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# Accounting Multiple Choice

Topic: Flexible Budgets and Standard Costs
Topic: Special Decisions and Capital Budgeting

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 inflows \$130,000 \$80,000
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
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 value of \$1 Present value of Annuity of \$1
due 3 years from now due at the end of each of 3 years
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 inflows \$130,000 \$80,000
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 inflows \$130,000 \$80,000
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 value of \$1 at 14% Present value of Annuity 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 inflows \$130,000 \$80,000
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

#### Solution Preview

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

We make the income statement
Sales (5,000X10) 50,000
Variable cost (5,000X5) 25,000
Contribution margin 25,000
Fixed cost 12,000
Operating income 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 inflows \$130,000 \$80,000
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%

Accounting Rate of return = Average Income/Average Investment
Depreciation per year = (400,000-0)/8 = 50,000
Average Net Income = 80,000-50,000=\$30,000
Average investment = 400,000/2 = 200,000
ARR = 30,000/200,000 = 15%

4. The flexible budget total cost formula applies ONLY to a specific relevant range.
TRUE
FALSE
Once the relevant range is crossed the cost behavior changes and so the formula is no longer valid.

5. The main financial goals in a business are to earn profits and to build a strong financial position.
TRUE
FALSE

The main goal is supposed to be shareholder wealth maximization

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.

The formula for direct material efficiency variance = (Actual qty used - Std qty) X Std rate
If it is favorable then actual is less than std

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

These models do not consider the time value of money

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

Material price variance = (Actual Price - Std Price) X Act Qty Purchased
=(10.50-11.75) X 11,500 = 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

A factory overhead flexible budget variance is the ...

#### Solution Summary

The solution explains various multiple choice questions relating to accounting

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