CHAPTER 14 COST ALLOCATION, CUSTOMER-PROFITABILITY ANALYSIS, AND SALES-VARIANCE ANALYSIS

TRUE/FALSE 1. Indirect costs are costs that cannot be traced to cost objects in an economically feasible way. Answer: Terms to Learn: 2. True Difficulty: cost allocation 1 Objective: 1

To motivate engineers to design simpler products, costs for production, distribution, and customer service may be included in product-cost estimates. Answer: Terms to Learn: True Difficulty: cost allocation 2 Objective: 1

!or e"ternal reporting, inventoriable costs under #$$% sometimes include &'( costs. Answer: Terms to Learn: !alse Difficulty: cost allocation 2 Objective: 1

)nder #$$%, inventoriable costs include only the costs of producing and sometimes the design costs of the product. *. To allocate a cost, it must satisfy all four purposes for which costs are allocated. Answer: !alse Difficulty: 2 Objective: 1 Terms to Learn: cost allocation To allocate a cost, it is only necessary to satisfy one of the purposes for which costs are allocated. +. Today, companies are simplifying their cost systems and moving toward lessdetailed and less-comple" cost allocation bases. Answer: !alse Difficulty: Objective: 2 Terms to Learn: cost allocation ,ompanies are moving toward more-detailed and more-comple" cost allocations because today technology can capture these costs in a relatively ine"pensive manner.

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.hen using the cause-and-effect criterion, cost drivers are selected as the cost allocation bases. Answer: Terms to Learn: True Difficulty: cost allocation 1 Objective: 2

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The ability-to-bear criterion is considered superior when the purpose of cost allocation is motivation. Answer: !alse Difficulty: 2 Objective: 2 Terms to Learn: cost allocation The cause-and-effect or benefits-received criteria is considered superior when the purpose of cost allocation is motivation.

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The benefits of implementing a more-comple" cost allocation system are relatively easy to 1uantify for application of the cost-benefit approach. Answer: !alse Difficulty: 2 Objective: 2 Terms to Learn: cost allocation The benefits of implementing a more-comple" cost allocation system are difficult to measure.

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3ach company must decide which corporate cost categories should be included in the indirect costs of the divisions 4 all, only a subset, or none. Answer: Terms to Learn: True Difficulty: cost allocation 2 Objective:

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!ull allocation of corporate costs to divisions is justified when the notion of controllability is applied. Answer: !alse Difficulty: Objective: Terms to Learn: cost allocation The controllability notion is used to justify e"cluding some or all corporate costs from division reports, not to justify including full costs.

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.hen there is a lesser degree of homogeneity, fewer cost pools are re1uired to accurately e"plain the use of company resources. Answer: !alse Difficulty: 2 Objective: Terms to Learn: homogeneous cost pool The greater the degree of homogeneity, the fewer the cost pools re1uired to accurately e"plain the use of company resources.

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If a cost pool is homogeneous, the cost allocations using that pool will be the same as they would be if costs of each individual activity in that pool were allocated separately. Answer: Terms to Learn: True Difficulty: homogeneous cost pool 2 Objective:

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!acility-sustaining costs do not have a cause-and-effect relationship with individual products. Answer: Terms to Learn: True Difficulty: homogeneous cost pool 2 Objective:

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$n individual cost item can be simultaneously a direct cost of one cost object and an indirect cost of another cost object. Answer: Terms to Learn: True Difficulty: homogeneous cost pool Objective:

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$ homogenous cost pool has costs that have similar cause-and-effect relationships with the cost-allocation base. Answer: Terms to Learn: True Difficulty: homogeneous cost pool 2 Objective:

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6nce a cost pool has been established, it should not need to be revisited or revised. Answer: !alse Difficulty: 2 Objective: Terms to Learn: homogeneous cost pool 6nce a cost pool has been established, it is often necessary to revisit it or revise it.

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$ll customers are e1ually important to a company and should receive e1ual levels of attention. Answer: !alse Difficulty: Objective: * Terms to Learn: customer-profitability analysis ,ustomers should receive a level of attention from the company that matches their contribution to the company7s profitability.

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The purpose of price discounting is to encourage increases in customer purchases. Answer: Terms to Learn: True Difficulty: price discounting Objective: *

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There are two elements that influence customer profitability 4 revenues and costs. Answer: Terms to Learn: True Difficulty: 2 customer-profitability analysis Objective: *

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,ompanies that only record the invoice price can usually trac8 the magnitude of price discounting. Answer: !alse Difficulty: 2 Terms to Learn: price discounting To trac8 discounting, the discount must be recorded. Objective: *

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$ customer cost hierarchy categori9es costs related to customers into different cost pools on the basis of using only one cost driver. Answer: !alse Difficulty: 2 Objective: * Terms to Learn: homogeneous cost pool, customer cost hierarchy $ customer cost hierarchy categori9es costs related to customers into different cost pools using different drivers.

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$n activity-based costing system may focus on customers rather than products. Answer: Terms to Learn: True Difficulty: 2 customer-profitability analysis Objective: +

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$ customer cost hierarchy may include distribution-channel costs. Answer: Terms to Learn: True Difficulty: 1 customer cost hierarchy Objective: +

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The cost of visiting customers is an e"ample of a customer output unit-level cost. Answer: !alse Difficulty: 2 Objective: + Terms to Learn: customer cost hierarchy The cost of visiting customers is an e"ample of a customer-sustaining cost.

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In general, distribution-channel costs are more easily influenced by customer actions than customer batch-level costs. Answer: !alse Difficulty: Objective: Terms to Learn: customer cost hierarchy In general, customer batch-level costs are more easily influenced by customer actions than distribution-channel costs.

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If one of four distribution channels is discontinued, corporate-sustaining costs such as general administration costs will most li8ely be reduced by 2+:. Answer: !alse Difficulty: Objective: Terms to Learn: customer cost hierarchy If one of four distribution channels is discontinued, corporate-sustaining costs such as general administration costs will most li8ely not be affected.

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To more accurately assess customer profitability, corporate-sustaining costs should be allocated. Answer: !alse Difficulty: Objective: Terms to Learn: customer-profitability analysis, customer cost hierarchy The allocation of corporate-sustaining costs serves no useful purpose in assessing customer profitability, decision ma8ing, performance evaluation, or motivation.

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It is common to find that a small number of customers generate a high percentage of operating income. Answer: Terms to Learn: True Difficulty: 2 customer-profitability analysis Objective: -

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;anagers who utili9e customer profitability charts should drop customers that generate a negative customer operating income, since dropping an unprofitable customer will automatically cause overall income to increase. Answer: !alse Difficulty: 2 Objective: Terms to Learn: customer profitability analysis ;anagers who utili9e customer profitability charts should not drop customers that generate a negative customer operating income, because dropping an unprofitable customer may not cause overall income to increase.

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It is possible that the largest customer in terms of revenue is not the most profitable customer. Answer: Terms to Learn: True Difficulty: 2 customer profitability analysis Objective: -

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The static-budget variance is the difference between an actual result and a budgeted amount in the static budget. Answer: Terms to Learn: True Difficulty: static budget variance 1 Objective: /

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The fle"ible-budget variance is the difference between an actual result and the fle"ible-budget amount based on the level of output actually achieved in the budget period. Answer: Terms to Learn: True Difficulty: 1 fle"ible budget variance Objective: /

$dditional insight can be gained by dividing the sales-mi" variance into the fle"ible-budget variance and the sales-volume variance. Answer: !alse Difficulty: 1 Objective: / Terms to Learn: static budget variance, fle"ible budget variance, sales-volume variance $dditional insight can be gained by dividing the static-budget variance into the fle"ible-budget variance and the sales-volume variance.

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$ favorable sales-mi" variance arises when the actual sales-mi" percentage is less than the budgeted sales-mi" percentage. Answer: !alse Difficulty: Objective: / Terms to Learn: sales-mi" variance $ favorable sales-mi" variance arises when the actual sales-mi" percentage e"ceeds the budgeted sales-mi" percentage.

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$ composite unit is a hypothetical unit with weights based on the mi" of individual units. Answer: Terms to Learn: True Difficulty: composite unit 1 Objective: /

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The sales-mi" variance can be e"plained in terms of the budgeted contribution margin per composite unit of the sales mi". Answer: Terms to Learn: True Difficulty: 2 sales-mi" variance, composite unit Objective: /

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The sales-1uantity variance is favorable when budgeted unit sales e"ceed actual unit sales. Answer: !alse Difficulty: Objective: / Terms to Learn: sales-1uantity variance The sales-1uantity variance is unfavorable when budgeted unit sales e"ceed actual unit sales.

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The sales mi" variance is the difference between budgeted contribution margin for the actual sales mi" and the budgeted contribution margin for the budgeted sales mi". Answer: Terms to Learn: True Difficulty: sales mi" variance 2 Objective: /

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The sales 1uantity variance is the difference between budgeted contribution margin based on actual units sold of all products at the budgeted mi", and contribution margin in the fle"ible budget. Answer: !alse Difficulty: 2 Objective: / Terms to Learn: sales 1uantity variance The sales 1uantity variance is the difference between budgeted contribution margin based on actual units sold of all products at the budgeted mi", and contribution margin in the static budget.

