Managerial Accounting – Exam 4Summer 2006

Student Number: __________________________

Pledge:

On my honor I have neither given or received help on this exam. I understand that any violation of the University Honor Policy will result in an automatic zero on this exam, and that I will be subject to all sanctions available under the University's Honor Policy.

Part I - Multiple Guess (135 points)

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. Lanta Restaurant compares monthly operating results with a static budget prepared at the beginning of the year. When actual sales are less than budget, would the restaurant usually report favorable variances on variable food costs and fixed supervisory salaries?

Food Costs Supervisory SalariesA) No NoB) No YesC) Yes NoD) Yes Yes

3. All other things equal, a company's return on investment (ROI) would generally increase when: A) average operating assets increase. B) sales decrease. C) operating expenses decrease. D) operating expenses increase.

4. The performance of the manager of Division A is measured by residual income. Which of the following would increase the manager's performance measure? A) Increase in average operating assets. B) Decrease in average operating assets. C) Increase in minimum required return. D) Decrease in net operating income.

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5. Consider the following three statements:

I. A profit center has control over both cost and revenue.

II. An investment center has control over invested funds, but not over costs and revenue.

III. A cost center has no control over sales

Which statement(s) is/are correct? A) Only I B) Only II C) Only I and III D) Only I and II

6. A company's return on investment is the:   A) margin divided by turnover.B) margin multiplied by turnover.C) turnover divided by average operating assets.D) turnover multiplied by average operating assets.E) none of the above.

7. Delmar Corporation is considering the use of residual income as a measure of the performance of its divisions. What major disadvantage of this method should the company consider before deciding to institute it?   A) this method does not make allowance for difference in the size of compared divisions.B) opportunities may be undertaken which will decrease the overall return on

investment.C) the minimum required rate of return may eliminate desirable opportunities from

consideration.D) residual income does not measure how effectively the division manager controls

costs.E) none of the above.

8. Which department is usually held responsible for an unfavorable materials quantity variance?  A) Marketing.B) Purchasing.C) Engineering.D) Production.E) None of the above.

9. A major weakness of flexible budgets is that:  A) they are geared only to a single level of activity.B) they give subordinates too much flexibility.C) they force the manager to compare actual costs at one level of activity to budgeted

costs at a different level of activity.D) none of these.

10. In a job order cost system, the amount of overhead cost that has been applied to a job that

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remains incomplete at the end of a period:

A. is deducted on the Income Statement as overapplied overhead. B) is closed to Cost of Goods Sold. C) is transferred to Finished Goods at the end of the period. D) is part of the ending balance of the Work in Process inventory account. E) none of the above.

11. Which one of the following costs would not be considered an indirect cost of serving a particular customer at a Pizza Hut franchise?A) The salary of the franchise's manager.B) The cost of the tables and chairs used to furnish the restaurant.C) The cost of the dough used to make the pizza that is ordered.D) The cost of lighting and heating the restaurant.

12. If a company applies overhead to jobs on the basis of a predetermined overhead rate, a credit balance in the Manufacturing Overhead account at the end of any period means that:

A) more overhead cost has been charged to jobs than has been incurred during the period.

B) more overhead cost has been incurred during the period than has been charged to jobs.

C) the amount of overhead cost charged to jobs is greater than the estimated cost for the period.

D) the amount of overhead cost charged to jobs is less than the estimated overhead cost for the period.

E) none of the above.

13. Which of the following statements is (are) true?A) Companies that produce many different products or services are more likely to use

job-order costing systems than process costing systems. B) Job-order costing systems are used by service firms and process costing systems are

used by manufacturers. C) Costs are traced to departments and then allocated to units of product when job-order

costing is used. D) All of the above.

14. The Precision Company used a predetermined overhead rate last year of $3 per direct labor hour, based on an estimate of 24,000 direct labor hours to be worked during the year. Actual costs and activity during the year were:

Actual manufacturing overhead cost incurred $84,000Actual direct labor hours worked 27,000

A) $3,000 underapplied. B) $3,000 overapplied. C) $12,000 underapplied. D) $12,000 overapplied.

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15 Variable 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.

16. Setting up equipment is an example of a: A) Unit-level activity. B) Batch-level activity. C) Product-level activity. D) Facility-level activity.

17. Which of the following statements regarding fixed costs is incorrect? A) Expressing fixed costs on a per unit basis usually is the best approach for decision-

making. B) Fixed costs expressed on a per unit basis will react inversely with changes in activity. C) Assumptions by accountants regarding the behavior of fixed costs rest heavily on the

concept of the relevant range. D) Fixed costs frequently represent long-term investments in property, plant, and

equipment.

18. Expense A is a fixed cost; expense B is a variable cost. During the current year the activity level has increased, but is still within the relevant range. In terms of cost per unit of activity, 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.

19. Last year, Black Company reported sales of $640,000, a contribution margin of $160,000, and a net loss of $40,000. Based on this information, the break-even point was: A) $640,000. B) $480,000. C) $800,000.D) $960,000.E) None of the above

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Use the following to answer questions 20-21:

The following is Allison Corporation's contribution format income statement for last month: Sales $800,000 Less variable expenses 300,000 Contribution margin 500,000 Less fixed expenses 400,000 Net income $100,000

The company has no beginning or ending inventories. The company produced and sold 10,000 units last month. 20. What is the company's contribution margin ratio?

