Accounting 285 – Exam II – Fall 2006
Chapters 5-8
Use the following information for the next FIVE questions:
Grossman Company sells miniature Bears footballs. Following is information about its revenue and cost structure:
Selling Price $18.00 per ball
Variable Costs:
Production (manufacturing costs) $3.00 per ball
Selling and Administration (non-manufacturing costs) $1.00 per ball
Fixed Costs:
Production (manufacturing costs) $4,000,000 per year
Selling and Administration (non-mfg costs) $3,000,000 per year
1. Assume that 1,000,000 units are produced and 800,000 units are sold. There is no beginning inventory. What will ending inventory be using variable costing?
a. $200,000
b. $600,000
c. $800,000
d. $1,400,000
2. Assume that 1,000,000 units are produced and 800,000 units are sold. There is no beginning inventory. What will ending inventory be using full costing?
a. $1,600,000
b. $600,000
c. $800,000
d. $1,400,000
3. Assume that 1,000,000 units are produced and 900,000 units are sold. There is no beginning inventory. What will income be using variable costing?
a. $5,600,000
b. $12,600,000
c. $6,000,000
d. $5,500,000
4. Assume that 1,000,000 units are produced and 900,000 units are sold. There is no beginning inventory. What will income be using full costing?
a. $5,600,000
b. $12,600,000
c. $6,000,000
d. $5,500,000
5. Assume that 1,000,000 units are produced and 900,000 units are sold. There is no beginning inventory. What is the cost of one unit of inventory using variable costing?
a. $3.00
b. $4.00
c. $7.00
d. $8.00
Use the following information for the next THREE questions:
Welcome Manufacturing makes doormats. They have two products. Product A is a monogrammed doormat that comes in 20 colors with the customers name added in the last stage of production. Product B is a standard doormat that is made in green and brown. Production of product A is 40,000 units and Product B is 200,000 units. Overhead costs for the factory appear below.
Activity / Driver / Total Pool Cost / Product A Usage / Product B usageSet up / # of setups / $500,000 / 3,000 setups / 7,000 setups
Procurement / # of orders / $900,000 / 20,000 orders / 40,000 orders
Fabrication / Direct labor hrs / $700,000 / 4,000 DL hours / 16,000 DL hours
Inspection / # of inspections / $300,000 / 10,000 inspections / 40,000 inspections
Monogramming / # of monograms / $600,000 / 40,000 monograms / 0 monograms
Shipping / # of shipments / $750,000 / 5,000 shipments / 10,000 shipments
Total Overhead / $3,750,000
6. What is the cost per inspection in the inspection pool?
a. $30.00
b. $7.50
c. $6.00
d. $50.00
7. What is the overhead cost of one unit of product A if the cost is computed using activity based costing and the cost pools shown above?
a. $15.63
b. $15.15
c. $37.50
d. $18.75
8. What is the overhead cost of one unit of product A if the cost is computed using traditional overhead with all overhead assigned on the basis of direct labor hours?
a. $15.63
b. $15.15
c. $37.87
d. $18.75
9. Bar J Company has a capacity of 50,000 units per year and is currently selling 45,000 for $400 each. Washington Company has approached Bar J about buying 2,000 units for only $300 each. The units would be packaged in bulk, saving Bar J $20 per unit when compared to the normal packaging cost.
Normally, Bar J has a variable cost of $280 per unit. The annual fixed cost of $2,000,000 would be unaffected by the special order. What would be the impact on profits if Bar J were to accept this special order?
a. Profits would increase $60,000
b. Profits would increase $80,000
c. Profits would decrease $200,000
d. Profits would increase $40,000
10. Which is the proper order of steps in the target costing process?
a. Analyze customer needs and wants, determine the desired profit, find the target cost, design the product.
b. Design the product, analyze customer needs and wants, determine the desired profit, find the target cost.
c. Analyze customer needs and wants, find the target cost, design the product, determine the desired profit.
d. Analyze customer needs and wants, determine the desired profit, design the product, find the target cost.
11. Which of the following is not a problem caused by assigning actual service department costs to operating departments based on actual usage?
a. The cost assigned to one manager will be affected by the service usage of another manager.
b. Inefficiencies in the service department will be passed along to the operating departments.
c. Operating managers causing the need for large amounts of service capacity will not have to bear the cost of this capacity.
d. All of the above are problems caused by actual allocation
12. Activity based pricing seeks to:
a. charge customers with the costs that they are creating.
b. make greater profits by charging all customers more.
c. maintain all customers in the customer base.
d. all of the above
Use the following for the next TWO questions
Mayhem Company maintains a Power Department that provides electricity to its two operating departments, Machining and Assembly. Mayhem has the following cost information for June in its Power Department:
Budget Actual
Fixed $100,000 $102,000
Variable (budgeted at $0.25/KWH) $ 20,000 $ 17,160
KWHs Generated 80,000 66,000
The Machining Department budgeted 40,000 KWHs (kilowatt hours) of power use and the Assembly Department also budgeted 40,000 KWHs of use. Due to mechanical breakdowns, Machining only used 26,000 KWHs, while Assembly used 40,000 KWHs. Machining has a peak monthly demand of 90,000 KWHs and Assembly has a peak of 60,000 KWHs.