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The mar8et-share variance is caused solely by the actual mar8et share being different than the budgeted mar8et share. Answer: Terms to Learn: True Difficulty: mar8et-share variance Objective: 0

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$ favorable mar8et-si9e variance results with a decrease in mar8et si9e. Answer: !alse Difficulty: Objective: Terms to Learn: mar8et-si9e variance $ favorable mar8et-si9e variance results with an increase in mar8et si9e. 0

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The fle"ible-budget variance can be further divided into the sales-mi" variance and the sales-1uantity variance. Answer: !alse Difficulty: 1 Objective: 0 Terms to Learn: sales-volume variance, sales-mi" variance, sales-1uantity variance The sales-volume variance can be further divided into the sales-mi" variance and the sales-1uantity variance.

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The mar8et share variance is the difference in budgeted contribution margin for actual mar8et si9e in units caused solely by the actual mar8et share being different from the budgeted mar8et share. Answer: Terms to Learn: True Difficulty: mar8et share variance 2 Objective: 0

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The mar8et si9e variance is the difference in budgeted contribution margin at budgeted mar8et share caused solely by actual mar8et si9e in units being different from budgeted mar8et si9e in units. Answer: Terms to Learn: True Difficulty: mar8et si9e variance 2 Objective: 0

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$ difficulty with the mar8et share and mar8et si9e variances is that accurate measures of mar8et share and mar8et si9e often do not e"ist. Answer: Terms to Learn: True Difficulty: 2 Objective: mar8et si9e variance, mar8et share variance 0

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The direct materials mi" variance is the sum of the direct materials mi" variances for each input. Answer: Terms to Learn: True Difficulty: 1 direct materials mi" variance Objective: 2

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$n unfavorable direct materials mi" variance results when cheaper direct materials are substituted for more e"pensive direct materials. Answer: !alse Difficulty: 2 Objective: 2 Terms to Learn: direct materials mi" variance $ favorable direct materials mi" variance results when cheaper direct materials are substituted for more e"pensive direct materials.

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$ favorable direct materials yield variance results when less direct materials are used than planned. Answer: Terms to Learn: True Difficulty: 2 Objective: 2 direct materials mi" variance, direct materials yield variance

MULTIPLE CHOICE *2. ,osts which are not economically feasible to trace but which are related to a cost object are 8nown as: a. fi"ed costs b. direct costs c. indirect costs d. variable costs Answer: Terms to Learn: c Difficulty: cost allocation 1 Objective: 1

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$ny item for which a separate measurement of cost is desired is 8nown as: a. cost allocation b. a cost object c. a direct cost d. an indirect cost Answer: Terms to Learn: b Difficulty: cost object 1 Objective: 1

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Indirect costs: a. often comprise a large percentage of overall costs assigned to a cost object b. specifically e"clude mar8eting costs c. cannot be used for e"ternal reporting d. are treated as period costs and not as product costs Answer: Terms to Learn: a Difficulty: indirect costs Objective: 1

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$ll of the following illustrate purposes for allocating costs to cost objects 3<,3%T to: a. provide information for economic decisions b. motivate managers and employees c. determine a selling price the mar8et will bear d. measure income and assets for reporting to e"ternal parties Answer: Terms to Learn: c Difficulty: cost allocation 2 Objective: 1

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The costs of all si" value-chain functions should be included when determining: a. whether to add a new product line b. the selling price of a service c. whether to ma8e or buy a component part from another manufacturer d. $ll of these answers are correct. Answer: Terms to Learn: d Difficulty: cost allocation Objective: 1

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&'( costs are used for which purpose of cost allocation= a. to provide information for economic decisions b. to report to e"ternal parties when using generally accepted accounting principles c. to calculate costs of a government contract d. $ll of these answers are correct. Answer: Terms to Learn: a Difficulty: cost allocation Objective: 1

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.hich purpose of cost allocation is used to encourage sales representatives to push high-margin products or services= a. to provide information for economic decisions b. to motivate managers and other employees c. to justify costs or compute reimbursement d. to measure income and assets for reporting to e"ternal parties Answer: Terms to Learn: b Difficulty: cost allocation 2 Objective: 1

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.hich purpose of cost allocation is used to decide on the selling price for a customi9ed product or service= a. to provide information for economic decisions b. to motivate managers and other employees c. to justify costs or compute reimbursement d. to measure income and assets for reporting to e"ternal parties Answer: Terms to Learn: a Difficulty: cost allocation 2 Objective: 1

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To guide cost allocation decisions, the cause-and-effect criterion: a. is used less fre1uently than the other criteria b. is the primary criterion used in activity-based costing c. is a difficult criterion on which to obtain agreement d. may allocate corporate salaries to divisions based on profits Answer: Terms to Learn: b Difficulty: cost allocation Objective: 2

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To guide cost allocation decisions, the benefits-received criterion: a. generally uses the cost driver as the cost allocation base b. results in subsidi9ing products that are not profitable c. is the primarily used criterion in activity-based costing d. may use an allocation base of division revenues to allocate advertising costs Answer: Terms to Learn: d Difficulty: cost allocation Objective: 2

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To guide cost allocation decisions, the fairness or e1uity criterion is: a. the criterion often cited in government contracts b. superior when the purpose of cost allocation is for economic decisions c. used more fre1uently than the other criteria d. the primary criterion used in activity-based costing Answer: Terms to Learn: a Difficulty: cost allocation Objective: 2

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To guide cost allocation decisions, the ability to bear criterion: a. is li8ely to be the most credible to operating personnel b. allocates costs in proportion to the benefits received c. results in subsidi9ing products that are not profitable d. is the criterion often cited in government contracts Answer: Terms to Learn: c Difficulty: cost allocation Objective: 2

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.hich cost-allocation criterion is appropriate when ma8ing an economic decision= a. the fairness or e1uity criterion b. the ability to bear criterion c. the cause-and-effect criterion d. $ll of these answers are correct. Answer: Terms to Learn: d Difficulty: cost allocation 2 Objective: 2

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.hich cost-allocation criterion is ;6>T li8ely to subsidi9e poor performers at the e"pense of the best performers= a. the fairness or e1uity criterion b. the benefits-received criterion c. the ability to bear criterion d. the cause-and-effect criterion Answer: Terms to Learn: c Difficulty: cost allocation 2 Objective: 2

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$ challenge to using cost-benefit criteria for allocating costs is that: a. the costs of designing and implementing comple" cost allocations are not readily apparent b. the benefits of ma8ing better-informed pricing decisions are difficult to measure c. cost systems are being simplified and fewer multiple cost-allocation bases are being used d. the costs of collecting and processing information 8eep spiraling upward Answer: Terms to Learn: b Difficulty: cost allocation Objective: 2

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,orporate overhead costs can be allocated: a. using a single cost pool b. to divisions using one cost pool and then reallocating costs to products using multiple cost pools c. using numerous individual corporate cost pools d. $ll of these answers are correct. Answer: Terms to Learn: d Difficulty: cost allocation 2 Objective:

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The ;6>T li8ely reason for allocating all corporate costs to divisions include that: a. division managers ma8e decisions that ultimately control corporate costs b. divisions receive benefits from all corporate costs c. the hierarchy of costs promotes cost management d. it is best to use multiple cost objects Answer: Terms to Learn: b Difficulty: cost allocation Objective:

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The ;6>T li8ely reason for ?6T allocating corporate costs to divisions include that: a. these costs are not controllable by division managers b. these costs are incurred to support division activities, not corporate activities c. division resources are already used to attain corporate goals d. divisions receive no benefits from corporate costs Answer: Terms to Learn: a Difficulty: cost allocation Objective:

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>ome companies only allocate corporate costs to divisions that are: a. planned and under the control of division managers b. output unit-level costs c. perceived as causally related to division activities d. direct costs Answer: Terms to Learn: c Difficulty: cost allocation 2 Objective:

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?ot allocating some corporate costs to divisions and products results in: a. an increase in overall corporate profitability b. the sum of individual product profitability being less than overall company profitability c. the sum of individual product profitability being greater than overall company profitability d. a decrease in overall corporate profitability Answer: Terms to Learn: c Difficulty: cost allocation Objective:

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The greater the degree of homogeneity, the a. greater the number of needed cost pools b. fewer the number of needed cost pools c. less accurate the costs of a particular cost object d. greater the variety of cause-and-effect relationships with the cost driver Answer: Terms to Learn: b Difficulty: homogeneous cost pool 2 Objective:

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.hen individual activities within a cost pool have a similar relationship with the cost driver, those costs: a. need to be reallocated b. need multiple cost drivers c. are considered a homogeneous cost pool d. are considered an allocated cost pool Answer: Terms to Learn: c Difficulty: homogeneous cost pool 2 Objective:

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@omogeneous cost pools lead to: a. more accurate costs of a given cost object b. more resources being assigned to that cost object c. the need for more cost drivers d. Aoth a and c are correct. Answer: Terms to Learn: a Difficulty: homogeneous cost pool 2 Objective:

