Accounting 285 – Exam II – Spring 2006

Chapters 6-8

1.Cool Company uses ABC costing. Which of the following is most likely to be the cost driver for the cost of ordering parts?

  1. weight of parts ordered
  2. number of orders placed
  3. direct labor cost
  4. depreciation expense

2.Robinson Company planned to make 500,000 cans of pasta sauce and spend $250,000 on tomatoes during November. However, demand was weak due to increased competition, and only 450,000 cans of pasta sauce were produced. The actual cost incurred was $230,000. Tomato prices were as expected during the period. Which of the following statements would be a fair statement regarding Robinson’s performance on tomato usage?

  1. Robinson was under flexible budget by $20,000 and did a good job controlling costs.
  2. Robinson was over budget by $5,000 and did a poor job of controlling costs.
  3. Robinson’s flexible budget for tomatoes for performance evaluation should have been $250,000.
  4. Both a and c are correct

3.A company normally sells its product for $15 per unit. Normally, the variable cost of production is $9 per unit and the variable selling cost is $2 per unit. Annual fixed costs for production are $5,000,000 and for selling and administrative are $1,000,000. An exporter has approached the company about buying 1,000,000 units at a price of $12 per unit. The company’s capacity is 5,000,000 units, and they are currently only selling 3,000,000. The variable selling cost of $2 per unit will be avoided on the export order. Assume existing sales will be unaffected by the special order. The company uses variable costing. What will be the impact on profits from accepting the special order?

a.Profits will increase by $3,000,000

b.Profits will increase by $1,000,000

c.Profits will decrease by $1,000,000

d.Profits will decrease by $3,000,000

12.A company is trying to decide whether to keep or drop the sporting goods department in their department store. If the segment is dropped, the manager will be fired. The manager's salary, in relation to the decision to keep or drop the sporting goods department, is

  1. sunk and therefore not relevant
  2. the same for all alternatives and therefore not relevant
  3. avoidable and therefore relevant
  4. not avoidable and therefore relevant

13. If a company drops a segment, all the direct fixed costs of the segment are avoided, but none of the common fixed costs are avoided. Income will decrease by which of the following for the segment?

a.sales

b.contribution margin

c.segment margin

d.segment net income

14. Range Corporation currently makes the buckles that it uses for its saddles. It uses 50,000 buckles annually. The costs to make the buckles are given below:

Materials$4.00 per buckle

Labor$3.00 per buckle

Variable overhead$2.00 per buckle

Fixed overhead$7.00 per buckle

A potential supplier has offered to sell Range the buckles for $11.00 each. If the buckles are purchased, 30% of the fixed overhead could be avoided. If Range accepts the offer, it will be:

  1. $100,000 worse off
  2. $250,000 better off
  3. $5,000 better off
  4. $35,000 better off

15.A company has variable production cost of $8 per unit and variable selling cost of $2 per unit. Annual fixed costs for production are $3,000,000 and for selling and administrative are $1,000,000. The company expects to sell 2,000,000 units. What price would the company charge if cost plus pricing is used and the policy is to mark up “full production cost” by 60%?

a.$15.20

b.$5.70

c.$16.00

d.$19.20

16.How are the fixed costs of production treated in determining whether or not to accept a special order?

a.They are increased in proportion to the amount production increases when the special order is accepted.

b.They are considered relevant only when the plant is operating at less than capacity.

c.If the order can be completed without incurring additional fixed costs, they are not relevant.

d.They are never relevant in the decision.

Use the following information for the next three questions.

Kansas Company buys wheat and separates it into wheat germ and flour. The wheat germ can then be sold as is, or processed further into cereal. The flour can be sold as is or processed into cake mix. Kansas incurred a joint cost of $210,000 in acquiring and processing 10,000 bushels of wheat. Information about the resulting products is shown below:

Product / Quantity produced / Sales value per pound / Total additional processing cost / Total sales after processing
Wheat germ / 50,000 lbs / $2.00 / $50,000 / $140,000
Flour / 300,000 lbs. / $0.50 / $180,000 / $400,000

17.Assume the joint cost is assigned to the products based on the physical quantity of output of each product at the split-off point. Assume that each product is sold at the split off point. What is the total gross profit generated, and how much gross profit will be shown for wheat germ, respectively?

a.$70,000; $70,000

b.$40,000; $40,000

c.$40,000; $70,000

d.$40,000; $5,714

18.Assume the joint cost is allocated to the products using the relative sales value at split-off. How much joint cost per pound will be allocated to wheat germ?

a.$0.60

b.$0.42

c.$1.68

d.$21.00

19.Assume the joint cost is allocated to the products using the relative sales value at split-off. Which products should be processed further?

a.flour

b.wheat germ

c.neither

d.both

Use the following information for the next three questions.

