static planning budget and flexible budget D) flexible budget and actual results

7) Paradiso Medical Clinic measures its activity in terms of patient-visits. Last month, the budgeted level of activity was 1,060 patient-visits and the actual level of activity was 1,050 patient-visits. The cost formula for administrative expenses is $3.00 per patient-visit plus $17,000 per month. The actual administrative expense was $19,300. In the clinic's flexible budget performance report for last month, the spending variance for administrative expenses was:

A) $220 U B) $850 F C) $30 F D) $880 F

Hairston Corporation manufactures and sells a single product. The company uses units as the measure of activity in its budgets and performance reports. During November, the company budgeted for 7,700 units, but its actual level of activity was 7,720 units. The company has provided the following data concerning the formulas used in its budgeting and its actual results for November:

Data used in budgeting:

Actual results for November:

8) The selling and administrative expenses in the planning budget for November would be closest to: A) $21,104 B) $22,140 C) $22,144 D) $21,049




Vanderhyde Kennel uses tenant-days as its measure of activity; an animal housed in the kennel for one day is counted as one tenant-day. During May, the kennel budgeted for 3,300 tenant-days, but its actual level of activity was 3,340 tenant-days. The kennel has provided the following data concerning the formulas used in its budgeting and its actual results for May:

Data used in budgeting:

Actual results for May:

9) The administrative expenses in the planning budget for May would be closest to: A) $7,792 B) $8,136 C) $7,886 D) $8,120

10) Biggs Enterprise's flexible budget cost formula for indirect materials, a variable cost, is $0.60 per unit of output. If the company's performance report for last month shows a $200 favorable spending variance for indirect materials and if 9,000 units of output were produced last month, then the actual costs incurred for indirect materials for the month must have been:

A) $5,400 B) $6,000 C) $5,200 D) $5,600

11) The variance that is usually most useful in assessing the performance of the purchasing department manager is:

A) the labor rate variance. B) the labor efficiency variance. C) the materials quantity variance. D) the materials price variance.




12) Variable manufacturing overhead is applied to products on the basis of standard direct labor-hours. If the labor efficiency variance is unfavorable, the variable overhead efficiency variance will be:

A) either favorable or unfavorable. B) unfavorable. C) zero. D) favorable.

13) The following labor standards have been established for a particular product:

The following data pertain to operations concerning the product for the last month:

What is the labor rate variance for the month? A) $2,877 F B) $4,246 U C) $1,295 F D) $4,246 F

14) Which of the following would produce a materials price variance? A) An excess number of direct labor-hours worked in completing a job. B) Shipping materials to the plant by air freight rather than by truck. C) An excess quantity of materials used. D) Breakage of materials in production.

15) Poor quality materials could have an unfavorable effect on which of the following variances?

A) Option A B) Option B C) Option C D) Option D

16) Which of the following would produce a labor rate variance? A) Use of persons with high hourly wage rates in tasks that call for low hourly wage rates. B) An unfavorable variable overhead rate variance. C) Excessive number of hours worked in completing a job. D) Poor quality materials causing breakage and work interruptions.




17) In a company's standard costing system direct labor-hours are used as the base for applying variable manufacturing overhead costs. The standard direct labor rate is twice the variable overhead rate. Last period the labor efficiency variance was unfavorable. From this information one can conclude that last period the variable overhead efficiency variance was:

A) favorable and twice the labor efficiency variance. B) unfavorable and half the labor efficiency variance. C) favorable and half the labor efficiency variance. D) unfavorable and twice the labor efficiency variance.

18) At Cady Corporation, maintenance is a variable overhead cost that is based on machine-hours. The performance report for June showed that actual maintenance costs totaled $9,600 and that the associated rate variance was $400 unfavorable. If 8,000 machine-hours were actually worked during June, the standard maintenance cost per machine-hour was:

A) $1.20 per MH B) $1.30 per MH C) $1.15 per MH D) $1.25 per MH

19) During a recent lengthy strike at Morell Manufacturing Company, management replaced striking assembly line workers with office workers. The assembly line workers had been paid $18 per hour while the office workers are only paid $10 per hour. What is the most likely effect on the labor variances in the first month of this strike?

