c. Decision making.

MAS CHAPTER 1: INTRODUCTION c 8. Conventional and just-in-time manufacturers both d. Reporting.

a. Maintain large inventories of their products.
Multiple Choice b. Sell only to other manufacturing companies. d 16. Which consideration influences the frequency of an internal
c. Desire to meet customers' deadlines. report?
a 1. The controller of a company or other organization is d. Require about the same amount of space to operate. a. The wishes of the managers receiving the report.
a. a staff manager. b. The frequency with which decisions are made that require the
b. an operating manager. d 9. Classifying costs by behavior is information in the report.
c. an accountant, not a manager. a. associated primarily with financial accounting. c. The cost of preparing the report.
d. a natural manager. b. not relevant to a company that has only selling expenses. d. All of the above.
c. common in reports prepared for external readers.
c 2. Which item is NOT an IMA Standard for Ethical Conduct? d. none of the above.
a. Integrity. a 17. A just-in-time manufacturer is more likely than a conventional
b. Competence. a 10. Which is NOT a common accounting classification of costs? manufacturer to
c. Loyalty. a. By the method of payment for the expenditure. a. receive more frequent deliveries of materials.
d. Objectivity. b. By the objective of expenditure. b. spend less money on advertising.
c. By behavior. c. need workers with fewer skills.
d 3. Which statement about the degree of detail in a report is true? d. By the function incurring the expenditure. d. all of the above.
a. It depends on the level of the manager receiving the report.
b. It may depend on the frequency of the report. a 11. Which classification of costs is most relevant for income c 18. A conventional manufacturer is more likely than a just-in-time
c. It depends on the type of manager receiving the report. statements to be used internally? manufacturer to
d. All of the above. a. Behavior. a. have a short production cycle.
b. Function. b. produce goods in small batches.
b 4. Managerial accounting is similar to financial accounting in that c. Method of payment. c. hold large inventories to serve as buffers.
a. both are governed by generally accepted accounting principles. d. Object. d. none of the above.
b. both deal with economic events.
c. both concentrate on historical costs. d 12. The set of processes that transform raw materials into finished a 19. The professional certification most relevant for managerial
d. both classify reported information in the same way. products is known as a accountants is the
a. differentiation strategy. a. CMA.
d 5. Managerial accounting differs from financial accounting in that it is b. flexible manufacturing system. b. CPA.
a. more concerned with the future. c. lowest cost strategy. c. CSA.
b. more concerned with segments of a company. d. value chain. d. MAS.
c. less constrained by rules and regulations.
d. all of the above. a 13. Income statements classifying costs by object show such items as d 20. A firm that is competing using a _______________________
a. tax expense, wages expense, depreciation expense. strategy is attempting to create a perception of uniqueness
b 6. One of the ways managerial accounting differs from financial b. cost of goods sold, selling expenses, administrative expenses. that will permit a higher selling price.
accounting is that managerial accounting c. assets, liabilities, owners' equity. a. value chain
a. is bound by generally accepted accounting principles. d. all of the above. b. lowest cost
b. classifies information in different ways. c. lead time
c. does not use financial statements. a 14. The period that begins with the arrival of materials and ends with d. differentiation
d. deals only with economic events. the shipment of a completed good is the
a. cycle time. b 21. Planning and control are
d 7. Which activity is NOT normally performed by managerial b. manufacturing cell. a. different names for the same thing.
accountants? c. computer-integrated manufacturing. b. the basic functions of management.
a. Assisting managers to interpret data in managerial accounting d. performance period. c. described equally well by the terms "decision making" and
reports. "performance evaluation."
b. Designing systems to provide information for internal and a 15. Which function is most directly related to management by d. exemplified by, respectively, financial statements and budgeting.
external reports. objectives?
c. Gathering data from sources other than the accounting system. a. Planning. a 22. In contrast to a balance sheet, an income statement
d. Deciding the best level of inventory to be maintained. b. Control. a. is for a period of time, a balance sheet is at a point in time.

1
 b. gives information about cash and a balance sheet does not. financial accountants, but not of managerial accountants. a. total variable costs will be lower than expected.
c. is prepared after the statement of retained earnings. b. contribution margin percentage will be higher than expected.
d. has two columns, while a balance sheet has more than two. F 10. Managerial accountants should, but have no obligation to, c. total contribution margin will be higher than expected.
maintain their professional skills. d. per-unit contribution margin will be lower than expected.
c 23. One characteristic of the conventional manufacturing environment
is CHAPTER 2: PROFIT PLANNING c 8. If all goes according to plan except that unit variable cost falls,
a. flexible manufacturing systems. a. total contribution margin will be lower than expected.
b. manufacturing cells. Multiple Choice b. the contribution margin percentage will be lower than expected.
c. a just-in-case philosophy. c. profit will be higher than expected.
d. a high degree of quality control. c 1. Which formula gives unit sales required to earn a target profit? (P = d. per-unit contribution margin will be lower than expected.
selling price, V = variable cost per unit, F = total fixed costs, T
d 24. A characteristic of the just-in-time manufacturing environment is = target profit) a 9. If all goes according to plan except that total fixed costs rise,
a. frequent deliveries of materials. a. F/(P - V) a. income will be lower than expected.
b. manufacturing cells. b. (F + T)/P b. total contribution margin will be lower than expected.
c. little or no inventory of finished product. c. (F + T)/(P - V) c. total sales will be lower than expected.
d. all of the above. d. (F + T)/V d. income will be higher than expected.

d 25. Conventional and just-in-time manufacturers differ in that the c 2. Which formula gives the sales dollars required to earn a target a 10. Which of the following decreases per-unit contribution margin the
conventional manufacturer is likely to profit? (P = selling price, V = variable cost per unit, F = total most for a company currently earning a profit?
a. be a new entrant into its industry. fixed costs, T = target profit) a. A 10% decrease in selling price.
b. need less storage space than its JIT competitors. a. F/[(P - V)/P] b. A 10% increase in variable cost per unit.
c. give less credibility to management accounting reports. b. (F + T)/(P) c. A 10% increase in fixed costs.
d. have a longer production cycle than its JIT competitors. c. (F + T)/[(P - V)/P] d. A 10% increase in fixed cost per unit.
d. F + T/V
True-False c 11. If variable cost as a percentage of sales increases, the
d 3. Over the relevant range, total revenues and total costs a. contribution margin percentage increases.
F 1. Published financial statements show costs classified by behavior. a. increase, but at a decreasing rate. b. selling price increases.
b. decrease. c. break-even point in dollars increases.
T 2. Generally accepted accounting principles govern financial c. remain constant. d. fixed costs decrease.
accounting but not managerial accounting. d. can be graphed as straight lines.
b 12. Which cost is most likely to be variable for a retailer?
T 3. Economic events are the raw data for both financial and b 4. At the break-even point, total contribution margin is a. Advertising.
managerial accounting. a. zero. b. Cost of goods sold.
b. equal to total fixed costs. c. Sales salaries.
F 4. Internal financial statements must be prepared using generally c. equal to total costs. d. Rent.
accepted accounting principles. d. equal to total variable costs.
a 13. A cost-volume-profit graph reflects relationships
T 5. The form and content of reports can influence decisions made by c 5. If a company is operating at a loss, a. expected to hold over the relevant range.
managers. a. fixed costs are greater than sales. b. of results over the past few years.
b. selling price is lower than variable cost per unit. c. that the company's managers would like to have happen.
F 6. Management-by-objectives and management-by-exception are c. selling price is less than average total cost per unit. d. likely to prevail for the industry.
two names for the same general management principle. d. fixed cost per unit is greater than variable cost per unit.
d 14. A multiproduct company
F 7. "Pro forma" is the name given to an income statement that b 6. As volume increases, average cost per unit a. cannot use CVP analysis.
classifies costs by function. a. increases. b. must use a separate CVP graph for each of its products.
b. decreases. c. can use CVP analysis only if the contribution margin percentages
T 8. Some managerial accounting reports contain costs not c. remains constant. on each product are the same.
incorporated in the basic accounting system. d. increases in proportion to the change in volume. d. could earn a higher-than-expected profit even though the total
number of units sold was less than expected.
F 9. A professional examination exists to test the competence of d 7. All else constant, if the selling price falls,

2
 d. the sales mix is relatively constant.
a 15. If selling price, per-unit variable cost, and total fixed costs are c 22. The tax rate is 40%. A company that wants a profit of $120,000
constant, after taxes must earn how much before taxes? a 30. A fixed cost is the same percentage of sales in three different
a. the break-even point in units remains constant. a. $ 48,000. months. Which of the following is true?
b. profit per unit remains constant for all levels of volume within the b. $ 72,000. a. The company had the same sales in each of those months.
relevant range. c. $200,000. b. The cost is both fixed and variable.
c. total variable costs equal total fixed costs. d. $300,000. c. The company is operating at its break-even point.
d. total contribution margin equals total fixed costs. d. The company is achieving its target level of profit.
a 23. Genco Company has a 30% contribution margin percentage and
b 16. XYZ Company desires a profit of $120,000 and expects to sell fixed costs of $30,000. To earn a 10% return on sales, Genco c 31. If a company raises its target dollar profit, its
20,000 units. Variable cost per unit is $16 and total fixed must have sales of a. break-even point rises.
costs are $160,000. The selling price must be a. $150,000. b. fixed costs increase.
a. $40. b. $100,000. c. required total contribution margin increases.
b. $30. c. $40,000. d. selling price rises.
c. $26. d. an amount that cannot be determined without more information.
d. $20. a 32. If the sales mix shifts toward higher contribution margin products,
a 24. If a company is earning a profit, its fixed costs the break-even point
a 17. Contribution margin percentage is 30% and contribution margin a. are less than total contribution margin. a. decreases.
per unit is $12. Which of the following is true? b. are equal to total contribution margin. b. increases.
a. Variable cost per unit is $28. c. are greater than total variable costs. c. remains constant.
b. Return on sales is 12%. d. can be greater than or less than total contribution margin. d. it is impossible to tell without more information.
c. Selling price is $48.
d. Variable cost percentage is 12%. a 25. Per-unit variable cost a 33. In the following graph, revenue is represented by
a. remains constant within the relevant range. A
b 18. Contribution margin is 30% of sales. Profit is $80,000. Sales are b. increases as volume increases within the relevant range. | * D
$600,000. Fixed costs are c. decreases as volume increases within the relevant range. | * *
a. $ 90,000. d. decreases if volume increases beyond the relevant range. | * *
b. $100,000. | * *
c. $160,000. d 26. An increase in the income tax rate | * *
d. $180,000. a. raises the break-even point. | *
b. lowers the break-even point. | * *
a 19. TRS Company changed production methods, increasing fixed costs c. decreases sales required to earn a particular after-tax profit. | * *
and decreasing its per-unit variable costs. The change d. increases sales required to earn a particular after-tax profit. | * *
a. increases risk and increases potential profit. B|*__________*___________________________________ C
b. increases risk and decreases potential profit. b 27. Contribution margin is | *
c. decreases risk and decreases potential profit. a. the same as gross margin. | *
d. decreases risk and increases potential profit. b. revenue minus variable costs. | *
c. revenue minus variable costs and fixed costs. | *
c 20. Introducing income taxes into cost-volume-profit analysis d. the ratio of income to sales. |*______________________________________________
a. raises the break-even point. O E
b. lowers the break-even point. c 28. Classifying a cost as fixed or variable depends on how it behaves
c. increases unit sales needed to earn a particular target profit. a. per unit, as the volume of activity changes. a. the line OA.
d. decreases the contribution margin percentage. b. in total, as the volume of activity changes. b. the line BD.
c. both a and b are correct. c. the vertical distance between the lines OA and BD.
d 21. Selling price is $100, unit variable cost is $68, and fixed costs are d. none of the above. d. the vertical axis.
$400,000. Unit sales required to earn a $120,000 profit are
a. 5,200 d 29. Critical to CVP analysis in a multiproduct company is that c 34. In the following graph, the vertical distance between the lines OA
b. 7,647 a. the products be complementary. and BD represents
c. 13,700 b. the products be sold to the same kinds of customers.
d. 16,250 c. all products have about the same contribution margin percentage. | A D

3
 | * * d. used in decisions to offer a new product or enter a new market. b 44. Acme has sales of $200,000, fixed costs of $100,000, and a profit
| * * of $20,000. What is Acme's margin of safety?
| * * c 37. The break-even point in units equals total fixed costs divided by a. $ 20,000
| * * a. selling price per unit. b. $ 33,333
| * b. variable cost per unit. c. $100,000
| * * c. contribution margin per unit. d. An amount that cannot be determined without more
| * * d. contribution margin percentage. information.
| * *
B|*__________* __________________________________ C d 38. The break-even point in dollars equals total fixed costs divided by b 45. Machine A has fixed costs of $450,000 and a variable cost of $20.
| * a. selling price per unit. Machine B has fixed costs of $600,000 and a variable cost of
| * b. variable cost as a percentage of selling price. $14. What is the indifference point, in units?
| * c. contribution margin per unit. a. 22,500
| * d. contribution margin percentage. b. 25,000
|*______________________________________________ c. 42,858
O E c 39. Company A has a lower variable cost per unit and higher total d. An amount that cannot be determined without more
fixed costs than Company B. The selling prices of their information.
a. revenue. products are the same. Sales fluctuate considerably for both
b. total variable cost. companies. Therefore, d 46. DJH Company has sales of $360,000, variable costs of $216,000,
c. profit or loss. a. Company A has a lower break-even point than Company B. and fixed costs of $150,000. To earn a 10% return on sales,
d. total contribution margin. b. Company A earns more profit than Company B. DJH must have sales of
c. Company A is more risky than Company B. a. $375,000.
d 35. In the following graph, total variable costs are represented by d. Company A has a lower contribution margin percentage than b. $440,000.
Company B. c. $470,000.
A b 40. The margin of safety is d. $500,000.
| * D a. the profit currently earned in excess of the target profit.
| * * b. the difference between current sales and sales at break-even. b 47. DJH Company has sales of $400,000, variable costs of $240,000,
| * * c. the ratio of contribution margin to variable cost. and fixed costs of $150,000. What is the break-even sales
| * * d. the difference between contribution margin currently earned and volume?
| * * contribution margin at break even. a. $150,000
| * b. $375,000
| * * a 41. The indifference point is the level of volume at which a company c. $390,000
| * * a. earns the same profit under different operating schemes. d. $550,000
| * * b. earns no profit.
B|*__________* __________________________________ C c. earns its target profit. a 48. Alvarez Inc. sells three products with the following results:
| * d. any of the above.
| * X Y Z
| * d 42. Selling price is $40, unit variable cost is $24, and fixed costs are ------ ------ ------
| * $400,000. Unit sales required to break even are Sales $10,000 $20,000 $30,000
|*______________________________________________ a. 10,000. Variable costs 4,000 12,000 15,000
O E b. 12,500.
c. 16,667. What is the weighted average contribution margin
a. the line BD. d. 25,000. percentage?
b. the line BC. a. 48.3%
c. the vertical distance between the lines OA and BD. d 43. ABC's variable costs are 60% of total revenue. If fixed costs are b. 50.0%
d. the vertical distance between the lines BD and BC. $300,000, what is the break-even sales volume? c. 51.7%
a. $120,000 d. Cannot be determined with the information given.
d 36. Target costing is b. $180,000
a. a substitute for CVP analysis. c. $500,00
b. used by companies that cannot classify their costs by behavior. d. $750,000 c 49. Scottso Enterprises has fixed costs of $120,000. At a sales volume
c. inappropriate if a company has already established a target profit. of $400,000, return on sales is 10%; at a $600,000 volume,

4
 return on sales is 20%. What is the break-even volume? high-low method of cost estimation is that the scatter- a. committed.
a. $160,000 diagram method b. variable.
b. $210,000 a. includes costs outside the relevant range. c. avoidable.
c. $300,000 b. considers more than two points. d. unnecessary.
d. An amount that cannot be determined without more c. can be used with more types of costs than the high-low method.
information. d. gives a precise mathematical fit of the points to the line. b 9. Which cost is most likely to be committed?
a. Repairs and maintenance.
d 50. Samson Inc. has a contribution margin percentage of 35%. If fixed a 2. The major objective of preparing a scatter-diagram is to b. Sum-of-the-years'-digits depreciation on the factory building.
costs are $630,000, what is the break-even point? a. derive an equation to predict future costs. c. Fee for a consultant on the company's long-range planning.
a. $ 220,500 b. perform regression analysis on the results. d. Advertising.
b. $ 409,500 c. determine the relevant range.
c. $ 969,231 d. find the high and low points to use for the high-low method of a 10. RST's average cost per unit is the same at all levels of volume.
d. $1,800,000 estimating costs. Which of the following is true?
a. RST must have only variable costs.
d 3. The cost estimation method that gives the most mathematically b. RST must have only fixed costs.
True-False precise cost prediction equation is c. RST must have some fixed costs and some variable costs.
a. the high-low method. d. RST's cost structure cannot be determined from this information.
F 1. Target costing is a technique for classifying costs according to their b. the scatter-diagram method.
behavior. c. the contribution margin method. b 11. A mixed cost
d. regression analysis. a. increases in steps as volume increases.
T 2. "Gross profit" and "contribution margin" refer to different things. b. contains a fixed component and a variable component.
c 4. Which cost is most likely to be mixed for a manufacturer? c. varies with more than one measure of volume.
F 3. A company that has no variable costs can never break even. a. Raw materials. d. cannot be accurately predicted.
b. Direct labor. b 12. A non-value-adding activity
T 4. A company with no fixed costs has a break-even point of zero. c. Manufacturing overhead. a. cannot be a cost driver.
d. Insurance. b. should be eliminated.
F 5. If a company's income statement shows a positive contribution c. usually drives only variable costs.
margin but a net loss, its fixed costs are too high. b 5. Which combination of object of cost and classification of cost is d. cannot usually be observed by managers.
most reasonable?
T 6. As unit sales increase, both average total cost and fixed cost per Object of Cost Classification of Cost d 13. A cost-predicting equation determined through regression analysis
unit decrease. --------------- ---------------------- a. always gives close predictions.
a. Materials used to make products Discretionary fixed cost b. will not work any better than one obtained using the high-low
T 7. An increase in contribution margin percentage reduces the break- b. Advertising cost Discretionary fixed cost method.
even point. c. Straight-line depreciation Variable cost c. can be used only for costs that vary with sales or production.
d. President's salary Avoidable fixed cost d. could be severely affected by outliers.
F 8. Return on sales is another name for contribution margin
percentage. c 6. A cost is variable if it varies with the b 14. Which of the following do JIT operations try to eliminate?
a. number of units manufactured. a. Discretionary fixed costs.
F 9. Contribution margin is total variable costs minus fixed costs. b. number of units sold. b. Non-value-adding costs.
c. level of some activity. c. Avoidable costs.
T 10. The weighted-average contribution margin percentage changes d. selling price of the product. d. Direct costs.
with changes in sales mix.
d 7. A non-value-adding cost is d 15. ABC Company breaks even at $600,000 sales and earns $60,000 at
a. usually direct to a product. $700,000 sales. Which of the following is true?
CHAPTER 3: COST ANALYSIS b. the same as a discretionary cost. a. Fixed costs are $40,000.
c. unavoidable. b. Profit at sales of $800,000 would be $160,000.
d. not essential to manufacturing a product. c. The selling price per unit is $6.
Multiple Choices d. Contribution margin is 60% of sales.
a 8. Fixed costs that cannot be reduced within a short period of time
b 1. The principal advantage of the scatter-diagram method over the are b 16. A seasonal business that sets selling prices at 20% above average

5
 cost for the preceding month will c. total fixed costs remain constant and per-unit fixed costs remain
a. be better off if it closed down during the off-season. constant. d 31. Which cost is LEAST likely to be discretionary?
b. charge higher prices in the off-season than in the busy season. d. total fixed costs increase and per-unit fixed costs increase. a. Salaries of salespeople.
c. always charge higher prices than its competitors. b. Advertising.
d. make a consistent return on sales of 20%. d 24. Which cost is NOT subtracted from selling price to c. Building maintenance.
calculate contribution margin per unit? d. Insurance.
b 17. The components of manufacturing cost are a. Variable manufacturing overhead.
a. variable costs, fixed costs, and overhead costs. b. Variable selling expenses. a 32. Which cost is LEAST likely to be direct to a particular product?
b. materials, direct labor, and overhead. c. Direct labor. a. Salaries of salespeople who sell all of the company's products.
c. purchases, wages, and manufacturing overhead. d. Fixed manufacturing overhead. b. Advertising of the product.
d. wages and salaries, maintenance and repairs, utilities, and c. License fees paid to the designer of the product.
depreciation. c 25. A committed fixed cost d. Cost of materials used to make the product.
a. can never be eliminated.
b 18. Which statement is true for a manufacturer? b. can be eliminated in the short-term and in the long-term. c 33. Which cost is most likely to be avoidable in deciding whether to
a. It cannot use the contribution-margin format of the income c. can be eliminated in the long-term, but not in the short-term. shut down one of the four assembly lines in a factory?
statement. d. can be eliminated in the short-term, but not in the long-term. a. Depreciation on the factory building.
b. Many costs vary with production activities, not with sales. b. Salaries of maintenance workers who service all assembly lines.
c. The concepts of fixed and variable costs do not apply. c 26. Avoidable costs are usually c. Power used to operate equipment on the assembly line.
d. Cost-volume-profit analysis is not appropriate. a. committed. d. Heat and light for the building.
b. common.
d 19. Fixed costs that managers can change on short notice are c. direct. c 34. DSP Company earned $100,000 on sales of $1,000,000. It earned
a. value-adding costs. d. fixed. 130,000 on sales of $1,100,000. Variable costs as a
b. variable costs. percentage of sales are
c. unavoidable costs. a 27. Direct costs are a. 30%.
d. discretionary costs. a. associated with a specific activity. b. 40%.
b. always variable. c. 70%.
c 20. A(n) __________ relationship is one that appears to exist even c. usually committed. d. 90%.
though there is no causal relationship. d. usually discretionary.
a. Correlation. b 35. DSP Company earned $100,000 on sales of $1,000,000. It earned
b. Outlier. c 28. Discretionary costs $130,000 on sales of $1,100,000. Total fixed costs are
c. Spurious. a. are usually unavoidable. a. $0.
d. Value-added. b. are not necessary for successful operations. b. $200,000.
c. can be either direct or indirect. c. $420,000.
c 21. Identifying cost drivers d. should be the first ones cut in a cost-reduction program. d. $900,000.
a. is not necessary with regression analysis.
b. is the same as identifying cost pools. a 29. Ogden Company had $300,000 overhead cost at 20,000 machine c 36. Predicting costs at activity levels that are outside the relevant
c. is an important part of cost management. hours, $320,000 overhead cost at 25,000 hours. Variable range is called
d. is useful only with step-variable costs. overhead cost per machine hour is a. association.
a. $ 4.00. b. correlation.
d 22. A cost pool is b. $12.80. c. extrapolation.
a. all of the costs of a particular department. c. $15.00. d. none of the above.
b. all costs in a group such as variable costs or discretionary fixed d. some other number.
costs. a 37. A non-value-adding cost
c. all costs related to a product or product line. b 30. Sacramento Company had $400,000 overhead cost at 50,000 a. is driven by a non-value-adding activity.
d. all costs that have the same driver. machine hours and $460,000 overhead cost at 60,000 hours. b. is discretionary.
Total fixed overhead is c. is direct to a product.
b 23. As volume increases, a. $ 60,000 d. allows the company to charge a higher price for the product.
a. total fixed costs remain constant and per-unit fixed costs increase. b. $100,000
b. total fixed costs remain constant and per-unit fixed costs c. $120,000. b 38. Looking at the following scatter diagrams we can conclude that
decrease. d. $320,000. $ $

