Managerial Accounting Exam 4

Summer 2006
Student Number: __________________________
Pledge:
On my onor ! a"e neiter gi"en or recei"ed el# on ti$ exam% ! under$tand tat any
"iolation o& te 'ni"er$ity (onor Policy )ill re$ult in an automatic *ero on ti$ exam+ and
tat ! )ill be $ub,ect to all $anction$ a"ailable under te 'ni"er$ity-$ (onor Policy%
Part ! . Multi#le /ue$$ 0123 #oint$4
1. A segment of a business responsible for both revenues and expenses would be called:
A) a cost center.
B) an investment center.
C) a profit center.
D) residual income.
2. anta !estaurant compares monthl" operating results with a static budget prepared at the
beginning of the "ear. #hen actual sales are less than budget$ would the restaurant
usuall" report favorable variances on variable food costs and fixed supervisor" salaries%
Food Costs Supervisory Salaries
A) &o &o
B) &o 'es
C) 'es &o
D) 'es 'es
(. All other things e)ual$ a compan"*s return on investment +!,-) would generall" increase
when:
A) average operating assets increase.
B) sales decrease.
C) operating expenses decrease.
D) operating expenses increase.
.. /he performance of the manager of Division A is measured b" residual income. #hich of
the following would increase the manager*s performance measure%
A) -ncrease in average operating assets.
B) Decrease in average operating assets.
C) -ncrease in minimum re)uired return.
D) Decrease in net operating income.
1
0. Consider the following three statements:
-. A profit center has control over both cost and revenue.
--. An investment center has control over invested funds$ but not over costs and
revenue.
---. A cost center has no control over sales
#hich statement+s) is1are correct%
A) ,nl" -
B) ,nl" --
C) ,nl" - and ---
D) ,nl" - and --
2. A compan"*s return on investment is the:
A) margin divided b" turnover.
B) margin multiplied b" turnover.
C) turnover divided b" average operating assets.
D) turnover multiplied b" average operating assets.
3) none of the above.
4. Delmar Corporation is considering the use of residual income as a measure of the
performance of its divisions. #hat ma5or disadvantage of this method should the
compan" consider before deciding to institute it%
A) this method does not ma6e allowance for difference in the si7e of compared divisions.
B) opportunities ma" be underta6en which will decrease the overall return on
investment.
C) the minimum re)uired rate of return ma" eliminate desirable opportunities from
consideration.
D) residual income does not measure how effectivel" the division manager controls
costs.
3) none of the above.
8. #hich department is usuall" held responsible for an unfavorable materials )uantit"
variance%
A) 9ar6eting.
B) :urchasing.
C) 3ngineering.
D) :roduction.
3) &one of the above.
;. A ma5or wea6ness of flexible budgets is that:
A) the" are geared onl" to a single level of activit".
B) the" give subordinates too much flexibilit".
C) the" force the manager to compare actual costs at one level of activit" to budgeted
costs at a different level of activit".
D) none of these.
2
1<. -n a 5ob order cost s"stem$ the amount of overhead cost that has been applied to a 5ob that
remains incomplete at the end of a period:
A. is deducted on the -ncome =tatement as overapplied overhead.
B) is closed to Cost of >oods =old.
C) is transferred to ?inished >oods at the end of the period.
D) is part of the ending balance of the #or6 in :rocess inventor" account.
3) none of the above.
11. #hich one of the following costs would not be considered an indirect cost of serving a
particular customer at a :i77a @ut franchise%
A) /he salar" of the franchise*s manager.
B) /he cost of the tables and chairs used to furnish the restaurant.
C) /he cost of the dough used to ma6e the pi77a that is ordered.
D) /he cost of lighting and heating the restaurant.
12. -f a compan" applies overhead to 5obs on the basis of a predetermined overhead rate$ a credit
balance in the 9anufacturing ,verhead account at the end of an" period means that:
A) more overhead cost has been charged to 5obs than has been incurred during the
period.
B) more overhead cost has been incurred during the period than has been charged to
5obs.
C) the amount of overhead cost charged to 5obs is greater than the estimated cost for the
period.
D) the amount of overhead cost charged to 5obs is less than the estimated overhead cost
for the period.
3) none of the above.
1(. #hich of the following statements is +are) true%
A) Companies that produce man" different products or services are more li6el" to use
5obAorder costing s"stems than process costing s"stems.
B) BobAorder costing s"stems are used b" service firms and process costing s"stems are
used b" manufacturers.
C) Costs are traced to departments and then allocated to units of product when 5obAorder
costing is used.
D) All of the above.
1.. /he :recision Compan" used a predetermined overhead rate last "ear of C( per direct
labor hour$ based on an estimate of 2.$<<< direct labor hours to be wor6ed during the
"ear. Actual costs and activit" during the "ear were:
Actual manufacturing overhead cost incurred C8.$<<<
Actual direct labor hours wor6ed 24$<<<
A) C($<<< underapplied.
B) C($<<< overapplied.
C) C12$<<< underapplied.