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Identifying homogeneous cost pools: a. re1uires judgment and should be reevaluated on a regular basis b. should include the input of management c. should include a cost-benefit analysis d. $ll of these answers are correct. Answer: Terms to Learn: d Difficulty: homogeneous cost pool 2 Objective:

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To allocate corporate costs to divisions, the allocation base used should: a. be an output unit-level base b. have the best cause-and-effect relationship with the costs c. combine administrative costs and human resource management costs d. allocate the full costs Answer: Terms to Learn: b Difficulty: cost allocation Objective:

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,orporate administrative costs allocated to a division cost pool are ;6>T li8ely to be: a. output unit-level costs b. facility-sustaining costs c. product-sustaining costs d. batch-level costs Answer: Terms to Learn: b Difficulty: cost allocation 1 Objective:

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To manage setup costs, a corporation might focus on the a. number of setup-hours b. number of units included in each production run c. batch-level costs incurred per setup-hour d. Aoth a and c are correct. Answer: Terms to Learn: d Difficulty: homogeneous cost pool Objective:

T@3 !6BB6.I?# I?!6&;$TI6? $%%BI3> T6 C)3>TI6?> /- T@&6)#@ /0: The @assan ,orporation has an 3lectric ;i"er (ivision and an 3lectric Bamp (ivision. 6f a D25,555,555 bond issuance, the 3lectric ;i"er (ivision used D1*,555,555 and the 3lectric Bamp (ivision used D-,555,555 for e"pansion. Interest costs on the bond totaled D1,+55,555 for the year. /-. .hat amount of interest costs should be allocated to the 3lectric ;i"er (ivision= a. D*+5,555 b. D1,5+5,555 c. D*,255,555 d. D1*,555,555 Answer: b Difficulty: 2 Terms to Learn: cost allocation D1*,555,555 E D25,555,555 " D1,+55,555F D1,5+5,555 //. Objective:

.hat amount of interest costs should be allocated to the 3lectric Bamp (ivision= a. D*+5,555 b. D1,5+5,555 c. D*,255,555 d. D-,555,555 Answer: a Difficulty: 2 Terms to Learn: cost allocation D-,555,555 E D25,555,555 " D1,+55,555 F D*+5,555 Objective:

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The above interest costs would be considered aGnH: a. output unit-level cost b. facility-sustaining cost c. product-sustaining cost d. batch-level cost Answer: Terms to Learn: c Difficulty: homogeneous cost pool 2 Objective:

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,ustomers ma8ing large contributions to the profitability of the company should: a. be treated the same as other customers because all customers are important b. receive a higher level of attention from the company than less profitable customers c. be charged higher prices for the same products than less profitable customers d. not be offered the volume-based price discounts offered to less profitable customers Answer: Terms to Learn: b Difficulty: customer-profitability analysis Objective: *

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%rice discounts are influenced by: a. the volume of product purchased b. a desire to sell to a customer in an area with high-growth potential c. negotiating s8ills of the sales person d. $ll of these answers are correct. Answer: Terms to Learn: d Difficulty: price discounting 2 Objective: *

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To improve customer profitability, companies should trac8: a. only the final invoice price of a sale b. the volume of the products purchased by each customer c. discounts ta8en by each customer d. Aoth b and c are correct. Answer: Terms to Learn: d Difficulty: 2 customer-profitability analysis Objective: *

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To improve customer profitability, companies should: a. strictly enforce their volume-based price discounting policy b. trac8 discounts by customer c. trac8 discounts by sales person d. Aoth b and c are correct. Answer: Terms to Learn: d Difficulty: 2 customer-profitability analysis Objective: *

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$ customer cost hierarchy categori9es costs related to customers into different cost pools on the basis of different: a. types of cost drivers b. benefits-received relationships c. levels of cause-and-effect relationships d. $ll of these answers are correct. Answer: Terms to Learn: d Difficulty: 2 customer cost hierarchy Objective: +

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,osts incurred to process orders would ;6>T li8ely be classified as a: a. customer output unit-level cost b. customer batch-level cost c. customer-sustaining cost d. corporate-sustaining cost Answer: Terms to Learn: b Difficulty: 1 customer cost hierarchy Objective: +

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Top management and general administration costs would ;6>T li8ely be classified as a: a. customer output unit-level cost b. customer batch-level cost c. customer-sustaining cost d. corporate-sustaining cost Answer: Terms to Learn: d Difficulty: 1 customer cost hierarchy Objective: +

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The cost of visiting customers would ;6>T li8ely be classified as a: a. customer output unit-level cost b. customer batch-level cost c. customer-sustaining cost d. corporate-sustaining cost Answer: Terms to Learn: c Difficulty: 1 customer cost hierarchy Objective: +

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,osts incurred to handle each unit sold would ;6>T li8ely be classified as a: a. customer output unit-level cost b. customer batch-level cost c. customer-sustaining cost d. corporate-sustaining cost Answer: Terms to Learn: a Difficulty: 1 customer cost hierarchy Objective: +

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IIIIIIIIIIIIIII categori9es costs related to customers into different cost pools on the basis of either different classes of cost drivers or different degrees of difficulty in determining the cause-and-effect Gor benefits-receivedH relationships. a. ,ustomer-profitability analysis b. ,ustomer revenues c. ,ustomer cost hierarchy d. %rice discounting Answer: Terms to Learn: c Difficulty: 1 customer cost hierarchy Objective: +

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$n advantage of using a bar chart to visuali9e customer profitability is that: a. differences in commissions paid to sales persons stand out b. loss customers stand out c. trends in the volume of purchases become apparent d. $ll of these answers are correct. Answer: b Difficulty: Objective: Terms to Learn: customer-profitability analysis ,ustomer actions will B3$>T affect: a. customer output unit-level costs b. customer batch-level costs c. customer-sustaining costs d. distribution-channel costs Answer: Terms to Learn: d Difficulty: 2 customer cost hierarchy Objective: -

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To reduce distribution-channel costs, a company could: a. improve the efficiency of the ordering process b. ma8e fewer customer visits c. eliminate distribution to retailers and only service wholesalers d. $ll of these answers are correct. Answer: Terms to Learn: c Difficulty: customer-profitability analysis Objective: -

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,orporate-sustaining costs: a. are common to all individual customers b. have a clear cause-and-effect relationship with several cost-allocation bases c. should be allocated for decisions regarding reducing customer costs d. $ll of these answers are correct. Answer: Terms to Learn: a Difficulty: customer cost hierarchy Objective: -

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The allocation of corporate-sustaining costs is useful for: a. evaluating the performance of salespersons with individual customer accounts b. motivating distribution-channel management c. focusing on the cause-and-effect relationships with the cost-allocation bases d. ?one of these answers is correct. Answer: Terms to Learn: d Difficulty: customer cost hierarchy Objective: -

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If deciding whether to eliminate a distribution channel, allocating corporatesustaining costs to distribution channels a. helps define cost reduction possibilities b. gives the misleading impression of potential cost savings c. identifies administrative inefficiencies d. evaluates the effectiveness of sales personnel Answer: Terms to Learn: b Difficulty: customer-profitability analysis Objective: -

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.hen corporate-sustaining costs are fully allocated to distribution channels, then the sum of the distribution-channel operating incomes is: a. less than company-wide operating income b. e1ual to company-wide operating income c. greater than company-wide operating income d. indeterminable Answer: Terms to Learn: b Difficulty: Objective: customer-profitability analysis, customer cost hierarchy

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,orporate-sustaining costs should be allocated to: a. motivate changes in customer behavior b. evaluate distribution-channel managers c. determine the selling price that will cover all costs d. identify the most profitable customers Answer: Terms to Learn: hierarchy c Difficulty: Objective: cost allocation, customer-profitability analysis, customer cost

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$ common finding in many studies is that a high percentage of operating income is: a. contributed by a small number of customers b. contributed to evenly by most customers c. the result of high discounting d. the result of cooperative efforts by many low-volume customers Answer: Terms to Learn: a Difficulty: 2 customer-profitability analysis Objective: -

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Boss-causing customers: a. should be dropped b. should be evaluated for ways to become profitable customers c. should be retained because each customer adds to long-run profitability d. do not e"ist because additional customer sales always increase profits Answer: Terms to Learn: b Difficulty: customer-profitability analysis Objective: -

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,ustomers are more valuable when they are all of the following 3<,3%T: a. well 8nown in the community b. e"pected to continue to do business with a company c. in an industry with high-growth potential d. re1uire special attention on a regular basis Answer: Terms to Learn: d Difficulty: customer-profitability analysis Objective: -

155. (ropping an unprofitable customer will: a. eliminate long-run costs assigned to that customer b. eliminate most short-run costs assigned to that customer c. decrease long-run profitability d. increase the potential to cross-sell other products that are more desirable Answer: Terms to Learn: b Difficulty: customer-profitability analysis Objective: -

151. ;ore insight into the static-budget variance can be gained by subdividing it into: a. the sales-mi" variance and the sales-1uantity variance b. the mar8et-share variance and the mar8et-si9e variance c. the fle"ible-budget variance and the sales-volume variance d. a cost hierarchy Answer: Terms to Learn: variance c Difficulty: 1 Objective: / static-budget variance, fle"ible-budget variance, sales-volume

