Accounting multiple choice : explained

Extracted Content from Question Files:

1. ABBA Manufacturing makes staplers. The budgeted selling price is $10 per stapler, the
variable rate is $5 per lock and budgeted fixed costs are $12,000. What is the budgered
operating income for 5,000 staplers?
a. $15,000
b. $50,000
c. $25,000
d. $13,000

2. Make or buy decisions are often referred to as outsourcing decisions.
TRUE
FALSE

3. Simms Manufacturing is considering two alternative investment proposals with the
following data:
Proposal X Proposal Y
Original cost $620,000 $400,000

Useful life 8 years 8 years
Estimated annual net cash $130,000 $80,000
inflows
Residual value $60,000 $0
Depreciation method Straight - line Straight - line
Required rate of return 14% 10%
What is the accounting rate of return for Proposal Y?
a. 40.0%
b. 16.0%
c. 20.0%
d. 15.0%

4. The flexible budget total cost formula applies ONLY to a specific relevant range.
TRUE
FALSE

5. The main financial goals in a business are to earn profits and to build a strong financial
position.
TRUE
FALSE
6. What does a favorable direct materials efficiency variance indicate?
a. The actual cost of direct materials was less than the standard cost of direct materials.
b. The standard quantity of direct materials for actual output was less than the actual
quantity of direct materials used.
c. The actual quantity of direct materials used was greater than the standard quantity for
budgeted output.
d. The actual quantity of direct materials used was less than the standard quantity for
actual output.
7. The payback and accounting rate of return models are conceptually better than the
discounted cash flow models because they are based on cash flows, and they consider
both profitability and the time value of money.
TRUE
FALSE

8. The actual cost of direct materials is $10.50 per pound. The standard cost per pound is
$11.75. During the current period, 10,000 pounds were used in production and 11,500
pounds were purchased. The standard quantity for actual units produced is 9,900 pounds.
How much is the direct materials price variance, assuming it is recorded at purchase
point?
a. $12,500 F
b. $14,375 U
c. $12,500 U
d. $14,375 F

9. Manufacturing overhead allocated to production equals the standard predetermined
manufacturing overhead rate times the actual quantity of allocation base allowed for the
standard number of outputs.
TRUE
FALSE

10. The overhead flexible budget variance is the difference between the actual overhead cost
and the flexible budget overhead for budgeted production.
TRUE
FALSE

11. The difference between total actual overhead and the flexible budget amount for actual
production is referred to as:
a. The production volume variance
b. The overhead efficiency variance.
c. The overhead flexible budget variance.
d. Both A and C are correct.
12. Standard cost help motivate employees by serving as benchmarks against which their
performance is measured.
TRUE
FALSE

13. Which of the following capital budgeting models is the simplest to compute?
a. Net present value
b. Internal rate of return
c. Payback
d. Accounting rate of return

14. The actual cost of direct labor per hour is $12.50 and the standard cost of direct labor per
hour is $12.00. Two standard direct labor hours are allowed per finished good. During
the current period, 250 finished goods were produced using 475 direct labor hours. How
much is the direct labor efficiency variance?
a. $312.50 F
b. $312.50 U
c. $300.00 U
d. $300.00 F

15. Simms Manufacturing is considering two alternative investment proposals with the
following data:

The investment data

Investment
A Investment B
Initial capital investment $60 0 $90 0
Estimated useful life 3 years 3 years
Estimated residual value $0 $0
Estimated annual net cash
inflow $25 0 $40 0
Required rate of return 10% 12%

The present value factors.

Present Present value of Annuity of $1
value of
$1
due 3 due at the end of each of 3 years
years from
now
8% 0.7938 2.5771
10% 0.7513 2.4869
12% 0.7118 2.4018
14% 0.675 2.3216
16% 0.6407 2.2459

How much is the net present value of Investment B?
a. $40,000
b. $(164)
c. $61,528
d. $6,072

16. Simms Manufacturing is considering two alternative investment proposals with the
following data:

Proposal X Proposal Y
Original cost $620,000 $400,000

Useful life 8 years 8 years
Estimated annual net cash $130,000 $80,000
inflows
Residual value $60,000 $0
Depreciation method Straight - line Straight - line
Required rate of return 14% 10%

Using the net present value model, which alternative should Simms select, and why?

PV of $1 factors
Present value of $1 at
Year 10% 12% 14%
1 0.909 0.893 0.877
2 0.826 0.797 0.769
3 0.751 0.712 0.675
4 0.683 0.636 0.592
5 0.621 0.567 0.519
6 0.564 0.507 0.456
7 0.513 0.452 0.4
8 0.467 0.404 0.351

PV of Annuity of $1 factors

Present value of Annuity of $1 at
Year 10% 12% 14%
1 0.909 0.893 0.877
2 1.736 1.69 1.647
3 2.487 2.402 2.322
4 3.17 3.037 2.914
5 3.791 3.605 3.433
6 4.355 4.111 3.889
7 4.868 4.564 4.288
8 5.335 4.968 4.639

a. Proposal X, because it is the only alternative with a positive net present value.
b. Proposal Y, because it is the only alternative with a positive net present value.
c. Proposal Y, because its net present value is $22,670 higher than the net present value of
Proposal X.
d. None of the above.

17. Boxes Company has collected the following data for one of its products:
Direct materials standard (3 pounds @ $1/lb.) $3 per finished good
Direct materials flexible budget variance unfavorable $14,000
Actual direct materials used 100,000 pounds
Actual finished goods produced 25,000 units

What is the actual cost of the direct materials used per pound?

a. $.89
b. $.75
c. $1.00
d. None of the above.