13. The Power Department is evaluated as a cost center. How would the cost control in the Power Department best be described for June?
a. Performance was good as spending was $840 under budget.
b. Given the actual activity level, costs were over budget by $2,660
c. Performance cannot be assessed from the above information since the actual activity level was below budget.
d. Performance was poor as spending was $840 over budget.
14. Mayhem assigns costs to departments at budgeted rates using a dual allocation method. Fixed costs are assigned using peak demand and variable costs are assigned using actual usage. What amount of power cost should be assigned to Machining and Assembly for June?
Machining Assembly
a. $66,500 $50,000
b. $46,942 $72,218
c. $39,000 $60,000
d. $60,000 $60,000
15. 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 with no severance package. The manager's salary, in relation to the decision to keep or drop the sporting goods department, is
a. sunk and therefore not relevant
b. avoidable and therefore relevant
c. not avoidable and therefore relevant
d. the same for all alternatives and therefore not relevant
16. Power Company uses a cost plus approach to pricing. Its costs are as follows:
Variable Production Cost $4.00 per unit
Variable Selling Cost $3.00 per unit
Fixed Production Cost $100,000 per year
Fixed Selling and Admin Cost $50,000 per year
If Power produces and sells 20,000 units for the year and sells at a markup on full cost of 90%, what price will be charged?
a. $27.55
b. $17.10
c. $9.00
d. $13.30
17. Which of the following is not an advantage of Activity Based Costing (ABC) over traditional volume based costing systems?
a. ABC may lead to improvement in cost control as managers are charged for using activities
b. ABC is less costly to implement than traditional systems
c. ABC is less likely than a traditional system to under cost complex products.
d. All of the above are advantages of ABC
18. Which of the following causes income to differ between variable and full costing?
a. Variable production cost
b. Fixed production cost
c. Variable selling and administrative cost
d. Sales
19. A company is making a decision on whether to make or buy a component. The direct labor is $6.00 per unit on the component. The direct labor would not be relevant in the decision analysis in which of the following situations?
a. The company can lay off employees with no compensation.
b. The company has a contract forbidding layoffs for the next ten years and has no alternative use for the direct labor.
c. The company has a contract forbidding layoffs for the next ten years, but could use the employees in another area instead of hiring new employees.
d. Direct labor would not be relevant in all of the above situations.
20. Schnek Company sells a single product that has variable costs of $10 per unit. Fixed costs will be $700,000 across all levels of sales shown.
80,000 / $35
90,000 / $33
100,000 / $31
110,000 / $30
120,000 / $28
What price should Schnek charge to maximize profits?
a. $35
b. $33
c. $31
d. $30
e. $28
Use the following information for the next TWO questions:
A dairy processes raw milk into cream and skim milk at joint cost of $100,000. Information on the two products that result from this process appear below:
Cream Skim Milk
Sales Value at Split Off $150,000 $50,000
Cost of further processing $50,000 $40,000
Sales Value after further processing $180,000 $120,000
Gallons of each product produced 100,000 150,000
21. What amount of joint cost would be assigned to Skim Milk if the joint cost is allocated to the products using the numbers of gallons produced?
a. $25,000
b. $75,000
c. $40,000
d. $60,000
22. Which products should be processed further?
a. Cream
b. Skim Milk
c. Neither
d. Both
Use the following information for the next THREE questions.
Mike’s Pen Company is trying to decide whether or not to continue making gel pens. The following information is available for the segments. Assume that all direct fixed costs could be avoided if a segment is dropped and that the total common fixed costs would remain unchanged if the gel pens were dropped.
Gel Pens / Felt Pens / PencilsSales / $120,000 / $420,000 / $360,000
Variable Costs / $64,000 / $220,000 / $140,000
Contribution Margin / $56,000 / $200,000 / $220,000
Direct Fixed Costs / $42,000 / $70,000 / $90,000
Segment Margin / $14,000 / $130,000 / $130,000
Allocated Common Fixed costs / $20,000 / $70,000 / $60,000
Net Income / ($6,000) / $60,000 / $70,000
23. If gel pens are dropped, overall net income would:
a. Decrease by $14,000
b. Increase by $14,000
c. Increase by $6,000
d. Decrease by $6,000
24. What impact would a 10% increase in the sales of felt pens have on overall company profitability?
a. Income would increase by $42,000
b. Income would increase by $20,000
c. Income would increase by $13,000
d. Income would increase by $6,000
25. Common fixed costs are allocated to segments based on sales dollars. How much common fixed cost would be allocated to Pencils if Gel Pens were dropped?
Assume sales of the other divisions would be unaffected.
a. $60,000
b. $70,000
c. $80,769
d. $69,231
26. Customer profitability analysis might result in:
a. dropping some customers that are unprofitable
b. lowering price or offering incentives to profitable customers.
c. giving incentives to all customers to place orders online.
d. all of the above
Version / 11 / B
2 / D
3 / A
4 / C
5 / A
6 / C
7 / C
8 / D
9 / B
10 / A
11 / D
12 / A
13 / B
14 / A
15 / B
16 / B
17 / B
18 / B
19 / B
20 / D
21 / D
22 / B
23 / A
24 / B
25 / D
26 / D