Review Sheet—Exam #2

Modules 13-15
Differences (Similarities) between financial and managerial accounting
Strategic Cost Management
Strategic Positioning
Cost Drivers (Types, examples)
Ethics in Managerial Accounting

Different Cost Behavior Patterns

Relevant Range
Committed vs. Discretionary Fixed Costs
Computing Total Costs, Average Unit Costs, Total (Unit) Variable Costs, Total (Unit) Fixed
Costs
Cost Estimation Tools
Manufacturing Cost Hierarchy

Assumptions of CVP Analysis

Contribution Margin (Unit Contribution Margin, Contribution Margin Ratio)
Contribution Income Statement
Profitability Analysis
Cost-Volume-Profit Analysis
Break-Even
Profit Planning
Break-Even in Sales Dollars
Operating Leverage

Example questions (concept):

1. Which of the following is an example of a discretionary fixed cost?
a. Depreciation of manufacturing facilities
b. Donations to charitable organizations
c. Salaries of production supervisors
d. Property taxes on manufacturing facilities
Answer: b.

2. The following procedure performed by a candy manufacturer is the BEST example of a

product level activity within a manufacturing cost hierarchy:
a. Cleaning the mixing machine for the next production run of candy, a special Halloween candy
b. Developing an advertising campaign for a special Halloween candy
c. Inspecting the quality of the candy produced during one of the special Halloween package
production runs
d. Resetting the packaging equipment to wrap a special 36-count Halloween package
Answer: b.
Example questions (calculation):

3. The Fairport Machine Shop wants to develop a cost estimating equation for its monthly cost of
electricity. It has the following data:

Cost of Electricity (Y) Direct Labor-Hours (X)

Month
January $13,000 1,500
April $15,000 1,700
July $17,000 2,000
October $14,500 1,600

What would be the best equation using the high-low method?

a. Y = $4,000 + $7X
b. Y = $0 + $9X
c. Y = $1,000 + $8X
d. Y = $4,000 + $8X
Answer : c.

4. The following information pertains to Cutter Company’s weekly activity and total costs:

Volume of Activity Total Cost

110 units $1,400
120 units $1,500
130 units $1,600

What are Cutter’s weekly fixed costs?

a. $0
b. $200
c. $300
d. $1,600
Answer: c.

5. Rozella’s income statement is as follows:

Sales (10,000 units) $120,000
Less variable costs - 48,000
Contribution margin $72,000
Less fixed costs - 24,000
Net income $ 48,000
What is the unit contribution margin?
a. $12.00
b. $7.20
c. $4.80
d. $2.40
Answer: b.
6. Rozella’s income statement is as follows:
Sales (10,000 units) $120,000
Less variable costs - 48,000
Contribution margin $72,000
Less fixed costs - 24,000
Net income $ 48,000
What is the contribution margin ratio?
a. 167 percent
b. 30 percent
c. 40 percent
d. 60 percent
Answer: d.

7. Rozella’s income statement is as follows:

Sales (10,000 units) $120,000
Less variable costs - 48,000
Contribution margin $72,000
Less fixed costs - 24,000
Net income $48,000
If sales increase by 1,000 units, profits will:
a. Increase by $12,000.
b. Increase by $7,200.
c. Increase by $4,800.
d. Increase by $8,000.
Answer: b.

8. Rozella’s income statement is as follows:

Sales (10,000 units) $80,000
Less variable costs - 48,000
Contribution margin $32,000
Less fixed costs - 24,000
Net income $ 8,000
If sales increase by $15,000, profits will:
a. Increase by $1,000.
b. Increase by $4,000.
c. Increase by $6,000.
d. Increase by $15,000.
Answer: c.

9. George Company sells one product at a price of $20 per unit. Variable expenses are 40
percent of sales, and fixed expenses are $20,000. The sales dollars level required to break even
are:
a. $2,500
b. $12,000
c. $33,333
d. $50,000
Answer: c.