18. Price variances shoe how changes in usage of raw materials and labor affect a
company’s profits.
TRUE
FALSE

19. Landmark Company is considering an investment in new equipment costing $360,000.
The equipment will be depreciated on a straight line basis over a five year life and is
expected to generate net cash inflows of $70,000 the first year, $80,000 the second year,
and $120,000 every year thereafter. What is the payback period for this investment?
a. 3.75 years
b. 3.50 years
c. 4 years
d. 3.25 years

20. Which of the following describes a sunk cost?
a. Relevant to a decision because it changes depending on the alternative course of
action selected.
b. A historical cost that may be relevant
c. A historical cost that is always irrelevant
d. An outlay expected to be incurred in the future.

21. Simms Manufacturing is considering two alternative investment proposals with the
following data:

Proposal X Proposal Y
Original cost $620,000 $400,000

Useful life 8 years 8 years
Estimated annual net cash $130,000 $80,000
inflows
Residual value $60,000 $0
Depreciation method Straight - line Straight - line
Required rate of return 14% 10%

What is the net present value of Proposal Y?

PV of a $1 factors
Present value of $1 at
Year 10% 12% 14%
1 0.909 0.893 0.877
2 0.826 0.797 0.769
3 0.751 0.712 0.675
4 0.683 0.636 0.592
5 0.621 0.567 0.519
6 0.564 0.507 0.456
7 0.513 0.452 0.4
8 0.467 0.404 0.351

PV of Annuity of $1 factors
Present value of Annuity of $1 at
Year 10% 12% 14%
1 0.909 0.893 0.877
2 1.736 1.69 1.647
3 2.487 2.402 2.322
4 3.17 3.037 2.914
5 3.791 3.605 3.433
6 4.355 4.111 3.889
7 4.868 4.564 4.288
8 5.335 4.968 4.639

a. $(133,250)
b. $26,800
c. $136,800
d. $0

22. Atlantic Company is considering investing in specialized equipment costing $360,000.
The equipment has a useful life of 5 years and a residual value of $45,000. Depreciation
is calculated using the straight line method. The expected net cash inflows from the
investment are:
Year 1 $ 160,000
Year 2 130,000
Year 3 100,000
Year 4 55,000
Year 5 40,000
$ 485,000
Atlantic Company’s required rate of return is 14%.

Present Value factors

Year Present Present value of Annuity of $1 at 14%
value of
$1 at 14%
1 0.877 0.877
2 0.769 1.647
3 0.675 2.322
4 0.592 2.914
5 0.519 3.433

What is the accounting rate of return on the investment?
a. $48,930
b. $(7,288)
c. $2,220
d. $24,465

23. Simms Manufacturing is considering two alternative investment proposals with the
following data:
Proposal X Proposal Y
Original cost $620,000 $400,000

Useful life 8 years 8 years
Estimated annual net cash $130,000 $80,000
inflows
Residual value $60,000 $0
Depreciation method Straight - line Straight - line
Required rate of return 14% 10%

What is the total present value of future cash inflows from Proposal Y?

PV of $1 factors
Present value of $1 at
Year 10% 12% 14%
1 0.909 0.893 0.877
2 0.826 0.797 0.769
3 0.751 0.712 0.675
4 0.683 0.636 0.592
5 0.621 0.567 0.519
6 0.564 0.507 0.456
7 0.513 0.452 0.4
8 0.467 0.404 0.351

PV of Annuity of $1 factors
Present value of Annuity of $1 at
Year 10% 12% 14%
1 0.909 0.893 0.877
2 1.736 1.69 1.647
3 2.487 2.402 2.322
4 3.17 3.037 2.914
5 3.791 3.605 3.433
6 4.355 4.111 3.889
7 4.868 4.564 4.288
8 5.335 4.968 4.639
a. $426,800
b. $536,800
c. $266,750
d. $436,800

24. Which of the following is a budget based on a single predicted amount of sales or
production?
a. Static budget
b. Fixed budget
c. Flexible budget
d. Standard budget
25. Net present value and the payback period are examples of discounted cash flow models
used in capital budgeting decisions.

TRUE
FALSE

26. Jennifer Gibson Company budgeted 4,000 pounds of direct materials costing $7.00 per
pound to make 8,000 units of product. The company actually used 4,200 pounds costing
$6.50 per pound to make the 8,000 units. What is the direct materials efficiency
variance?
a. $1,400 U
b. $3,400 F
c. $1,400 F
d. $3,400 U

27. In deciding whether to accept a special sales order, any fixed cost that would remain
unchanged is considered relevant data.

TRUE
FALSE

28. Which of the following is a carefully predetermined cost that is usually expressed on a
per unit basis?

a. Standard cost
b. Flexible cost
c. Allocated cost
d. Applied cost

29. The standard variable overhead rate for Unbeatable Toys is $5. Budgeted fixed
overhead is $20,000. Unbeatable Toys budgeted 2,000 units for the current period and
actually produced 1,950 finished units. What is the production volume variance?

a. $250 U
b. $500 F
c. $250 F
d. $500 U

30. What do flexible budgets help to measure?

a. The efficiency of operations at the actual activity levels.
b. The amount by which standard and expected prices differ
c. Both A and B
d. None of the above
31. Which of the following is irrelevant when making a decision?
a. The cost of an asset that the company is considering replacing.
b. Fixed overhead costs that differ among alternatives.
c. The expected increase in sales of one product line as a result of a decision to drip a
separate unprofitable produce line.
d. The cost of further processing a product that could be sold as is.

32. In a capital budgeting decision, the residual value of an asset being considered for
purchase is:

a. Relevant only if the asset is later disposed of at a loss.
b. Relevant.
c. Relevant only if the asset is later disposed of at a gain.
d. Irrelevant

33. Investments with longer payback periods are more desirable, all else being equal.

TRUE
FALSE