152. The static-budget variance will be favorable when: a. actual unit sales are less than budgeted unit sales b. the actual contribution margin is greater than the static-budget contribution margin c. the actual sales mi" shifts toward the less profitable units d. the composite unit for the actual mi" is greater than for the budgeted mi" Answer: Terms to Learn: b Difficulty: static budget variance Objective: /

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15 . ;ore insight into the sales-volume variance can be gained by subdividing it into: a. the sales-mi" variance and the sales-1uantity variance b. the mar8et-share variance and the mar8et-si9e variance c. the fle"ible-budget variance and the mar8et-si9e variance d. a cost hierarchy Answer: Terms to Learn: a Difficulty: sales-volume variance 1 Objective: /

15*. The budgeted contribution margin per composite unit for the budgeted mi" can be computed by dividing the: a. total budgeted contribution margin by the actual total units b. total budgeted contribution margin by the total budgeted units c. actual total contribution margin by the total actual total units d. actual total contribution margin by the total budgeted units Answer: Terms to Learn: b Difficulty: composite unit 1 Objective: /

15+. The sales-mi" variance results from a difference between the: a. actual mar8et share and the budgeted mar8et share b. actual contribution margin and the budgeted contribution margin c. budgeted contribution margin per composite unit for the actual mi" and the budgeted contribution margin per composite unit for the budgeted mi" d. actual mar8et si9e in units and the budgeted mar8et si9e in units Answer: Terms to Learn: c Difficulty: sales-mi" variance 2 Objective: /

15-. The sales-mi" variance will be unfavorable when: a. the actual sales mi" shifts toward the less profitable units b. the composite unit for the actual mi" is greater than for the budgeted mi" c. actual unit sales are less than budgeted unit sales d. the actual contribution margin is greater than the static-budget contribution margin Answer: Terms to Learn: a Difficulty: sales-mi" variance Objective: /

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15/. The sales-mi" variance will be favorable when: a. the actual contribution margin is greater than the static-budget contribution margin b. actual unit sales are less than budgeted unit sales c. the actual sales mi" shifts toward the less profitable units d. the composite unit for the actual mi" is greater than for the budgeted mi" Answer: Terms to Learn: d Difficulty: sales-mi" variance Objective: /

150. $n unfavorable sales-mi" variance would ;6>T li8ely be caused by: a. a new competitor providing better service in the high-margin product sector b. a competitor having distribution problems with high-margin products c. the company offering low-margin products at a higher price d. the company e"periencing 1uality-control problems that get negative media coverage of low-margin products Answer: Terms to Learn: a Difficulty: sales-mi" variance Objective: /

152. $ shift towards a mi" of products with a lower contribution margin per unit will ;6>T li8ely result in aGnH: a. unfavorable sales-mi" variance b. unfavorable sales-1uantity variance c. favorable sales-mi" variance d. favorable sales-1uantity variance Answer: Terms to Learn: a Difficulty: sales-mi" variance 2 Objective: /

115. The sales-1uantity variance will be unfavorable when: a. the composite unit for the actual mi" is greater than for the budgeted mi" b. actual unit sales are less than budgeted unit sales c. the actual contribution margin is greater than the static-budget contribution margin d. the actual sales mi" shifts toward the less profitable units Answer: Terms to Learn: b Difficulty: sales-1uantity variance Objective: /

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111. $ favorable sales-1uantity variance would ;6>T li8ely be caused by: a. a new competitor providing better service in the high-margin product sector b. a competitor having distribution problems with high-margin products c. the company offering low-margin products at a higher price d. the company e"periencing 1uality-control problems that get negative media coverage of low-margin products Answer: Terms to Learn: b Difficulty: sales-1uantity variance Objective: /

112. The formula, G$ctual sales 1uantity in units J >tatic budget sales 1uantity in unitsH " Audgeted contribution margin per unit, is e1ual to the: a. sales-volume variance b. sales-mi" variance c. sales-1uantity variance d. mar8et-share variance Answer: Terms to Learn: a Difficulty: sales-volume variance 2 Objective: /

11 . The sales-1uantity variance results from a difference between: a. the actual sales mi" and the budgeted sales mi" b. the actual 1uantity of units sold and the budgeted 1uantity of unit sales in the static budget c. actual contribution margin and the budgeted contribution margin d. actual mar8et si9e in units and the budgeted mar8et si9e in units Answer: Terms to Learn: b Difficulty: sales-1uantity variance 2 Objective: /

T@3 !6BB6.I?# I?!6&;$TI6? $%%BI3> T6 C)3>TI6?> 11* T@&6)#@ 11/: ,eylon Tea %roducts has an e"clusive contract with Aritish (istributors. ,alamine and ,eylon are two brands of teas that are imported and sold to retail outlets. The following information is provided for the month of ;arch: Actual ,alamine ,eylon 1,/55 lbs. 1,055 lbs. D2.+5 D2.+5 1.55 2.55 D1.+5 D5.+5 Budget ,alamine ,eylon 2,555 lbs. 1,+55 lbs D2.55 D .55 1.55 1.+5 D1.55 D1.+5

>ales in pounds %rice per pound Kariable cost per pound ,ontribution margin

Audgeted and actual fi"ed corporate-sustaining costs are D1,/+5 and D2,555, respectively.

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11*. .hat is the actual contribution margin for the month= a. D ,/+5 b. D*,*55 c. D*,2+5 d. D ,*+5 Answer: d Difficulty: 2 Terms to Learn: contribution margin G1,/55 " D1.+5H L G1,055 " D5.+5H F D ,*+5 11+. .hat is the contribution margin for the fle"ible budget= a. D ,/+5 b. D*,*55 c. D*,2+5 d. D ,*+5 Answer: b Difficulty: 2 Terms to Learn: fle"ible budget G1,/55 " D1.55H L G1,055 " D1.+5H F D*,*55 Objective: / Objective: /

11-. !or the contribution margin, what is the total static-budget variance= a. D 55 favorable b. D2+5 unfavorable c. D+55 favorable d. D055 unfavorable Answer: d Difficulty: 2 Objective: / Terms to Learn: static-budget variance Kariance F MG2,555 " D1.55H L G1,+55 " D1.+5HN J MG1,/55 " D1.+5H L G1,055 " D5.+5HN D055 unfavorable F D*,2+5 J D ,*+5 11/. !or the contribution margin, what is the total fle"ible-budget variance= a. D 55 favorable b. D2+5 unfavorable c. D+55 favorable d. D055 unfavorable Answer: b Difficulty: 2 Terms to Learn: fle"ible-budget variance D2+5 unfavorable F D*,*55 J D ,*+5 Gsee calculations for the answers to 1uestions 11* and 11+H Objective: /

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T@3 !6BB6.I?# I?!6&;$TI6? $%%BI3> T6 C)3>TI6?> 110 T@&6)#@ 125: 3dna7s !lowering %lants provides the following information for the month of ;ay: Actual Tulips #eraniums 1,2+5 1,055 D11 D10 Budget Tulips #eraniums 2,2+5 1,+55 D15 D25

>ales in units ,ontribution margin per unit

110. .hat is the budgeted contribution margin per composite unit for the actual mi"= a. D1 .05 b. D1*.55 c. D1*. d. D1*.05 Answer: d Difficulty: 2 Objective: / Terms to Learn: composite unit MD15 " G1,2+5H E G1,2+5 L 1,055HHN L MD25 " G1,055H E G1,2+5 L 1,055HHN F D1*.05 112. .hat is the budgeted contribution margin per composite unit for the budgeted mi"= a. D1 .05 b. D1*.55 c. D1*. d. D1*.05 Answer: b Difficulty: 2 Objective: / Terms to Learn: composite unit MD15 " G2,2+5H E G2,2+5 L 1,+55HHN L MD25 " G1,+55 E G2,2+5 L 1,+55HHN F D1*.55 125. !or ;ay, 3dna will report aGnH: a. favorable sales-mi" variance b. unfavorable sales-mi" variance c. favorable sales-volume variance d. unfavorable sales-volume variance Answer: a Difficulty: 2 Terms to Learn: sales-mi" variance Gsee calculations for answers to 1uestions 110 and 112H Objective: /

T@3 !6BB6.I?# I?!6&;$TI6? $%%BI3> T6 C)3>TI6?> 121 T@&6)#@ 12 : 3dna7s !lowering %lants provides the following information for the month of ;ay: !uchsia 15,555 D2 Actual (ogwood 2,+55 D/ Budget !uchsia (ogwood 0,555 2,555 D15 D0

>ales in units ,ontribution margin per unit

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121. .hat is the budgeted contribution margin per composite unit for the actual mi"= a. D0.55 b. D0.-5 c. D2.55 d. D2.-5 Answer: d Difficulty: 2 Objective: / Terms to Learn: composite unit MD15 " G15,555H E G15,555 L 2,+55HHN L MD0 " G2,+55 E G15,555 L 2,+55HHN F D2.-5 122. .hat is the budgeted contribution margin per composite unit for the budgeted mi"= a. D0.55 b. D0.-5 c. D2.55 d. D2.-5 Answer: d Difficulty: 2 Objective: / Terms to Learn: composite unit MD15 " G0,555 E G0,555 L 2,555HHN L MD0 " G2,555 E G0,555 L 2,555HHN F D2.-5 12 . !or ;ay, 3dna will report aGnH: a. favorable sales-mi" variance b. unfavorable sales-mi" variance c. favorable sales-volume variance d. unfavorable sales-volume variance Answer: Terms to Learn: c Difficulty: sales-volume variance Objective: /