6
 | ** | ** d. An amount that cannot be determined without more c 50. Osceola Company earned $50,000 on sales of $400,000. It earned
| * ** | ** * information. $70,000 on sales of $450,000. Total fixed costs are
| *** * | * * a. $ 0.
| * * | ** a 44. GMH Company had $200,000 overhead cost at 25,000 machine b. $ 50,000.
| | hours and $240,000 overhead cost at 60,000 hours. Variable c. $110,000.
| | overhead per machine hour is d. $180,000.
|__________________ |__________________ a. $4.00.
activity activity b. $1.00.
Cost A Cost B c. $0.83. True-False
d. some other number.
a. cost A will be easier to predict than cost B. F 1. The major variable cost in a manufacturing company is factory
b. cost B will be easier to predict than cost A. d 45. Elmwood Company had $300,000 overhead cost at 40,000 overhead.
c. cost A is out-of-control. machine hours, and $360,000 overhead cost at 60,000
d. cost B has no fixed component. hours. Total fixed overhead is T 2. In interpreting regression results, the higher the correlation, the
a. $ 36,000 better cost predictions are likely to be.
b 39. MNO has a break-even point of 200,000 units and earns a b. $ 40,000
$100,000 profit at sales of 250,000 units. Which of the c. $ 60,000. F 3. Discretionary costs are step-variable.
following is true? d. $180,000.
a. Fixed costs are $100,000. F 4. Discretionary fixed costs are not necessary to successful operation
b. Total contribution margin at 200,000 units is $400,000. b 46. Crookston Company breaks even at $300,000 sales and earns of the business.
c. Profit at sales of 300,000 units is $120,000. $40,000 at $400,000 sales. Which of the following is true?
d. Selling price per unit is $2. a. Fixed costs are $120,000. T 5. High-low, scatter diagram, and regression analysis are methods of
b. Profit at sales of $500,000 would be $50,000. developing formulas to predict mixed costs.
a 40. The closeness of the relationship between the cost and the activity c. The selling price per unit is $4.
is called d. Contribution margin is 10% of sales. F 6. As volume increases, the per-unit amount of a mixed cost
a. correlation. increases.
b. spurious. a 47. Glenwood has an average unit cost of $45 at 20,000 units and $25
c. regression analysis. at 60,000 units. What is the variable cost per unit? T 7. In developing a cost-prediction equation using regression analysis,
d. manufacturing overhead. a. $15 you might not select the one with the highest correlation.
b. $20
d 41. R-squared is a measure of c. $35 F 8. A company using activity-based costing need not do regression
a. the spurious relationship between cost and activity. d. An amount that cannot be determined without more analysis or scatter diagrams.
b. the fixed cost component. information.
c. the variable cost per unit of activity. F 9. An r-squared of .91 with a regression equation means that
d. how well the regression line accounts for the changes in b 48. Glenwood has an average unit cost of $45 at 20,000 units and $25 predictions will be accurate 91% of the time.
the dependent variable. at 60,000 units. What is the total fixed cost?
a. $400,000 T 10. A multiple regression equation uses more than one driver to
c 42. DJH has an average unit cost of $20 at 20,000 units and $13.75 at b. $600,000 predict costs.
40,000 units. What is the variable cost per unit? c. $900,000
a. $5.00 d. An amount that cannot be determined without more CHAPTER 4: ACTIVITY-BASED COSTING AND MANAGEMENT
b. $6.25 information.
c. $7.50
d. An amount that cannot be determined without more b 49. Osceola Company earned $50,000 on sales of $400,000. It earned Multiple Choice
information. $70,000 on sales of $450,000. Contribution margin as a
percentage of sales is a 1. Activity-based costing
b 43. DJH has an average unit cost of $20 at 20,000 units and $13.75 at a. 30%. a. requires the identification of cost drivers.
40,000 units. What is the total fixed cost? b. 40%. b. is used only in JIT operations.
a. $125,000 c. 60%. c. applies only to discretionary fixed costs.
b. $250,000 d. 70%. d. does not help to identify activities as value-adding or non-value-
c. $400,000 adding.

7
 a 16. Number of purchase orders is an example of a(n) ____________
a 2. A company using activity-based costing a 10. A tool that focuses on manufacturing processes and seeks to activity.
a. tries to identify cost drivers. reduce or optimize the activities performed within the a. Batch
b. allocates all costs to individual products. process is b. Facility-sustaining
c. looks for the activity with which total costs are most closely a. process value analysis c. Product-sustaining
associated. b. re-engineering d. Unit
d. is probably using the JIT philosophy. c. caveat analysis
d. benchmarking d 17. Direct labor hours is an example of a(n) ____________ activity.
a 3. Machine setups is an example of a(n) ____________ activity. a. Batch
a. Batch d 11. A tool that compares how tasks are performed internally with the b. Facility-sustaining
b. Facility-sustaining best practices of industry leaders is c. Product-sustaining
c. Product-sustaining a. process value analysis d. Unit
d. Unit b. re-engineering
c. caveat analysis b 18. Property taxes on the plant is an example of a(n) _____________
d 4. Machine hours is an example of a(n) ____________ activity. d. benchmarking activity.
a. Batch a. Batch
b. Facility-sustaining b 12. An approach to developing new ways to perform existing activities b. Facility-sustaining
c. Product-sustaining is called c. Product-sustaining
d. Unit a. process value analysis d. Unit
b. re-engineering
b 5. Landscaping is an example of a(n) _____________ activity. c. caveat analysis d 19. Production volume is an example of a(n) _____________ activity.
a. Batch d. benchmarking a. Batch
b. Facility-sustaining b. Facility-sustaining
c. Product-sustaining c 13. Which of the following statements is true? c. Product-sustaining
d. Unit a. The traditional approach to costing uses many different d. Unit
cost drivers.
d 6. Material cost is an example of a(n) _____________ activity. b. Costs that are indirect to products are by definition d 20. ____________ are those performed each time a unit is produced
a. Batch traceable to directly to products. or sold.
b. Facility-sustaining c. Costs that are indirect to products are traceable to a. Batch-level activities
c. Product-sustaining some activity. b. Facility-sustaining activities
d. Unit d. All of the above statements are true. c. Sustaining activities
d. Unit-level activities
c 7. The activities that drive resource requirements are called the a 14. Which of the following is NOT a sign of poor cost data?
a. activity drivers a. Competitors' prices for high-volume products appear a 21. ____________ are those that a company performs when it makes
b. cost objects much too high. a group of units.
c. resource drivers b. The company seems to have a highly profitable niche a. Batch-level activities
d. sustaining activities all to itself. b. Facility-sustaining activities
c. Customers don't balk at price increases for low-volume c. Sustaining activities
b 8. The resource utilized by a given product divided by the total products. d. Unit-level activities
amount of the resource available is called the d. Competitors' prices for low-volume products appear
a. activity driver much too high. b 22. ____________ relate to an entire plant as a whole.
b. consumption ratio d 15. Which of the following is a sign of poor cost data? a. Batch-level activities
c. cost object a. Competitors' prices for high-volume products appear b. Facility-sustaining activities
d. sustaining activity much too high. c. Sustaining activities
b. The company seems to have a highly profitable niche all d. Unit-level activities
c 9. The segment for which you are estimating the cost is called the to itself.
a. activity driver c. Customers don't balk at price increases for low-volume c 23. ____________ arise because a company maintains a particular
b. consumption ratio products. product or service.
c. cost object d. All of the statements are true. a. Batch-level activities
d. sustaining activity b. Facility-sustaining activities

8
 c. Sustaining activities b 31. Genco manufactures two versions of a product. Production and Units produced 1,000 3,000 6,000
d. Unit-level activities cost information show the following: Direct labor hours 2,000 1,000 2,000
Number of inspections 20 30 50
d 24. Which of the following is not a type of sustaining activity? Model A Model B
a. Capacity-sustaining Units produced 200 400 Inspection costs totaled $100,000. Using ABC, inspections costs
b. Customer-sustaining Material moves (total) 20 80 allocated to each unit of Model X would be
c. Distribution-channel sustaining Direct labor hours per unit 1 2 a. $10.00
d. Unit-sustaining b. $20.00
Material handling costs total $200,000. Under ABC, the material c. $40.00
a 25. Which of the following is true regarding activity-based handling costs allocated to each unit of Model A would be: d. Some other number
management? a. $10
a. ABM is using information about activities to manage b. $200 b 35. Cadott Manufacturing produces three products. Production and
portions of the organization other than costs. c. $333 cost information show the following:
b. ABM is applying ABC to external financial reporting. d. Some other number
c. ABM requires the use of re-engineering principles. Model X Model Y Model Z
d. All of the above are true. c 32. Genco manufactures two versions of a product. Production and Units produced 1,000 3,000 6,000
cost information show the following: Direct labor hours 2,000 1,000 2,000
a 26. The quality costs that are incurred to determine whether Number of inspections 20 30 50
particular units of product meet quality standards are Model A Model B
a. appraisal costs. Units produced 200 400 Inspection costs totaled $100,000. Using ABC, inspections costs
b. external failure costs. Material moves (total) 20 80 allocated to each unit of Model Y would be
c. internal failure costs. Direct labor hours per unit 1 2 a. $ 6.67
d. prevention costs. b. $10.00
Material handling costs total $200,000. Under ABC, the material c. $20.00
c 27. The cost of downtime on machines while rework is being handling costs allocated to each unit of Model B would be: d. Some other number
performed is a(n) a. $200
a. appraisal cost. b. $333 b 36. Cadott Manufacturing produces three products. Production and
b. external failure cost. c. $400 cost information show the following:
c. internal failure cost. d. Some other number
d. prevention cost. Model X Model Y Model Z
a 33. Genco manufactures two versions of a product. Production and Units produced 1,000 3,000 6,000
b 28. The cost of processing customer complaints is a(n) cost information show the following: Direct labor hours 2,000 1,000 2,000
a. appraisal cost. Number of inspections 20 30 50
b. external failure cost. Model A Model B
c. internal failure cost. Units produced 200 400 Inspection costs totaled $100,000. Using ABC, inspections costs
d. prevention cost. Material moves (total) 20 80 allocated to each unit of Model Z would be
Direct labor hours per unit 1 3 a. $ 6.67
d 29. Worker training is a(n) b. $ 8.33
a. appraisal cost. Material handling costs total $200,000. Direct labor hours are used c. $10.00
b. external failure cost. to allocate overhead costs. The material handling costs d. Some other number
c. internal failure cost. allocated to each unit of Model A would be:
d. prevention cost. a. $143 c 37. Cadott Manufacturing produces three products. Production and
b. $200 cost information show the following:
b 30. The cost to repair a unit of product that fails after it is sold is c. $333
a(n) d. Some other number Model X Model Y Model Z
a. appraisal cost. Units produced 1,000 3,000 6,000
b. external failure cost. b 34. Cadott Manufacturing produces three products. Production and Direct labor hours 2,000 1,000 2,000
c. internal failure cost. cost information show the following: Number of inspections 20 30 50
d. prevention cost.
Model X Model Y Model Z Inspection costs totaled $100,000. Using direct labor hours as the

9
 allocation base, inspections costs allocated to each unit of b. 20%-30%-50% c. $82.00
Model X would be c. 10%-30%-60% d. Some other number
a. $10.00 d. Some other numbers
b. $20.00 b 44. Waupaca Company produces three products with the following
c. $40.00 c 41. Superior Inc. produces three products. Production and cost production and cost information:
d. Some other number information is as follows:
Model A Model B Model C
a 38. Cadott Manufacturing produces three products. Production and Model Q Model R Model S Units produced 2,000 6,000 12,000
cost information show the following: Units produced 2,000 6,000 12,000 Direct labor hours (total) 4,000 2,000 4,000
Direct labor hours 4,000 2,000 4,000 Number of setups 100 150 250
Model X Model Y Model Z Number of setups 100 150 250 Number of shipments 200 225 275
Units produced 1,000 3,000 6,000 Engineering change orders 15 10 5
Direct labor hours 2,000 1,000 2,000 The consumption ratios based on units produced would be:
Number of inspections 20 30 50 Q R S Overhead costs include setups $90,000; shipping costs $140,000;
a. 40%-20%-40% and engineering costs $180,000. What would be the per unit
Inspection costs totaled $100,000. . Using direct labor hours as the b. 20%-30%-50% overhead cost for Model A if activity-based costing were
allocation base, inspections costs allocated to each unit of c. 10%-30%-60% used?
Model Y would be d. Some other numbers a. $20.50
a. $6.67 b. $74.00
b. $10.00 a 42. Superior Inc. produces three products. Production and cost c. $82.00
c. $20.00 information is as follows: d. Some other number
d. Some other number
Model Q Model R Model S a 45. Waupaca Company produces three products with the following
a 39. Cadott Manufacturing produces three products. Production and Units produced 2,000 6,000 12,000 production and cost information:
cost information show the following: Direct labor hours 4,000 2,000 4,000
Number of setups 100 150 250 Model A Model B Model C
Model X Model Y Model Z Units produced 2,000 6,000 12,000
Units produced 1,000 3,000 6,000 The consumption ratios for direct labor hours would be: Direct labor hours (total) 4,000 2,000 4,000
Direct labor hours 2,000 1,000 2,000 Q R S Number of setups 100 150 250
Number of inspections 20 30 50 a. 40%-20%-40% Number of shipments 200 225 275
b. 20%-30%-50% Engineering change orders 15 10 5
Inspection costs totaled $100,000. Using direct labor hours as the c. 10%-30%-60%
allocation base, inspections costs allocated to each unit of d. Some other numbers Overhead costs include setups $90,000; shipping costs $140,000;
Model Z would be and engineering costs $180,000. What would be the per unit
a. $6.67 c 43. Waupaca Company produces three products with the following overhead cost for Model B if activity-based costing were
b. $8.33 production and cost information: used?
c. $10.00 a. $22.00
d. Some other number Model A Model B Model C b. $66.00
Units produced 2,000 6,000 12,000 c. $123.00
b 40. Superior Inc. produces three products. Production and cost Direct labor hours (total) 4,000 2,000 4,000 d. Some other number
information is as follows: Number of setups 100 150 250
Number of shipments 200 225 275 a 46. Waupaca Company produces three products with the following
Model Q Model R Model S Engineering change orders 15 10 5 production and cost information:
Units produced 2,000 6,000 12,000
Direct labor hours 4,000 2,000 4,000 Overhead costs include setups $90,000; shipping costs $140,000; Model A Model B Model C
Number of setups 100 150 250 and engineering costs $180,000. What would be the per unit Units produced 2,000 6,000 12,000
overhead cost for Model A if direct labor hours were the Direct labor hours (total) 4,000 2,000 4,000
The consumption ratios for number of setups would be: allocation base? Number of setups 100 150 250
Q R S a. $20.50 Number of shipments 200 225 275
a. 40%-20%-40% b. $41.00 Engineering change orders 15 10 5

10
 d. $120.00 low-volume products.
Overhead costs include setups $90,000; shipping costs $140,000;
and engineering costs $180,000. What would be the per unit d 49. Kimball Company produces two products in a single factory. The T 3. ABC will be most useful in estimating fixed costs.
overhead cost for Model C if activity-based costing were following production and cost information has been
used? determined: T 4. Two major influences on costs are complexity and diversity.
a. $10.83
b. $32.50 Model 1 Model 2 T 5. Volume-based measures will tend to overcost high volume
c. $245.28 Units produced 1,000 200 products.
d. Some other number Material moves (total) 100 40
Testing time (total) 250 125 F 6. Activities that drive resource requirements are known as activity
c 47. Kimball Company produces two products in a single factory. The Direct labor hours per unit 1 5 drivers.
following production and cost information has been
determined: The controller has determined total overhead to be $480,000. F 7. ABC is required for GAAP financial reporting.
$140,000 relates to material moves; $150,000 relates to
Model 1 Model 2 testing; the remainder is related to labor time. F 8. ABC will benefit a JIT operation more than a non-JIT operation.
Units produced 1,000 200
Material moves (total) 100 40 If Kimball uses direct labor hours to allocate overhead to each F 9. External failure costs are made up solely of opportunity costs.
Testing time (total) 250 125 model, what would overhead per unit be for Model 2?
Direct labor hours per unit 1 5 a. $158.33 F 10. The acceptable quality level is the point where internal failure
b. $400.00 costs are minimized.
The controller has determined total overhead to be $480,000. c. $950.00
$120,000 relates to material moves; $150,000 relates to d. $1,200.00
testing; the remainder is related to labor time. CHAPTER 5: SHORT-TERM DECISIONS AND ACCOUNTING
c 50. Kimball Company produces two products in a single factory. The INFORMATION
If Kimball uses direct labor hours to allocate overhead to each following production and cost information has been
model, what would overhead per unit be for Model 1? determined: Multiple Choice
a. $10.00
b. $120.00 Model 1 Model 2 a 1. The salary or wage that you could be earning while you are taking
c. $240.00 Units produced 1,000 200 this test is
d. $400.00 Material moves (total) 100 40 a. an opportunity cost.
Testing time (total) 250 125 b. a sunk cost.
b 48. Kimball Company produces two products in a single factory. The Direct labor hours per unit 1 5 c. an incremental cost.
following production and cost information has been d. a joint cost.
determined: The controller has determined total overhead to be $480,000.
$140,000 relates to material moves; $150,000 relates to d 2. The kind of cost that can be ignored in short-term decision making
Model 1 Model 2 testing; the remainder is related to labor time. is
Units produced 1,000 200 a. a differential cost.
Material moves (total) 100 40 If Kimball uses activity-based costing to allocate overhead to each b. an opportunity cost.
Testing time (total) 250 125 model, what would overhead per unit be for Model 2? c. a relevant cost.
Direct labor hours per unit 1 5 a. $158.33 d. a sunk cost.
b. $415.93
The controller has determined total overhead to be $480,000. c. $925.00 b 3. The role of sunk costs in decision making can be summed up in
$140,000 relates to material moves; $150,000 relates to d. Some other number which of the following sayings?
testing; the remainder is related to labor time. a. Nothing ventured, nothing gained.
b. Bygones are bygones.
If Kimball uses activity-based costing to allocate overhead to each True-False c. A penny saved is a penny earned.
model, what would overhead per unit be for Model 1? d. The love of money is the root of all evil.
a. $400.00 F 1. ABC can only be used in a company that produces a single product.
b. $295.00 c 4. Allocated costs are
c. $240.00 F 2. A company that uses only volume-based measures will overcost its a. generally separable.

11
 b. generally variable. c. Opportunity costs are irrelevant. d. some other number.
c. generally common. d. The company should make the component if the purchase price is
d. especially important in deciding whether to drop a segment. less than the per-unit variable cost to make the c 17. In a make-or-buy decision, which of the following is true?
component. a. Variable costs are the only relevant costs.
a 5. The Robinson-Patman Act forbids charging different prices to b. Allocated fixed costs are relevant.
different customers unless b 11. Which of the following costs is relevant in deciding whether to sell c. Alternative uses of space and machinery are relevant.
a. the price differences are justified by differences in distribution joint products at split-off or process them further? d. Making is the correct decision when there is idle capacity.
costs. a. The unavoidable costs of further processing.
b. prices offered competitors are fully disclosed to all customers. b. The avoidable costs of further processing. a 18. The best characterization of an opportunity cost is that it is
c. such prices produce profits no greater than normal profits. c. The variable cost of operating the joint process. a. relevant to decision making but is not usually reflected in
d. the customers are located within the seller's state. d. The cost of materials used to make the joint products. accounting records.
b 12. A manufacturing process that invariably produces two or more b. not relevant to decision making and is not usually reflected in
c 6. A product should be dropped if products accounting records.
a. it has a negative incremental profit. a. is a complementary process. c. relevant to decision making and is usually reflected in accounting
b. it has a negative contribution margin. b. is a joint process. records.
c. dropping it will increase the total profit of the company. c. normally has only fixed costs. d. not relevant to decision making and is usually reflected in
d. it is not essential to the company's product line. d. usually has primarily variable costs. accounting records.

a 7. From its refining process an oil company obtains three products, d 13. Which of the following is a short-term decision in which a 19. A sunk cost is
one of which can be processed further into a different opportunity costs are not relevant? a. not avoidable.
product, the other two of which can be sold after further a. Make-or-buy decision. b. avoidable under one alternative but not under another.
refining. The refining process is b. Special-order decision. c. joint or common.
a. a joint process. c. Drop-a-segment decision. d. direct to a segment.
b. a mixed cost process. d. None of the above.
c. an unavoidable process. b 20. Differential costs are costs that are
d. a process whose costs should be allocated to the resulting c 14. Which of the following is a true statement? a. not avoidable.
products. a. Theory of Constraints is useful for identifying physical b. avoidable under one alternative but not under another.
constraints but cannot incorporate nonphysical c. joint or common.
b 8. The Accessories Department shows sales of $35,000. Variable costs constraints. d. not direct to a segment.
are $30,000 and allocated unavoidable fixed costs are b. Theory of Constraints is useful in analyzing internal
$9,000, leaving a $4,000 loss. Based on this information and constraints but cannot identify external constraints. a 21. A common cost
all other things equal, c. Constraints may be either internal or external. a. relates to a process that produces more than one product.
a. the department contributes $35,000 to total profits. d. Internal constraints are physical while external b. should be allocated to the segments of a company.
b. dropping the department will reduce total company profits by constraints are imaginary. c. can usually be avoided in its entirety by dropping a segment.
$5,000. d. none of the above.
c. the department should be closed. b 15. A company has space that it uses to make a component. It could
d. the department should be kept only if unit volume can be rent the space to another company. The rent is a 22. An opportunity cost commonly associated with a special order is
increased enough to increase sales by $4,000. a. a sunk cost. \ a. the contribution margin on lost sales.
b. an opportunity cost. b. the variable costs of the order.
d 9. A major factor in evaluating a special order is c. a joint cost. c. additional fixed costs related to the increased output.
a. the expected contribution margin on the order. d. an avoidable cost. d. any of the above.
b. the possible effects on sales at regular prices.
c. the availability of capacity to produce the additional units. a 16. Escanaba Company has 200 units of an obsolete component. The b 23. Which of the following statements pertaining to the Theory
d. all of the above. variable cost to produce them was $10 per unit. They could of Constraints is true?
now be sold for $1.75 each and it would cost $7.60 to make a. Inventory is evil and should never be kept.
a 10. Which of the following is true for a make-or-buy decision? them now. If the units could be used to make a product for a b. Inventory is important to keep immediately before a
a. The reliability of the outside supplier of the component is special order, their relevant cost is bottleneck process.
important to the decision. a. $ 1.75. c. Inventory should be kept before every machining
b. Depreciation on equipment used in making the component and b. $ 7.60. process to prevent any downtime.
having no other use is the critical factor in the decision. c. $10.00. d. None of the above are true.