10. The following information pertains to Oliver’s 2010 operations:

Selling price per unit $50
Variable costs per unit $20
Total fixed costs $100,000
Oliver’s break-even point in units is:
a. 2,000 units
b. 3,333 units
c. 5,000 units
d. 60,000 units
Answer: c.

11. The following information pertains to Manning, Inc:

Selling price per unit $100
Variable costs per unit $70
Total fixed costs $420,000
Tax rate 40%
The sales volume required to obtain a target after-tax profit of $108,000 is:
a. 6,000 units
b. 8,572 units
c. 14,000 units
d. 20,000 units
Answer: d.

12. The following information pertains to Manning, Inc:

Selling price per unit $100
Variable costs per unit $70
Total fixed costs $420,000
Tax rate 40%
The break-even point in sales dollars is:
a. $700,000
b. $427,000
c. $600,000
d. $1,400,000
Answer: d.

Modules 17-18

Product Costs vs. Period Costs

Components of Product Cost
Predetermined Overhead Rates
Process Costing vs. Job Costing
Job Order Records
Statement of Cost of Goods Manufactured
Raw Materials Used Calculation
Total Manufacturing Costs Calculation
Cost of Finished Goods Calculation
Cost of Sales Calculation

Activities and Cost Drivers

Activity-Based Costing Model
Cost Objective
Plant-Wide Rate and Traditional Product Costing
Unit Activity Costs and ABC
Benefits of ABC
Activity-Based Management

Example questions (concept):

1. How is depreciation on the manufacturing building and equipment classified in financial

reporting?
a. As an irrelevant cost because it has already been incurred
b. As a current expense
c. As part of the cost of the products produced
d. As a period cost
Answer: c.

2. Which of the following costs are treated as part of the cost of product?
a. Wages of plant security guards
b. Insurance on the plant building and equipment
c. Depreciation on the kitchen sink in the plant cafeteria
d. All of the above are product costs
Answer: d.

3. Which of the following is NOT a period cost?

a. The president’s salary
b. Sales commissions
c. Depreciation on the mainframe computer in the Information Systems Department
d. Subsidy of the plant cafeteria
Answer: d.

4. For which of the following products would job order costing be least likely to be used?
a. Residential building
b. Textbook printing
c. Mortgage loan processing
d. Newsprint paper Manufacturing
Answer: d.

5. For which of the following manufactured products would job costing be more appropriate than
process costing?
a. Paint
b. Designer dresses sold to celebrities
c. Chemicals
d. Liquid soap
Answer: b.

6. Traditional cost systems tend to _____________________ high-volume, low-complexity

products.
a. Undercost
b. Overcost
c. Accurately cost
d. None of the above
Answer: b.

Example questions (calculation):

7. Irving Corp. obtained the following information from its accounting records:
Sales = $18,000
Beginning Finished Goods Inventory = $10,500
Ending Finished Goods Inventory = $8,500
Cost of Goods Sold = $8,000
Ending Work-in-Process Inventory = $9,500
The Cost of Goods Manufactured this period equals:
a. $8,000.
b. $9,000.
c. $10,000.
d. $11,500.
Answer: c.

8. Information from Rosedale Company is given below in $000s for this period:
Sales $350
Selling and administrative costs 26
Purchases of raw materials 9
Direct labor 11
Manufacturing overhead 105
Raw materials used (all direct cost) 11
Cost of goods manufactured 68
Beginning raw materials inventory 25
Beginning work-in-process inventory 78
Beginning finished goods inventory 80
Ending finished goods inventory 75

Required
Determine the following amounts in dollars:
a. Ending Raw Materials assuming all Raw Materials costs are classified as direct costs.
b. Ending Work-in-Process Inventory.
c. Cost of Goods Sold.
Answer:
a. $23
b. $137
c. $73

9. Tennco, Inc. has two categories of overhead: maintenance and inspection. Costs expected for
these categories for the coming year are as follows:

Maintenance $300,000
Inspection 200,000

The following data have been assembled for use in developing a bid for a proposed job:
.
Direct materials $3,000
Direct labor $8,000
Machine-hours 400
Number of inspections 4
Direct labor-hours 800

The practical capacity of machine-hours for all jobs during the year is 25,000, and for
inspections is 800. These are the cost drivers for maintenance and inspection costs, respectively.