T@3 !6BB6.I?# I?!6&;$TI6? $%%BI3> T6 C)3>TI6?> 12* T@&6)#@ 12/: The <T&$ $ppliance ;anufacturing ,orporation manufactures two vacuum cleaners, the >tandard and the >uper. The following information was gathered about the two products: Audgeted sales in units Audgeted selling price Audgeted contribution margin per unit $ctual sales in units $ctual selling price >tandard ,255 D 55 D215 ,+55 D 2+ >uper 055 D0+5 D++5 1,+55 D0*5

1*-2+

12*. .hat is the budgeted sales-mi" percentage for the >tandard and the >uper vacuum cleaners, respectively= a. 5.05 and 5.25 b. 5./5 and 5. 5 c. 5.25 and 5.05 d. 5. 5 and 5./5 Answer: a Difficulty: 1 Terms to Learn: sales-mi" variance ,255 E G ,255 L 055H F 5.05 and 055 E G ,255 L 055H F 5.25 Objective: /

12+. .hat is the total sales-volume variance in terms of the contribution margin= a. D150,555 unfavorable b. D150,555 favorable c. D2/0,555 favorable d. D**0,555 favorable Answer: Terms to Learn: >tandard >uper d Difficulty: 2 sales-volume variance F G ,+55 J ,255H " D215 F F G1,+55 J 055H " D++5 F Objective: D - ,555 ! 0+,555 ! D**0,555 ! /

12-. .hat is the total sales-1uantity variance in terms of the contribution margin= a. D115,555 favorable b. D1/5,555 favorable c. D2/0,555 favorable d. D**0,555 favorable Answer: Terms to Learn: >tandard >uper c Difficulty: 2 Objective: sales-1uantity variance F G+,555 J *,555H " .0 " D215 F D1-0,555 ! F G+,555 J *,555H " .2 " D++5 F 115,555 ! D2/0,555 ! /

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12/. .hat is the total sales-mi" variance in terms of the contribution margin= a. D115,555 favorable b. D1/5,555 favorable c. D2/0,555 favorable d. D**0,555 favorable Answer: Terms to Learn: >tandard >uper b Difficulty: 2 sales-mi" variance F +,555 " G./ J .0H " D215 F F +,555 " G. J .2H " D++5 F Objective: D15+,555 ) D2/+,555 ! D1/5,555 ! /

Gsee calculations for answers to 1uestion 12-H 120. ;ore insight into the sales-1uantity variance can be gained by subdividing it into: a. the sales-mi" variance and the sales-volume variance b. the mar8et-share variance and the mar8et-si9e variance c. the fle"ible-budget variance and the sales-volume variance d. a cost hierarchy Answer: Terms to Learn: b Difficulty: sales-1uantity variance 1 Objective: 0

122. The mar8et-share variance results from a difference between the: a. actual mar8et share and the budgeted mar8et share b. actual contribution margin and the budgeted contribution margin c. budgeted contribution margin per composite unit for the actual mi" and the budgeted contribution margin per composite unit for the budgeted mi" d. actual mar8et si9e in units and the budgeted mar8et si9e in units Answer: Terms to Learn: a Difficulty: mar8et-share variance 1 Objective: 0

1 5. The mar8et-share variance will be favorable when: a. the fle"ible-budget contribution margin is greater than the static-budget contribution margin b. the actual mar8et share is greater than the budgeted mar8et share c. actual mar8et si9e in units is less than budgeted mar8et si9e in units d. actual unit sales are less than budgeted unit sales Answer: Terms to Learn: b Difficulty: mar8et-share variance 2 Objective: 0

1*-2/

1 1. The mar8et-share variance is ;6>T influenced by: a. economic downturns in the economy b. how well managers perform relative to their peers c. shifts in consumer preferences that are outside of the manager7s control d. rates of inflation Answer: Terms to Learn: b Difficulty: mar8et-share variance Objective: 0

1 2. $n unfavorable mar8et-share variance would ;6>T li8ely be caused by: a. a competitor providing better service b. a competitor having distribution problems c. the company offering products at a lower price d. the company e"periencing 1uality-control problems that get negative media coverage Answer: Terms to Learn: 1 a Difficulty: mar8et-share variance Objective: 0

. The mar8et-si9e variance results from a difference between the: a. actual mar8et share and the budgeted mar8et share b. actual contribution margin and the budgeted contribution margin c. budgeted contribution margin per composite unit for the actual mi" and the budgeted contribution margin per composite unit for the budgeted mi" d. actual mar8et si9e in units and the budgeted mar8et si9e in units Answer: Terms to Learn: d Difficulty: mar8et-si9e variance 1 Objective: 0

1 *. The mar8et-si9e variance will be unfavorable when: a. the fle"ible-budget contribution margin is greater than the static-budget contribution margin b. the actual mar8et share is greater than the budgeted mar8et share c. actual mar8et si9e in units is less than budgeted mar8et si9e in units d. actual unit sales are less than budgeted unit sales Answer: Terms to Learn: c Difficulty: mar8et-si9e variance 2 Objective: 0

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1 +. $ favorable mar8et-si9e variance would ;6>T li8ely be caused by: a. the company reducing the services provided to customers b. an increase in overall mar8et si9e c. a new competitor moving into the area d. a competitor providing better prices Answer: Terms to Learn: b Difficulty: mar8et-si9e variance Objective: 0

1 -. &eliable information about mar8et si9e and mar8et share is available for: a. no industries b. the management consulting and personal financial planning industries c. the automobile and television industries d. all industries Answer: Terms to Learn: c Difficulty: 2 Objective: mar8et-si9e variance, mar8et-share variance 0

T@3 !6BB6.I?# I?!6&;$TI6? $%%BI3> T6 C)3>TI6?> 1 / T@&6)#@ 1 2: Oorro ,ompany manufactures remote control devices for garage doors. The following information was collected during Pune: $ctual mar8et si9e GunitsH $ctual mar8et share $ctual average selling price Audgeted mar8et si9e GunitsH Audgeted mar8et share Audgeted average selling price Audgeted contribution margin per composite unit for budgeted mi" 1 /. .hat is the mar8et-si9e variance= a. D+55 ) b. D1,+55 ) c. D1,-55 ! d. D1,555 ! Answer: b Difficulty: Terms to Learn: mar8et-si9e variance G15,555 J 11,555H " 5. 5 " D+ F D1,+55 ) 2 Objective: 0 15,555 2: D15.55 11,555 5: D11.55 D +.55

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1 0. .hat is the mar8et-share variance= a. D1,555 ! b. D1,155 ! c. D+55 ) d. D1,+55 ) Answer: a Difficulty: Terms to Learn: mar8et-share variance 15,555 " G5. 2 J 5. 5H " D+ F D1,555 ! 1 2. .hat is the sales-1uantity variance= a. D1,+55 ) b. D1,555 ! c. D+55 ) d. The variance cannot be determined. Answer: c Difficulty: 2 Terms to Learn: sales-1uantity variance D1,+55 ) L D1,555 ! F D+55 ) Gsee calculations for answers to 1uestions 1 / and 1 0H Objective: 0 2 Objective: 0

T@3 !6BB6.I?# I?!6&;$TI6? $%%BI3> T6 C)3>TI6?> 1*5 T@&6)#@ 1*0: The >asita ,orporation manufactures two types of vacuum cleaners, the O3?IT@ for commercial building use and the @ouse-@elper for residences. Audgeted and actual operating data for the year 25<+ were as follows: Static Budget ?umber sold ,ontribution margin Actual Results ?umber sold ,ontribution margin O3?IT@ +,555 D1,+55,555 O3?IT@ *,555 D1,205,555 @ouse-@elper 25,555 D ,555,555 @ouse-@elper 20,555 D ,225,555 Total 2+,555 D*,+55,555 Total 2,555 D+,255,555

%rior to the beginning of the year, a consulting firm estimated the total volume for vacuum cleaners of the O3?IT@ and @ouse-@elper category to be 2+5,555 units, but actual industry volume was 2+-,555 units. 1*5. .hat is the contribution margin for the fle"ible budget= a. D1,255,555 b. D*,255,555 c. D+,255,555 d. D+,*55,555 Answer: Terms to Learn: d Difficulty: contribution margin 2 Objective: /

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Budgeted contribution margin per unit: O3?IT@ F D1,+55,555E+,555 F D 55 @ouse-@elper F D ,555,555E25,555 F D1+5 Fle ible-budget contribution margin: *,555 " D 55 F D1,255,555 20,555 " D1+5 F *,255,555 D+,*55,555 1*1. .hat is the total static-budget variance in terms of the contribution margin= a. D255,555 favorable b. D/55,555 favorable c. D255,555 unfavorable d. D -5,555 unfavorable Answer: b Difficulty: 1 Terms to Learn: static-budget variance D/55,555 favorable F D*,+55,555 J D+,255,555 Objective: /

