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    Accounting Multiple Choice

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    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
    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 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

    © BrainMass Inc. brainmass.com October 9, 2019, 10:03 pm ad1c9bdddf
    https://brainmass.com/business/capital-budgeting/206730

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    Solution Preview

    Please see the attached file for answers/explanations in blue

    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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