An artist creates original works on commission. She is likely to use what type of costing?
John Adams is a cash receipts clerk for Boro Company. He receives payments from customers and records the payments to the customers' accounts. John receives a payment from Bobbie Jones for merchandise purchased on account. But, instead of recording the payment to Jones' account and depositing the cash, he pockets the cash. Later, John receives a payment from Shorty Cobb. Instead of recording the payment to Cobb's account, he records it to Jones' account. This is an example of
understating accounts receivables
A potential capital investment will be depreciated $5,000 per year for five years. Which of the following pieces of information would a manager need to calculate the cash flow associated with depreciation?
the asset's residual value
the discount rate
the tax rate
none of the above, since there is no cash flow associated with depreciation
Capital investment decisions typically involve several kinds of cash flows. Which kind best describes an asset's residual value?
none of the above
Choosing the proper method of allocating costs to products and services can have a major impact on what?
the selling price of the product or service if selling price is based on competition
arriving at a proper cost for the product or service
total manufacturing costs
the method used doesn't matter
In large firms where different divisions compete for limited investment capital, managers are tempted to make liberal cash flow assumptions that show positive Net Present Values (NPV) to obtain approval for their projects. What can senior management do to offset this tendency?
senior management should stipulate a discount rate much higher than the company's cost of capital to reduce the present value of projects
senior management should stipulate a discount rate slightly higher than the company's cost of capital to reduce the present value of projects
senior management should stipulate a discount rate much lower than the company's cost of capital to reduce the present value of projects
senior management should stipulate a discount rate slightly lower than the company's cost of capital to reduce the present value of projects
It is estimated that the cost of electricity to run a machine for an entire 8-hour shift is $16. The machine can produce 200 units of product for each hour of operation. How much electricity cost is allocated to each unit of product?
cannot calculate from the information given
Fast Delivery Company delivers packages and business documents for local businesses located in the Houston metropolitan area. If the company decided to adopt an ABC costing system to accumulate costs for its service, what would be an appropriate cost driver to use for the cost of the packaging envelopes provided to customers?
number of miles to be driven in the delivery
number of drivers on the truck
number of packages
number of orders
Which of the following elements of Cooper's cost hierarchy is most difficult to allocate because they cannot be associated directly with a product?
All of the following are strategic decisions except
the types of products a company should manufacture
how products should be distributed
whether to enter new markets
improving machine setup times
Sebastian, an investment center manager in RKH Corporation, is trying to boost the current period's return on investment. Which of the following actions will achieve that goal?
purchasing a new piece of equipment on the last day of the fiscal year
raising commission rates for salespeople from 3% to 4%
delaying preventive maintenance on existing equipment until next year
all of the above will increase the current period's ROI
A collection of related operating budgets is known as a
pro forma financial statement
Hamilton has budgeted total manufacturing overhead costs for the year as $125,000 based on 20,000 direct labor hours. The ratio of variable manufacturing overhead costs to fixed manufacturing overhead costs is 2:1. In a given month 2,000 direct labor hours are budgeted for production. How much overhead is budgeted?
Research has shown that managers perform best when
there is no budget to worry about
there is a moderately difficult but achievable budget
the budget is obviously unachievable, but presents a tremendous challenge
budgets contain a maximum of slack
Kirland Company collected the following information to prepare its cash budget for the first quarter of a recent fiscal period.
If Kirkland wants an ending cash balance of $4,000, how much will it have to borrow in the first quarter?
Beginning cash balance $4,250
Capital Expenditures 3,000
Collections on account 23,000
Depreciation on factory equipment 1,000
Period costs 11,100
Product costs (excludes depreciation) 20,150
some other amount
The cost of customer ill will caused by a defective product is an example of a(n)
internal failure cost
external failure cost
Control charts may be used for each of the following except
provide a warning for an unexpected change
return the system to an "in-control" status
decrease inspection costs
identify errors in the process and determine basic causes
If a materials quantity variance is based on the amount of material used in a period, who should be held accountable for managing the variance?
cannot be determined from the information given
Which of the following statements is TRUE?
marketing managers never contribute to production variances
unfavorable materials quantity variances are always the responsibility of the production manager
both 1 and 2 are true
neither 1 nor 2 is true
Product variability has what effect on costs and customer satisfaction?