1*2. .hat is the total fle"ible-budget variance in terms of the contribution margin= a. D255,555 favorable b. D/55,555 favorable c. D255,555 unfavorable d. D -5,555 unfavorable Answer: c Difficulty: 2 Terms to Learn: fle"ible budget variance D255,555 unfavorable F D+,*55,555 J D+,255,555 Gsee calculation for answer to 1uestion 1*5H Objective: /

1* . .hat is the total sales-volume variance in terms of the contribution margin= a. D255,555 favorable b. D1,2-5,555 favorable c. D255,555 unfavorable d. D -5,555 unfavorable Answer: a Difficulty: 2 Terms to Learn: sales-volume variance D255,555 favorable F D*,+55,555 J D+,*55,555 Gsee calculation for answer to 1uestion 1*5H Objective: /

1**. .hat is the total sales-1uantity variance in terms of the contribution margin= a. D255,555 unfavorable b. D255,555 favorable c. D -5,555 unfavorable d. D1,2-5,555 favorable Answer: Terms to Learn: d Difficulty: sales-1uantity variance Objective: /

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Budgeted sales-mi percentage: O3?IT@ F +,555E2+,555 F 5.25 Actual sales-mi percentage: O3?IT@ F *,555E 2,555 F 5.12+ Salesquantity a!iance O3?IT@ @ouse-@elper Total

@ouse-@elper F 25,555E2+,555 F 5.05 @ouse-@elper F 20,555E 2,555 F 5.0/+ >ales-1uantity variance F D *25,555 ! F D 0*5,555 ! D1,2-5,555 !

$ctual units of all Audgeted Audgeted products sold J sales-mi" : ,; Audgeted units of per unit all products sold G 2,555 J 2+,555H " 5.25 " D 55 G 2,555 J 2+,555H " 5.05 " D1+5

1*+. .hat is the total sales-mi" variance in terms of the contribution margin= a. D255,555 unfavorable b. D -5,555 unfavorable c. D255,555 favorable d. D1,2-5,555 favorable Answer: Terms to Learn: Sales-"i# a!iance O3?IT@ @ouse-@elper Total b Difficulty: sales-mi" variance $ctual units $ctual sales-mi" of all : - Audgeted products sold sales-mi" : 2,555 " G5.12+ $ 5.255H " 2,555 " G5.0/+ $ 5.055H " Objective: Audgeted ,; per unit D 55 D1+5 /

>ales-mi" variance F D/25,555 ! F D -5,555 ) D -5,555 )

1*-. .hat is the budgeted contribution margin per composite unit of the budgeted mi"= a. D1*5.-2+ b. D105.555 c. D250.555 d. D1-2.+55 Answer: b Difficulty: Terms to Learn: composite unit O3?IT@ F D 55 " .2 F @ouse-@elper F D1+5 " .0 F 6& D*,+55,555E2+,555 F 2 D -5 125 D105 Objective: 0

1*- 2

1*/. .hat is the mar8et-si9e variance= a. D1,1+2,555 ! b. D150,555 ! c. D -5,555 ) d. D1,2-5,555 ! Answer: b Difficulty: Terms to Learn: mar8et-si9e variance Actual mar!et share F 2,555E2+-,555 F 5.12+ Budgeted mar!et share F 2+,555E2+5,555 F 5.155 Ma!%et-si&e a!iance $ctual mar8et Audgeted si9e in units $ mar8et share Audgeted mar8et si9e in units G2+-,555 $ 5.155 " 2+5,555H " Objective: 0

Audgeted ,; per composite unit for budgeted mi" D105

;ar8et-si9e variance

>asita ,orp

F D150,555 !

1*0. .hat is the mar8et-share variance= a. D -5,555 ) b. D1,2-5,555 ! c. D1,1+2,555 ! d. D150,555 ! Answer: Terms to Learn: Ma!%et-s'a!e a!iance c Difficulty: mar8et-share variance $ctual mar8et si9e in units 2+-,555 " $ctual mar8et share J Audgeted mar8et share G5.12+ $ 5.155H " Objective: Audgeted ,; per composite unit for budgeted mi" D105 0

;ar8et-share variance

>asita ,orp

F D1,1+2,555 !

1*2. ;ore insight into the fle"ible-budget variance for direct materials can be gained by subdividing it into the direct materials: a. mi" and volume variances b. mar8et-share and mar8et-si9e variances c. mi" and yield variances d. price and efficiency variances Answer: Terms to Learn: d Difficulty: 2 Objective: $ direct material price variance, direct material efficiency variance

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1+5. ;ore insight into the efficiency variance for direct materials can be gained by subdividing it into the direct materials: a. mi" and volume variances b. mar8et-share and mar8et-si9e variances c. mi" and yield variances. d. price and efficiency variances Answer: Terms to Learn: c Difficulty: 2 Objective: $ direct materials mi" variance, direct materials yield variance

1+1. The direct materials mi" variance will be favorable when: a. the fle"ible-budget contribution margin is greater than the actual contribution margin b. the actual direct materials input mi" is less e"pensive than the budgeted direct materials input mi" c. the actual 1uantity of total inputs used is greater than the fle"ible budget for total inputs d. actual unit sales are less than budgeted unit sales Answer: Terms to Learn: b Difficulty: 2 direct materials mi" variance Objective: $

1+2. The materials yield variance will be unfavorable when: a. the fle"ible-budget contribution margin is greater than the actual contribution margin b. the actual direct materials input mi" is less e"pensive than the budgeted direct materials input mi" c. the actual 1uantity of total inputs used is greater than the fle"ible budget for total inputs d. actual unit sales are less than budgeted unit sales Answer: Terms to Learn: c Difficulty: 2 direct materials yield variance Objective: $

1+ . The direct materials mi" variance is the: a. average of the direct materials mi" variances for each input b. sum of the direct materials mi" variances for each input c. difference between the direct materials mi" variances for each input d. multiple of the direct materials mi" variances for each input Answer: Terms to Learn: b Difficulty: 2 direct materials mi" variance Objective: $

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E(ERCISES A)* PROBLEMS 1+*. !or each cost pool listed select an appropriate allocation base from the list below. $n allocation base may be used only once. $ssume a manufacturing company. Allocation bases for which the information system can provide data: 1. 2. . *. +. -. /. 0. ?umber of employees per department 3mployee wages and salaries per department %roduction facility s1uare footage @ours of operation of each production department ;achine hours by department 6perations costs of each department @ours of computer use per month per department Indirect labor-hours per department

"ost pools: IIIIIII IIIIIII IIIIIII IIIIIII IIIIIII a. b. c. d. e. Kice %resident of !inance7s office e"penses ,omputer operations used in conjunction with manufacturing %ersonnel (epartment ;anufacturing machinery cost 3nergy costs

Ans+e!, -a. 6perations costs of each department /b. @ours of computer use per month per department 1c. ?umber of employees per department +d. ;achine-hours by department *e. @ours of operation of each production department Difficulty: 2 Objective: Terms to Learn: cost allocation

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1++. @andy-;an >ervices is a repair-service company speciali9ing in small household jobs. 3ach client pays a fi"ed monthly service fee based on the number of rooms in the house. &ecords are 8ept on the time and material costs used for each repair. The following profitability data apply to five customers: ;arveline Aurnett P Pac8son &oger Pones %aul >aas Aec8y >tephan ,ustomer &evenues D 55 255 05 /+ +5 ,ustomer ,osts D22+ 5+ /+ 115 225

Requi!ed: a. ,ompute the operating income for each of the five customers. b. .hat options should @andy-;an >ervices consider in light of the customerprofitability results= c. .hat problems might @andy-;an >ervices encounter in accurately estimating the operating costs of each customer= Ans+e!, a. ;arveline Aurnett P Pac8son &oger Pones %aul >aas Aec8y >tephan ,ustomer &evenues D 55 255 05 /+ +5 ,ustomer ,osts D22+ 5+ /+ 115 225 6perating income D /+ G15+H + G +H 1 5

b. 1. %ay increased attention to the profitable customers >tephan and Aurnett. 2. >ee8 ways of reducing costs and increasing revenues for the loss accounts of P Pac8son and %aul >aas. .or8 with the customers so their behavior reduces overall costs. &educe costs with better scheduling. ;aybe a different fee schedule needs to be implemented depending on the age of the house, the distance to the home, if the repair is preventive or an emergency, etc. (etermine whether the operating income pattern will probably continue or not and why. . $s a last resort, the company may want to discontinue the Pac8son account if the customer does not agree to a fee increase and the operating loss pattern is e"pected to continue.

1*- -

c.

%roblems in accurately estimating operating costs of each customer include: 1. The basic underlying records may not be accurate. 2. >ome repair personnel may be efficient and more e"perienced, others may be less e"perienced and slower, and still others may Qchit-chatQ more with the clients than others. . ,osts that are allocated to more than one customer may be distorting operating income. !or e"ample, how is the cost of a trip for parts for three different customers allocated= Difficulty: 2 Objective: Terms to Learn: customer-profitability analysis

1+-.