A) Option A B) Option B C) Option C D) Option D

20) A quantity of a particular raw material was purchased for $43,250. The standard cost of the material was $2.00 per kilogram and there was an unfavorable materials price variance of $3,250. How many kilograms were purchased?

A) 20,000 B) 23,250 C) 24,875 D) 21,625

21) Throughput Time consists of: A) Inspection Time and Move Time. B) Process Time, Inspection Time, and Move Time. C) Process Time. D) Process Time, Inspection Time, Move Time, and Queue Time.

22) Manufacturing Cycle Efficiency (MCE) is computed as: A) Process Time ÷ Delivery Cycle Time. B) Throughput Time ÷ Delivery Cycle Time. C) Value-Added Time ÷ Delivery-Cycle Time. D) Value-Added Time ÷ Throughput Time.




23) Fruchter Corporation keeps careful track of the time required to fill orders. The times recorded for a particular order appear below:

The throughput time was: A) 11.0 hours B) 37.4 hours C) 4.6 hours D) 32.8 hours

24) Contribution income statements are used to measure the performance of: A) both cost centers and investment centers. B) both profit centers and investment centers. C) both cost centers and profit centers. D) cost centers.

25) A company that is seeking to increase ROI should attempt to decrease: A) margin. B) sales. C) average operating assets. D) turnover.

26) Consider the following three conditions:

I. An increase in sales II. An increase in operating assets III. A reduction in expenses

Which of the above conditions provide a way in which a manager can improve return on investment? A) Only I and II B) Only I C) Only I and III D) Only II and III

27) Net operating income is defined as: A) net income plus interest and taxes. B) sales minus variable expenses and traceable fixed expenses. C) sales minus variable expenses. D) contribution margin minus traceable and common fixed expenses.




28) Which of the following would be an argument for the use of net book value in the computation of operating assets in return on investment calculations?

A) It eliminates both age of equipment and method of depreciation as factors in ROI computations.

B) It is consistent with how plant and equipment items are reported on the balance sheet. C) It allows ROI to decrease over time as assets get older. D) It allows the manager to replace old, worn-out equipment with a minimum adverse impact on


29) Managerial performance can be measured in many different ways including return on investment (ROI) and residual income. A good reason for using residual income instead of ROI is:

A) Managers are more likely to accept projects that are beneficial to the company. B) ROI does not take into account both turnover and margin. C) A minimum rate of return does not have to be specified when the residual income approach is

used. D) Residual income can be computed without having to measure operating assets.

30) Which of the following performance measures will decrease if the minimum required rate of return increases?

A) Option A B) Option B C) Option C D) Option D

31) Residual income: A) will always be greater than zero. B) is the return on investment (ROI) percentage multiplied by average operating assets. C) is the net operating income earned above a certain minimum required return on average

operating assets. D) is the net operating income earned above a certain minimum required return on sales.

32) All other things being the same, which of the following would increase the residual income? A) Decrease in average operating assets. B) Decrease in net operating income. C) Decrease in sales. D) Increase in minimum required return.




33) Given the following data:

Return on investment (ROI) would be: A) 5% B) 25% C) 60% D) 12%

34) Given the following data:

The residual income would be: A) $6,000 B) $8,000 C) $2,800 D) $0

35) In a make-or-buy decision, relevant costs include: A) fixed factory overhead costs applied to products B) avoidable fixed costs C) fixed selling and administrative expenses D) unavoidable fixed costs

36) Management is considering a one-time-only special order. There is sufficient idle capacity to fill the order without affecting any normal sales. Which one of the following is NOT relevant in making the decision?

A) incremental costs B) absorption costing unit product costs C) differential costs D) variable costs

37) When a multi-product factory operates at full capacity, decisions must be made about which products to emphasize. In making such decisions, products should be ranked based on:

A) unit sales volume B) contribution margin per unit C) contribution margin per unit of the constraining resource D) selling price per unit




38) Two or more products produced from a common input are called: A) sunk costs. B) joint costs. C) common costs. D) joint products.