Trout Company makes two products and is implementing an Activity Based Costing (ABC) system. Previously, all overhead had been applied on the basis of direct labor hours. The Company produces 20,000 units of product A and 2,000 units of product B. Overhead costs and the ABC pools that will be used are shown in the table below.

Cost Pool / Driver and Level / Cost in Pool / Use by Product A / Use by Product B
Setup / 2,000 setups / $500,000 / 1,600 setups / 400 setups
Ordering / 10,000 orders / $200,000 / 7,000 orders / 3,000 orders
Quality Control / 4,000 inspections / $800,000 / 2,000 inspections / 2,000 inspections
Other / 50,000 direct labor hours / $1,000,000 / 42,000 direct labor hours / 8,000 direct labor hours

20. What is the overhead cost per unit for Product A when all overhead is applied based on direct labor hours?

a.$200.00

b.$105.00

c. $80.00

d. $42.00

21. What is the overhead cost per unit for Product B using ABC?

  1. $89.00
  2. $360.00
  3. $200.00
  4. $105.00

22. Using ABC, what is the cost per order in the Ordering pool?

  1. $250.00
  2. $28.57
  3. $66.67

d.$20.00

23. Which of the following are desirable characteristics of an allocation received by a manger of a producing department from a service department for using the resources of the service department?

  1. The amount of the allocation should be based solely on the usage of the service by the producing department and not a function of the use of the service by other departments.
  2. The manager should be able to budget for the cost.

c.The allocation should force the production manager to pay for the capacity demands the production manager is creating.

d.All of the above are desirable characteristics of an allocation received by a manger of a producing department from a service department.

24.Cook Company sells a single product that has variable costs of $10 per unit. Fixed costs will remain constant across all levels of sales shown.

Units Sold / Price per unit
80,000 / $35
90,000 / $33
100,000 / $31
110,000 / $29

What price should Cook charge to maximize profits?

a.$35

b.$33

c.$31

d.$29

25.A company has three segments with the following financial information and is considering dropping Hospital Supplies.

Hospital Supplies / Retail Stores / Mail Order
Sales / $120,000 / $440,000 / $360,000
Variable Costs / $64,000 / $200,000 / $140,000
Contribution Margin / $56,000 / $240,000 / $220,000
Direct Fixed Costs / $50,000 / $80,000 / $90,000
Allocated Common Fixed Costs / $20,000 / $70,000 / $60,000
Net Income / ($14,000) / $90,000 / $70,000

If Hospital Supplies is dropped, mail order sales are expected to increase by 20%. What is the impact on overall profits of a 20% increase in Mail Order? Ignore all other impacts.

a.Increase profits by $44,000

b.Increase profits by $72,000

c.Increase profits by $26,000

d.Increase profits by $14,000

Answers
1 / B / 14 / C
2 / B / 15 / A
3 / A / 16 / C
4 / A / 17 / C
5 / B / 18 / C
6 / B / 19 / A
7 / A / 20 / B
8 / A / 21 / B
9 / B / 22 / D
10 / D / 23 / D
11 / C / 24 / D
12 / C / 25 / C
13 / C / 26 / A

From Spring 06 Exam I

Use the following information for the next FOUR questions:

Data Manufacturing makes and sells a wireless keyboard to be used with laptop computers. The following amounts represent Data’s cost structure:

Selling price$22

Variable costs per unit:

Production$9

Selling and Administrative$3

Fixed Costs per year:

Production overhead$2,000,000

Selling and administrative$500,000

During 2005, 500,000 units were produced and 440,000 units were sold. There was no beginning inventory.

21.What is the cost of one unit of inventory using variable costing?

a.$9.00

b.$12.00

c.$13.00

d.$17.00

22.What is the total dollar value of ending inventory using full costing?

a.$720,000

b.$780,000

c.$960,000

d.$540,000

23.What is income under full costing?

a.$2,140,000

b.$1,960,000

c.$1,900,000

d.$1,420,000

24.What is income under variable costing?

a.$1,180,000

b.$1,720,000

c.$1,900,000

d.$2,140,000

21 / A
22 / B
23 / A
24 / C