Using the appropriate cost drivers, the total cost of the potential job is:

a. $11,000.
b. $7,200.
c. $16,800.
d. $15,000.
Answer: c

10. Franklin, Inc uses activity-based costing. The company produces X and Y. Information
relating to the two products is as follows:

X Y
Units produced 38,000 50,000
Machine-hours 15,000 17,000
Direct labor-hours 16,000 24,000
Materials handling (number of 8,000 12,000
moves)
Setups 10,000 14,000

The following costs are reported:

Materials handling $160,000
Labor-related overhead 480,000
Setups 240,000

Labor-related overhead costs assigned to product X are:

a. $192,000.
b. $232,000.
c. $288,000.
d. $272,500.
Answer: a

11. The following information is available pertaining to Bonita Division, that uses a plant-wide
overhead rate based on machine hours:
Mixing Dept. Finishing Total
Dept.
Overhead $30,000 $60,000 $90,000
Direct labor-hours 7,500 2,500 10,000
Machine-hours 2,500 7,500 10,000

Production information pertaining to Job 101:

Mixing Dept. Finishing Total

Dept.
Prime costs $5,000 $0 $5,000
Direct Labor- 250 0 250
hours
Machine-hours 10 10 20
Units produced 500 0 500

What are the total overhead costs assigned to Job 101?

a. $120
b. $200
c. $90
d. $180
Answer: d.

12. Bass Corporation manufactures two products: A and B. The total indirect manufacturing
overhead resource costs of $91,700 have been assigned to four activity cost pools that use the
following cost drivers:

Product Number of Setups Machine Runs Packing Hours Orders

Product A 40 70 2,000 150
Product B 20 140 3,000 250
Cost per Pool $7,500 $4,200 $60,000 $20,000

Required:

a. Compute the unit activity costs for each of the cost drivers listed.

b. Assign the overhead costs to products A and B using activity-based costing.

Answer:
a.

Unit cost per Setup = $125.00 per setup

Unit cost per Machine Run = $20 per run
Unit cost per hour of Packing = $12 per hour
Unit cost per Order = $50 per order

b.

Total cost of Product A = $37,900

Total cost of Product B = $53,800

Module 21

Advantages/Benefits of Budgeting
Management by Exception
Common Approaches to Budgeting
The Budgeting Process
The Master Budget (sale, purchase, expense, cash budgets, budgeted financial statements and
production budget)
Budgeting and Human Behavior
Budgetary Slack

Example questions (concept):

1. Which of the following costs would be reported in the general and administrative expense
budget?
a. Factory overhead
b. Sales commissions
c. Direct manufacturing labor
d. Expenses incurred in an accounting department
Answer: d

2. Which of the following budgets for a manufacturing firm indicates the raw materials that must
be acquired to meet production needs and ending inventory requirements?
a. The sales budget
b. The production budget
c. The purchases budget
d. The manufacturing disbursements budget
Answer: c

3. Which of the following budgets tends to tie into all of the other budgets?
a. The operating budget
b. The cash budget
c. The sales budget
d. The purchasing budget
Answer: b

4. Which of the following is (are) the primary source(s) of information for the cash budget?
a. The prior year's financial statements
b. The capital budget
c. The sales forecast
d. The purchases and operating expense budgets
Answer: d

Example questions (calculation):

5. Reinmund Company has a sales budget for next month of $500,000. Cost of goods sold is
expected to be 40 percent of sales. All goods are purchased in the month used and paid for in the
month following purchase. The beginning inventory of merchandise is $10,000, and an ending
inventory of $12,000 is desired. Beginning accounts payable is $76,000. For Reinmund
Company, the ending accounts payable should be:
a. $78,000.
b. $122,000.
c. $178,000.
d. $202,000.
Answer: d