12
 a. The number of units of each product the company can sell. $400. A discount store has offered $0.80 per unit for 400
c 24. Which of the following cost-classification schemes is most relevant b. The contribution margin of each product. units of product M. The managers believe that if they accept
to decision making? c. The amount of resource-use required for each unit of each the special order, they will lose some sales at the regular
a. Fixed--variable. product. price. Determine the number of units they could lose before
b. Joint--common d. All of the above. the order became unprofitable.
c. Avoidable--unavoidable. a. 267 units
d. Direct--common. c 31. Which of the following is NOT relevant in a make-or-buy decision b. 500 units
about a part the entity uses in some of its products? c. 600 units
d 25. Which of the following is NOT relevant in deciding whether to a. The reliability of the outside supplier. d. Some other number.
process a joint product beyond its split-off point? b. The alternative uses of owned equipment used to make the part.
a. The split-off value. c. The outside supplier's per-unit variable cost to make the part. b 37. Bear Valley produces three products: A, B, and C. One machine is
b. The price after additional processing. d. The number of units of the part needed each period. used to produce the products. The contribution margins,
c. The cost of further processing. sales demands, and time on the machine (in minutes) are as
d. The cost of operating the joint process. d 32. Which of the following is NOT relevant to a decision about follows:
whether to drop a segment? time
c 26. Benson Company has 200 units of an obsolete part. The variable a. The contribution margin expected to be produced by the on
cost to produce them was $4 per unit. They could now be segment. Demand CM
sold for $3 each and it would cost $6 to make them now. The b. The avoidable fixed costs direct to that segment. machine
parts could be reworked for $8 each and sold for $17. What c. The complementary effects of dropping the segment. ------ ----
is the monetary advantage of reworking the parts over the d. "None of the above" is the best answer because all of the above --------
next-best action? are relevant. A 100 $25 10
a. $ 600. B 80 18 5
b. $1,000. a 33. Just-in-time manufacturers are less likely than conventional C 150 30 10
c. $1,200. manufacturing companies to
d. $2,000. a. operate a joint process that results in joint products. There are 2400 minutes available on the machine during the
b. be able to accommodate special orders. week. How many units should be produced and sold to
b 27. Pueblo Company sells a product for $60. Variable cost is $32. c. have constraints on their productive capacity. maximize the weekly contribution?
Pueblo could accept a special order for 1,000 units at $46. If d. fit any of the above characterizations. A B C
Pueblo accepted the order, how many units could it lose at a. 100 80 150
the regular price before the decision became unwise? d 34. The total demand for Product Z is relevant to a decision about b. 50 80 150
a. 1,000. a. the best use of a resource that is in limited supply and is used in c. 90 0 150
b. 500. the production of Product Z and one other of the d. 100 80 100
c. 200. company's products.
d. 0. b. whether to sell Product Z, a joint product, at split-off or process it d 38. Elk Grove produces three products: A, B, and C. A machine is used
further into another salable product. to produce the products. The contribution margins, sales
c 28. Which of the following is NOT a short-term decision? c. replacing Product Z with another product. demands, and time on the machine (in minutes) are as
a. Accept a special order. d. all of the above decisions. follows:
b. Make-or-buy a component. time
c. Replace a machine. c 35. Buchanan Company currently sells 4,000 units of product Q for $1 on
d. Sell a joint product at split-off or process it further. each. Capacity is 5,000 units. Variable costs are $0.40 and Demand CM
avoidable fixed costs are $400. A chain store has offered machine
d 29. The variable cost of a unit of product made yesterday is $0.80 per unit for 400 units of Q. If Buchanan accepts the ------ ----
a. an incremental cost. order, the change in income will be a --------
b. an opportunity cost. a. $60 decrease. A 120 $20 5
c. a differential cost. b. $80 decrease. B 80 36 10
d. a sunk cost. c. $160 increase. C 100 50 15
d. $480 increase.
d 30. The most profitable use of a resource that has limited capacity and There are 2400 minutes available on the machine during the
is needed in the production of more than one product is a a 36. Tyler Company currently sells 1,000 units of product M for $1 week. How many units should be produced and sold to
function of which of the following? each. Variable costs are $0.40 and avoidable fixed costs are maximize the weekly contribution?

13
 A B C A 10,000 $35 $70,000 $40
a. 120 80 100 Direct materials $10,000 B 20,000 $40 $30,000 $45
b. 20 80 100 Direct labor 15,000 C 30,000 $20 $90,000 $25
c. 120 30 100 Variable overhead 5,000
d. 120 80 66 Fixed overhead 30,000 Which products should be processed further?
------- a. A only.
a 39. Black Oak Company makes and sells oak boxes for a Total manufacturing cost $60,000 b. A and B.
price of $60 each. Unit costs based on anticipated ======= c. B and C.
monthly sales of 1,000 boxes are as follows: d. A, B, and C.
An outside supplier has offered to supply the part at $40 per
Direct material cost $15 unit. It is estimated that 20% of the fixed overhead assigned b 44. Genco Company produces three products from a joint process
Direct labor cost 12 to Part X will no longer be incurred if the company purchases costing $100,000. The following information is available:
Variable manufacturing overhead 3 the part from the outside supplier. If DJH Company
Variable selling overhead 5 purchases 1,000 units of Part X from the outside supplier per
Fixed costs 2 month, then its monthly operating income will Costs to Selling Price
a. decrease by $20,000. Selling Price Process After Further
A chain store has offered to buy 100 boxes per b. decrease by $4,000. Units at Split-off Further Processing
month at $58 each. To accept this special order, c. not change. ----- ------------ ------- ---------
Black Oak will have to restrict its sales to regular d. increase by $20,000. A 2,000 $25 $60,000 $50
customers to only 900 boxes per monthly because B 3,000 $30 $60,000 $45
its production capacity cannot be expanded in the c 42. DJH Company produces 1,000 units of Part X per month. The total C 5,000 $40 $80,000 $60
short run. However, no variable selling expenses manufacturing costs of the part are as follows:
will be incurred for this special order. If Black Oak Which products should be sold without further processing?
accepts the chain store's offer, its profit will Direct materials $10,000 a. B only.
a. increase by $300. Direct labor 15,000 b. A and B.
b. increase by $500. Variable overhead 5,000 c. B and C.
c. decrease by $200. Fixed overhead 30,000 d. A, B, and C.
d. decrease by $500. -------
Total manufacturing cost $60,000 c 45. Colfax Company expects to incur the following costs at the
a 40. Medford Corporation operates a plant with a productive capacity ======= planned production level of 10,000 units:
to manufacture 20,000 units of its product a year. The follow
information pertains to the production costs at capacity: An outside supplier has offered to supply the part at $40 per Direct materials $100,000
unit. It is estimated that 20% of the fixed overhead assigned Direct labor 120,000
Variable costs $160,000 to Part X will no longer be incurred if the company purchases Variable overhead 60,000
Fixed costs 240,000 the part from the outside supplier. What is the maximum Fixed overhead 30,000
-------- price that DJH Company should be willing to pay the outside
Total costs $400,000 supplier? The selling price is $50 per unit. The company currently
========= a. $60 operates at full capacity of 10,000 units. Capacity can be
b. $40 increased to 13,000 units by operating overtime. Variable
A supplier has offered to sell 4,000 units to Medford c. $36 costs increase by $14 per unit for overtime production. Fixed
annually. Assume no change in the fixed costs. What is the d. $25 overhead costs remain unchanged when overtime
price per unit that makes Medford indifferent between the operations occur. Colfax Company has received a special
"make" and "buy" options? c 43. Scooter Company produces three products from a joint process order from a wholesaler who has offered to buy 1,000 units
a. $8 costing $100,000. The following information is available: at $45 each. What is the incremental cost associated with
b. $12 this special order?
c. $20 a. $14,000
d. $0 Costs to Selling Price b. $28,000
Selling Price Process After Further c. $42,000
b 41. DJH Company produces 1,000 units of Part X per month. The total Units at Split-off Further Processing d. $45,000
manufacturing costs of the part are as follows: ----- ------------ ------- ----------
14
b 46. Colfax Company expects to incur the following costs at the Direct materials $120,000 Demand CM on
planned production level of 10,000 units: Direct labor 80,000 M1 on M2
Variable overhead 40,000 A 100 $12 5
Direct materials $100,000 Fixed overhead 160,000 10
Direct labor 120,000 -------- B 80 18 10
Variable overhead 60,000 Total cost $400,000 5
Fixed overhead 30,000 ======== C 150 25 5
10
The selling price is $50 per unit. The company currently Sutton Company has offered to sell GMH 100,000 units of
operates at full capacity of 10,000 units. Capacity can be Part X per year. If GMH accepts this offer, the facilities used There are 2,400 minutes available on each machine during
increased to 13,000 units by operating overtime. Variable to produce Part X can be used in the production of other the week. How many units should be produced and sold to
costs increase by $14 per unit for overtime production. Fixed components. This change would save GMH $10,000 in rent maximize the weekly contribution?
overhead costs remain unchanged when overtime for the leased production facility used at present to support A B C
operations occur. Colfax Company has received a special the production of other components. What is the maximum a. 100 80 150
order from a wholesaler who has offered to buy 1,000 units price that GMH should be willing to pay Sutton for part X? b. 50 80 150
at $45 each. What is the impact on Colfax's operating income a. $1.20 c. 90 0 150
if this special order is accepted? b. $2.00 e. 100 80 100
a. $17,000 increase c. $2.40
b. $3,000 increase d. $2.50 True-False
c. no change
d. $5,000 decrease d 49. Barrie, Inc., produces three products: A, B, and C. Two machines F 1. If the results of a decision are not as good as expected, there has
are used to produce the products. The contribution margins, been an error in the decision-making process.
c 47. GMH Company manufactures 100,000 units of Part X annually for sales demands, and time on each machine (in minutes) is as
use in one of its main products. The total manufacturing cost follows: T 2. The costs of operating a joint process can be fixed or variable.
for 100,000 units of Part X is as follows: time
time T 3. Incremental costs can be either fixed or variable.
Direct materials $120,000 Demand CM on
Direct labor 80,000 M1 on M2 T 4. In general, the smaller the segment being considered in a decision,
Variable overhead 40,000 A 100 $12 5 the fewer the avoidable costs.
Fixed overhead 160,000 10
------- B 80 18 10 T 5. A given fixed cost might be separable and relevant for the purpose
Total cost $400,000 5 of one decision and common and irrelevant for the purpose
======== C 100 25 15 of another decision in the same company.
5
Selin Company has offered to sell GMH 100,000 units of Part F 6. Opportunity cost is usually the amount paid for a resource.
X per year. If GMH accepts this offer, the facilities used to There are 2,400 minutes available on each machine during
produce Part X can be used in the production of other the week. How many units should be produced and sold to T 7. Fixed costs that are allocated to several segments are normally
components. This change would save GMH $10,000 in rent maximize the weekly contribution? irrelevant to decisions for one of those segments.
for the leased production facility used at present to support A B C
the production of other components. What is the amount of a. 100 80 100 T 8. The only revenues or costs that are relevant in decision making are
relevant costs for this make-or-buy decision? b. 20 80 100 the differential revenues or costs.
a. $200,000 c. 100 40 100
b. $240,000 d. 100 80 73 T 9. Constraints may be internal to the firm or external to the firm.
c. $250,000
d. $400,000 b 50. Barrie, Inc., produces three products: A, B, and C. Two machines T 10. Management's objective should be to exploit a constraint rather
are used to produce the products. The contribution margins, than to eliminate it.
d 48. GMH Company manufactures 100,000 units of Part X annually for sales demands, and time on each machine (in minutes) is as
use in one of its main products. The total manufacturing cost follows:
for 100,000 units of Part X is as follows: time CHAPTER 6: OPERATIONAL
time AND FINANCIAL BUDGETING

15
 b 15. Prohibiting managers from overspending budget allowances
Multiple Choice d 8. Budgets set at very high levels of performance (i.e., very low costs) a. improves company performance.
a. assist in planning the operations of the company. b. can harm company performance.
a 1. The starting point in preparing a comprehensive budget is b. stimulate people to perform better than they ordinarily would. c. eliminates the need for comparisons of budgeted and actual
a. the sales forecast. c. are helpful in evaluating the performance of managers. amounts.
b. the cash budget. d. can lead to low levels of performance. d. usually reduces the need to prepare a cash budget.
c. the budgeted income statement.
d. the flexible expense budget. c 9. Inventory policy is most critical in the budgeting of b 16. Which of the following will occur if X Co.'s actual sales in May are
a. sales. lower than its budgeted sales for that month?
d 2. Budgets are related to which of the following management b. cost of goods sold. a. X won't have enough cash to cover bills requiring payment in May.
functions? c. purchases. b. X's actual inventory at the end of May will be higher than
a. Planning. d. expenses. budgeted.
b. Control. c. X's actual purchases in June will be higher than budgeted.
c. Performance evaluation. a 10. Budgeting expenditures by purpose is called d. All of the above.
d. All of the above. a. program budgeting.
b. zero-based budgeting. c 17. JIT manufacturers are more likely than conventional
d 3. Which of the following should be used to forecast sales? c. line budgeting. manufacturers to
a. Regression analysis. d. flexible budgeting. a. use static budget allowances for manufacturing costs.
b. The scatter diagram. b. prepare production budgets without a sales forecast.
c. The judgment of the most experienced managers. c 11. Which of the following is a difference between a static budget and c. budget unit production equal to budgeted unit sales.
d. Whatever method produces the most accurate forecast. a flexible budget? d. experience budget variances.
a. A flexible budget includes only variable costs, a static budget
a 4. A critical factor for using indicator methods to forecast sales is includes only fixed costs. a 18. If cash receipts from customers are greater than sales, which of
a. the availability of a forecasted value for the indicator. b. A flexible budget includes all costs, a static budget includes only the following is most likely to be true?
b. an upward trend in the value of the indicator. fixed costs. a. The balance of accounts receivable will decrease.
c. governmental collection of data for computing and reporting the c. A flexible budget gives different allowances for different levels of b. The company's outstanding debt will decrease.
value of the indicator. activity; a static budget does not. c. The company's cash balance will increase.
d. the availability of an indicator that covers the entire country. d. None of the above. d. The company will show a profit.

d 5. Which of the following equations can be used to budget a 12. A static budget is most appropriate for a department c 19. A cash budget is NOT prepared until a company has
purchases? (BI = beginning inventory, EI = ending inventory a. with only fixed costs. a. obtained a commitment from its bank that cash will be available
desired, CGS = budgeted cost of goods sold) b. with only variable costs. as needed.
a. Budgeted purchases = CGS + BI - EI c. with mostly mixed costs. b. prepared the pro forma balance sheet.
b. Budgeted purchases = CGS + BI d. with any of the above characteristics. c. prepared its purchases budget.
c. Budgeted purchases = CGS + EI + BI d. determined that enough cash is available to meet dividend
d. Budgeted purchases = CGS + EI - BI d 13. Which of the following is NOT an advantage of budgeting? payments.
a. It requires managers to state their objectives.
b 6. A flexible budget is b. It facilitates control by permitting comparisons of budgeted and a 20. Which of the following is LEAST likely to be affected if unit sales for
a. one that can be changed whenever a manager so desires. actual results. this month are lower than budgeted?
b. adjusted to reflect expected costs at the actual level of activity. c. It facilitates performance evaluation by permitting comparisons of a. Production for this month.
c. one that uses the formula total cost = cost per unit x units budgeted and actual results. b. Production for next month.
produced. d. It provides a check-up device that allows managers to keep close c. Cash receipts for next month.
d. the same as a continuous budget. tabs on their subordinates. d. Inventory at the end of this month.

b 7. The use of flexible (as opposed to static) budget allowances is b 14. An imposed budget b 21. "Incremental budgeting" refers to
LEAST important for which of the following? a. is the same as a static budget. a. line-by-line approval of expenditures.
a. Costs of the production department. b. can lead to poor performance. b. setting budget allowances based on prior year expenditures.
b. Costs of the general accounting department. c. is best for planning purposes. c. requiring top management approval of increases in budgets.
c. Costs of the product shipping department. d. eliminates the need for a sales forecast. d. using incremental revenues and costs in budgeting.
d. Costs of the material receiving department.

16
b 22. The principal DISADVANTAGE of line budgeting is c 29. Quorum Company desires an ending inventory of $120,000. It b. 60,000 units.
a. it can only be used by not-for-profit entities. expects sales of $240,000 and has a beginning inventory of c. 52,000 units.
b. it limits the flexibility of managers to accomplish the entity's $80,000. Cost of sales is 60% of sales. Budgeted purchases d. 28,000 units.
objectives. are
c. it works only in conjunction with zero-based budgeting. a. $120,000. c 35. Sams Company manufactures a single product. It keeps its
d. none of the above. b. $144,000. inventory of finished goods at 75% the coming month's
c. $184,000. budgeted sales, inventory of raw materials at 50% of the
a 23. The cash receipts budget d. $264,000. coming month's budgeted production needs. Each unit of
a. requires a sales forecast. product requires two pounds of materials. The production
b. requires a purchases or production budget. d 30. Garamond Company budgeted purchases of $200,000. Cost of budget is, in units: May, 1,000; June, 1,200; July, 1,300;
c. is prepared after the cash disbursements budget. sales was $240,000 and the desired ending inventory was August, 1,600. Raw material purchases in June would be
d. has none of the above characteristics. $84,000. The beginning inventory was a. 1,525 pounds.
a. $40,000. b. 2,550 pounds.
c 24. The type of company most likely to run short of cash during the b. $64,000. c. 2,800 pounds.
year is one with c. $84,000. d. 3,050 pounds.
a. little seasonality. d. $124,000. a 36. Hayward Company desires an ending inventory of $70,000. It
b. high contribution margin percentage. expects sales of $400,000 and has a beginning inventory of
c. high seasonality and rapid sales growth. a 31. Wildwood Company budgeted purchases of 20,000 units. The $65,000. Cost of sales is 65% of sales. Budgeted purchases
d. relatively low fixed costs. budgeted beginning inventory was 4,800 units and the are
budgeted ending inventory was 6,000 units. Budgeted sales a. $265,000.
d 25. If a company is earning a profit, were b. $395,000.
a. its cash balance is increasing. a. 18,800 units. c. $405,000.
b. its monthly cash disbursements will be stable. b. 21,200 units. d. $535,000.
c. its inventory is increasing. c. 24,800 units.
d. it might have to borrow money. d. 26,000 units. c 37. Bryce Company budgeted sales of 50,000 units for January, 60,000
for February. Bryce Company desires an ending inventory
a 26. One difference between budgeting in for-profit and not-for-profit c 32. Menomonie Company budgeted sales of 18,000 units. The equal to one-half of the following month's sales needs.
entities is that not-for-profit entities usually budgeted beginning inventory was 3,000 units and the Inventory on January 1 was as desired. Budgeted production
a. budget expenses before revenues. budgeted ending inventory was 5,000 units. Budgeted for January is
b. don't need a cash budget. production is a. 22,000 units.
c. are less likely to use incremental budgeting. a. 23,000 units. b. 52,000 units.
d. use computer software-packages to facilitate the budgeting b. 21,000 units. c. 55,000 units.
process. c. 20,000 units. d. 74,000 units.
d. 16,000 units.
d 27. To prepare its cash disbursements budget, a company uses c 38. Chetek Company budgeted purchases of 19,000 units. The
information from d 33. Baker Company budgets supplies as $20,000 + ($1.20 x direct budgeted beginning inventory was 12,400 units and the
a. its balance sheet at the end of the prior period. labor hours). Baker has budgeted 18,000 direct labor hours, budgeted ending inventory was 13,000 units. Budgeted sales
b. its purchases budget. $130,000 direct labor cost. The flexible budget allowance for were
c. its capital budget. supplies is a. 32,000 units.
d. all of the above sources. a. $18,000. b. 31,400 units.
b. $20,000. c. 18,400 units.
b 28. Just-in-time manufacturers are more likely than conventional c. $150,000. d. 19,600 units.
manufacturers to d. some other number.
a. prepare production budgets without a sales forecast. d 39. Barron Company manufactures a single product. Barron keeps
b. budget materials purchases equal to the current month's needs b 34. Equinox Company budgeted sales of 44,000 units for January, inventory of raw materials at 50% of the coming month's
for production. 60,000 for February. The budgeted beginning inventory for budgeted production needs. Each unit of product requires
c. budget unit production for the month at greater than budgeted January 1 was 14,000 units. Equinox desires an ending three pounds of materials. The production budget is, in
unit sales for the month. inventory equal to one-half of the following month's sales units: May, 1,000; June, 1,200; July, 1,300; August, 1,600.
d. experience cash shortages. needs. Budgeted production for January is Raw material purchases in July would be
a. 74,000 units. a. 1,450 pounds.

