Purchase Solution

# 14 practice management accounting questions

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1. Theft of raw materials is most likely to lead to
a. Direct materials price variance
b. Favorable direct materials price variance
c. Unfavorable direct materials efficiency variance
d. Favorable direct materials efficiency variance

Use the following information for the next 4 questions.

Welch Company budgeted the following cost standards for the current year:
Direct materials = 1.40 pounds per unit @ \$1.50 per pound
Direct labor = 0.75 hours per unit @ \$6 per hour
Actual production and costs were as follows:
Units produced = 2,800
Direct materials used = 4,500 lbs.
Direct materials purchased = 5,000 lbs. @ a cost of \$5,850
Direct labor incurred = 2,000 hours at a cost of \$13,000

2. The material price variance for materials purchased was
a. \$1,650 F
b. \$870 U
c. \$2,520 U
d. \$780 F

3. The material efficiency variance was
a. \$1,650 F
b. \$870 U
c. \$2,520 U
d. \$780 F

4. The labor price variance was
a. \$600 F
b. \$400 U
c. \$4,800 F
d. \$1,000 U

5. The labor efficiency variance was
a. \$600 F
b. \$400 U
c. \$4,800 F
d. \$1,000 U

Use the following information for the next 2 questions.
Phoxco is considering automating its production line at a cost of \$40,000 to acquire the necessary equipment. The annual cost savings are expected to be \$8,000 for 14 years. The firm requires a 20% rate of return. Ignore income taxes.

6. What is the internal rate of return on this investment?
a. Less than 20%
b. Equal to 20%
c. More than 20%
d. Cannot be determined

7. The net present value for this investment is
a. Positive
b. Zero
c. Negative
d. Cannot be determined

The Bonkers Corp. is contemplating the purchase of a piece of equipment with the following cash flow data:
Incremental
Year Initial Cost Contribution Terminal Value
0 \$84,000
1 \$30,000
2 25,000
3 20,000
4 15,000 \$9,000
8. Ignoring income taxes, what is the payback period?
a. 3.00 years
b. 3.33 years
c. 3.60 years
d. 3.50 years

Use the following information for the next 2 questions.
BBM Corporation's managers are attempting to build a new product, a better mousetrap. They began by determining the features customers wanted and what they would pay for those features. BBM's engineers then reverse-engineered a competitor's product to understand its design and related production processes. Their analysis indicated that customers would pay \$10.00 for a better mousetrap.

9. What process did BBM use according to the preceding scenario?
a. Kaizen costing
b. Value chain costing
c. Target costing
d. Life cycle costing

10. If BBM's required profit margin is 25%, the target cost of a better mousetrap is:
a. \$2.50
b. \$7.50
c. \$12.50
d. None of the above

11. Life cycle costing can be used to identify unprofitable products due to high costs at the end of a product's life. Which of the following is the best example of such a product?
a. Nuclear reactors
b. Cherry orchards
c. CPA firms
d. Universities

12. The chief executive officer told Nick, the production manager at BRS Corporation, to reduce costs and increase profits. In response, Nick decided to produce more units for inventory. BRS is most likely using
a. Variable costing.
b. Throughput costing.
c. Absorption costing.
d. Capacity-based costing.

13. Which costing method matches costs and revenues most appropriately for generally accepted accounting principles?
a. Throughput costing
b. Absorption costing
c. Variable costing
d. Activity-based costing

The Mukilteo Division of Snohomish Corp. produces and sells a product to outside and internal customers. Per-unit data collected from its operations include:
Outside sales price \$640
Direct materials 105
Direct labor 250

14. If Mukilteo is operating at full capacity and selling solely to outside customers, what price should another division pay for Mukilteo's product?
a. \$285
b. \$625
c. \$640
d. \$480

##### Solution Summary

A sentence and/or a computation support the selection and give you guidance on the concept the question is testing.

##### Solution Preview

1. Theft of raw materials is most likely to lead to
a. Direct materials price variance
b. Favorable direct materials price variance
c. Unfavorable direct materials efficiency variance
d. Favorable direct materials efficiency variance

Unfavorable materials efficiency variance because the quantity used will be more than permitted by standard. Pick C.

Use the following information for the next 4 questions.
Welch Company budgeted the following cost standards for the current year:
Direct materials = 1.40 pounds per unit @ \$1.50 per pound
Direct labor = 0.75 hours per unit @ \$6 per hour
Actual production and costs were as follows:
Units produced = 2,800
Direct materials used = 4,500 lbs.
Direct materials purchased = 5,000 lbs. @ a cost of \$5,850
Direct labor incurred = 2,000 hours at a cost of \$13,000

2. The material price variance for materials purchased was
a. \$1,650 F
b. \$870 U
c. \$2,520 U
d. \$780 F

5,000 x \$1.50 = what they "should" have paid = \$7,500 less what they paid \$5,850 = \$1,650 F (A)

3. The material efficiency variance was
a. \$1,650 F
b. \$870 U
c. \$2,520 U
d. \$780 F

2,800 x 1.4 pounds = what they "should" have used = 3,920 pounds versus 4,500 pounds = 580 pounds over standard x \$1.50 = \$870 U (B)

4. The labor price variance was
a. \$600 F
b. \$400 ...

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