$romatic ,offee, Inc., sells two types of coffee, ,olombian and Alue ;ountain. The monthly budget for ).>. coffee sales is based on a combination of last yearRs performance, a forecast of industry sales, and the companyRs e"pected share of the ).>. mar8et. The following information is provided for ;arch: Actual ,olombian Alue ;ountain ;ountain >ales in pounds %rice per pound Kariable cost per pound ,ontribution margin /,555 lbs. D2+ 11 D1* 0,555 lbs. D 5 1* D1Budget ,olombian -,*55 lbs. D2+ 12 D1 Alue 0,-55 lbs D 5 1 D1/

Audgeted and actual fi"ed corporate-sustaining costs are D-5,555 and D/2,555, respectively. Requi!ed, a. ,alculate the actual contribution margin for the month. b. ,alculate the contribution margin for the static budget. c. ,alculate the contribution margin for the fle"ible budget. d. (etermine the total static-budget variance, the total fle"ible-budget variance, and the total sales-volume variance in terms of the contribution margin. Ans+e!, a. $ctual contribution margin: /,555 " D1* F D 20,555 0,555 " D1- F 120,555 D22-,555 -,*55 " D1 F D 0 ,255 0,-55 " D1/ F 1*-,255 D222,*55

b.

>tatic-budget contribution margin:

1*- /

c.

!le"ible-budget contribution margin:

/,555 " D1 F D 21,555 0,555 " D1/ F 1 -,555 D22/,555

d.

>tatic-budget variance is D ,*55 unfavorable F D222,*55 $ D22-,555 !le"ible-budget variance is D1,555 unfavorable F D22/,555 $ D22-,555 >ales-volume variance is D2,*55 unfavorable F D222,*55 $ D22/,555

Difficulty: 2 Objective: / Terms to Learn: contribution margin, static budget variance, fle"ible budget variance, sales volume variance

1*- 0

1+/.

@arryRs 3lectronics manufactures TKs and K,&s. (uring !ebruary, the following activities occurred: Audgeted units sold Audgeted contribution margin per unit $ctual units sold $ctual contribution margin per unit TKs 1/,-*5 D25 25,555 D155 K,&s --, -5 D1+05,555 D1+0

Requi!ed, ,ompute the following variances in terms of the contribution margin. a. b. c. (etermine the total sales-mi" variance. (etermine the total sales-1uantity variance. (etermine the total sales-volume variance. F F D1,055,555 1,025,555 D 25,555 unfavorable

Ans+e!, a. TKs MG155,555 " 5.25H " D25N MG155,555 " 5.21H " D25N K,&s MG155,555 " 5.05H " D1+-N G155,555 " 5./2H " D1+-N

F D12,*05,555 F 12, 2*,555 D 1+-,555 favorable

Total sales-mi" variance F D25,555 unfavorable L D1+-,555 favorable F D--,555 favorable. b. TKs SMG155,555 J 0*,555H " 5.21N " D25T F D 52,*55 favorable K,&s SMG155,555 $ 0*,555H " 5./2N " D1+-T F 1,2/1,0*5 favorable Total sales-1uantity variance D2,2/*,2*5 favorable Total sales-volume variance F D--,555 favorable L D2,2/*,2*5 favorable F D2, *5,2*5 favorable

c.

Difficulty: Objective: / Terms to Learn: sales-volume variance, sales-mi" variance, sales-1uantity variance

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1+0.

>peedy %rinting manufactures soft cover boo8s. !or Panuary, the following information is available: Audgeted mar8et si9e GunitsH Audgeted mar8et share Audgeted average contribution margin per unit $ctual mar8et si9e GunitsH $ctual mar8et share $ctual average contribution margin per unit 12+,555 10: D1.25 155,555 12: D1.22

Requi!ed, ,ompute the mar8et-share variance, the mar8et-si9e variance, and the sales1uantity variance in terms of the contribution margin. Ans+e!, 155,555 " 5.12 " D1.25 F D22,055 155,555 " 5.10 " D1.25 F D21,-55 12+,555 " 5.10 " D1.25 F D2/,555

;ar8et-share variance D1,255 !

;ar8et-si9e variance D+,*55 )

>ales-1uantity variance D*,255 ) Difficulty: 2 Objective: 0 Terms to Learn: mar8et-share variance, mar8et-si9e variance, sales-1uantity variance

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1+2.

The 6mega ,orporation manufactures two types of vacuum cleaners: the O3?IT@ for commercial building use and the @ouse-@elper for residences. Audgeted and actual operating data for the year 25<+ are as follows: Static Budget ?umber sold ,ontribution margin Actual Results ?umber sold ,ontribution margin O3?IT@ 1+,555 D ,/+5,555 O3?IT@ 1-,+55 D-,255,555 @ouse-@elper -5,555 D12,555,555 @ouse-@elper 0,+55 D15,255,555 Total /+,555 D1+,/+5,555 Total ++,555 D1-,*55,555

Requi!ed, a. ,alculate the contribution margin for the fle"ible budget. b. (etermine the total static-budget variance, the total fle"ible-budget variance, and the total sales-volume variance in terms of the contribution margin. Ans+e!, Budgeted contribution margin per unit: O3?IT@ F D ,/+5,555E1+,555 F D2+5 @ouse-@elper F D12,555,555E-5,555 F D255 a. !le"ible-budget contribution margin: 1-,+55 " D2+5 F D *,12+,555 0,+55 " D255 F /,/55,555 D11,02+,555

b.

>tatic-budget variance is D-+5,555 favorable F D1+,/+5,555 $ D1-,*55,555 !le"ible-budget variance is D*,+/+,555 favorable F D11,02+,555 $ D1-,*55,555 >ales-volume variance is D ,22+,555 unfavorable F D1+,/+5,555 $ D11,02+,555

Difficulty: 2 Objective: / Terms to Learn: contribution margin, static-budget variance, fle"ible-budget variance, sales volume variance

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1-5.

The 6mega ,orporation manufactures two types of vacuum cleaners: the O3?IT@ for commercial building use and the @ouse-@elper for residences. Audgeted and actual operating data for the year 25<+ are as follows: Static Budget ?umber sold ,ontribution margin Actual Results ?umber sold ,ontribution margin O3?IT@ 1+,555 D ,/+5,555 O3?IT@ 1-,+55 D-,255,555 @ouse-@elper -5,555 D12,555,555 @ouse-@elper 0,+55 D15,255,555 Total /+,555 D1+,/+5,555 Total ++,555 D1-,*55,555

Requi!ed, ,ompute the sales-mi" variance and the sales-1uantity variance by type of vacuum cleaner, and in total. Gin terms of the contribution marginH Ans+e!, Budgeted sales-mi percentage: O3?IT@ F 1+,555E/+,555 F 25: Actual sales-mi percentage: O3?IT@ F 1-,+55E++,555 F 5:

@ouse-@elper F -5,555E/+,555 F 05: @ouse-@elper F 0,+55E++,555 F /5:

Budgeted contribution margin per unit: O3?IT@ F D ,/+5,555E1+,555 F D2+5 @ouse-@elper F D12,555,555E-5,555 F D255 Sales-"i# $ctual units $ctual salesAudgeted ,; >ales-mi" a!iance of all mi" : $ per unit variance products sold Audgeted sales-mi" : O3?IT@ ++,555 " G5. $ 5.2H " D2+5 F D1, /+,555 ! @ouse-@elper F D1,155,555 ++,555 " G5./ $ 5.0H " D255 ) Total D 2/+,555 ! Salesquantity a!iance O3?IT@ @ouse-@elper Total Difficulty: Objective: / Terms to Learn: sales-mi" variance, sales-1uantity variance $ctual units of all products sold J Audgeted units of all products sold G++,555 J /+,555H " G++,555 J /+,555H " Audgeted Audgeted sales-mi" : ,; per unit 5.2 " 5.0 " D2+5 D255 >ales-1uantity variance F D1,555,555 ) F D ,255,555 ) D*,255,555 )

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1-1.

The 6mega ,orporation manufactures two types of vacuum cleaners, the O3?IT@ for commercial building use and the @ouse-@elper for residences. Audgeted and actual operating data for the year 25<+ are as follows: Static Budget ?umber sold ,ontribution margin Actual Results ?umber sold ,ontribution margin O3?IT@ 1+,555 D ,/+5,555 O3?IT@ 1-,+55 D-,255,555 @ouse-@elper -5,555 D12,555,555 @ouse-@elper 0,+55 D15,255,555 Total /+,555 D1+,/+5,555 Total ++,555 D1-,*55,555

%rior to the beginning of the year, a consulting firm estimated the total volume for vacuum cleaners of the Oenith and @ouse-@elper category to be 55,555 units, but actual industry volume was only 2/+,555 units. Requi!ed, ,ompute the mar8et-share variance and mar8et-si9e variance in terms of the contribution margin. Ans+e!, Actual mar!et share: F ++,555E2/+,555 F 5.25 Budgeted mar!et share: F /+,555E 55,555 F 5.2+ Budgeted contribution margin per composite unit of budgeted mi : O3?IT@ F D2+5 " 5.2 F D +5 @ouse-@elper F D255 " 5.0 F 1-5 6& D1+,/+5,555E/+,555F D215 Ma!%et-s'a!e a!iance 6mega ,orp Ma!%et-si&e a!iance $ctual mar8et si9e in units 2/+,555 " $ctual mar8et share J Audgeted mar8et share G5.2 $ 5.2+H " Audgeted ,; per composite unit for budgeted mi" D215 Audgeted ,; per composite unit for budgeted mi" ;ar8et-share variance F D2,00/,+55 ) ;ar8et-si9e variance

6mega ,orp

$ctual Audgeted mar8et si9e in mar8et share units $ Audgeted mar8et si9e in units G2/+,555 $ 5.2+ " 55,555H "

D215

F D1, 12,+55 )

Difficulty: Objective: 0 Terms to Learn: mar8et-share variance, mar8et-si9e variance

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1-2.