17
 b. 2,400 pounds. b. $168,000. the sale. Cash collections in August would be
c. 3,900 pounds. c. $278,000. a. $35,000.
d. some other number. d. some other number. b. $62,000.
c. $78,000.
c 40. Acker Company has prepared the following flexible budget for d 45. Reid Co. makes payments for purchases 10% during the month of d. $86,000.
production costs: total production costs = $260,000 + $5X, purchase, 60% in the following month, and the remainder in
where X is the number of machine hours. Acker produced the second month following the purchase. Purchases are a 50. Clearwater Inc. has projected sales to be $160,000 in April,
20,000 units, using 34,000 machine hours at a total cost of projected to be $130,000 in January, $140,000 in February, $200,000 in May, and $240,000 in June. Clearwater collects
$425,000. The flexible budget allowance for production and $160,000 in March. The March 31 accounts payable 40% of a month's sales in the month of sale, 40% in the
costs is balance will be month following the sale, and 20% in the second month
a. $260,000. a. $48,000. following the sale. The accounts receivable balance on June
b. $425,000. b. $96,000. 30 would be
c. $430,000. c. $144,000. a. $184,000.
d. $525,000. d. $186,000. b. $144,000.
c. $ 40,000.
c 41. Scooter Inc. has projected sales to be $130,000 in June, $135,000 c 46. Andover Inc. has projected sales to be: February, $10,000; March, d. some other number.
in July and $150,000 in August. Scooter collects 30% of a $9,000; April, $8,000; May, $10,000; and June, $11,000.
month's sales in the month of sale, 50% in the month Andover has 30% cash sales and 70% sales on account. True-False
following the sale, and 16% in the second month following Accounts are collected 40% in the month following the sale
the sale. Cash collections in August would be and 55% collected the second month. Total cash receipts in F 1. A just-in-time manufacturer does NOT need a sales budget.
a. $ 45,000. May would be
b. $127,300. a. $3,000. T 2. A flexible budget allowance is NOT especially useful for budgeting
c. $133,300. b. $8,150. discretionary costs.
d. $138,500. c. $8,705.
d. some other number. F 3. The purchases budget is prepared before the sales budget because
d 42. Rundall Co. makes payments for purchases 30% during the month the company cannot estimate what it will sell until it has
of purchase and the remainder the following month. April d 47. Conde Inc. has projected sales to be: February, $20,000; March, some idea of what will be on hand.
purchases are projected to be $160,000; May purchases will $18,000; April, $16,000; May, $20,000; and June, $22,000.
be $240,000. Cash payments in May will be Conde has 30% cash sales and 70% sales on account. F 4. The longer the time period covered by a budget, the more useful
a. $ 72,000. Accounts are collected 40% in the month following the sale the budget will be for controlling operations.
b. $108,000. and 60% collected the second month. Accounts receivable
c. $168,000. for May 31 would be F 5. A purchases budget is normally prepared after the company has
d. $184,000. a. $ 6,160. forecast how much cash it will have available to pay for
b. $13,300. purchases.
c 43. Randall Co. makes payments for purchases 30% during the month c. $14,000.
of purchase and the remainder the following month. April d. $20,720. F 6. Imposed budgets are exceptionally ambitious goals not likely to be
purchases are projected to be $80,000; May purchases will achieved without making fundamental changes in the way a
be $120,000. The accounts payable balance on May 31 will d 48. Holmgren estimates its supplies purchases to be $21,000 in job is done.
be August and $28,000 in September. Holmgren pays 70% of its
a. $36,000. accounts in the month of purchase with the remainder paid F 7. A JIT manufacturer that maintains no inventory doesn't need a cash
b. $54,000. the following month. September payments would be disbursements budget.
c. $84,000. a. $14,700.
d. $92,000. b. $19,600. F 8. The budget for a retailer is likely to be more complex than that for
c. $23,100. a manufacturer because a retailer has a wider variety of
c 44. Alfuth Co. makes payments for purchases 10% during the month d. $55,900. customers.
of purchase, 60% in the following month, and the remainder
in the second month following the purchase. Purchases are c 49. Danner Inc. has projected sales to be $100,000 in June, $90,000 in F 9. The increasing public demand for accountability from
projected to be $260,000 in January, $280,000 in February, July, and $70,000 in August. Danner collects 50% of a governmental and other not-for-profit organizations has
and $320,000 in March. March payments will be month's sales in the month of sale, 30% in the month resulted in an increased use of incremental budgeting.
a. $ 32,000. following the sale, and 16% in the second month following

18
T 10. Line-by-line budget authorization is common in governmental a. The major competitor for the product to be manufactured with c. it will have a positive NPV.
units. the machinery being considered for purchase has been d. its incremental cash flows may not cover its cost.
rated "unsatisfactory" by a consumer group.
b. The interest rate on long-term debt declines. c 13. Cost of capital is
c. The income tax rate is raised by the Congress. a. the amount the company must pay for its plant assets.
d. Congress approves the use of faster depreciation than was b. the dividends a company must pay on its equity securities.
previously available. c. the cost the company must incur to obtain its capital resources.
CHAPTER 7: CAPITAL BUDGETING DECISIONS—PART I d. the cost the company is charged by investment bankers who
a 7. If an investment has a positive NPV, handle the issuance of equity or long-term debt
Multiple Choice a. its IRR is greater than the company's cost of capital. securities.
b. cost of capital exceeds the cutoff rate of return.
d 1. Calculating the payback period for a capital project requires c. its IRR is less than the company's cutoff rate of return. d 14. The normal methods of analyzing investments
knowing which of the following? d. the cutoff rate of return exceeds cost of capital. a. cannot be used by not-for-profit entities.
a. Useful life of the project. b. do not apply if the project will not produce revenues.
b. The company's minimum required rate of return. c 8. Which of the following describes the annual returns that are c. cannot be used if the company plans to finance the project with
c. The project's NPV. discounted in determining the NPV of an investment? funds already available internally.
d. The project's annual cash flow. a. Net incomes expected to be earned by the project. d. require forecasts of cash flows expected from the project.
b. Pre-tax cash flows expected from the project.
c 2. The payback criterion for capital investment decisions c. After-tax cash flows expected from the project. a 15. Which of the following is NOT a defect of the payback method?
a. is conceptually superior to the IRR criterion. d. After-tax cash flows adjusted for the time value of money. a. It ignores cash flows because it uses net income.
b. takes into consideration the time value of money. b. It ignores profitability.
c. gives priority to rapid recovery of cash. b 9. Which of the following capital budgeting methods does NOT c. It ignores the present values of cash flows.
d. emphasizes the most profitable projects. consider the time value of money? d. It ignores the pattern of cash flows beyond the payback period.
a. IRR.
a 3. Which of the following is NOT relevant in calculating annual net b. Book rate of return. b 16. A company with cost of capital of 15% plans to finance an
cash flows for an investment? c. Time-adjusted rate of return. investment with debt that bears 10% interest. The rate it
a. Interest payments on funds borrowed to finance the project. d. NPV. should use to discount the cash flows is
b. Depreciation on fixed assets purchased for the project. a. 10%.
c. The income tax rate. b 10. All other things being equal, as cost of capital increases b. 15%.
d. Lost contribution margin if sales of the product invested in will a. more capital projects will probably be acceptable. c. 25%.
reduce sales of other products. b. fewer capital projects will probably be acceptable. d. some other rate.
c. the number of capital projects that are acceptable will change, but
a 4. If the present value of the future cash flows for an investment the direction of the change is not determinable just by c 17. Which of the following events will increase the NPV of an
equals the required investment, the IRR is knowing the direction of the change in cost of capital. investment involving a new product?
a. equal to the cutoff rate. d. the company will probably want to borrow money rather than a. An increase in the income tax rate.
b. equal to the cost of borrowed capital. issue stock. b. An increase in the expected per-unit variable cost of the product.
c. equal to zero. c. An increase in the expected annual unit volume of the product.
d. lower than the company's cutoff rate of return. d 11. Which of the following is a basic difference between the IRR and d. A decrease in the expected salvage value of equipment.
the book rate of return (BRR) criteria for evaluating
b 5. The relationship between payback period and IRR is that investments? b 18. An investment has a positive NPV discounting the cash flows at a
a. a payback period of less than one-half the life of a project will a. IRR emphasizes expenses and BRR emphasizes expenditures. 14% cost of capital. Which statement is true?
yield an IRR lower than the target rate. b. IRR emphasizes revenues and BRR emphasizes receipts. a. The IRR is lower than 14%.
b. the payback period is the present value factor for the IRR. c. IRR is used for internal investments and BRR is used for external b. The IRR is higher than 14%.
c. a project whose payback period does not meet the company's investments. c. The payback period is less than 14 years.
cutoff rate for payback will not meet the company's d. IRR concentrates on receipts and expenditures and BRR d. The book rate of return is 14%.
criterion for IRR. concentrates on revenues and expenses.
d. none of the above. a 19. The technique most concerned with liquidity is
a 12. If a project has a payback period shorter than its life, a. payback.
c 6. Which of the following events is most likely to reduce the expected a. its NPV may be negative. b. NPV.
NPV of an investment? b. its IRR is greater than cost of capital. c. IRR.

19
 d. book rate of return. a. inflation. c 34. Which of the following methods FAILS to distinguish between
b. uncertainty. return of investment and return on investment?
d 20. The technique that does NOT use cash flows is c. the opportunity cost of waiting. a. NPV.
a. payback. d. none of the above. b. IRR.
b. NPV. c. Payback.
c. IRR. a 27. In contrast to the payback and book rate of return methods, the d. Book rate of return.
d. book rate of return. NPV and IRR methods
a. consider the time value of money. c 35. If a company is NOT subject to income tax, which of the following
a 21. If there were no income taxes, b. ignore depreciation. is true of a proposed investment?
a. depreciation would be ignored in capital budgeting. c. use after-tax cash flows. a. The project's IRR equals the entity's cost of capital.
b. the NPV method would not work. d. all of the above. b. The project's NPV is zero.
c. income would be discounted instead of cash flow. c. Depreciation on assets required for the project is irrelevant to the
d. all potential investments would be desirable. a 28. Which of the following is a discounted cash flow method? evaluation.
a. NPV. d. The expected annual increase in future cash flows equals the
a 22. Two new products, X and Y, are alike in every way except that the b. Payback. investment required to undertake the project.
sales of X will start low and rise throughout its life, while c. Book rate of return.
those of Y will be the same each year. Total volumes over d. All of the above. d 36. Which of the following increases NPV and IRR?
their five-year lives will be the same, as will selling prices, a. An upward revision in expected annual net cash flows.
unit variable costs, cash fixed costs, and investment. The a 29. Which statement describes the relevance of depreciation in b. An upward revision of expected life.
NPV of product X calculating cash flows? c. An upward revision of the residual value of the long-lived assets
a. will be less than that of product Y. a. Depreciation is relevant only when income taxes exist. being acquired for the project.
b. will be the same as that of product Y. b. Depreciation is always relevant. d. All of the above.
c. will be greater than that of product Y. c. Depreciation is never relevant.
d. none of the above. d. Depreciation is relevant only with discounted cash flow methods. d 37. Qualitative issues could increase the acceptability of a project
under which of the following conditions?
d 23. Which of the following events is most likely to increase the b 30. As the discount rate increases a. The IRR is less than the company's cutoff rate.
number of investments that meet a company's acceptance a. present value factors increase. b. The project has a negative NPV.
criteria? b. present value factors decrease. c. The payback period is longer than the company's cutoff period.
a. Top management raises the target rate of return. c. present value factors remain constant. d. All of the above.
b. The interest rate on long-term debt rises. d. it is impossible to tell what happens to the factors.
c. The income tax rate rises. a 38. If Co. X wants to use IRR to evaluate long-term decisions and to
d. The IRS allows companies to expense purchases of fixed assets, a 31. As the length of an annuity increases establish a cutoff rate of return, X must be sure the cutoff
instead of depreciating them over their lives. a. present value factors increase. rate is
b. present value factors decrease. a. at least equal to its cost of capital.
d 24. Investment A has a payback period of 5.4 years, investment B one c. present value factors remain constant. b. at least equal to the rate used by similar companies.
of 6.7 years. From this information we can conclude d. it is impossible to tell what happens to present value factors. c. greater than the IRR on projects accepted in the past.
a. that investment A has a higher NPV than B. d. greater than the current book rate of return.
b. that investment A has a higher IRR than B. a 32. The only future costs that are relevant to deciding whether to
c. that investment A's book rate of return is higher than B's. accept an investment are those that will a 39. Which of the following is NOT relevant in calculating net cash
d. none of the above. a. be different if the project is accepted rather than rejected. flows for Project N?
b. be saved if the project is accepted rather than rejected. a. Interest payments on funds that would be borrowed to finance
d 25. Investment A has a book rate of return of 26%, investment B one c. be deductible for tax purposes. Project N.
of 18%. From this information we can conclude d. affect net income in the period that they are incurred. b. Depreciation on assets purchased for Project N.
a. that investment A has a higher NPV than B. c. The contribution margin the company would lose if sales of the
b. that investment A has a higher IRR than B. a 33. Which of the following is true of an investment? product introduced by Project N will reduce sales of
c. that investment A has a shorter payback period than B. a. The lower the cost of capital, the higher the NPV. other products.
d. none of the above. b. The lower the cost of capital, the higher the IRR. d. The income tax rate applicable to the entity.
c. The longer the project's life, the shorter its payback period.
c 26. A dollar now is worth more than a dollar to be received in the d. The higher the project's NPV, the shorter its life. b 40. If the IRR on an investment is zero,
future because of a. its NPV is positive.

20
 b. its annual cash flows equal its required investment. d. 33.3%.
c. it is generally a wise investment. T 6. Salvage value is usually ignored in computing the tax depreciation
d. its cash flows decrease over its life. a 47. An investment opportunity costing $150,000 is expected to on an investment in depreciable assets.
yield net cash flows of $36,000 annually for six years. The
d 41. If depreciation on a new asset exceeds its savings in cash NPV of the investment at a cutoff rate of 12% would be F 7. IRR can be computed for even cash flows, but not for uneven cash
operating costs, which of the following is true? a. $(2,004). flows.
a. The project is usually unacceptable. b. $2,004.
b. The annual after-tax cash flow on the new asset will be greater c. $150,000. T 8. If IRR is less than the cost of capital, the NPV will be negative.
than the savings in cash operating costs. d. $147,996.
c. The project has a negative NPV. F 9. IF NPV is negative, IRR is equal to the cost of capital.
d. All of the above. c 48. An investment opportunity costing $100,000 is expected to yield
net cash flows of $22,000 annually for seven years. The T 10. Payback emphasizes the return of the investment and ignores the
d 42. Cost of capital is payback period of the investment is return on the investment.
a. the interest rate an entity must pay to borrow money. a. 0.22 years.
b. the return an entity's stockholders expect on their investment. b. 3.08 years.
c. the rate of return the entity can earn from investing available c. 4.55 years. CHAPTER 8: CAPITAL BUDGETING DECISIONS—PART II
cash. d. some other number.
d. a concept of managerial finance incorporating all of the above Multiple Choice
ideas. a 49. An investment opportunity costing $200,000 is expected to yield
net cash flows of $39,000 annually for eight years. The IRR of c 1. Which of the following groups of capital budgeting techniques uses
b 43. An investment opportunity costing $75,000 is expected to the investment is between the time value of money?
yield net cash flows of $23,000 annually for five years. The a. 10 and 12%. a. Book rate of return, payback, and profitability index.
NPV of the investment at a cutoff rate of 14% would be b. 12 and 14%. b. IRR, payback, and NPV.
a. $(3,959). c. 14 and 16%. c. IRR, NPV, and profitability index.
b. $3,959. d. 16 and 18%. d. IRR, book rate of return, and profitability index.
c. $75,000.
d. $78,959. b 50. An investment opportunity costing $80,000 is expected to b 2. Discounted cash flow techniques for analyzing capital budgeting
yield net cash flows of $25,000 annually for four years. The decisions are NOT normally applied to projects
b 44. An investment opportunity costing $55,000 is expected to yield cost of capital is 10%. The book rate of return would be a. requiring no investment after the first year of life.
net cash flows of $22,000 annually for five years. The a. 10.0%. b. having useful lives shorter than one year.
payback period of the investment is b. 12.5%. c. that are essential to the business.
a. 0.4 years. c. 21.3%. d. involving replacement of existing assets.
b. 2.5 years. d. 32.0%.
c. $33,000. d 3. The profitability index
d. some other number. a. does not use present values of cash flows.
True-False b. is generally preferable to any other approach for evaluating
c 45. An investment opportunity costing $180,000 is expected to yield mutually exclusive investment alternatives.
net cash flows of $53,000 annually for five years. The IRR of T 1. Payback period is the length of time it will take a company to c. produces the same ranking of investment alternatives as does the
the investment is between recoup its outlay for an investment. IRR criterion.
a. 10 and 12%. d. is a discounted cash flow method.
b. 12 and 14%. T 2. Discounted cash flow techniques apply to investments that involve
c. 14 and 16%. either costs only, or both costs and revenues. a 4. Companies using MACRS for tax purposes and straight-line
d. 16 and 18%. depreciation for financial reporting purposes usually find
F 3. Cost of capital is the interest rate that a company expects to pay to that the relationship between the tax basis and book value
b 46. An investment opportunity costing $150,000 is expected to finance a particular capital investment project. of their assets is
yield net cash flows of $45,000 annually for five years. The a. the tax basis is lower than book value.
cost of capital is 10%. The book rate of return would be F 4. The higher the cost of capital, the higher the present value of b. the tax basis is higher than book value.
a. 10%. future cash inflows. c. the tax basis is the same as book value.
b. 20%. d. none of the above.
c. 30%. F 5. If the IRR on a capital project is positive, its NPV will be positive.

21
c 5. A company that wants to use MACRS for tax purposes must most depreciable assets have some residual value. b. An increase in interest rates.
a. request permission from the IRS. b. an investment in working capital is returned in full at the c. An increase in the number of years over which assets must be
b. acquire new assets at or near the middle of the year. end of a project's life, while an investment in depreciable depreciated.
c. ignore salvage value in calculating depreciation. assets has no residual value. d. None of the above.
d. do none of the above. c. an investment in working capital is not tax-deductible when made,
nor taxable when returned, while an investment in c 18. Which of the following statements is true?
c 6. The government could encourage increases in investment by depreciable assets does allow tax deductions. a. All revenue is taxed.
a. increasing tax rates. d. because an investment in working capital is usually returned in full b. All expenses are tax-deductible.
b. lengthening the MACRS periods. at the end of the project's life, it is ignored in c. Some revenues and expenses have no tax effects.
c. letting a company expense fixed assets in the year acquired computing the amount of the investment required for d. Income taxes are based solely on revenues and expenses.
instead of through annual depreciation charges. the project.
d. taking actions that would increase interest rates. b 19. The profitability index is the ratio of
d 12. The proper treatment of an investment in receivables and a. total cash inflows to the cost of the investment.
a 7. In choosing from among mutually exclusive investments the inventory is to b. the present value of cash inflows to the cost of the investment.
manager should normally select the one with the highest a. ignore it. c. the NPV of the investment to the cost of the investment.
a. NPV. b. add it to the required investment in fixed assets. d. the IRR to the company's cost of capital.
b. IRR. c. add it to the required investment in fixed assets and subtract it
c. profitability index. from the annual cash flows. c 20. With respect to income taxes, the principal advantage of MACRS
d. book rate of return. d. add it to the investment in fixed assets and add the present value over straight-line depreciation is that
of the recovery to the present value of the annual cash a. total taxes will be lower under MACRS.
a 8. In deciding whether to replace a machine, which of the following is flows. b. taxes will be constant from year to year under MACRS.
NOT a sunk cost? c. taxes will be lower in the earlier years under MACRS.
a. The expected resale price of the existing machine. a 13. If a company uses a five-year MACRS period to depreciate assets d. taxes will decline in future years under MACRS.
b. The book value of the existing machine. instead of a 10-year life with straight-line depreciation,
c. The original cost of the existing machine. a. the NPV of the investment is higher. a 21. If the profitability index is less than one,
d. The depreciated cost of the existing machine. b. the IRR of the investment is lower. a. the IRR is less than cost of capital.
c. there is no difference in either NPV or IRR. b. the IRR is the same as cost of capital.
a 9. A company is considering replacing a machine with one that will d. total cash flows over the useful life would be lower. c. the IRR is greater than cost of capital.
save $50,000 per year in cash operating costs and have d. none of the above is true.
$20,000 more depreciation expense per year than the a 14. The NPV and IRR methods give
existing machine. The tax rate is 40%. Buying the new a. the same decision (accept or reject) for any single investment. c 22. Which of the following combinations is possible?
machine will increase annual net cash flows of the company b. the same choice from among mutually exclusive investments. Profitability Index NPV IRR
by c. different rankings of projects with unequal lives. ------------------- -------- -------------------------
a. $38,000. d. the same rankings of projects with different required investments. a. greater than 1 positive equals cost of capital
b. $30,000. b. greater than 1 negative less than cost of capital
c. $20,000. d 15. An investment with a positive NPV also has c. less than 1 negative less than cost of capital
d. $12,000. a. a positive profitability index. d. less than 1 positive less than cost of capital
b. a profitability index of one. d 23. Which of the following combinations is NOT possible?
c 10. Not-for-profit entities c. a profitability index less than one. Profitability Index NPV IRR
a. cannot use capital budgeting techniques because profitability is d. a profitability index greater than one. ------------------- -------- --------------------------
irrelevant to them. a. greater than 1 positive more than cost of capital
b. cannot use discounted cash flow techniques because the time b 16. Classifying an asset in a MACRS life category is based on b. equals 1 zero equals cost of capital
value of money is irrelevant to them. a. useful life estimated by the company. c. less than 1 negative less than cost of capital
c. might have serious problems in quantifying the benefits expected b. asset depreciation range (ADR) guidelines. d. less than 1 positive less than cost of capital
from an investment. c. the cost of the asset.
d. should use the IRR method to make investment decisions. d. any of the above factors. b 24. In capital budgeting, sensitivity analysis is used
a. to determine whether an investment is profitable.
c 11. A major difference between an investment in working capital and d 17. Which of the following makes investments more desirable than b. to see how a decision would be affected by changes in variables.
one in depreciable assets is that they had been? c. to test the relationship of the IRR and NPV.
a. an investment in working capital is never returned, while a. An increase in the income tax rate. d. to evaluate mutually exclusive investments.