increases costs and increases customer dissatisfaction
decreases costs and increases customer dissatisfaction
increases costs and decreases customer dissatisfaction
decreases costs and decreases customer dissatisfaction
Holding all other factors equal, if net income increases, what will be the effect on return on investment (ROI)?
it will increase proportionately
it will decrease proportionately
it will remain the same
ROI will increase at twice the rate of the increase in net income
All of the following are disadvantages of the just-in-time manufacturing philosophy except
producing in small batches increases the number of machine setups
having lower inventory levels decreases carrying costs
maintaining low levels of inventory can cause the company to miss a sales opportunity
receiving raw materials in small batches increases shipping costs
Bottlenecks are generally caused by
inefficient machine operators
a machine that produces at a slower rate than other machines in the process
none of the above will generally produce bottlenecks
The solution explains some multiple choice questions in managerial accounting
Managerial Accounting Problems Computed
PROBLEM 2-25 Working with Incomplete Data from the Income Statement and Schedule of Cost of
Goods Manufactured [ LO4 , LO5 ]
Supply the missing data in the following cases. Each case is independent of the others. Replace each "?" with the correct answer in red text.
1 2 3 4
Schedule of Cost of Goods Manufactured
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . $4,500 $6,000 $5,000 $3,000
Direct labor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ? $3,000 $7,000 $4,000
Manufacturing overhead . . . . . . . . . . . . . . . . . . $5,000 $4,000 ? $9,000
Total manufacturing costs . . . . . . . . . . . . . . . . . $18,500 ? $20,000 ?
Beginning work in process inventory . . . . . . . . . $2,500 ? $3,000 ?
Ending work in process inventory . . . . . . . . . . . ? $1,000 $4,000 $3,000
Cost of goods manufactured . . . . . . . . . . . . . . . $18,000 $14,000 ? ?
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,000 $21,000 $36,000 $40,000
Beginning finished goods inventory . . . . . . . . . . $1,000 $2,500 ? $2,000
Cost of goods manufactured . . . . . . . . . . . . . . . $18,000 $14,000 ? $17,500
Goods available for sale. . . . . . . . . . . . . . . . . . . ? ? ? ?
Ending finished goods inventory . . . . . . . . . . . . ? $1,500 $4,000 $3,500
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . $17,000 ? $18,500 ?
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,000 ? $17,500 ?
Selling and administrative expenses . . . . . . . . . ? $3,500 ? ?
Net operating income. . . . . . . . . . . . . . . . . . . . . $4,000 ? $5,000 $9,000
PROBLEM 5-16 High-Low Method; Cost of Goods Manufactured [ LO1 , LO3 ]
Amfac Company manufactures a single product. The company keeps careful records of manufacturing
activities from which the following information has been extracted:
Level of Activity
Number of units produced . . . . . . . . . . . . . . . . 6,000 9,000
Cost of goods manufactured . . . . . . . . . . . . . . $168,000 $257,000
Work in process inventory, beginning . . . . . . . $9,000 $32,000
Work in process inventory, ending . . . . . . . . . . $15,000 $21,000
Direct materials cost per unit . . . . . . . . . . . . . . $6 $6
Direct labor cost per unit . . . . . . . . . . . . . . . . . $10 $10
Manufacturing overhead cost, total . . . . . . . . . ? ?
The company's manufacturing overhead cost consists of both variable and fixed cost elements.
To have data available for planning, management wants to determine how much of the overhead
cost is variable with units produced and how much of it is fixed per month.
1. For both March and June, estimate the amount of manufacturing overhead cost added to production.
The company had no under applied or over applied overhead in either month. (Hint: A
useful way to proceed might be to construct a schedule of cost of goods manufactured.)
2. Using the high-low method, estimate a cost formula for manufacturing overhead. Express the
variable portion of the formula in terms of a variable rate per unit of product.
3. If 7,000 units are produced during a month, what would be the cost of goods manufactured?
(Assume that work in process inventories do not change and that there is no under applied or
over applied overhead cost for the month.)
PROBLEM 6-19 Basics of CVP Analysis [ LO1 , LO3 , LO4 , LO6 , LO8]
Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit. Variable
costs are $8 per unit, and fixed costs total $180,000 per year.