The ,hair ,ompany manufactures two modular types of chairs: one for the residential mar8et, and the other for the office mar8et. Audgeted and actual operating data for the year 25<+ are: Static Budget ?umber of chairs sold ,ontribution margin Actual Results ?umber of chairs sold ,ontribution margin &esidential 2-5,555 D2-,555,555 &esidential 2*0,*55 D22, +-,555 6ffice 1*5,555 D11,255,555 6ffice 1-+,-55 D1 ,2*0,555 Total *55,555 D /,255,555 Total *1*,555 D +,-5*,555

%rior to the beginning of the year, an office products research firm estimated the industry volume for residential and office chairs of the type sold by the ,hair ,ompany to be 2,*55,555. $ctual industry volume for the year 25<+ was only 2,255,555 chairs. Requi!ed, ,ompute the following variances in terms of contribution margin: a. ,ompute the total static-budget variance, the total fle"ible-budget variance, and the total sales-volume variance. b. ,ompute the sale-mi" variance and the sales-1uantity variance by type of chair, and in total. c. ,ompute the mar8et-share variance and mar8et-si9e variance. Ans+e!, a. Budgeted contribution margin per unit: &esidential F D2-,555,555E2-5,555 F D155 6ffice F D11,255,555E1*5,555 F D05 Fle ible-budget contribution margin: &esidential 2*0,*55 " D155 F D2*,0*5,555 6ffice 1-+,-55 " D05 F D1 ,2*0,555 D 0,500,555 >tatic-budget variance is D1,+2-,555 unfavorable F D /,255,555 $ D +,-5*,555 >ales-volume variance is D000,555 favorable F D /,255,555 $ D 0,500,555 !le"ible-budget variance is D2,*0*,555 unfavorable F D 0,500,555 $ D +,-5*,555

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b.

Actual sales-mi percentage: &esidential F 2*0,*55E*1*,555 F -5: 6ffice F 1-+,-55E*1*,555 F *5: Budgeted sales-mi percentage: &esidential F 2-5,555E*55,555 F -+: 6ffice F 1*5,555E*55,555 F +:

Sales-"i# a!iance &esidential 6ffice Total Salesquantity a!iance &esidential 6ffice Total c.

$ctual units of all products sold *1*,555 " *1*,555 "

$ctual sales-mi" Audgeted : $ Audgeted ,; sales-mi" : per unit G5.- $ 5.-+H " G5.* $ 5. +H " Audgeted sales-mi" : 5.-+ " 5. + " D155 D05 Audgeted ,; per unit D155 D05

>ales-mi" variance F D2,5/5,555 ) F D1,-+-,555 ! D *1*,555 ) >ales-1uantity variance

$ctual units of all products sold J Audgeted units of all products sold G*1*,555 $ *55,555H " G*1*,555 $ *55,555H "

F D 215,555 ! FD 22,555 !

D1, 52,555 ! F *1*,555E 2,255,555 F 10.01010: or 5.1001010 F *55,555E 2,*55,555 F 1-.----/: or 5.1-----/

Actual mar!et share Budgeted mar!et share

Budgeted contribution margin per composite unit of budgeted mi : &esidential F D155 " .-+ F D-+ 6ffice F D05 " . + F 20 6& D /,255,555E*55,555 D2 Ma!%ets'a!e a!iance ,hair ,omp any 2,255,555 " $ctual mar8et si9e in units $ctual mar8et share J Audgeted mar8et share G5.1001010 $ 5.1-----/H " Audgeted ,; per composite unit for budgeted mi" D2 ;ar8et-share variance F D*,*52,555 ! ($nswers may vary due to rounding)

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Ma!%et-si&e a!iance

$ctual mar8et si9e in units $ Audgeted mar8et si9e in units G2,255,555 $ 2,*55,555H "

Audgeted mar8et share

Audgeted ,; per composite unit for budgeted mi" D2

;ar8et-si9e variance

,hair ,omp any

5.1-----/ "

F D ,155,555 )
G$nswers may vary due to roundingH

Difficulty: Objectives: /, 0 Terms to Learn: static-budget variance, fle"ible budget variance, sales-volume variance, sales-mi" variance, sales-1uantity variance, mar8et-share variance, mar8et-si9e variance

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CRITICAL THI)-I). 1- . $ company might choose to allocate corporate costs to various divisions within the company for what four purposes= #ive an e"ample of each. Ans+e!, 1. To provide information for economic decisions, for e"ample, allocating costs from all si" value-chain functions to decide on the selling price of a customi9ed product. 2. To motivate managers and employees, for e"ample, allocating corporate costs such as accounting support to division managers to discourage re1uesting a multitude of unnecessary financial reports. To justify costs or compute reimbursement, for e"ample, to allocate fi"ed design and production costs when arriving at a fair price for a government contract. To measure income and assets for reporting to e"ternal parties, for e"ample, allocating manufacturing overhead when costing inventories for financial statements presented in the company7s annual report.

*.

?ote: 3"amples will vary. Difficulty: 2 Objective: Terms to Learn: cost allocation 1

1-*. $n electronics manufacturer is trying to encourage its engineers to design simpler products so that overall costs are reduced. Requi!ed, .hich of the value-chain function costs G&'(, design, production, mar8eting, distribution, customer serviceH should be included in product-cost estimates to achieve the above purpose= .hy= Ans+e!, $ll costs that are affected by the design should be included in the product cost estimate. These costs include the cost of design, production, distribution, and customer service. Difficulty: 1 Objective: 1 Terms to Learn: cost allocation

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1-+.

>hould a company allocate its corporate costs to divisions= Ans+e!: >ome companies allocate all corporate costs to divisions because corporate costs are incurred to support division activities. $llocating all corporate costs motivates division managers to e"amine how corporate costs are planned and controlled. $lso, companies that want to calculate the full cost of products in order to ma8e some economic decision must allocate corporate costs to indirectcost pools of divisions. >ome companies do not allocate corporate costs to divisions because these costs are not controllable by division managers. %articularly if performance evaluations are based on these allocations, a company will often not choose to allocate certain corporate costs that are not perceived as being controllable by division management. 6ther companies allocate only those corporate costs, such as corporate human resources, that are widely perceived as either causally related to division activities or provide e"plicit benefits to divisions. Difficulty: 2 Objectives: Terms to Learn: cost allocation

1--. Bist at least three different levels of costs in a customer-cost hierarchy and an e"ample of each. Ans+e!, Bist any three of the following: 1. ,ustomer output unit-level costs, product-handling costs of each product sold 2. ,ustomer batch-level costs, order processing costs incurred . ,ustomer-sustaining costs, costs of visits to the customer *. (istribution-channel costs, a particular distribution channel manager7s salary +. ,orporate-sustaining costs, costs of top management ?ote: 3"amples will vary. Difficulty: 2 Objective: Terms to Learn: customer cost hierarchy +

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1-/. .hy would a manager perform customer-profitability analysis= Ans+e!, ,ustomer profitability analysis highlights how individual customers contribute to profitability. It helps managers determine whether customers who are contributing significantly to profits are receiving a comparable level of attention from the organi9ation. Difficulty: 2 Objective: Terms to Learn: customer-profitability analysis 1-0. .hat actions might be ta8en with an unprofitable customer= Ans+e!: $n unprofitable customer might be dropped as a customer, might be charged more for some of the resources of the company that it is using in e"cess of other customers, or heEshe might be counseled on how to use less resources and be restored to profitability in the future. Difficulty: 2 Objectives: Terms to Learn: customer profitability analysis 1-2. .hy would a manager want to calculate the sale-mi" and the sales-1uantity variances= ;ar8et-share and mar8et-si9e variances= Ans+e!, To manage effectively and ma8e proper decisions, a manager must 8eep informed on whether organi9ational initiatives are progressing as planned. Kariances help to inform managers about the reasons Gwhether favorable or unfavorableH for the differences between the actual result and the budgeted result. >pecifically, the sale-mi" and the sales-1uantity variances help to e"plain the sales-volume variance, and the mar8et-share and mar8et-si9e variances help to e"plain the sales-1uantity variance. Difficulty: 2 Objectives: /, 0 Terms to Learn: sales-mi" variance, sales-1uantity variance, mar8et-si9e variance, mar8et-share variance

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