6. Arizona Corporation has a sales budget for next month of $200,000. Cost of goods sold is
expected to be $100,000. All goods are purchased in the month used and paid for in the month
following their purchase. The beginning inventory of merchandise is $8,000, and an ending
inventory of $6,000 is desired. Beginning accounts payable is $26,000. How much merchandise
inventory will Arizona need to purchase next month?
a. $100,000
b. $98,000
c. $102,000
d. $200,000
Answer: b

7. Mazzitelli Company manufactures boxes. To manufacture a box, it takes 20 units of wood

and 1 unit of plastic. Scheduled production of boxes for the next two months is 1,050 and 1,250
boxes, respectively. Beginning inventory is 8,000 units of wood and 60 units of plastic. The
ending inventory of wood is planned to decrease 1,000 units each of the next two months, and
the plastic inventory is expected to increase 10 units each of the next two months.

Based on this information, the number of units of wood that Mazzitelli needs to purchase during
the first month is:
a. 1,000 units.
b. 20,000 units.
c. 2,000 units.
d. 9,000 units.
Answer: b

8. The Palack Manufacturing Company expects to incur the following per unit costs for 1,000
units of production:
Direct materials 2lb. @ $10 = $20
Direct labor 1 hr. @ $12 = $12
Variable overhead 75% of direct labor costs
Fixed overhead 50% of direct labor costs
What is the total cost reported in the manufacturing cost budget?
a. $12,000
b. $47,000
c. $57,000
d. $15,000
Answer: b

9. The forecasted sales pertain to Louis Corporation:

Month Sales
September $100,000
October 80,000

Finished Goods Inventory (August 31) 7,000

Louis Corporation has a selling price of $5 on all units and expects to maintain ending
inventories equal to 25 percent of the next month's sales.
How many units does Louis expect to produce in September?
a. 14,000
b. 18,000
c. 17,000
d. 25,000
Answer: c

10. Casey Productions needs to know its anticipated cash inflows for the next quarter by month.
Cash sales are 10 percent of total sales each month. Historically, credit sales on account have
been collected as follows: 60 percent in the month of sale, 30 percent in the month after the sale,
and the remaining 10 percent two months after the sale. Sales for the quarter are projected as
follows: April, $60,000; May, $50,000; and June, $70,000. Accounts receivable on March 31
were $30,000.
Calculate the amount of Casey’s expected cash collections for June.

Answer:
Casey will collect $7,000 + $37,800 + $13,500 + $5,400 = $63,700.

Modules 22-23
Responsibility Accounting
Responsibility Centers
Standard Costs
Flexible Budget
Standard Cost Variance
Standard Cost Variance Analysis
Materials Price and Quantity Variances
Cause of Materials Price/Quantity Variance
Labor Rate and Efficiency Variances
Cause of Labor Rate/Efficiency Variance
Variable Overhead Spending and Efficiency Variances
Fixed Overhead Variance
Sales Price and Volume Variances

Segment Reports
Segment Costs
Segment Contribution Margin
Segment Margin
Transfer Pricing (Definition, methods)
Return on Investment
Residual Income
(Dis)Advantages of ROI and residual Income
Balanced Scorecard (Definition, measures)

Example questions (concept):

1. A favorable labor efficiency variance is created when:
A. actual labor hours worked exceed standard hours allowed.
B. actual hours worked are less than the standard hours allowed.
C. actual wages paid are less than amounts that should have been paid.
D. actual units produced exceed budgeted production levels.
E. actual units produced exceed standard hours allowed.
Answer: B

2. The individual generally responsible for the direct-material price variance is the:
A. sales manager.
B. production supervisor.
C. purchasing manager.
D. finance manager.
E. head of the human resources department.
Answer: C

3. A direct-labor efficiency variance cannot be caused by:

A. inexperienced employees.
B. poor quality raw materials.
C. employee inefficiency.
D. an out-of-date labor time standard.
E. producing fewer finished units than originally planned.
Answer: E