22
 a. has a payback period longer than its life.
b 25. A unique feature of the analysis of a replacement decision is that d 31. An investment whose profitability index is 1.00 b. has a negative profitability index.
a. the analysis considers total rather than differential costs. a. has an IRR equal to the prevailing interest rate. c. must be rejected.
b. the amount used as the cost of the investment is not likely to b. returns to the company only the cash outlay for the investment. d. doesn't necessarily fit any of the above descriptions.
equal the price to be paid for the new asset. c. has a payback period equal to its useful life.
c. the time value of money is ignored. d. has an NPV of zero. c 38. A company evaluates a project using straight-line depreciation
d. such decisions seldom involve cash flows. over its 10-year estimated useful life and then reevaluates it
a 32. In connection with a capital budgeting project, an investment in using a 7-year MACRS class life. The second analysis will
a 26. Because of idle capacity, a company is considering two assets for working capital is normally recovered show
sale. They are identical in all respects except that asset A has a. at the end of the project's life. a. a lower IRR for the project.
a higher tax basis than asset B. Only one need be sold now b. in the first year of the project's life. b. the same NPV and IRR for the project.
and the market price is the same for both assets. Which of c. evenly through the project's life. c. a higher NPV for the project.
the following is true? d. when the company goes out of business. d. lower total cash flows over the 10 years.
a. The cash flow is greater from selling asset A.
b. The cash flow is greater from selling asset B. b 33. For investments that have only costs (no revenues or cost a 39. Assuming that a project has already been evaluated using the
c. The cash flow is the same no matter which one is sold. savings), an appropriate decision rule is to accept the project following techniques, the evaluation under which technique
d. It is not possible to determine how the cash flows from sales of that has the is least likely to be affected by an increase in the estimated
the assets will differ. a. longest payback period. residual value of the project?
b. lowest present value of cash outflows. a. Payback period.
a 27. If the tax law were changed so that owners of apartment buildings c. higher present value of future cash outflows. b. IRR.
had to depreciate them over 50 years instead of the current d. lowest internal rate of return. c. NPV.
31.5 years, d. PI.
a. rents would rise. b 34. The cash inflow from the return of an investment in working
b. rents would fall because annual depreciation charges would fall. capital is d 40. Qualitative factors can influence managers to
c. rents would stay about the same. a. adjusted for taxes due. a. accept an investment project having negative NPV.
d. more people would invest in apartment buildings. b. discounted to present value. b. reject an investment project having an IRR greater than the
c. ignored if any depreciable assets also involved in the project have company's cutoff rate.
b 28. Which statement could express the results of a sensitivity analysis no expected residual value. c. raise the "ranking" of an investment project.
of an investment decision? d. not real. d. take any of the above courses of action.
a. The NPV of the project is $50,000.
b. A 5% decline in volume will make the project unprofitable. d 35. NPV is appropriate to use to analyze which decision relating to a a 41. The replacement decision is
c. This project ranks third out of the five available. joint-products company? a. an example of a decision among mutually exclusive alternatives.
d. This project does not meet the cutoff rate of return. a. Whether or not to sell facilities now used for additional processing b. best arrived at by using the total-project rather than the
of one of the joint products. differential approach.
c 29. XYZ Co. is adopting just-in-time principles. When evaluating an b. Whether or not to acquire facilities needed for additional c. devoid of qualitative issues.
investment project that would reduce inventory, how should processing of one of the joint products. d. none of the above.
XYZ treat the reduction? c. Whether or not to sell facilities now used to operate the joint
a. Ignore it. process. c 42. Acme is considering the sale of a machine with a book value of
b. Decrease the cost of the investment and decrease cash flows at d. All of the above. $160,000 and 3 years remaining in its useful life. Straight-line
the end of the project's life. depreciation of $50,000 annually is available. The machine
c. Decrease the cost of the investment. d 36. If X Co. expects to get a one-year bank loan to help cover the has a current market value of $200,000. What is the cash
d. Decrease the cost of the investment and increase the cash flow at initial financing of capital project Q, the analysis of Q should flow from selling the machine if the tax rate is 40%?
the end of the project's life. a. offset the loan against any investment in inventory or receivables a. $50,000
required by the project. b. $160,000
b 30. Which of the following combinations of capital budgeting b. show the loan as an increase in the investment. c. $184,000
techniques includes only discounted cash flow techniques? c. show the loan as a cash outflow in the second year of the project's d. $200,000
a. Book rate of return, payback, and profitability index. life.
b. NPV, IRR, and profitability index. d. ignore the loan. c 43. Hoff is considering the sale of a machine with a book value of
c. IRR, payback, and NPV. $160,000 and 3 years remaining in its useful life. Straight-line
d. Profitability index, NPV, and payback. d 37. A project that has a negative NPV depreciation of $50,000 annually is available. The machine

23
 has a current market value of $100,000. What is the cash b. between zero and one. T 5. The only costs and revenues relevant to a replacement decision are
flow from selling the machine if the tax rate is 40%? c. greater than one. those that will change if a replacement is made.
a. $50,000 d. cannot be determined without more information.
b. $100,000 T 6. Both the incremental and the total-project approaches to analyzing
c. $124,000 b 49. Portage Press Company is considering replacing a machine with a a replacement decision should yield the same decision.
d. $160,000 book value of $200,000, a remaining useful life of 5 years,
and annual straight-line depreciation of $40,000. The F 7. Both the IRR and the book rate of return methods of analyzing
a 44. Altoona Company is considering replacing a machine with a book existing machine has a current market value of $200,000. investments should yield the same decision.
value of $200,000, a remaining useful life of 4 years, and The replacement machine would cost $300,000, have a 5-
annual straight-line depreciation of $50,000. The existing year life, and save $100,000 per year in cash operating costs. F 8. If the payback period of an investment is shorter than its life, its
machine has a current market value of $175,000. The If the replacement machine would be depreciated using the profitability index is greater than l.
replacement machine would cost $320,000, have a 4 year straight-line method and the tax rate is 40%, what would be
life, and save $100,000 per year in cash operating costs. If the increase in annual net cash flow if the company replaces T 9. When compared with straight-line depreciation, using MACRS will
the replacement machine would be depreciated using the the machine? result in a larger NPV.
straight-line method and the tax rate is 40%, what would be a. $60,000
the increase in annual income taxes if the company replaces b. $68,000 F 10. IRR and book rate of return will usually yield the same value for an
the machine? c. $76,000 investment.
a. $28,000 d. $84,000
b. $40,000 CHAPTER 9: RESPONSIBILITY ACCOUNTING
c. $42,000 b 50. Winneconne Company is considering replacing a machine with a
d. $64,000 book value of $400,000, a remaining useful life of 5 years, Multiple Choice
and annual straight-line depreciation of $80,000. The
b 45. An investment opportunity costing $300,000 is expected to existing machine has a current market value of $400,000. c 1. Goal congruence exists when
yield net cash flows of $100,000 annually for five years. The The replacement machine would cost $550,000, have a 5- a. the goals of the company harmonize with each other.
profitability index of the investment at a cutoff rate of 14% year life, and save $75,000 per year in cash operating costs. b. the company's managers are pursuing their own goals effectively.
would be If the replacement machine would be depreciated using the c. the company's managers are pursuing the goals of the company.
a. 3.0. straight-line method and the tax rate is 40%, what would be d. all of the above are true.
b. 1.14. the net investment required to replace the existing
c. 0.33. machine? c 2. Goal congruence is most likely to result when
d. 14%. a. $90,000 a. reports to managers include all costs.
b. $150,000 b. managers' behavior is affected by the criteria used to judge their
d 46. A project has a NPV of $30,000 when the cutoff rate is 10%. The c. $330,000 performances.
annual cash flows are $41,010 on an investment of d. $550,000 c. performance evaluation criteria encourage behavior in the
$100,000. The profitability index for this project is company's best interests as well as in the manager's
a. 1.367. best interests.
b. 3.333. True-False d. a manager knows the criteria used to judge his or her
c. 2.438. performance.
d. 1.300. T 1. The higher the IRR on an investment project, the higher its
profitability index. d 3. In responsibility accounting the most relevant classification of costs
is
c 47. A project has an IRR in excess of the cost of capital. The F 2. If the payback period of an investment project is shorter than its a. fixed and variable.
profitability index for this project would be life, the project's profitability index is greater than 1. b. incremental and nonincremental.
a. less than zero. c. discretionary and committed.
b. between zero and one. F 3. If a company has decided that a certain task must be performed d. controllable and noncontrollable.
c. greater than one. and three machines accomplish that task, the machine with
d. cannot be determined without more information. the lowest initial cash outlay should be selected. c 4. Which of the following is critically important for a responsibility
accounting system to be effective?
b 48. A project has an IRR less than the cost of capital. The profitability T 4. An investment with an IRR greater than cost of capital has a a. Each employee should receive a separate performance report.
index for this project would be profitability index greater than 1. b. Service department costs should be allocated to the operating
a. less than zero. departments that use the service.

24
 c. Each manager should know the criteria used for evaluating his or c. only useful in a segment that deals with outsiders as well as with
her performance. other segments of the same company. b 18. Which of the following costs is LEAST likely to appear on the
d. The details on the performance reports for individual managers d. the amount charged by a cost center for a service performed for a performance report for the foreman of a production
should add up to the totals on the report to their profit center. department?
supervisor. a. Wages of direct laborers.
c 12. The cost allocation policy most likely to encourage use of a service b. Rent on machinery used in department.
c 5. Which of the following items is LEAST likely to appear on the is based on c. Repairs to machinery used in department.
performance report of the manager of a product line? a. budgeted total costs of the service department. d. Cost of materials used.
a. Variable manufacturing costs for products in the line. b. actual total costs of the service department.
b. Selling expenses for the line. c. budgeted variable costs for the service department. d 19. ABC Company operates a factory that makes components for
c. A share of company-wide advertising. d. actual variable costs for the service department. other ABC factories to assemble. The factory could be
d. Revenues from the line. treated as
c 13. Which of the following statements is true? a. a cost center.
b 6. The sequence that reflects increasing breadth of responsibility is a. A company changes its total income when it changes the bases b. an artificial profit center.
a. cost center, investment center, profit center. used to allocate indirect costs. c. an investment center.
b. cost center, profit center, investment center. b. A company should select an allocation basis so as to raise or lower d. any of the above.
c. profit center, cost center, investment center. reported income on given products.
d. investment center, cost center, profit center. c. A company's total income will remain unchanged no matter how d 20. For reports to follow the principles of responsibility accounting,
indirect costs are allocated. which of the following must be true?
a 7. The criteria used for evaluating performance d. Costs should be allocated on an "ability-to-bear" basis. a. Each segment of the entity is an artificial profit center.
a. should be designed to help achieve goal congruence. b. The company is decentralized.
b. can be used only with profit centers and investment centers. a 14. If a company allocates costs of a service department to other c. The company uses transfer prices.
c. should be used to compare past performance with current departments, it should d. The reports show controllable costs separately from
performance. a. consider the likely effects of the allocations on the use of the noncontrollable costs.
d. motivate people to work in the company's best interests. services.
b. use the method that best reflects the relative sizes of the c 21. The effective use of responsibility accounting requires that
b 8. A balanced scorecard approach to performance measurement departments. performance reports for cost centers
a. can only be used in profit or investment centers. c. turn the service department into an investment center. a. show only variable costs.
b. balances financial measures with nonfinancial measures. d. allocate only the fixed costs of the service department. b. show a fair share of allocated costs.
c. uses only qualitative data to evaluate performance. c. distinguish between controllable and noncontrollable costs.
d. uses budgeted data rather than historical data. a 15. If a computer department does work for other departments, d. show a fair share of revenues attributable to the center.
charging a flat price per hour, the computer department is
b 9. If a company has a favorable sales volume variance, its a. an artificial profit center. b 22. Criteria for evaluating performance should be carefully selected
a. sales price variance is also favorable. b. a cost center. because
b. total contribution margin might be less than planned. c. an investment center. a. they must be approved by the IRS.
c. total contribution margin will be more than planned. d. none of the above. b. a manager's behavior can be affected by the criteria used to judge
d. income will be positive. his or her performance.
a 16. The WORST method of allocating service department costs is c. managers may find out what they are.
c 10. Transfer prices a. to allocate total actual costs based on actual use of the service. d. stockholders inquire about them at annual meetings.
a. reduce employee turnover. b. to allocate total budgeted costs based on long-term expected use
b. are necessary for investment centers. of the service. d 23. Which of the following is NOT a good reason for allocating indirect
c. should encourage the kinds of behavior that upper-level c. to allocate total budgeted costs based on actual use of the service. costs to operating departments?
management wants. d. none of the above, because all the above are equally undesirable. a. To remind managers of the need to cover indirect costs.
d. are not used for departments with high amounts of fixed costs. b. So that operating managers will encourage service department
b 17. As a general rule, the best transfer price to use to transfer the managers to keep costs down.
b 11. A transfer price is costs of a service center to an operating department is c. To encourage managers to use services wisely.
a. an accounting device to turn profit centers into investment a. the price charged by an outside company for the same service. d. To determine the true costs of operating departments.
centers. b. the price that encourages goal congruence. b 24. An artificial profit center
b. the price charged by one segment of the company for goods or c. one that is based on budgeted variable cost. a. has no investment.
services provided to another segment. d. one that is based on budgeted total cost. b. does not provide its goods or services outside the entity.

25
 c. cannot control its costs. pay for the services they use. departments.
d. could not be operated as a cost center. b. To remind managers of the need to cover indirect costs. d. alternative organizational structures.
c. To encourage managers to use more services.
c 25. A responsibility center is d. The costs are not controllable by the operating departments. b 39. Cascade Company had the following results in June.
a. any department.
b. any manager. d 32. Which of the following is a good reason for NOT allocating indirect Planned Actual
c. any area of activity for which a manager is responsible. costs to operating departments? ------- -------
d. only large departments. a. To remind managers that revenues must cover indirect costs. Sales $80,000 $78,900
b. To recognize that operating departments benefit from the Variable costs 50,000 48,500
a 26. ABC's actual selling price was less than planned and actual unit services. ------- -------
volume more than planned. Therefore, c. To encourage managers to use services wisely. Contribution margin $30,000 $30,400
a. ABC had a favorable sales volume variance. d. Because allocating them might prompt operating managers to use ======= =======
b. ABC's total contribution margin was more than planned. nonincremental costs in making decisions.
c. ABC had a favorable sales price variance. Planned sales were 10,000 units; actual sales were 9,700
d. ABC's actual total sales equaled planned total sales. b 33. A profit center is a responsibility center units. The sales price variance is
a. that sells its output outside the company. a. $1,100 U.
b 27. The term "dual rates" refers to b. whose manager is responsible for both revenues and costs. b. $1,000 F.
a. allocating costs to several operating departments. c. that provides a service to other responsibility centers. c. $900 U.
b. allocating fixed costs based on capacity requirements and variable d. within an investment center. d. $400 F.
costs based on use.
c. allocating both actual costs and budgeted costs. d 34. An investment center is c 40. Cascade Company had the following results in June.
d. using the budgeted rate to allocate some costs, the actual rate to a. larger than a cost center.
allocate others. b. larger than a profit center. Planned Actual
c. seldom the responsibility of a single manager. ------- -------
a 28. Which of the following methods of allocating the costs of service d. not truthfully characterized in any of the above statements. Sales $80,000 $78,900
departments provides the broadest recognition of Variable costs 50,000 48,500
departments served? a 35. The managerial level at which a particular cost is controllable ------- -------
a. Reciprocal allocation. a. varies from company to company. Contribution margin $30,000 $30,400
b. Step-down allocation. b. depends on whether the cost is fixed or variable. ======= =======
c. Direct allocation. c. depends on whether the cost is direct or indirect.
d. Arbitrary allocation. d. is irrelevant to the preparation of performance reports. Planned sales were 10,000 units, actual sales were 9,700
units. The sales volume variance is
d 29. Which of the following is a good reason for allocating indirect d 36. If at all possible, a manager's performance report should a. $1,100 U.
costs to operating departments? a. consider the results that the manager can control. b. $1,000 F.
a. The company could lose money if the operating departments do b. consider only the results that the manager can control. c. $900 U.
not pay for the services they use. c. not be influenced by the results of decisions made by other d. $400 F.
b. To remind managers of the need to cover indirect costs. managers.
c. To encourage managers to use more services. d. reflect all of the above characteristics. b 41. Certainty Stores has three stores and one service center. The
d. To determine the true costs of operating departments. percentage of services used in the current year are Store X,
d 37. Comparing budgeted and actual amounts is important 35%; Store Y, 40%; and Store Z, 25%. The service center costs
b 30. When a manager takes an action that benefits his or her in evaluating the performance of were budgeted at $160,000 fixed and $240,000 variable.
responsibility center, but not the company as a whole, a. the manager of a cost center. Actual fixed costs were $140,000 and actual variable costs
a. it is a non-controllable action. b. the manager of a profit center. were $270,000. Actual service center costs are allocated to
b. there is a lack of goal congruence. c. the manager of an investment center. the stores based on actual usage of the service center.
c. the center must be an artificial profit center. d. any manager. Service center costs allocated to Store Y are
d. the manager should be fired. a. $64,000.
c 38. Direct, step-down, and reciprocal are names for b. $164,000.
d 31. Which of the following is a good reason for NOT allocating indirect a. the allocation methods most likely to produce goal congruence. c. $410,000.
costs to operating departments? b. transfer-pricing methods. d. some other number.
a. The company saves money if the operating departments do not c. methods for allocating costs of service departments to operating

26
c 42. Certainty Stores has three stores and one service center. The c. $112.50. to Store B are
percentage of services used in the current year are Store X, d. $130. a. $350,000.
35%; Store Y, 40%; and Store Z, 25%. The service center costs b. $372,500.
were budgeted at $350,000 fixed and $250,000 variable. c 45. Wabasha Co. has two service departments (A and B) and two c. $400,000.
Actual fixed costs were $370,000 and actual variable costs producing departments (X and Y). Data provided are as d. $550,000.
were $280,000. Budgeted service center costs are allocated follows:
to the stores based on actual usage of the service center. d 48. Basin Co. has two service departments (A and B) and two
Service center costs allocated to Store Y are Service Depts. Operating Depts. producing departments (X and Y). Data provided are as
a. $140,000. -------------- --------------- follows:
b. $148,000. A B X Y
c. $240,000. ------- ------ ------ ------ Service Depts. Operating Depts.
d. $260,000. Direct costs $150 $300 A B X Y
Services performed by Dept. A 40% 40% 20% ------- ------ ------ ------
c 43. Wabasha Co. has two service departments (A and B) and two Services performed by Dept. B. 20% 70% 10% Direct costs $200 $400
producing departments (X and Y). Data provided are as Wabasha uses the reciprocal method to allocate service Services performed by Dept. A 20% 40% 40%
follows: department costs. The service department cost allocated to Services performed by Dept. B. 30% 60% 10%
Department Y is
Service Depts. Operating Depts. a. $60. Basin uses the direct method to allocate service department
-------------- --------------- b. $75. costs. The service department cost allocated to Department
A B X Y c. $85. X is
------- ------ ------ ------ d. $135. a. $280.
Direct costs $240 $400 b. $300.
Services performed by Dept. A 40% 40% 20% d 46. Olson Stores has three stores and one service center. The c. $320.
Services performed by Dept. B. 20% 70% 10% percentage of services used in the current year are Store A, d. $443.
40%; Store B, 25%; and Store C, 45%. The expected long-
Wabasha uses the direct method to allocate service term budgeted usages are Store A, 30%; Store B, 30%; and a 49. Basin Co. has two service departments (A and B) and two
department costs. The service department cost allocated to Store C, 40%. The service center costs were budgeted at producing departments (X and Y). Data provided are as
Department Y is $450,000 fixed and $550,000 variable. Actual fixed costs follows:
a. $88. were $430,000 and actual variable costs were $570,000.
b. $96. Olson allocates the budgeted variable costs of the central Service Depts. Operating Depts.
c. $130. purchasing unit based on actual use of the unit's services, A B X Y
d. $240. and allocates budgeted fixed costs based on expected long- ------- ------ ------ ------
term use of the unit's services. Service center costs allocated Direct costs $200 $400
c 44. Wabasha Co. has two service departments (A and B) and two to Store A are Services performed by Dept. A 20% 40% 40%
producing departments (X and Y). Data provided are as a. $135,000. Services performed by Dept. B. 30% 60% 10%
follows: b. $220,000.
c. $300,000. Basin uses the step-down method to allocate service
Service Depts. Operating Depts. d. $355,000. department costs. Department A costs are allocated first.
-------------- --------------- The service department cost allocated to Department X is
A B X Y b 47. Olson Stores has three stores and one service center. The a. $457.
------- ------ ------ ------ percentage of services used in the current year are Store A, b. $443.
Direct costs $250 $400 45%; Store B, 35%; and Store C, 20%. The expected long- c. $320.
Services performed by Dept. A 40% 40% 20% term budgeted usages are Store A, 30%; Store B, 40%; and d. $300.
Services performed by Dept. B. 20% 70% 10% Store C, 30%. The service center costs were budgeted at
$450,000 fixed and $550,000 variable. Actual fixed costs c 50. Basin Co. has two service departments (A and B) and two
Wabasha uses the step-down method to allocate service were $430,000 and actual variable costs were $570,000. producing departments (X and Y). Data provided are as
department costs. Department A costs are allocated first. Olson allocates the budgeted variable costs of the central follows:
The service department cost allocated to Department Y is purchasing unit based on actual use of the unit's services,
a. $90. and allocates budgeted fixed costs based on expected long- Service Depts. Operating Depts.
b. $97.50. term use of the unit's services. Service center costs allocated A B X Y