39) Vanikord Corporation currently has two divisions which had the following operating results for last year:

Because the Rubber Division sustained a loss, the president of Vanikoro is considering the elimination of this division. All of the division's traceable fixed costs could be avoided if the division was dropped. None of the allocated common corporate fixed costs could be avoided. If the Rubber Division was dropped at the beginning of last year, how much higher or lower would Vanikoro's total net operating income have been for the year?

A) $50,000 higher B) $20,000 higher C) $50,000 lower D) $30,000 lower

40) Tish Corporation produces a part used in the manufacture of one of its products. The unit product cost is $26, computed as follows:

An outside supplier has offered to provide the annual requirement of 5,000 of the parts for only $21 each. The company estimates that 75% of the fixed manufacturing overhead cost above could be eliminated if the parts are purchased from the outside supplier. Assume that direct labor is an avoidable cost in this decision. Based on these data, the per-unit dollar advantage or disadvantage of purchasing from the outside supplier would be:

A) $3 advantage B) $4 disadvantage C) $1 disadvantage D) $5 advantage




41) Consider the following production and cost data for two products, Q and P:

A total of 24,000 machine minutes are available each period and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period?

A) $132,000 B) $120,000 C) $456,000 D) $144,000

42) Zemlya Corporation currently records $4,000 of depreciation each year on the computer that it uses for its major data processing needs. The computer currently has one more year of useful life left and it will have a salvage value of zero at the end of that year. Jennifer, one of the accountants at Zemlya, suggested that the computer be sold immediately for $3,000 and that the company hire a data processing firm to handle the corporation's data processing needs. The computer currently requires $25,000 in annual operating costs in addition to the depreciation. The data processing firm would charge $10,000 per year for its services. If Zemlya decides to implement this change, what effect will this have on the corporation's net cash flow for the last year of the computer's useful life?

A) decrease of $22,000 B) increase of $15,000 C) increase of $18,000 D) decrease of $25,000

43) Which of the following is not an effective way of dealing with a production constraint (i.e., bottleneck)?

A) Reduce the number of defective units produced at the bottleneck. B) Pay overtime to workers assigned to work stations located after the bottleneck in the

production process. C) Pay overtime to workers assigned to the bottleneck. D) Subcontract work that would otherwise require use of the bottleneck.

44) Opportunity costs are: A) the same as variable costs. B) relevant in decision making. C) not used for decision making. D) the same as historical costs.




45) Consider the following statements:

I. A division's net operating income, after deducting both traceable and allocated common fixed costs, is negative. II. The division's avoidable fixed costs exceed its contribution margin. III. The division's traceable fixed costs plus its allocated common corporate costs exceed its contribution margin.

Which of the above statements is a valid reason for eliminating the division? A) Only II B) Only III C) Only I D) Only I and II

ESSAY. Write your answer in the space provided or on a separate sheet of paper.

1) Branner Corporation uses customers served as its measure of activity. During June, the company budgeted for 26,000 customers, but actually served 23,000 customers. The company bases its budgets on the following information: Revenue should be $2.80 per customer served. Wages and salaries should be $22,100 per month plus $0.70 per customer served. Supplies should be $0.50 per customer served. Insurance should be $5,200 per month. Miscellaneous expenses should be $2,100 per month plus $0.30 per customer served. The company reported the following actual results for June:

Revenue $63,800 Wages and salaries $37,100 Supplies $9,900 Insurance $5,400 Miscellaneous expense $6,200


Prepare the company's flexible budget performance report for June. Label each variance as favorable (F) or unfavorable (U).




2) Stewart Corporation makes a product with the following standard costs:

The company reported the following results concerning this product in August.

The company applies variable overhead on the basis of direct labor-hours. The direct materials purchases variance is computed when the materials are purchased.


a. Compute the materials quantity variance. b. Compute the materials price variance. c. Compute the labor efficiency variance. d. Compute the labor rate variance. e. Compute the variable overhead efficiency variance. f. Compute the variable overhead rate variance.




3) Financial data for Redstone Company for last year appear below:

The company paid dividends of $32,200 last year. The "Investment in Balsam Company" on the statement of financial position represents an investment in the stock of another company.


a. Compute the company's margin, turnover, and return on investment for last year. b. The Board of Directors of Redstone has set a minimum required return of 25%. What was the company's residual income last year?



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