(
D) C12$<<< overapplied.
10 Dariable cost:
A) increases on a per unit basis as the number of units produced increases.
B) remains constant on a per unit basis as the number of units produced increases.
C) remains the same in total as production increases.
D) decreases on a per unit basis as the number of units produced increases.
12. =etting up e)uipment is an example of a:
A) EnitAlevel activit".
B) BatchAlevel activit".
C) :roductAlevel activit".
D) ?acilit"Alevel activit".
14. #hich of the following statements regarding fixed costs is incorrect%
A) 3xpressing fixed costs on a per unit basis usuall" is the best approach for decisionA
ma6ing.
B) ?ixed costs expressed on a per unit basis will react inversel" with changes in activit".
C) Assumptions b" accountants regarding the behavior of fixed costs rest heavil" on the
concept of the relevant range.
D) ?ixed costs fre)uentl" represent longAterm investments in propert"$ plant$ and
e)uipment.
18. 3xpense A is a fixed costF expense B is a variable cost. During the current "ear the
activit" level has increased$ but is still within the relevant range. -n terms of cost per unit
of activit"$ we would expect that:
A) expense A has remained unchanged.
B) expense B has decreased.
C) expense A has decreased.
D) expense B has increased.
1;. ast "ear$ Blac6 Compan" reported sales of C2.<$<<<$ a contribution margin of C12<$<<<$
and a net loss of C.<$<<<. Based on this information$ the brea6Aeven point was:
A) C2.<$<<<.
B) C.8<$<<<.
C) C8<<$<<<.
D) C;2<$<<<.
3) &one of the above
.
Ese the following to answer )uestions 2<A21:
/he following is Allison Corporation*s contribution format income statement for last month:
=ales C8<<$<<<
ess variable expenses (<<$<<<
Contribution margin 0<<$<<<
ess fixed expenses .<<$<<<
&et income C1<<$<<<
/he compan" has no beginning or ending inventories. /he compan" produced and sold 1<$<<<
units last month.

2<. #hat is the compan"*s contribution margin ratio%
A) 22.0G
B) 12<.<G
C) 0<<G
D) 2<G
21. -f sales increase b" 2<< units$ b" how much should net income increase%
A) C12$<<<
B) C0$<<<
C) C2$<<<
D) C1<$<<<
3) &one of the above

22. Beaver Compan" used a predetermined overhead rate last "ear of C2 per direct labor
hour$ based on an estimate of 20$<<< direct labor hours to be wor6ed during the "ear.
Actual costs and activit" during the "ear were:
Actual manufacturing overhead cost incurred C.4$<<<
Actual direct labor hours wor6ed 2.$<<<
/he underA or overapplied overhead last "ear was:
A) C1$<<< underapplied.
B) C1$<<< overapplied.
C) C($<<< overapplied.
D) C2$<<< underapplied.
2(. Ender ampre" Compan"*s 5obAorder costing s"stem$ manufacturing overhead is applied
to #or6 in :rocess inventor" using a predetermined overhead rate. During Banuar"$
ampre"*s transactions included the following:
Direct materials issued to production C ;<$<<<
-ndirect materials issued to production 8$<<<
9anufacturing overhead cost incurred 120$<<<
9anufacturing overhead cost applied 11($<<<
Direct labor cost incurred 1<4$<<<
0
ampre" Compan" had no beginning or ending inventories. #hat was the cost of goods
manufactured for Banuar"%
A) C(<2$<<<
B) C(1<$<<<
C) C(22$<<<
D) C((<$<<<
3) &one of the above

2.. An unfavorable labor efficienc" variance indicates that:
A) /he actual labor rate was higher than the standard labor rate.
B) /he labor rate variance must also be unfavorable.
C) Actual labor hours wor6ed exceeded standard labor hours for the production level
achieve.
D) ,vertime labor was used during the period.
3) &one of the above.
20. A favorable labor rate variance indicates that
A) actual hours exceed standard hours.
B) standard hours exceed actual hours.
C) the actual rate exceeds the standard rate.
D) the standard rate exceeds the actual rate.
3) &one of the above.
22. -f the actual labor hours wor6ed exceed the standard labor hours allowed$ what t"pe of
variance will occur%
A) ?avorable labor efficienc" variance.
B) ?avorable labor rate variance.
C) Enfavorable labor efficienc" variance.
D) Enfavorable labor rate variance.
3) &one of the above.
24. #hich of the following statements is true%
-. ,ne of the wea6nesses of budgets is that the" are of little value in uncovering
potential bottlenec6s in an organi7ation
--. ,ne of the advantages of a selfAimposed budget is that the person directl" involved
in an activit" is more li6el" to be in a position to ma6e good budget estimates.
A) =tatement -
54 Statement !!
C) &either statement is true.
D) Both statements are true.
2
28. #hich of the following statements is true%
-. A direct material )uantit" standard generall" includes an allowance for waste.
--. An unfavorable labor rate variance can occur if wor6ers with high hourl" wage
rates are assigned to wor6 on products whose standards assume wor6ers with low
hourl" wage rates.