Answer the following independent questions:
1. What is the product's CM ratio?
2. Use the CM ratio to determine the break-even point in sales dollars.
3. Due to an increase in demand, the company estimates that sales will increase by $75,000 during
the next year. By how much should net operating income increase (or net loss decrease)
assuming that fixed costs do not change?
4. Assume that the operating results for last year were:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $400,000
Variable expenses . . . . . . . . . . . . . . . . . . . 160,000
Contribution margin . . . . . . . . . . . . . . . . . . 240,000
Fixed expenses . . . . . . . . . . . . . . . . . . . . . 180,000
Net operating income . . . . . . . . . . . . . . . . $ 60,000
a. Compute the degree of operating leverage at the current level of sales.
b. The president expects sales to increase by 20% next year. By what percentage should net
operating income increase?
5. Refer to the original data. Assume that the company sold 18,000 units last year. The sales
manager is convinced that a 10% reduction in the selling price, combined with a $30,000 increase
in advertising, would cause annual sales in units to increase by one-third. Prepare two
contribution format income statements, one showing the results of last year's operations and
one showing the results of operations if these changes are made. Would you recommend that
the company do as the sales manager suggests?
6. Refer to the original data. Assume again that the company sold 18,000 units last year. The president
does not want to change the selling price. Instead, he wants to increase the sales commission
by $1 per unit. He thinks that this move, combined with some increase in advertising, would
increase annual sales by 25%. By how much could advertising be increased with profits remaining
unchanged? Do not prepare an income statement; use the incremental analysis approach.
PROBLEM 6-21 Basic CVP Analysis; Graphing [ LO1 , LO2 , LO4 , LO6 ]
The Fashion Shoe Company operates a chain of women's shoe shops around the country. The
shops carry many styles of shoes that are all sold at the same price. Sales personnel in the shops are
paid a substantial commission on each pair of shoes sold (in addition to a small basic salary) in
order to encourage them to be aggressive in their sales efforts.
The following worksheet contains cost and revenue data for Shop 48 and is typical of the
company's many outlets:
1. Calculate the annual break-even point in dollar sales and in unit sales for Shop 48.
2. Prepare a CVP graph showing cost and revenue data for Shop 48 from zero shoes up to 17,000
pairs of shoes sold each year. Clearly indicate the break-even point on the graph.
3. If 12,000 pairs of shoes are sold in a year, what would be Shop 48's net operating income or
4. The company is considering paying the store manager of Shop 48 an incentive commission of
75 cents per pair of shoes (in addition to the salesperson's commission). If this change is
made, what will be the new break-even point in dollar sales and in unit sales?
5. Refer to the original data. As an alternative to (4) above, the company is considering paying
the store manager 50 cents commission on each pair of shoes sold in excess of the break-even
point. If this change is made, what will be the shop's net operating income or loss if 15,000
pairs of shoes are sold?
6. Refer to the original data. The company is considering eliminating sales commissions entirely
in its shops and increasing fixed salaries by $31,500 annually. If this change is made, what
will be the new break-even point in dollar sales and in unit sales for Shop 48? Would you
recommend that the change be made? Explain.
PROBLEM 9-15 Production and Direct Materials Budgets [LO3, LO4]
Pearl Products Limited of Shenzhen, China, manufactures and distributes toys throughout South
East Asia. Three cubic centimeters (cc) of solvent H300 are required to manufacture each unit of
Supermix, one of the company's products. The company is now planning raw materials needs for
the third quarter, the quarter in which peak sales of Supermix occur. To keep production and sales
moving smoothly, the company has the following inventory requirements:
a. The finished goods inventory on hand at the end of each month must be equal to 3,000 units of
Supermix plus 20% of the next month's sales. The finished goods inventory on June 30 is
budgeted to be 10,000 units.
b. The raw materials inventory on hand at the end of each month must be equal to one-half of the
following month's production needs for raw materials. The raw materials inventory on June
30 is budgeted to be 54,000 cc of solvent H300.
c. The company maintains no work in process inventories.
A sales budget for Supermix for the last six months of the year follows.