4. What will cause the variable-overhead efficiency variance?

A. Efficient or inefficient use of a specific component of variable overhead (e.g., electricity).
B. Full or partial utilization of major equipment resources.
C. Production of units in excess of the number of units sold.
D. Efficient or inefficient use of the cost driver (e.g., machine hours) for variable overhead.
E. Changes in the salary cost of production supervisors.
Answer: D

5. Easy-to-Use Software operates stores within five regions. Regional managers are held
accountable for marketing, advertising, and sales decisions, and all costs incurred within their
region. In addition, regional managers decide whether new stores will open, where the stores
will be located, and whether the stores will lease or purchase the facilities. If store managers are
accountable for marketing, advertising, and sales decisions, and costs incurred within their
stores, ideally, what type of responsibility center should be used?
Region Store
A. Profit center Profit center
B. Profit center Cost center
C. Profit center Revenue center
D. Investment center Profit center
E. Investment center Cost center
Answer: D

6. ROI is most appropriately used to evaluate the performance of:

A. cost center managers.
B. revenue center managers.
C. profit center managers.
D. investment center managers.
E. both profit center managers and investment center managers.
Answer: D

7. Consider the following statements about residual income:

I. Residual income incorporates a firm's cost of acquiring investment capital.
II. Residual income is a percentage measure, not a dollar measure.
III. If used correctly, residual income may result in division managers making
decisions that are in their own best interest and not in the best interest of the entire firm.
Which of the above statements is (are) true?
 A. I.
B. II.
C. I and II.
D. II and III.
E. I and III.
Answer: A

8. Transfer prices can be based on:

A. variable cost.
B. full cost.
C. an external market price.
D. a negotiated settlement between the buying and selling divisions.
E. all of the above.

Answer: E

9. Cook River Company management is analyzing the company’s standard cost variances for
direct materials for the most recent period. The following information was available from
company records.
Actual quantity of materials used 24,000 units
Budgeted quantity of materials used 22,000 units
Actual price paid for materials $4 per unit
Budgeted price paid for materials $6 per unit
There were no increases or decreases in inventories during the period. Calculate the materials
quantity variance for the period.

Answer:
Materials quantity variance = (budgeted quantity – actual quantity) × Standard Price
$12,000 (U)

10. Red River Valley Company management is analyzing the company’s standard cost variances
for direct materials for the most recent period. The following information was available from
company records.
Actual quantity of materials used 24,000 units
Budgeted quantity of materials used 22,000 units
Actual price paid for materials $8 per unit
Budgeted price paid for materials $12 per unit
There were no increases or decreases in inventories during the period. Calculate the materials
price variance for the period.

Answer:
Materials price variance = (Budgeted Price – Actual Price) × Actual Quantity
96,000 (F)

11. Hartwell Engineering Company uses a standard cost system. The following information
pertains to 20x7:
Actual total direct labor costs $160,000
Total standard labor hours allowed 12,000 hrs.
Actual labor rate $16 per hour
Standard labor rate $17 per hour
Calculate Hartwell's labor efficiency variance.

Answer:
Labor Efficiency Variance = (Budgeted Labor Hours – Actual Labor Hours) × Standard Labor
Rate
34,000 (F)

12. The management of Rose Enterprises is analyzing variable overhead variances for the fiscal
period just ended. During the period, Rose’s management used 2,500 hours of direct labor. It
had budgeted to use 4,000 hours of direct labor. Hours of direct labor is the single overhead
driver of variable overhead. Variable overhead consists of two items. Indirect labor was
budgeted as $3.00 per hour of direct labor. Indirect materials was budgeted as $2.00 per hour of
direct labor. Actual variable overhead was $15,000. Calculate Rose's variable overhead
efficiency variance.