A) =tatement -
B) =tatement --
C) &either statement is true.
64 5ot $tatement$ are true%
2;. #hich of the following statements is true%
-. ?ixed costs should not be included in a flexible budget since such costs are not
li6el" to be controllable b" managers.
--. /he static budget should be used primaril" to determine whether cost control is
being maintained.
A) =tatement -
B) =tatement --
74 Neiter $tatement i$ true%
D) Both statements are true.
(<. #hich of the following statements is true%
-. -n a standard cost s"stem$ overhead is applied on the basis of the actual level of
activit" rather than the standard level of activit" allowed for the output of a period.
--. A compan" has a standard cost s"stem in which fixed and variable manufacturing
overhead costs are applied to products on the basis of direct laborAhours. /he
compan"*s choice of the denominator level of activit" has no effect on the fixed
overhead budget variance.
A) =tatement -
54 Statement !!
C) &either statement is true.
D) Both statements are true.
4
Part !! Problem$ 063 #oint$4
1. The Lopez Company uses standard costing its manufacturing plant for auto-parts.
The standard cost of a particular auto-part, based on a denominator level of 4,000
output units per year, budgeted variable overhead of $192,000, and budgeted fxed
overhead of $360,000 is as follows:
Input per unit
Direct materials 3 lbs. at $5 per lb.
Direct labor 5 hrs. at $15 per
hour
Variable overhead 6 machine hours
Fixed overhead 6 machine hours
There was no beginning or ending raw materials inventory, actual production was
4,400 units, and actual costs were as follows.
Actual Total Cost
Direct materials 13,460 lbs $66,836
Direct labor 21,500 hours $344,000
Variable overhead 28,400 hours $245,000
Fixed overhead 28,400 hours $373,000
Calculate the following variances. Be sure to indicate favorable or unfavorableH 040 #oint$4
9aterials :rice Dariance: IIIIIIIIIIIIIIIIIII
9aterials Juantit" Dariance: IIIIIIIIIIIIIIIIIII
Direct abor 3fficienc" Dariance: IIIIIIIIIIIIIIIIIII
Direct abor !ate Dariance: IIIIIIIIIIIIIIIIIII
Dariable ,@ =pending Dariance: IIIIIIIIIIIIIIIIIII
Dariable ,@ 3fficienc" Dariance: IIIIIIIIIIIIIIIIIII
?ixed ,@ Dolume Dariance: IIIIIIIIIIIIIIIIIII
?ixed ,@ Budget Dariance: IIIIIIIIIIIIIIIIIII
8
Blan6
;
2. =eco Corp.$ a wholesale suppl" compan"$ uses independent sales agents to mar6et the
compan"*s products. /hese agents currentl" receive a commission of 2<G of sales$ but
are demanding an increase to 20G of sales. =eco had alread" prepared its budget for next
"ear before learning of the sales agents* demand for an increase in commissions. /hat
budgeted income statement appears below:
=3C, C,!:.
Budgeted -ncome =tatement
=ales C1<$<<<$<<<
Cost of sales 2$<<<$<<<
>ross margin .$<<<$<<<
=elling and administrative expenses:
Commissions C2$<<<$<<<
All other expenses +fixed) 1<<$<<< 2$1<<$<<<
&et income C 1$;<<$<<<
=eco is considering the possibilit" of emplo"ing its own salespersons. /hree individuals
would be re)uired$ at a salar" of C(<$<<< each$ plus commissions of 0G of sales. -n
addition$ a sales manager would be emplo"ed at a fixed annual salar" of C12<$<<<.
!e)uired: 023 #oint$4
a. Compute =eco*s brea6Aeven point in sales dollars based upon the compan"*s budgeted
income statement$ assuming that the compan" continues to use independent sales
agents and that the" are paid the old commission rate of 2<G of sales.
b. Compute =eco*s brea6Aeven point in sales dollars$ assuming that the compan"
emplo"s its own salespersons.
Answer:
a. 3stimated brea6Aeven based on the budgeted income statement.
=ales +a) C1<$<<<$<<<
Dariable expenses:
Cost of sales C2$<<<$<<<
Commissions 2$<<<$<<< 8$<<<$<<<
Contribution margin +b) C 2$<<<$<<<
Contribution margin ratio +b) K +a) 2<G
?ixed expenses C 1<<$<<<
Contribution margin ratio K <.2<
Brea6Aeven C 0<<$<<<
b. 3stimated brea6Aeven with compan" emplo"ing its own salespersons
Dariable expense ratios:
Cost of sales 2<G
Commissions 0G
1<
/otal 20G
Contribution margin ratio +1<<G 20G) (0G
?ixed expenses:
=ales manager C 12<$<<<
( salespersons L C(<$<<< each ;<$<<<
Administrative 1<<$<<<
/otal C (0<$<<<
?ixed expenses C (0<$<<<
Contribution margin ratio K <.(0
Brea6Aeven point C1$<<<$<<<
11