27
 ------- ------ ------ ------ Multiple Choice b. be computed so that the total profits of all the divisions equals
Direct costs $200 $400 the total profit for the company.
Services performed by Dept. A 20% 40% 40% c 1. Both ROI and RI can be used for performance evaluation of c. be based on the principle of controllability.
Services performed by Dept. B. 30% 60% 10% a. cost centers. d. be based on cash flows rather than accrual basis accounting.
b. profit centers.
Basin uses the reciprocal method to allocate service c. investment centers. c 8. Divisional profit
department costs. The service department cost allocated to d. all of the above. a. is computed in essentially the same way as is income for the
Department X is company as a whole.
a. $300. b 2. The best transfer price is usually b. should include a deduction for an appropriate share of the
b. $340. a. actual cost plus a percentage markup. company's common costs.
c. $417. b. a reliable market price. c. normally includes the results of intracompany sales.
d. $468. c. budgeted full cost plus a percentage markup. d. is not affected by depreciation methods.
d. budgeted variable cost plus a percentage markup.
True-False d 9. Using replacement costs for assets in computing ROI and RI
d 3. This year Division A made sales to Division B at a higher transfer a. is prohibited because it violates generally accepted accounting
F 1. All responsibility centers are either natural or artificial. price than was used last year. All other things equal, which of principles.
the following is true? b. will increase both ROI and RI for a division.
F 2. The sales volume variance is the difference between actual and a. A's profit this year should be about the same as last year. c. is unfair to divisional managers.
planned unit sales multiplied by the actual contribution b. B's profit this year should be about the same as last year. d. is less popular than the use of book values in those computations.
margin per unit. c. The company's total profit should be higher this year than last
year. c 10. Using residual income for evaluating performance
F 3. The principle of controllability is less important to the internal d. The company's total profit should be about the same this year as a. penalizes managers whose segments have low ROIs.
reporting for a centralized company than for a decentralized last year. b. penalizes managers of relatively large segments.
one. c. encourages managers to maximize dollars of profit after a
b 4. Goal congruence is especially relevant to all of the following required ROI has been achieved.
F 4. Allocated costs are less important to the internal reporting for a EXCEPT d. encourages managers to maximize ROI for the company.
centralized company than for a decentralized company. a. setting transfer prices for an artificial profit center.
b. quoting prices for outside customers of an investment center. c 11. Which item is usually NOT relevant to a decision by a divisional
F 5. Achieving goal congruence is less important in a centralized c. selecting costs to be included in performance reports. manager to reduce a transfer price to meet a price offered to
organization than in a decentralized one. d. setting transfer prices for an investment center. another division by an outside supplier?
a. Opportunity cost.
T 6. It is not always possible to separate the variable and fixed d 5. For a division, ROI b. Variable manufacturing costs.
components of actual costs. a. is usually less than ROI for the company as a whole. c. Fixed divisional overhead.
b. eliminates the distortion that cost allocation can produce in other d. The price offered by the outside supplier.
F 7. A profit center will always have sales to outside customers. measures of performance.
c. usually cannot be computed if divisional assets are valued at their c 12. Division A earns $6,000 on an investment of $36,000. On an
T 8. The sales price variance is the difference between the actual selling replacement costs. investment of $84,000, Division B earns $12,000. Which of
price and the planned selling price multiplied by actual units d. is a performance measure inferior, for some purposes, to residual the following is true?
sold. income. a. Division A's profits are too low.
b. If there are further costs that are common to both divisions, the
T 9. The direct method of allocating service department costs ignores a 6. Divisional ROI is usually total company's ROI is probably greater than 15%.
all of the interactions between service departments. a. higher than that for the company as a whole. c. If the minimum desired ROI is 10%, Division A's residual income is
b. lower than that for an outside company operating in the same lower than that of Division B.
F 10. The reciprocal method of allocating service department costs industry. d. ROI for Division B is greater than ROI for Division A.
considers only the usage by the producing departments in c. lower than return on sales for the division.
determining the allocations. d. lower than that for the enterprise as a whole. d 13. Which equation describes ROI? (I = investment, S = sales, and
N = income)
c 7. Divisional profits should a. S/I
CHAPTER 10: DIVISIONAL PERFORMANCE MEASUREMENT a. exclude revenues and expenses related to dealings with other b. S/I x N
divisions within the same enterprise. c. S/I x S/N

28
 d. N/S x S/I b. ROS decreases.
d 21. The worst transfer-pricing method is to base the prices on c. ROI increases.
a 14. Which equation describes residual income? (I = investment, N = a. market prices. d. ROI could increase or decrease.
income, and K = minimum required ROI) b. budgeted variable costs.
a. N - (K x I) c. budgeted total costs. a 29. Which transfer price is ideal for the company when the selling
b. (K x I) - N d. actual total costs. division is at capacity?
c. N/I - K a. Market price.
d. (K x I) - (N/I) d 22. All other things remaining constant, if a division doubles its b. Incremental cost.
investment turnover, its ROI will c. Budgeted full cost.
c 15. If Division C has a 10% return on sales, income of $10,000, and an a. decrease. d. Actual variable cost plus a percentage profit.
investment turnover of 4 times, its sales are b. remain constant.
a. $10,000. c. increase. c 30. From the standpoint of the company, the important question in
b. $40,000. d. double. transfer pricing is
c. $100,000. a. what is fair to the divisions.
d. $400,000. c 23. Residual income b. how to determine the profit of the divisions.
a. is always the best measure of divisional performance. c. whether or not the transfer should take place.
b 16. If Division C has a 10% return on sales, income of $10,000, and an b. is not as good a measure of performance as ROI. d. when the transfer should be made.
investment turnover of 4 times, divisional investment is c. overcomes some of the problems associated with ROI.
a. $10,000. d. cannot be used by divisions that deal with others in the same d 31. The ROI of Division A relative to that of Division B can be
b. $25,000. company. influenced by
c. $40,000. b 24. If two divisions earn the same ROI and RI, which of the following is a. the industry in which each division operates.
d. $100,000. true? b. the transfer price used for sales to Division B.
a. Their managers must be about equally skillful. c. the tax structures of the countries in which the divisions operate.
c 17. If Division C has a 10% return on sales, income of $10,000, and an b. Their incomes and investments must be the same. d. all of the above.
investment turnover of 4 times, its ROI is c. Both divisions are doing as well as they should be.
a. 5000%. d. All of the above. c 32. Considering liabilities in computing divisional investment
b. 100%. a. encourages managers of divisions to pay their bills faster.
c. 40%. c 25. Which of the following is most likely to be included in calculating b. discourages managers of divisions from acquiring long-term
d. 10%. divisional profit? financing.
a. Interest on corporate debt. c. raises divisional ROI above what it would otherwise be.
b 18. If a division's ROI and the minimum required ROI are the same, b. Income taxes. d. is a bad managerial practice.
the division's residual income is c. Sales to other divisions within the company.
a. positive. d. A share of corporate administration expenses. d 33. Interdivisional sales
b. zero. a. lower the company's public image.
c. negative. b 26. If sales increase, while income and investment remain constant, b. minimize income taxes.
d. none of the above. which of the following is true? c. are ignored when computing divisional ROI.
a. Investment turnover decreases. d. do none of the above.
a 19. If residual income for Division Q of Company Z is negative, which b. ROS decreases.
of the following is true? c. ROI increases. a 34. Which of the following is true about transfer prices for sales
a. Q's ROI is less than Z's minimum required ROI. d. ROI could increase or decrease. between divisions located in different countries?
b. Q's ROI equals Z's minimum required ROI. a. They should consider the tax structures in the two countries.
c. Q's ROI is higher than Z's minimum required ROI. c 27. Compared to a jewelry store, a supermarket has b. They are usually set by the governments of the two countries.
d. None of the above. a. higher margin and higher turnover. c. They cannot affect the total income of the company.
b. higher margin and lower turnover. d. All of the above.
b 20. Market-based transfer prices are best for c. lower margin and higher turnover.
a. the company when the selling division is operating below d. lower margin and lower turnover. d 35. Multinational companies face special problems in which of the
capacity. following areas of managerial practice?
b. the company when the selling division is operating at capacity. c 28. If income increases while sales and investment remain constant, a. Performance evaluation.
c. the buying division if it is operating at capacity. which of the following is true? b. Transfer prices.
d. the buying division. a. Investment turnover increases. c. Allocating common costs.

29
 d. All of the above. c 41. Scottso Division has the following results for the year: XYZ's overall profit if Alcatraz ACCEPTS the outside price and
Capone continues to buy inside?
b 36. Which of the following describes the computation of ROI? Revenues $1,080,000 a. no change
a. Return on Sales x Investment Variable expenses 440,000 b. $140,000 decrease in XYZ profits
b. Investment Turnover x Return on Sales Fixed expenses 400,000 c. $80,000 decrease in XYZ profits
c. Income - (Investment x Minimum RI) d. $40,000 increase in XYZ profits
d. Sales x Investment Turnover Total divisional assets are $1,600,000. The company's
minimum required rate of return is 14 percent. Return on c 46. If the investment turnover decreased by 20% and ROS decreased
b 37. If the investment turnover increased by 20% and ROS decreased sales for Scottso is by 30%, the ROI would
by 30%, the ROI would a. 1.5%. a. increase by 30%.
a. increase by 20%. b. 15.0%. b. decrease by 20%.
b. decrease by 16%. c. 22.2%. c. decrease by 44%.
c. increase by 4%. d. 67.5%. d. none of the above.
d. none of the above.
d 42. Monrovia Division has net income of $240,000 on sales of c 47. If the investment turnover increased by 10% and ROS increased by
b 38. Scottso Division has the following results for the year: $3,200,000. If the investment is $1,600,000 what is asset 20%, the ROI would
turnover? a. increase by 10%.
Revenues $1,080,000 a. 15.0% b. increase by 20%.
Variable expenses 440,000 b. 7.5% c. increase by 30%.
Fixed expenses 400,000 c. 10.0 d. increase by 32%.
d. 2.0
Total divisional assets are $1,600,000. The company's b 48. Durand Division has the following results for the year:
minimum required rate of return is 14 percent. Residual a 43. Monrovia Division has net income of $240,000 on sales of
income for Scottso is $3,200,000. If the investment is $1,600,000 what is ROI? Revenues $470,000
a. $(64,000). a. 15.0% Net income 130,000
b. $16,000. b. 7.5%
c. $151,200. c. 10.0 Total divisional assets are $625,000. The company's
d. $224,000. d. 2.0 minimum required rate of return is 12 percent. Residual
income for Durand is
c 39. Scottso Division has the following results for the year: b 44. Alcatraz Division of XYZ Corp. sells 80,000 units of part X to the a. $3,760.
outside market. Part X sells for $40, has a variable cost of b. $55,000.
Revenues $1,080,000 $22, and a fixed cost per unit of $10. Alcatraz has a capacity c. $73,600.
Variable expenses 440,000 to produce 100,000 units per period. Capone Division d. cannot be determined without further information.
Fixed expenses 400,000 currently purchases 10,000 units of part X from Alcatraz for
$40. Capone has been approached by an outside supplier c 49. Durand Division has the following results for the year:
Total divisional assets are $1,600,000. The company's willing to supply the parts for $36. What is the effect on
minimum required rate of return is 14 percent. Return on XYZ's overall profit if Alcatraz REFUSES the outside price and Revenues $470,000
investment for Scottso is Capone decides to buy outside? Net income 130,000
a. 54%. a. no change
b. 18%. b. $140,000 decrease in XYZ profits Total divisional assets are $625,000. The company's
c. 15%. c. $80,000 decrease in XYZ profits minimum required rate of return is 12 percent. Return on
d. 10%. d. $40,000 increase in XYZ profits investment for Durand is
a. 9.0%.
b 40. Monrovia Division has net income of $240,000 on sales of a 45. Alcatraz Division of XYZ Corp. sells 80,000 units of part X to the b. 18.3%.
$3,200,000. If the investment is $1,600,000 what is ROS? outside market. Part X sells for $40, has a variable cost of c. 20.8%.
a. 15.0% $22, and a fixed cost per unit of $10. Alcatraz has a capacity d. 27.7%.
b. 7.5% to produce 100,000 units per period. Capone Division
c. 10.0 currently purchases 10,000 units of part X from Alcatraz for d 50. Durand Division has the following results for the year:
d. 2.0 $40. Capone has been approached by an outside supplier
willing to supply the parts for $36. What is the effect on Revenues $470,000

30
 Net income 130,000 b 9. Filter Company's budget for overhead costs is:
d 2. A major advantage of using standard costs is that
Total divisional assets are $625,000. The company's a. they are easier to compute than actual costs. total overhead cost = $50,000 + ($4 x direct labor
minimum required rate of return is 12 percent. Return on b. they are lower than actual costs. hours)
sales for Durand is c. products with standard costs can be sold at lower prices.
a. 9.0%. d. they provide information for control purposes. Standard direct labor time is 1.5 hours per unit of product.
b. 18.3%. The standard wage rate is $6 per hour. Standard variable
c. 20.8%. a 3. Setting standards overhead cost for a unit of product is
d. 27.7%. a. has important behavioral implications. a. $4.00.
b. is largely a matter of calculating rates and quantities. b. $6.00.
True-False c. should be done to make them as tight as possible. c. $9.00.
d. is done only for manufacturing activities. d. $10.00.
F 1. Multinational companies cannot use transfer prices.
d 4. Which of the following is NOT a quantity variance? b 10. The major variance used in controlling fixed costs is the
T 2. Long-term debt is seldom considered in determining divisional ROI. a. Material use variance. a. efficiency variance.
b. Labor efficiency variance. b. budget variance.
F 3. The measure most commonly used for evaluating divisional c. Variable overhead efficiency variance. c. use variance.
performance is investment turnover. d. Fixed overhead budget variance. d. none of the above.

T 4. Allocating all common assets, liabilities, and costs to divisions does a 5. A major drawback to setting standards based on historical results is d 11. If the variable overhead standard is based on direct labor hours
not affect the ROI of the company as a whole. that such standards and actual hours worked exceed standard hours allowed, the
a. can perpetuate inefficiencies. result is
T 5. Using residual income as a criterion for evaluating divisional b. are harder to compute than are engineered standards. a. a favorable labor efficiency variance.
performance requires that the company establish a c. are usually too hard to meet because of inflation. b. an unfavorable variable overhead spending variance.
minimum desired rate of return on investment. d. are usually not well received by workers. c. a favorable variable overhead spending variance.
d. an unfavorable variable overhead efficiency variance.
F 6. Return on investment is the product of return on sales and b 6. Cascade Company, which has a $3 standard cost per unit and
inventory turnover. budgeted production at 1,000 units, actually produced 1,200 a 12. Control charts are used
units. Total standard cost for the period is a. to decide whether to investigate variances.
F 7. Return on investment for a multidivision company will be lower a. $3,000. b. to develop standard costs.
than the ROI for the division with the lowest ROI. b. $3,600. c. to calculate variances.
c. an amount that cannot be determined without knowing the d. for all of the above purposes.
T 8. Transfer prices equal to market prices are least appropriate when variances for the period.
the selling division has excess productive capacity. d. none of the above. c 13. An unfavorable labor efficiency variance
a. means that workers were inefficient and their supervisor did a
F 9. Multinational companies must use transfer prices based on actual c 7. Which variance is LEAST likely to be affected by hiring workers with poor job.
costs. less skill than those already working? b. causes a favorable variable overhead efficiency variance.
a. Material use variance. c. can result from an action taken by a manager other than the
F 10. Return on investment is defined as net income divided by b. Labor rate variance. supervisor of the workers.
stockholders' equity. c. Material price variance. d. should always be investigated and corrected.
d. Variable overhead efficiency variance.
CHAPTER 11: CONTROL AND EVALUATION OF COST CENTERS
c 8. Which variance is MOST likely to be affected by buying a more
Multiple Choice expensive material that produces less waste and is easier to d 14. The sum of the material price variance and material use variance
handle? always equals the difference between
c 1. The two general types of variable cost variances are the a. Labor rate variance. a. actual and standard material purchases.
a. rate variance and spending variance. b. Variable overhead spending variance. b. actual material purchases and standard material use.
b. price variance and budget variance. c. Direct labor efficiency variance. c. standard material purchases and standard material use.
c. price variance and quantity variance. d. Fixed overhead budget variance. d. none of the above pairs of amounts.
d. quantity variance and efficiency variance.

31
c 15. Which set of terms describes the same type of variance? b 28. Probably the best level at which to set standards is
a. Price variance, rate variance, use variance. b 21. Which formula calculates a use or efficiency variance? (AQ = a. historical performance.
b. Price variance, rate variance, efficiency variance. actual quantity of the factor, AP = actual price of the factor, b. currently attainable performance.
c. Use variance, efficiency variance, quantity variance. SQ = standard price of the factor, SQ = standard quantity of c. ideal performance.
d. Use variance, efficiency variance, spending variance. the factor) d. any of the above.
a. (AQ x AP) - (SQ x SP).
d 16. A product requires 0.60 standard labor hours, the standard labor b. (AQ x SP) - (SQ x SP). d 29. The use of ideal standards
rate is $10 per hour, and production was 300 units. Actual c. (AQ x AP) - (AQ x SP) a. motivates workers to perform well.
labor cost was $1,862 at $9.80 per hour. Which of the d. (SQ x SP) - (SQ x AP). b. results in mostly favorable variances.
following is true? c. is preferred by most managers.
a. The labor rate variance was $98 favorable. b 22. Using variances to evaluate performance d. can cause performance to suffer.
b. The labor rate variance was $62 unfavorable. a. is especially useful to JIT companies.
c. The labor efficiency variance was $62 unfavorable. b. can be misleading because of interdependence among variances. d 30. An 80% learning curve means that
d. The labor efficiency variance was $100 unfavorable. c. cannot be used with activity-based overhead standards. a. the incremental time for each unit is 80% of the time of the unit
d. all of the above. before it.
d 17. Cascade Company bought 10,000 pounds of material and used b. the cumulative average time is 80% of the cumulative average
9,500. The material price variance was $300 unfavorable b 23. Using activity-based costing in setting standards time at the previous unit.
and the standard price per pound is $3. The cost of a. is most valuable for direct labor standards. c. as production doubles, the incremental time for a unit is 80% of
materials purchased was b. should provide better variable overhead standards. the time at the previous doubling point.
a. $28,200 c. is unnecessary. d. as production doubles, the cumulative average time is 80% of the
b. $28,800 d. gives the same standards that traditional methods do. time at the previous doubling point.
c. $29,700
d. $30,300 c 24. A purchasing manager bought cheaper-than-normal materials that b 31. In which company is the learning effect probably most important?
are difficult to handle. Which combination of variances is a. A canner of orange juice.
c 18. The standard price of a material is $2 per pound. The company LEAST likely to be affected by this decision? b. A manufacturer of airplanes.
bought 2,000 pounds at $1.90 per pound and used 1,700 a. Material use and direct labor use. c. A highly automated chemical manufacturer.
pounds. Standard use was 1,800 pounds. The material price b. Material use, direct labor use, and variable overhead efficiency. d. A manufacturer of nails.
variance was c. Direct labor rate and variable overhead budget.
a. $170 favorable. d. Direct labor use and variable overhead efficiency. a 32. Which of the following is NOT a reason why some JIT operations
b. $180 favorable. do not use standards?
c. $200 favorable. d 25. Standard costs are useful for a. Standards are often set too tight for JIT operations.
d. $400 favorable. a. planning. b. Using standards can stifle continuous improvement.
b. control. c. Standards focus on cost centers, not on the entire manufacturing
c 19. A company made 1,200 units with a $550 favorable labor use c. performance evaluation. operation.
variance. There was no labor rate variance and actual labor d. all of the above. d. All of the above are reasons.
cost was $19,250. The actual wage rate was $11. Standard
labor time per unit is b 26. Which kinds of variances should be investigated? d 33. The role of activity-based costing in standard costs is to
a. 0.5 hours a. Those that are large and unfavorable. a. determine the standard material content of products.
b. 1.0 hour b. Those that are large and either favorable or unfavorable. b. find value-adding activities.
c. 1.5 hours c. All variances, despite their size. c. determine the variable overhead rate per direct labor hour.
d. 2.0 hours d. Only use variances. d. identify drivers of overhead costs.

a 20. Which formula calculates a price or rate variance? (AQ = actual b 27. The material price variance is calculated a 34. A company that uses activity-based costing to develop
quantity of the factor, AP = actual price of the factor, SQ = a. the same as the labor rate variance. standard costs
standard price of the factor, SQ = standard quantity of the b. on the quantity of materials bought, not the quantity used. a. will usually have more than one variable overhead
factor) c. on the quantity of materials used, not the quantity bought. component in its standard costs.
a. (AQ x AP) - (AQ x SP). d. by multiplying the difference between the actual and standard b. cannot compute variable overhead efficiency
b. (AQ x AP) - (SQ x AP). price of materials times the quantity of materials used. variances.
c. (AQ x SP) - (SQ x SP) c. will have less information about the profitability of
d. (AQ x SP) - (SQ x AP). individual products.