Answer:
(Budgeted Quantity of the Variable Overhead Base – Actual Quantity of the Variable Overhead
Base) × Standard Variable Overhead Rate = Variable Overhead Efficiency Variance
$7,500 (F)

13. The management of Rose Enterprises is analyzing variable overhead variances for the fiscal
period just ended. During the period, Rose’s management used 2,500 hours of direct labor. It
had budgeted to use 4,000 hours of direct labor. Hours of direct labor is the single overhead
driver of variable overhead. Variable overhead consists of two items. Indirect labor was
budgeted as $3.00 per hour of direct labor. Indirect materials was budgeted as $2.00 per hour of
direct labor.
Actual variable overhead was $15,000. Calculate Rose's variable overhead spending variance.

Answer:
(Budgeted Quantity of the Variable Overhead Base × Standard Variable Overhead Rate) –
Actual
$5,000 (F)

14.

The following provides cost standards for product no. B55:

Direct material 3 pounds at $2.50 per $ 7.50
pound
Direct labor 5 hours at $7.50 per hour 37.50

Actual results:
Units produced 7,800 units
 Direct material purchased 25,000 pounds at $2.70 $ 67,500
Direct material used 23,100 pounds at $2.70 62,370
Direct labor 40,100 hours at $7.30 292,730
Required:
a. The direct-material quantity variance is: $750F.
b. The direct-material price variance is: $5,000U.
c. The direct-labor rate variance is: $8,020F.
d. The direct-labor efficiency variance is: $8,250U.
e. The standard hours allowed for the work performed are: 39,000.
f. Collins Corporation had a favorable direct-labor efficiency variance of $5,250 for the
period just ended. The actual wage rate was $0.50 more than the standard rate of $10.00.
If the company's standard hours allowed for actual production totaled 9,000, how many
hours did the firm actually work: 8,475.

15. Wabash Company has the following information pertaining to its Stone Division for this year
Stones
Fixed manufacturing expenses $100,000
Fixed selling and administrative expenses 70,000
Sales 400,000
Direct manufacturing costs (variable) 100,000
Variable selling and administrative 90,000
expenses
Common expenses for the year are $24,000.
Calculate the Stone Division’s contribution margin.

Answer:
Contribution Margin: $210,000

16. Wabash Company has the following information pertaining to its Brick division for this year:
Bricks
Fixed manufacturing expenses $35,000
Fixed selling and administrative expenses 30,000
Sales 250,000
Direct manufacturing costs (variable) 40,000
Variable selling and administrative expenses 70,000
Corporate expenses allocated to the brick division are $24,000.
Calculate the brick division’s division margin.

Answer:
Division Margin $75,000

17. Westchester Company has the following data for this year:
Bottling Mixing
Division Division
Average operating assets $160,000 $400,000
Contribution margin 80,000 250,000
Operating income 40,000 60,000
Sales 200,000 600,000
Weighted-average cost of capital 18% 18%
Westchester Company has a target ROI of 18 percent.

Required:
Calculate the following amounts for each division:
a. Return on sales ratio
b. Operating investment turnover
c. ROI
d. Residual income

Bottling Division:
a. Return on sales ratio= 20 percent
b. Investment turnover ratio = 1.25
c. ROI = 25 percent
d. Residual income = $11,200
Mixing Division:
a. Return on sales ratio = 10 percent
b. Investment turnover ratio = 1.50
c. ROI = 15 percent
d. Residual income = $(12,000)

Note from the instructor: The sample questions, calculations in particular, are similar in
format to the ones to be found in you exams. The instructor will not be able to help you
with how to do the problems, but know that the problem structure is very similar to those
homework and exercises problems that we worked during each lesson. I encourage you to
discuss with others (via the threaded discussion under the exam #2 unit); compare answers
and methodology. Good luck!

All exams and exam reviews are properties of the school of accounting and are restricted to
the use in the current class, you are not allowed to make copies and distribute them.

Your exam will be open book/notes, which means that you may refer to the ppt slides of the
lecture notes, but should not refer to other class materials, such as homework solutions and
exam review sheets.