July . . . . . . . . . . . . . . 35,000
August . . . . . . . . . . . . 40,000
September . . . . . . . . 50,000
October . . . . . . . . . . . 30,000
November . . . . . . . . . 20,000
December . . . . . . . . . 10,000
1. Prepare a production budget for Supermix for the months July, August, September, and
2. Examine the production budget that you prepared in (1) above. Why will the company produce
more units than it sells in July and August, and fewer units than it sells in September and
3. Prepare a direct materials budget showing the quantity of solvent H300 to be purchased for
July, August, and September, and for the quarter in total.
PROBLEM 9-17 Schedules of Expected Cash Collections and Disbursements [LO2, LO4, LO8]
You have been asked to prepare a December cash budget for Ashton Company, a distributor of
exercise equipment. The following information is available about the company's operations:
a. The cash balance on December 1 is $40,000.
b. Actual sales for October and November and expected sales for December are as follows:
October November December
Cash sales . . . . . . . . . . . . . $65,000 $70,000 $83,000
Sales on account . . . . . . . . $400,000 $525,000 $600,000
Sales on account are collected over a three-month period as follows: 20% collected in the
month of sale, 60% collected in the month following sale, and 18% collected in the second
month following sale. The remaining 2% is uncollectible.
c. Purchases of inventory will total $280,000 for December. Thirty percent of a month's inventory
purchases are paid during the month of purchase. The accounts payable remaining from
November's inventory purchases total $161,000, all of which will be paid in December.
d. Selling and administrative expenses are budgeted at $430,000 for December. Of this amount,
$50,000 is for depreciation.
e. A new Web server for the Marketing Department costing $76,000 will be purchased for cash
during December, and dividends totaling $9,000 will be paid during the month.
f. The company maintains a minimum cash balance of $20,000. An open line of credit is available
from the company's bank to bolster the cash position as needed.
1. Prepare a schedule of expected cash collections for December.
2. Prepare a schedule of expected cash disbursements for merchandise purchases for December.
3. Prepare a cash budget for December. Indicate in the financing section any borrowing that will be
needed during the month. Assume that any interest will not be paid until the following month.
PROBLEM 10-19 Critique a Report; Prepare a Performance Report [LO1, LO4, LO6]
TipTop Flight School offers f ying lessons at a small municipal airport. The school's owner and
manager has been attempting to evaluate performance and control costs using a variance report that
compares the planning budget to actual results. A recent variance report appears below:
After several months of using such variance reports, the owner has become frustrated. For example,
she is quite conf dent that instructor wages were very tightly controlled in July, but the report
shows an unfavorable variance.
The planning budget was developed using the following formulas, where q is the number of
1. Should the owner feel frustrated with the variance reports? Explain.
2. Prepare a flexible budget performance report for the school for July.
3. Evaluate the school's performance for July.
PROBLEM 11-14 Comprehensive Variance Analysis [LO2, LO3, LO4]
Miller Toy Company manufactures a plastic swimming pool at its Westwood Plant. The plant has
been experiencing problems as shown by its June contribution format income statement below:
Janet Dunn, who has just been appointed general manager of the Westwood Plant, has been given
instructions to "get things under control." Upon reviewing the plant's income statement, Ms. Dunn
has concluded that the major problem lies in the variable cost of goods sold. She has been provided
with the following standard cost per swimming pool:
During June the plant produced 15,000 pools and incurred the following costs:
a. Purchased 60,000 pounds of materials at a cost of $1.95 per pound.
b. Used 49,200 pounds of materials in production. (Finished goods and work in process inventories
are insignifi cant and can be ignored.)
c. Worked 11,800 direct labor-hours at a cost of $7.00 per hour.
d. Incurred variable manufacturing overhead cost totaling $18,290 for the month. A total of
5,900 machine-hours was recorded.
It is the company's policy to close all variances to cost of goods sold on a monthly basis.
1. Compute the following variances for June:
a. Direct materials price and quantity variances.
b. Direct labor rate and effi ciency variances.
c. Variable overhead rate and effi ciency variances.
2. Summarize the variances that you computed in (1) above by showing the net overall favorable
or unfavorable variance for the month. What impact did this fi gure have on the company's income
statement? Show computations.
3. Pick out the two most signifi cant variances that you computed in (1) above. Explain to
Ms. Dunn possible causes of these variances.