32
 d. all of the above. c. 1,160 units a 46. Chippewa paid $32,225 to direct labor for the production of 1,700
d. some other number units. Standards allow 3 labor hours per unit at a rate of
d 35. Advanced manufacturers $6.50 per hour. Actual hours totaled 5,150. The direct labor
a. are especially concerned with material price variances. b 41. Acme has a standard price of $6 per pound for materials. July's rate variance was
b. almost always seek out the least expensive vendors. results showed an unfavorable material price variance of $44 a. $1,250 favorable
c. use more materials than conventional manufacturers. and a favorable quantity variance of $228. If 1,066 pounds b. $925 favorable
d. are generally more concerned with quality and delivery than with were used in production, what was the standard quantity c. $325 favorable
price. allowed for materials? d. $325 unfavorable
a. 1,066
b 36. For a company whose variable overhead relates to direct labor, b. 1,104 d 47. Chippewa paid $32,225 to direct labor for the production of 1,700
the variable overhead efficiency variance c. 1,294 units. Standards allow 3 labor hours per unit at a rate of
a. results from efficient or inefficient use of variable overhead d. some other number $6.50 per hour. Actual hours totaled 5,150. The direct labor
elements. efficiency variance was
b. results from efficient or inefficient use of direct labor. a. $1,250 favorable
c. is always the same as the direct labor efficiency variance. c 42. Genco paid $78,800 to direct labor for the production of 1,500 b. $925 favorable
d. is more like a budget variance than a use variance. units. Standards allow 2 labor hours per unit at a rate of c. $325 favorable
$25.00 per hour. Actual hours totaled 2,900. The direct labor d. $325 unfavorable
b 37. Acme Company produced 500 units with a $50 unfavorable labor rate variance was
rate variance. The labor use variance was $180 favorable. a. $2,050 favorable a 48. Chetek Company has standard variable costs as follows:
Actual labor cost was $17,870. The standard wage rate was b. $3,800 favorable Materials, 3 pounds at $4.00 per pound
$9. Actual hours were c. $6,300 unfavorable $12.00
a. 1,520 d. some other number Labor, 2 hours at $10.00 per hour
b. 1,980 20.00
c. 2,000 a 43. Genco paid $78,800 to direct labor for the production of 1,500 Variable overhead, $7.50 per labor hour
d. 2,020 units. Standards allow 2 labor hours per unit at a rate of 15.00
$25.00 per hour. Actual hours totaled 2,900. The direct labor
a 38. Crunch Company expects a 90% learning curve. The first batch of a efficiency variance was $47.00
new product required 1,000 hours. The total time for the a. $2,500 favorable
first four batches should be b. $3,800 favorable During September, Chetek produced 5,000 units, using 9,640
a. 3,240 hours. c. $6,300 unfavorable labor hours at a total wage of $94,670 and incurring $78,600
b. 3,600 hours. d. some other number in variable overhead. The variable overhead budget variance
c. 4,000 hours. is
d. some other number of hours. c 44. Danner had a $550 favorable direct labor rate variance and a $720 a. $6,300 unfavorable
unfavorable efficiency variance. Danner paid $6,650 for 800 b. $3,600 unfavorable
c 39. Crunch Company expects a 90% learning curve. The first batch of a hours of labor. What was the standard direct labor wage c. $2,700 favorable
new product required 10 hours. The first four batches should rate? d. some other number
take an average of a. $8.10
a. 10 hours. b. $8.31 c 49. Barron Company has standard variable costs as follows:
b. 9 hours. c. $9.00 Materials, 3 pounds at $4.00 per pound
c. 8.1 hours. d. some other number $12.00
d. some other number of hours. Labor, 2 hours at $10.00 per hour
c 45. Jeter's Company had a $510 unfavorable direct labor rate variance 20.00
c 40. Acme has a standard of 15 parts of component X costing $1.50 and a $1,000 favorable efficiency variance. Jeter's standard Variable overhead, $7.50 per labor hour
each. Acme purchased 14,910 units of X for $21,950. Acme payroll was $11,200 at a standard wage of $10 per hour. 15.00
generated a $415 favorable price variance and a $3,735 What was the actual direct labor wage rate?
favorable quantity variance. If there were no changes in the a. $9.56 $47.00
component inventory, how many units of finished product b. $10.00
were produced? c. $10.50 During September, Barron produced 5,000 units, using 9,640
a. 994 units d. some other number labor hours at a total wage of $94,670 and incurring $78,600
b. 1,000 units in variable overhead. The variable overhead efficiency

33
 variance is a. materials, work in process, and finished goods. d. production was less than the level used to set the fixed overhead
a. $6,300 unfavorable b. materials, labor, and manufacturing overhead. application rate.
b. $3,600 unfavorable c. materials, labor, and finished goods.
c. $2,700 favorable d. materials, labor, and production costs. b 9. The principal reason for using more than one rate to apply
d. $3,300 favorable overhead is
a 2. A predetermined overhead rate CANNOT be used a. to keep the individual rates low.
c 50. Silver Bow manufactured the first batch of product in 100 a. if a company does not budget its overhead costs. b. that overhead costs are driven by more than one activity.
hours. The second batch took an additional 60 hours. What b. by a company that uses job-order costing. c. that such rates recognize the seasonal nature of some costs.
percent learning occurred? c. in a multiple-product company. d. to simplify recordkeeping.
a. 100% d. by a highly automated company where labor is a minor part of
b. 90% product cost. a 10. Activity-based overhead rates are more useful than a single plant-
c. 80% wide rate if
d. Cannot be determined with the information given. a 3. Assigning overhead to jobs using a predetermined overhead rate is a. overhead costs are driven by several activities.
called b. direct labor cost varies significantly from department to
True-False a. applying. department.
b. budgeting. c. all products require about the same amounts of all activities.
T 1. Standard costs are per-unit expressions of flexible budget c. product costing. d. manufacturing overhead costs are nearly all fixed.
allowances based on output. d. job-order costing.
c 11. Actual costing and normal costing differ in treating
F 2. The value of b, the exponent in the learning curve formula, is the d 4. Predetermined overhead rates are based on activity measured by a. materials cost.
learning rate. a. number of jobs. b. direct labor cost.
b. units of sales. c. overhead cost.
T 3. The use of ideal standards could have undesirable effects on c. units of production. d. all of the above.
output. d. units of an input factor.
d 12. Which company is LEAST likely to use job-order costing?
F 4. Learning curves can only be used for a one-of-a-kind special order b 5. Absorption costing is required a. Furniture maker.
product. a. for financial accounting purposes only. b. Printer.
b. for financial accounting and tax purposes. c. Construction company.
F 5. So long as total actual costs approximate total budgeted costs c. for financial and managerial accounting purposes. d. Flour maker.
there is no need for managerial concern or action. d. for managerial accounting purposes only.
d 13. A cost pool is
T 6. It is not always possible to separate the variable and fixed a 6. Both actual and normal costing a. all costs of a production department.
components of actual overhead cost. a. include material, labor, and overhead in product cost. b. the material and labor cost used on a particular job.
b. require predetermined overhead rates. c. overapplied or underapplied overhead costs.
F 7. When an unfavorable variance occurs, there is some action that c. are likely to result in over- or underabsorption of overhead. d. a group of overhead costs driven by the same activity.
some manager can take to correct the event or circumstance d. will show a favorable volume variance if production is greater
that gave rise to the variance. than budgeted. c 14. Each group of overhead costs should be applied based on
F 8. Standard costs are devices for measuring effectiveness but not a. direct labor hours or cost.
efficiency. b 7. An advantage of normal costing over actual costing is that b. units produced.
a. the company can compute the exact cost of a unit of product. c. whatever activity drives those specific overhead costs.
F 9. "Ideal standards" are those most likely to be met under most b. unit costs are not affected by monthly fluctuations in production d. machine time.
conditions. activity.
c. control over fixed costs is improved. d 15. A POOR reason to use activity-based overhead rates is that
T 10. The labor efficiency variance excludes the effects of laborers being d. the company need not forecast the level of productive activity for a. some departments are labor-intensive, some are machine-
paid more or than the standard labor rate. the year. intensive.
b. significant amounts of overhead are driven by different factors.
CHAPTER 12: INTRODUCTION TO PRODUCT COSTING d 8. An unfavorable volume variance signifies that c. rates calculated for some departments are much higher than for
Multiple Choice a. cost control was poor. other departments.
b. sales were less than budgeted. d. all jobs require about the same amounts of cost-driving activities.
b 1. The three major components of manufacturing cost are c. production was less than sales.

34
a 16. XYZ had an $8,000 unfavorable volume variance, a $11,500 b. direct labor cost.
unfavorable variable overhead spending variance, and c. machine hours.
$1,500 total underapplied overhead. The fixed overhead d. raw material use.
budget variance was c 30. Hoyt Company applies overhead at $4 per direct labor hour. In
a. $18,000 favorable. a 24. Spooner applies overhead based on direct labor cost. It had March Hoyt incurred overhead of $96,000. Underapplied
b. $21,000 favorable. budgeted manufacturing overhead of $50,000 and budgeted overhead was $4,000. How many direct labor hours did Hoyt
c. $17,500 unfavorable. direct labor of $25,000. Actual overhead was $52,500, work?
d. $21,000 unfavorable. actual labor cost was $27,000. Overhead was a. 25,000
a. overapplied by $1,500. b. 24,000
d 17. Machine hours used to set the predetermined overhead rate were b. overapplied by $2,000. c. 23,000
25,000, actual hours were 24,000, and overhead applied was c. overapplied by $2,500. d. 22,000
$60,000. Budgeted overhead for the year was d. underapplied by $2,000.
a. $57,600. d 31. A company using activity-based overhead rates
b. $59,000. c 25. Hayward applies overhead at $5 per machine hour. During March a. will usually have higher budget variances than one using a
c. $60,000. it worked 10,000 hours and overapplied overhead by $3,000. single rate.
d. $62,500. Actual overhead was b. will usually have higher volume variances than one using a
a. $53,000. single rate.
c 18. The three inventory accounts in a manufacturing company are b. $50,000. c. cannot compute fixed and variable components of
a. Materials, Labor, and Manufacturing Overhead. c. $47,000. overhead cost.
b. Materials, Labor, and Finished Goods. d. none of the above. d. should have better information for planning and control
c. Materials, Work in Process, and Finished Goods. than one using a single rate.
d. Materials, Finished Goods, and Inventory Sold. b 26. Aurora applies overhead at $9 per direct labor hour of which $4 is
variable overhead. Budgeted direct labor hours were 80,000. a 32. Daly had a $9,000 favorable volume variance, a $7,500
a 19. A predetermined overhead rate is calculated using Budgeted fixed overhead was unfavorable variable overhead spending variance, and
a. budgeted overhead cost and budgeted activity. a. $320,000 $6,000 total overapplied overhead. The fixed overhead
b. actual overhead cost and actual activity. b. $400,000. budget variance was
c. budgeted overhead cost and budgeted direct labor hours. c. $720,000. a. $4,500 favorable.
d. budgeted overhead cost and budgeted direct labor cost. d. none of the above. b. $8,000 favorable.
c. $4,500 unfavorable.
d 20. Under normal costing, income can be a 27. Which is a good reason to use separate overhead rates? d. $8,000 unfavorable.
a. lower than under actual costing. a. Some departments are labor-intensive, some are machine-
b. higher than under actual costing. intensive. d 33. Acme had a $6,000 favorable fixed overhead budget variance, a
c. the same as under actual costing. b. Labor rates vary considerably among departments. $2,500 unfavorable variable overhead spending variance,
d. any of the above. c. The resulting overhead rates are all about the same. and $1,000 total overapplied overhead. The volume variance
d. All jobs require about the same percentage of time in all was
a 21. The numerator in computing a predetermined overhead rate is departments. a. $4,500 overapplied.
a. budgeted manufacturing overhead cost. b. $4,500 underapplied.
b. actual manufacturing overhead cost. c 28. In contrast to a company that uses a single overhead rate, one that c. $2,500 overapplied.
c. budgeted activity. uses activity-based costing d. $2,500 underapplied.
d. fixed manufacturing overhead. a. will have higher product costs than one using a single
overhead rate. b 34. Waldorf had a $10,000 unfavorable fixed overhead budget
c 22. The denominator in calculating a predetermined overhead rate is b. cannot compute budget variances. variance, a $6,000 unfavorable variable overhead spending
a. budgeted manufacturing overhead cost. c. will incur additional costs for recordkeeping. variance, and a $2,000 favorable volume variance. The total
b. actual manufacturing overhead cost. d. must have a preponderance of fixed overhead costs. overhead was
c. budgeted activity. a. $14,000 overapplied.
d. actual activity. a 29. Which of the following is a sign of poor cost control? b. $14,000 underapplied.
a. A high unfavorable budget variance. c. $18,000 overapplied.
c 23. In a factory operated largely by robots, the best basis for applying b. A high unfavorable volume variance. d. $18,000 underapplied.
overhead is probably c. High underapplied overhead.
a. direct labor hours. d. High overapplied overhead. a 35. Bacon had a $18,000 unfavorable volume variance, a $5,000

35
 unfavorable fixed overhead budget variance, and $12,000 d. $48,000. b. $10,700.
total underapplied overhead. The variable overhead c. $22,000.
spending variance was b 40. Bonds Company uses the equation $300,000 + $1.75 per direct d. $30,000.
a. $11,000 favorable. labor hour to budget manufacturing overhead. Bonds has
b. $1,000 favorable. budgeted 125,000 direct labor hours for the year. Actual a 45. Antaya Company uses the equation $375,000 + $1.20 per direct
c. $11,000 unfavorable. results were 110,000 direct labor hours, $297,000 fixed labor hour to budget manufacturing overhead. Antaya has
d. $23,000 unfavorable. overhead, and $194,500 variable overhead. The fixed budgeted 75,000 direct labor hours for the year. Actual
overhead budget variance for the year is results were 81,000 direct labor hours, $388,000 fixed
d 36. Gonzalez Company uses the equation $520,000 + $2 per direct a. $2,000. overhead, and $98,600 variable overhead. The variable
labor hour to budget manufacturing overhead. Gonzalez has b. $3,000. overhead spending variance for the year is
budgeted 150,000 direct labor hours for the year. Actual c. $47,000. a. $2,700.
results were 150,000 direct labor hours and $817,500 total d. $48,000. b. $10,700.
manufacturing overhead. The total overhead applied for the c. $22,000.
year is d 41. Bonds Company uses the equation $300,000 + $1.75 per direct d. $30,000.
a. $300,000. labor hour to budget manufacturing overhead. Bonds has
b. $520,000. budgeted 125,000 direct labor hours for the year. Actual c 46. Antaya Company uses the equation $375,000 + $1.20 per direct
c. $817,500. results were 110,000 direct labor hours, $297,000 fixed labor hour to budget manufacturing overhead. Antaya has
d. $820,000. overhead, and $194,500 variable overhead. The fixed budgeted 75,000 direct labor hours for the year. Actual
overhead volume variance for the year is results were 81,000 direct labor hours, $388,000 fixed
a 37. Gonzalez Company uses the equation $520,000 + $2 per direct a. $2,000. overhead, and $98,600 variable overhead. The fixed
labor hour to budget manufacturing overhead. Gonzalez has b. $3,000. overhead budget variance for the year is
budgeted 150,000 direct labor hours for the year. Actual c. $47,000. a. $2,700.
results were 150,000 direct labor hours and $817,500 total d. $48,000. b. $10,700.
manufacturing overhead. The total overhead variance for c. $22,000.
the year is a 42. Machine hours used to set the predetermined overhead rate were d. $30,000.
a. $2,500 favorable. 80,000, actual hours were 90,000, and overhead applied was
b. $12,500 favorable. $117,000. Budgeted overhead for the year was d 47. Antaya Company uses the equation $375,000 + $1.20 per direct
c. $2,500 unfavorable. a. $104,000. labor hour to budget manufacturing overhead. Antaya has
d. some other number. b. $117,000. budgeted 75,000 direct labor hours for the year. Actual
c. $131,625. results were 81,000 direct labor hours, $388,000 fixed
c 38. Bonds Company uses the equation $300,000 + $1.75 per direct d. some other number. overhead, and $98,600 variable overhead. The fixed
labor hour to budget manufacturing overhead. Bonds has overhead volume variance for the year is
budgeted 125,000 direct labor hours for the year. Actual a 43. Cooke Company uses the equation $450,000 + $1.50 per direct a. $1,400.
results were 110,000 direct labor hours, $297,000 fixed labor hour to budget manufacturing overhead. Cooke has b. $13,000.
overhead, and $194,500 variable overhead. The total budgeted 150,000 direct labor hours for the year. Actual c. $15,600.
overhead variance for the year is results were 156,000 direct labor hours and $697,500 total d. $30,000.
a. $2,000. manufacturing overhead. The total overhead variance for
b. $3,000. the year is a 48. Machine hours used to set the predetermined overhead rate were
c. $47,000. a. $4,500 favorable. 68,000, actual hours were 64,000, and budgeted overhead
d. $48,000. b. $18,000 favorable. was $142,800. Overhead applied for the year was
c. $4,500 unfavorable. a. $134,400.
a 39. Bonds Company uses the equation $300,000 + $1.75 per direct d. $18,000 unfavorable. b. $136,500.
labor hour to budget manufacturing overhead. Bonds has c. $142,800.
budgeted 125,000 direct labor hours for the year. Actual b 44. Antaya Company uses the equation $375,000 + $1.20 per direct d. $151,725.
results were 110,000 direct labor hours, $297,000 fixed labor hour to budget manufacturing overhead. Antaya has
overhead, and $194,500 variable overhead. The variable budgeted 75,000 direct labor hours for the year. Actual a 49. Rhoda had a $2,000 favorable volume variance, a $7,000
overhead spending variance for the year is results were 81,000 direct labor hours, $388,000 fixed unfavorable variable overhead spending variance, and
a. $2,000. overhead, and $98,600 variable overhead. The total $3,000 total underapplied overhead. The fixed overhead
b. $3,000. overhead variance for the year is budget variance was
c. $47,000. a. $2,700. a. $1,000 favorable.

36
 b. $8,000 favorable. b 2. Variable costing is UNACCEPTABLE for
c. $2,000 unfavorable. a. managerial accounting. c 9. Which item is NOT used to compute the fixed overhead volume
d. $8,000 unfavorable. b. financial accounting. variance?
c. transfer pricing. a. Standard fixed cost per unit.
b 50. Katrina Inc. had a $30,000 favorable fixed overhead budget d. reporting by product lines for internal purposes. b. Budgeted fixed overhead.
variance, a $44,000 unfavorable variable overhead spending c. Actual fixed overhead.
variance, and $44,000 total underapplied overhead. The d 3. A criticism of variable costing for managerial accounting purposes d. Actual quantity produced.
volume variance was is that it
a. $30,000 overapplied. a. is not acceptable for product line segmented reporting. b 10. Which variance is LEAST relevant for control purposes?
b. $30,000 underapplied. b. does not reflect cost-volume-profit relationships. a. Material use variance.
c. $58,000 overapplied. c. overstates inventories. b. Fixed overhead volume variance.
d. $58,000 underapplied. d. might encourage managers to emphasize the short term c. Fixed overhead budget variance.
at the expense of the long term. d. Labor efficiency variance.
True-False
c 4. Normal costing and standard costing differ in that a 11. A company that sets a standard fixed cost based on practical
T 1. A major advantage of normal costing over actual costing is that it a. the two systems can show different overhead budget capacity
smoothes out fluctuations in unit costs. variances. a. should expect unfavorable volume variances.
b. only normal costing can be used with absorption costing. b. will set its selling prices too low.
F 2. Normal costing incomes are less than actual costing incomes. c. the two systems show different volume variances if c. has a higher cost per unit than a company using
standard hours do not equal actual hours. normal activity to set the standard.
T 3. The term overapplied overhead is not used with actual costing. d. normal costing is less appropriate for multiproduct firms. d. usually overapplies its fixed costs.

T 4. A seasonal business using normal costing expects high overapplied d 5. Variable costing and absorption costing will show the same a 12. A predetermined overhead rate for fixed costs is unlike a standard
and underapplied overhead during individual months of the incomes when there are no fixed cost per unit in that a predetermined overhead rate is
year. a. beginning inventories. a. based on an input factor like direct labor hours and a
b. ending inventories. standard cost per unit is based on a unit of output.
F 5. Underapplied overhead indicates inefficient operations. c. variable costs. b. based on practical capacity and a standard fixed cost can
d. beginning and ending inventories. be based on any level of activity.
F 6. Activity-based overhead rates give higher costs than does a single, c. used with variable costing while a standard fixed cost is
plant-wide rate. c 6. ABC had the same activity in 20X3 as in 20X2 except that used with absorption costing.
production was higher in 20X3 than in 20X2. ABC will show d. likely to be higher than a standard fixed cost per unit.
F 7. A cost pool consists of all of the costs of a particular department. a. higher income in 20X3 than in 20X2.
b. the same income in both years. b 13. ABC had $400,000 budgeted fixed overhead costs and based its
T 8. Absorption costing is required by GAAP for external financial c. the same income in both years under variable costing. standard on normal activity of 40,000 units. Actual fixed
reporting. d. the same income in both years under absorption costing. overhead costs were $430,000, actual production was
36,000 units, and sales were 30,000 units. The volume
F 9. Variable costing and full costing are the same thing. b 7. The use of variable costing requires knowing variance was
a. the contribution margin and break-even point for each a. $30,000.
T 10. Overhead variances do not exist when actual costing is used. product. b. $40,000.
b. the variable and fixed components of production cost. c. $70,000.
CHAPTER 13: STANDARD COSTING, VARIABLE c. controllable and noncontrollable components of all costs. d. $77,777.
COSTING, AND THROUGHPUT COSTING d. the number of units of each product produced during the
Multiple Choice period. a 14. Advocates of variable costing for internal reporting purposes do
NOT rely on which of the following points?
a 1. Which of the following is NOT a type of absorption costing? d 8. Which measure of activity is likely to give the LOWEST standard a. The matching concept.
a. Direct costing. fixed cost per unit? b. Price-volume relationships.
b. Actual costing. a. Actual activity. c. Absorption costing does not include selling and
c. Normal costing. b. Normal capacity. administrative expenses as part of inventoriable cost.
d. None of the above. c. Budgeted activity. d. Production influences income under absorption costing.
d. Practical capacity.