A) 62.5% B) 160.0% C) 500% D) 20%

21. If sales increase by 200 units, by how much should net income increase? A) $16,000 B) $5,000 C) $2,000 D) $10,000E) None of the above

22. Beaver Company used a predetermined overhead rate last year of $2 per direct labor hour, based on an estimate of 25,000 direct labor hours to be worked during the year. Actual costs and activity during the year were:

Actual manufacturing overhead cost incurred $47,000 Actual direct labor hours worked 24,000

The under- or overapplied overhead last year was: A) $1,000 underapplied. B) $1,000 overapplied.C) $3,000 overapplied. D) $2,000 underapplied.

23. Under Lamprey Company's job-order costing system, manufacturing overhead is applied to Work in Process inventory using a predetermined overhead rate. During January, Lamprey's transactions included the following:

Direct materials issued to production $ 90,000 Indirect materials issued to production 8,000 Manufacturing overhead cost incurred 125,000 Manufacturing overhead cost applied 113,000 Direct labor cost incurred 107,000

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Lamprey Company had no beginning or ending inventories. What was the cost of goods manufactured for January? A) $302,000 B) $310,000 C) $322,000 D) $330,000E) None of the above

24. An unfavorable labor efficiency variance indicates that:

A) The actual labor rate was higher than the standard labor rate. B) The labor rate variance must also be unfavorable. C) Actual labor hours worked exceeded standard labor hours for the production level

achieve. D) Overtime labor was used during the period. E) None of the above.

25. 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. E) None of the above.

26. If the actual labor hours worked exceed the standard labor hours allowed, what type of variance will occur? A) Favorable labor efficiency variance. B) Favorable labor rate variance. C) Unfavorable labor efficiency variance. D) Unfavorable labor rate variance. E) None of the above.

27. Which of the following statements is true?

I. One of the weaknesses of budgets is that they are of little value in uncovering potential bottlenecks in an organization

II. One of the advantages of a self-imposed budget is that the person directly involved in an activity is more likely to be in a position to make good budget estimates.

A) Statement IB) Statement IIC) Neither statement is true.D) Both statements are true.

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28. Which of the following statements is true?

I. A direct material quantity standard generally includes an allowance for waste.

II. An unfavorable labor rate variance can occur if workers with high hourly wage rates are assigned to work on products whose standards assume workers with low hourly wage rates.

A) Statement IB) Statement IIC) Neither statement is true.D) Both statements are true.

29. Which of the following statements is true?

I. Fixed costs should not be included in a flexible budget since such costs are not likely to be controllable by managers.

II. The static budget should be used primarily to determine whether cost control is being maintained.

A) Statement IB) Statement IIC) Neither statement is true.D) Both statements are true.

30. Which of the following statements is true?

I. In a standard cost system, overhead is applied on the basis of the actual level of activity rather than the standard level of activity allowed for the output of a period.

II. A company has a standard cost system in which fixed and variable manufacturing overhead costs are applied to products on the basis of direct labor-hours. The company's choice of the denominator level of activity has no effect on the fixed overhead budget variance.

A) Statement IB) Statement IIC) Neither statement is true.D) Both statements are true.

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Part II – Problems (65 points)

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 fixed overhead of $360,000 is as follows:

Input per unitDirect 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 CostDirect materials 13,460 lbs $66,836Direct labor 21,500 hours $344,000Variable overhead 28,400 hours $245,000Fixed overhead 28,400 hours $373,000

Calculate the following variances. Be sure to indicate favorable or unfavorable! (40 points)

Materials Price Variance: ___________________

Materials Quantity Variance: ___________________

Direct Labor Efficiency Variance: ___________________

Direct Labor Rate Variance: ___________________

Variable OH Spending Variance: ___________________

Variable OH Efficiency Variance: ___________________

Fixed OH Volume Variance: ___________________

Fixed OH Budget Variance: ___________________

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Blank

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2. Seco Corp., a wholesale supply company, uses independent sales agents to market the company's products. These agents currently receive a commission of 20% of sales, but are demanding an increase to 25% of sales. Seco had already prepared its budget for next year before learning of the sales agents' demand for an increase in commissions. That budgeted income statement appears below:

SECO CORP.Budgeted Income Statement

Sales $10,000,000 Cost of sales 6,000,000 Gross margin 4,000,000 Selling and administrative expenses: Commissions $2,000,000 All other expenses (fixed) 100,000 2,100,000 Net income $ 1,900,000

Seco is considering the possibility of employing its own salespersons. Three individuals would be required, at a salary of $30,000 each, plus commissions of 5% of sales. In addition, a sales manager would be employed at a fixed annual salary of $160,000.

Required: (25 points)

a. Compute Seco's break-even point in sales dollars based upon the company's budgeted income statement, assuming that the company continues to use independent sales agents and that they are paid the old commission rate of 20% of sales.

b. Compute Seco's break-even point in sales dollars, assuming that the company employs its own salespersons.

Answer: a. Estimated break-even based on the budgeted income statement.

Sales (a) $10,000,000 Variable expenses: Cost of sales $6,000,000 Commissions 2,000,000 8,000,000 Contribution margin (b) $ 2,000,000

Contribution margin ratio (b) ÷ (a) 20%

Fixed expenses $ 100,000 Contribution margin ratio ÷ 0.20 Break-even $ 500,000

b. Estimated break-even with company employing its own salespersons

Variable expense ratios: Cost of sales 60% Commissions 5% Total 65% Contribution margin ratio (100% – 65%) 35%

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Fixed expenses: Sales manager $ 160,000 3 salespersons @ $30,000 each 90,000 Administrative 100,000 Total $ 350,000

Fixed expenses $ 350,000 Contribution margin ratio ÷ 0.35 Break-even point $1,000,000

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