37
d 15. Calculating income under variable costing does NOT require c. Variable selling and administrative expenses. d. none of the above.
knowing d. Fixed selling and administrative expenses.
a. unit sales. c 29. Under variable costing there can be no
b. unit variable manufacturing costs. a 22. ABC Company had 15,000 units in ending inventory. The total cost a. fixed overhead variances.
c. selling price. of those units under variable costing is b. fixed overhead budget variance.
d. unit production. a. less than it is under absorption costing. c. fixed overhead volume variance.
b. the same as it is under absorption costing. d. no fixed overhead.
a 16. Inventoriable costs under absorption costing include c. more than it is under absorption costing.
a. both fixed and variable production costs. d. any of the above. c 30. ABC had the same activity in 20X4 as in 20X3 except that
b. only variable production costs. production was lower in 20X4 than in 20X3. ABC will show
c. all production costs plus variable selling and administrative b 23. York Company had $200,000 income using absorption costing. a. lower income in 20X4 than in 20X3.
costs. York has no variable manufacturing costs. Beginning b. the same income in both years.
d. all production costs plus all selling and administrative inventory was $15,000 and ending inventory was $22,000. c. the same income in both years under variable costing.
costs. Income under variable costing would have been d. the same income in both years under absorption costing.
a. $178,000.
b 17. Inventoriable costs under variable costing include b. $193,000. a 31. Rounder Industries manufactures a single product. Variable
a. fixed and variable production costs. c. $200,000. production costs are $20 and fixed production costs are
b. variable production costs. d. $207,000. $300,000. Rounder uses a normal activity of 20,000 units to
c. all production costs plus variable selling and administrative set its standard costs. Rounder began the year with no
costs. c 24. An unfavorable volume variance means that inventory, produced 22,000 units, and sold 21,000 units.
d. all production costs plus all selling and administrative a. cost control was probably poor. Ending inventory under variable costing would be
costs. b. absorption costing income is lower than variable costing a. $20,000.
income. b. $30,000.
d 18. Absorption costing and variable costing differ in that c. actual output was less than the level used to set the c. $35,000.
a. income is lower under variable costing. standard fixed cost. d. cannot be determined without further information.
b. variable costing treats selling costs as period costs. d. actual output was more than the level used to set the
c. variable costing treats all variable costs as product costs. standard fixed cost. c 32. Rounder Industries manufactures a single product. Variable
d. inventory cost is higher under absorption costing. production costs are $20 and fixed production costs are
d 25. Which variance CANNOT arise under variable costing? $300,000. Rounder uses a normal activity of 20,000 units to
c 19. Absorption costing differs from variable costing in that a. variable overhead budget variance. set its standard costs. Rounder began the year with no
a. standards can be used with absorption costing, but not b. variable overhead efficiency variance. inventory, produced 22,000 units, and sold 21,000 units.
with variable costing. c. fixed overhead budget variance. Ending inventory under absorption costing would be
b. absorption costing inventories are more correctly valued. d. fixed overhead volume variance. a. $20,000.
c. production influences income under absorption costing, b. $30,000.
but not under variable costing. a 26. Standard costing differs from normal costing in the treatment of c. $35,000.
d. companies using absorption costing have lower fixed a. materials, direct labor, and overhead. d. cannot be determined without further information.
costs. b. materials and direct labor.
c. direct labor and overhead. a 33. Rounder Industries manufactures a single product. Variable
a 20. Which method gives the lowest inventory cost per unit? d. overhead. production costs are $20 and fixed production costs are
a. Variable costing. $300,000. Rounder uses a normal activity of 20,000 units to
b. Absorption costing using normal activity to set the d 27. Normal costing differs from actual costing in treating set its standard costs. Rounder began the year with no
standard fixed cost. a. materials, direct labor, and overhead. inventory, produced 22,000 units, and sold 21,000 units. The
c. Absorption costing using practical capacity to set the b. materials and direct labor. volume variance under variable costing would be
standard fixed cost. c. direct labor and overhead. a. $0.
d. Actual absorption costing. d. overhead. b. $20,000.
c. $30,000.
b 21. Which costs are treated differently under absorption costing and c 28. As compared to normal costing, standard costing can yield d. some other number.
variable costing? a. different volume variances and budget variances.
a. Variable manufacturing costs. b. different budget variances. c 34. Rounder Industries manufactures a single product. Variable
b. Fixed manufacturing costs. c. different volume variances. production costs are $20 and fixed production costs are

38
 $300,000. Rounder uses a normal activity of 20,000 units to a 39. Gamma Corporation has total budgeted fixed costs of began the year with 1,000 units in inventory, produced
set its standard costs. Rounder began the year with no $150,000. Actual production was 8,000 units; normal 11,000 units, and sold 11,500 units. Ending inventory under
inventory, produced 22,000 units, and sold 21,000 units. The capacity is 7,500 units. What was the volume variance? absorption costing would be
volume variance under absorption costing would be a. $10,000 favorable a. $10,000.
a. $0. b. $15,000 favorable b. $13,000.
b. $20,000. c. $15,000 unfavorable c. $23,000.
c. $30,000. d. $10,000 unfavorable d. cannot be determined without further information.
d. some other number. d 45. Madison Industries manufactures a single product using standard
b 40. Eastern Co. has total budgeted fixed costs of $150,000. costing. Variable production costs are $26 and fixed
b 35. Rounder Industries manufactures a single product. Variable Actual production of 39,000 units resulted in a $6,000 production costs are $250,000. Madison uses a normal
production costs are $20 and fixed production costs are favorable volume variance. What normal capacity was used activity of 12,500 units to set its standard costs. Madison
$300,000. Rounder uses a normal activity of 20,000 units to to determine the fixed overhead rate? began the year with 1,000 units in inventory, produced
set its standard costs. Rounder began the year with no a. 33,000 11,000 units, and sold 11,500 units. The volume variance
inventory, produced 22,000 units, and sold 21,000 units. The b. 37,500 under variable costing would be
standard cost of goods sold under variable costing would be c. 40,560 a. $10,000.
a. $400,000. d. Cannot be determined without further information. b. $20,000.
b. $420,000. c. $30,000.
c. $735,000. a 41. Western Company has a standard fixed cost of $8 per unit. d. some other number.
d. some other number. At an actual production of 8,000 units a favorable volume
variance of $12,000 resulted. What were total budgeted c 46. Madison Industries manufactures a single product using standard
c 36. Rounder Industries manufactures a single product. Variable fixed costs? costing. Variable production costs are $26 and fixed
production costs are $20 and fixed production costs are a. $52,000 production costs are $250,000. Madison uses a normal
$300,000. Rounder uses a normal activity of 20,000 units to b. $64,000 activity of 12,500 units to set its standard costs. Madison
set its standard costs. Rounder began the year with no c. $76,000 began the year with 1,000 units in inventory, produced
inventory, produced 22,000 units, and sold 21,000 units. The d. Cannot be determined without further information. 11,000 units, and sold 11,500 units. The volume variance
standard cost of goods sold under absorption costing would under absorption costing would be
be d 42. Monona Corporation has total budgeted fixed costs of a. $10,000.
a. $400,000. $64,000. Actual production was 15,000 units; normal b. $20,000.
b. $420,000. capacity is 16,000 units. What was the volume variance? c. $30,000.
c. $735,000. a. $4,000 favorable d. some other number.
d. some other number. b. $4,267 favorable
c. $4,267 unfavorable b 47. Madison Industries manufactures a single product using standard
c 37. Alpha Company has a standard fixed cost of $10 per unit. At an d. $4,000 unfavorable costing. Variable production costs are $26 and fixed
actual production of 16,000 units an unfavorable volume production costs are $250,000. Madison uses a normal
variance of $20,000 resulted. What were total budgeted b 43. Madison Industries manufactures a single product using standard activity of 12,500 units to set its standard costs. Madison
fixed costs? costing. Variable production costs are $26 and fixed began the year with 1,000 units in inventory, produced
a. $140,000 production costs are $250,000. Madison uses a normal 11,000 units, and sold 11,500 units. The standard cost of
b. $160,000 activity of 12,500 units to set its standard costs. Madison goods sold under variable costing would be
c. $180,000 began the year with 1,000 units in inventory, produced a. $230,000.
d. Cannot be determined without further information. 11,000 units, and sold 11,500 units. Ending inventory under b. $299,000.
variable costing would be c. $506,000.
a 38. Beta Company has a standard fixed cost of $10 per unit using a. $10,000. d. $529,000.
a normal capacity of 11,000 units. An unfavorable volume b. $13,000.
variance of $12,000 resulted. What was the volume c. $23,000. c 48. Sigma Company has a standard fixed cost of $18 per unit
produced? d. cannot be determined without further information. using a normal capacity of 9,000 units. A favorable volume
a. 9,800 variance of $18,000 resulted. What was the volume
b. 11,000 c 44. Madison Industries manufactures a single product using standard produced?
c. 12,200 costing. Variable production costs are $26 and fixed a. 8,000
d. Cannot be determined without further information. production costs are $250,000. Madison uses a normal b. 9,000
activity of 12,500 units to set its standard costs. Madison c. 10,000

39
 d. Cannot be determined without further information. F 8. Variable costing must be used for internal reporting.
c 6. Which company is most likely to use job-order costing?
c 49. Western Co. has total budgeted fixed costs of $72,000. F 9. According to GAAP, absorption costing must be used for internal a. A brewery.
Actual production of 5,500 units resulted in a $6,000 reporting. b. An automobile manufacturer.
unfavorable volume variance. What normal capacity was c. A bridge builder.
used to determine the fixed overhead rate? T 10. According to GAAP, absorption costing must be used for external d. A button manufacturer.
a. 5,000 financial reporting.
b. 5,500 c 7. Which company is most likely to use process costing?
c. 6,000 a. A manufacturer of nuclear reactors.
d. Cannot be determined without further information. CHAPTER 14: PROCESS COSTING AND THE COST ACCOUNTING CYCLE b. A construction contractor.
c. A cannery.
d 50. Madison Industries manufactures a single product using standard Multiple Choice d. A textbook publisher.
costing. Variable production costs are $26 and fixed
production costs are $250,000. Madison uses a normal c 1. ABC Company made the following journal entry. a 8. Fixed production costs are inventoriable only if a company
activity of 12,500 units to set its standard costs. Madison Work in Process Inventory $200,000 a. uses absorption costing.
began the year with 1,000 units in inventory, produced Direct Labor $188,000 b. uses standard costing.
11,000 units, and sold 11,500 units. The standard cost of Direct Labor Rate Variance 12,000 c. produces a single product.
goods sold under absorption costing would be From this entry we can tell that ABC uses d. receives permission from the Internal Revenue Service.
a. $230,000. a. job-order costing. d 9. Which cost accumulation method is most likely to be used by a
b. $299,000. b. process costing. company that mass produces similar products?
c. $506,000. c. standard costing. a. Actual costing.
d. $529,000. d. normal costing. b. Normal costing.
c. Job-order costing.
True-False d 2. CDE Company made the following journal entry. d. Standard costing.
Finished Goods Inventory $250,000
F 1. Absorption costing incomes are always higher than variable costing Work in Process Inventory $250,000 c 10. Standard costing can be used in
incomes. From this entry we can tell that CDE uses a. only job-order costing systems.
a. job-order costing. b. only process costing systems.
F 2. Income under standard variable costing is not influenced by the b. process costing. c. either job-order or process systems.
total amount of fixed manufacturing costs. c. standard costing. d. either manufacturing or retailing firms.
d. any of the above.
T 3. A multiproduct company using standard absorption costing a 11. Which of the following is the same whether the company uses
calculates standard fixed costs for each product using a b 3. Which of the following is NOT relevant in determining weighted- standard process costing or actual process costing?
standard fixed overhead rate based on an input factor such average unit cost in process costing? a. Equivalent production.
as direct labor hours. a. Cost of beginning inventory. b. Cost of goods transferred from work in process to finished
b. Equivalent unit production in beginning inventory. goods.
T 4. A major difference between standard costing and normal costing is c. Equivalent unit production in ending inventory. c. Net income for the period.
that one uses actual hours to apply overhead and the other d. Units completed. d. Cost per unit of ending inventory of work in process.
uses standard hours.
d 4. Standard process costing does NOT require information about c 12. It is usually necessary to calculate equivalent unit production for
T 5. Proponents of variable costing for external reporting argue that a. units completed during the period. a. materials.
while fixed production costs benefit production as a whole, b. equivalent unit production in ending inventory. b. conversion costs.
they do not benefit any particular unit of product. c. standard cost per unit. c. materials and conversion costs.
d. actual unit cost for the period. d. materials, conversion costs, and overhead.
T 6. A company using absorption costing can increase its income by
increasing production without increasing sales. d 5. A company that uses job-order costing b 13. If a company uses actual process costing, the amount transferred
a. cannot use standard costs. from Work in Process Inventory to Finished Goods Inventory
F 7. A company using variable costing can increase its income by b. accumulates costs by department. is the cost of
increasing production without increasing sales. c. probably makes a single product. a. equivalent unit production for the period.
d. does not have to calculate equivalent production. b. units completed during the period.

40
 c. units completed and sold during the period. c. $2.220 a. Cost of beginning inventory.
d. all units worked on during the period. d. $0.524. b. Equivalent unit production in beginning inventory.
c. Equivalent unit production in ending inventory.
b 14. If a company uses standard process costing, the amount a 21. Weighted-average EUP is 11,400 units. Beginning inventory was d. Units completed.
transferred from Work in Process Inventory to Finished 1,000 units 60% complete, ending inventory is 2,000 units
Goods Inventory is the 20% complete. The number of units completed is c 28. Weighted-average equivalent production is always
a. standard cost of equivalent unit production for the period. a. 11,000. a. less than the number of units completed.
b. standard cost of units completed during the period. b. 10,800. b. equal to the number of units completed.
c. actual cost of units completed and sold during the period. c. 10,400. c. equal to or greater than the number of units completed.
d. actual cost of all units worked on during the period. d. 9,400. d. any of the above.

a 15. Under standard costing, the amount of direct labor cost charged c 22. Algoma completed 10,000 units, had beginning inventory of 2,500 d 29. FIFO equivalent production can be
(debited) to Work in Process Inventory is units 40% complete, and ending inventory of 1,000 units a. less than the number of units completed.
a. standard labor hours at standard rates. 20% complete. Weighted-average EUP was b. equal to the number of units completed.
b. standard labor hours at actual rates. a. 9,200. c. equal to or greater than the number of units completed.
c. actual labor hours at actual rates. b. 10,000. d. any of the above.
d. actual direct labor cost incurred. c. 10,200.
d. 11,000. a 30. Which item is NOT relevant in determining FIFO equivalent unit
d 16. A company that uses standard costing production?
a. must make only one product. d 23. Which formula gives weighted-average equivalent unit a. Cost of beginning inventory.
b. always has a volume variance unless normal capacity and production? (UC = units completed, BI = equivalent units in b. Equivalent unit production in beginning inventory.
practical capacity are the same. beginning inventory, EI = equivalent units in ending c. Equivalent unit production in ending inventory.
c. shows higher incomes than it would if it used actual inventory) d. Units completed.
costing. a. UC + BI + EI.
d. shows the same per-unit cost of inventory each month. b. UC + BI - EI. b 31. The FIFO method of calculating equivalent production and unit
c. UC + EI - BI. costs
c 17. The numerator of weighted-average unit cost calculations is d. UC + EI. a. is less likely to be accurate than the weighted-average
a. current period cost. method.
b. cost of beginning inventory. c 24. Which formula gives FIFO equivalent unit production? (UC = units b. is more useful for control purposes than the weighted-
c. current period cost plus cost of beginning inventory. completed, BI = equivalent units in beginning inventory, EI = average method.
d. cost of goods sold. equivalent units in ending inventory) c. cannot be used unless a company also uses standard
a 18. The numerator of the FIFO unit cost calculation is a. UC + BI + EI. costing.
a. current period cost. b. UC + BI - EI. d. eliminates the need to calculate separate equivalent-
b. cost of beginning inventory. c. UC + EI - BI. production numbers for each element of
c. current period cost plus cost of beginning inventory. d. UC + EI. manufacturing cost.
d. cost of goods sold.
c 25. The entry to apply overhead in a job-order system is a 32. Backflushing, or backflush costing
b 19. FIFO equivalent unit production (EUP) is 6,200 units. EUP in ending a. debit Cost of Goods Sold, credit Manufacturing Overhead. a. requires significantly less recordkeeping than other
inventory is 300, in beginning inventory it is 125. Weighted- b. debit Finished Goods Inventory, credit Work-in-Process methods.
average EUP is Inventory. b. can be used by any company.
a. 6,500. c. debit Work-in-Process Inventory, credit Manufacturing c. ignores inventories.
b. 6,325. Overhead. d. does not distinguish between materials and conversion
c. 6,025. d. debit Work-in-Process Inventory, credit Direct Labor. costs.
d. 5,900.
a 26. Conversion costs are c 33. Scooter Corp had no beginning inventories, finished 40,000 units,
a 20. Weighted-average EUP is 4,100 units. Cost incurred during the a. labor and overhead costs. and sold 36,000 units. There were no ending inventories of
period are $11,250, and the beginning inventory was $2,150. b. materials and labor costs. materials or work in process. Materials purchased and used
Unit cost is c. all fixed manufacturing costs. were $225,000; direct labor and overhead were $170,000.
a. $3.268. d. all manufacturing costs. Ending inventory would be valued at
b. $2.744. a 27. Which item is NOT relevant in determining FIFO unit cost? a. $17,000.

41
 b. $22,500. was 60% complete. How many units were completed during c. $3,990.
c. $39,500. the period? d. some other number.
d. some other number. a. 39,700
b. 44,900 b 45. Garden Co. had a beginning inventory of 3,000 units 60%
b 34. Scooter Corp had no beginning inventories, finished 40,000 units, c. 46,200 complete, ending inventory of 3,000 units 80% complete,
and sold 36,000 units. There were no ending inventories of d. 50,100 and transferred out 27,500 units. FIFO unit costs were $2.15
materials or work in process. Materials purchased and used for materials, $1.25 for conversion costs. All materials are
were $225,000; direct labor and overhead were $170,000. c 40. Howe has a FIFO EUP of 46,580 units. Beginning inventory of 6,500 added at the start of the process. Beginning inventory cost
Cost of goods sold would be valued at units was 80% complete; the ending inventory of 2,800 units $9,400. The cost of finished units transferred out is
a. $39,500. was 60% complete. Weighted-average EUP is a. $69,875.
b. $355,500. a. 46,580. b. $92,900.
c. $395,000. b. 47,880. c. $93,500.
d. some other number. c. 51,780. d. $103,700.
d. some other number.
b 35. Dewey Company had a beginning inventory of 3,000 units 35% b 46. Garden Co. had a beginning inventory of 3,000 units 60%
complete, and an ending inventory of 2,500 units 20% b 41. Sosa Inc. had $3,000 in beginning work in process and incurred an complete, ending inventory of 3,000 units 80% complete,
complete. If 17,500 units were completed, weighted-average additional $28,500 during the period. If weighted-average and transferred out 27,500 units. FIFO unit costs were $2.15
EUP is EUP was 10,000 units, unit cost would be for materials, $1.25 for conversion costs. All materials are
a. 17,500. a. $2.85. added at the start of the process. Beginning inventory cost
b. 18,000. b. $3.15. $9,400. The cost of ending inventory is
c. 18,550. c. $9.50. a. $8,160.
d. 20,000. d. some other number. b. $9,450.
c. $10,200.
b 36. Dewey Company had a beginning inventory of 3,000 units 35% a 42. Granger Co. had $3,000 in beginning work in process and incurred d. $17,000.
complete, and an ending inventory of 2,500 units 20% an additional $28,500 during the period. If FIFO EUP was
complete. If 17,500 units were completed, FIFO EUP is 10,000 units, unit cost would be d 47. Woods Run has a weighted-average EUP of 49,750 units.
a. 17,500. a. $2.85. Beginning inventory of 4,500 units was 60% complete; the
b. 16,950. b. $3.15. ending inventory of 4,800 units was 60% complete. The units
c. 16,050. c. $9.50. completed during the period is
d. 15,050. d. some other number. a. 49,750.
b. 44,950.
a 37. Cheatem has a weighted-average EUP of 30,000 units. Beginning b 43. Field Company had a beginning inventory of 2,000 units 40% c. 47,050.
inventory was 4,000 units 40% complete; ending inventory complete, ending inventory of 1,500 units 70% complete, d. 46,870.
was 5,000 units 60% complete. The number of units and transferred out 23,500 units. Weighted-average unit
completed is costs were $1.15 for materials, $0.75 for conversion costs. b 48. Woods Run has a weighted-average EUP of 49,750 units.
a. 27,000. All materials are added at the start of the process. The cost Beginning inventory of 4,500 units was 60% complete; the
b. 29,000. of finished units transferred to finished goods is ending inventory of 4,800 units was 60% complete.
c. 30,000. a. $28,750. Conversion costs in beginning inventory were $1,960;
d. 31,000. b. $44,650. conversion costs added during the period were $40,825.
c. $47,500. Conversion costs per unit are
b 38. Cheatem has a weighted-average EUP of 30,000 units. Beginning d. $52,250. a. $0.82.
inventory was 4,000 units 40% complete; ending inventory b. $0.86.
was 5,000 units 60% complete. FIFO EUP is b 44. Field Company had a beginning inventory of 4,000 units 40% c. $0.70.
a. 25,400. complete, ending inventory of 3,000 units 70% complete, d. cannot be determined with the information given.
b. 28,400. and transferred out 47,000 units. Weighted-average unit
c. 30,000. costs were $1.15 for materials, $0.75 for conversion costs. a 49. Grover Co. had a beginning inventory of 1,750 units 70%
d. 31,000. All materials are added at the start of the process. The cost complete, ending inventory of 3,000 units 20% complete,
of ending inventory is and transferred out 24,500 units. Weighted-average unit
d 39. Howe has a FIFO EUP of 46,580 units. Beginning inventory of 6,500 a. $5,700. costs were $2.15 for materials, $1.75 for conversion costs.
units was 80% complete; the ending inventory of 2,800 units b. $5,025 All materials are added at the start of the process. The cost

42
 of finished units transferred to finished goods is
a. $95,550.
b. $102,375.
c. $107,250.
d. $114,075.

c 50. Grover Co. had a beginning inventory of 1,750 units 70% complete,
ending inventory of 3,000 units 20% complete, and
transferred out 24,500 units. Weighted-average unit costs
were $2.15 for materials, $1.75 for conversion costs. All
materials are added at the start of the process. The cost of
ending inventory is
a. $2,340.
b. $6,450.
c. $7,500.
d. $11,700.

43