Accounting 4B FRESNO CITY COLLEGE

Activity Based Costing
Which allocates overhead based on each product’s use of particular activities in making the product. In addition to providing more accurate product costing, ABC also can contribute to increased efficiency in the value chain. For example, suppose one of a company’s overhead pools is allocated based on the number of setups that each product requires.
Balanced Scorecard
Corrects for this limited perspective: This approach uses both financial and non-financial measures to evaluate all aspects of a company’s operations in an integrated fashion.
What activities and responsibilities are not associated with management’s functions?
Accountability.
The principle difference between a merchandising and a manufacturing income statement is the
Cost of goods sold section.
Which one of the following is not a cost element in manufacturing a product?
Office salaries.
For inventoriable costs to become expenses under the matching principle,
The product to which they attach must be sold.
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Which of the following is not a manufacturing cost category?
Cost of goods sold.
Management accountants would not.
Prepare reports primarily for external users.
In an analogous sense, external user is to internal user as generally accepted accounting principles are to-
Relevance to decision.
For a manufacturing company, which of the following is an example of a period cost rather than a product cost?
Wages of salespersons.
Which one of the following costs would not be inventoriable?
Period costs.
Cost of goods sold.
Appears on both manufacturing and merchandising companies’ income statements.
Product costs are also called?
Inventoriable costs.
The function that pertains to keeping the activities of the enterprise on track is.
Controlling.
In determining whether planned goals are being met, a manager is performing the function of.
Controlling.
Internal reports are generally.
Detailed.
What is work in process inventory generally described as?
Costs applicable to units that have been started in production but are only partially completed.
Cost of goods manufactured is calculated as follows.
Beginning WIP + direct materials used + direct labor + manufacturing overhead – ending WIP.
In October, Roby Company reports 21,720 actual direct labor hours, and it incurs $118,080 of manufacturing overhead costs. Standard hours allowed for the work done is 23,030 hours. The predetermined overhead rate is $5.33 per direct labor hour.
The formula is: Actual Overhead – Overhead Applied = Total Overhead Variance
$118,080 – $122,750* = $4,670 Favorable

*23,030 x $5.33 = $122,750

Wallowa Company is considering a long-term investment project called ZIP. ZIP will require an investment of $116,300. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $80,490, and annual cash outflows would increase by $40,120. Compute the cash payback period.
Estimated annual cash inflows $80,490
Estimated annual cash outflows -40,120
Net annual cash flow $40,370

Cash payback period = $116,300/$40,370 = 2.88 years.

Lewis Company’s standard labor cost of producing one unit of Product DD is 3.20 hours at the rate of $11.00 per hour. During August, 42,300 hours of labor are incurred at a cost of $11.18 per hour to produce 13,000 units of Product DD.
(a) Total labor variance:
( AH x AR ) – ( SH x SR )
(42,300 x $11.18) – (41,600* x $11.00)
$472,914 – $457,600 = $15,314 Unfavorable
/*13,000 x 3.20 = 41,600

(b) Labor price variance:
( AH x AR ) – ( AH x SR )
(42,300 x $11.18) – (42,300 x $11.00)
$472,914 – $465,300 = $7,614 Unfavorable

Labor quantity variance:
( AH x SR ) – ( SH x SR )
(42,300 x $11.00) – (41,600 x $11.00)
$465,300 – $457,600 = $7,700 Unfavorable

(c) Labor price variance:
( AH x AR ) – ( AH x SR )
(42,300 x $11.18) – (42,300 x $11.32)
$472,914 – $478,836 = $5,922 Favorable

Labor quantity variance:
( AH x SR ) – ( SH x SR )
(42,300 x $11.32) – (45,500 x $11.32)
$478,836 – $515,060 = $36,224 Favorable

*3.50 × 13,000= 45,500

Manufacturing overhead data for the production of Product H by Smart Company are as follows.

Overhead incurred for 48,800 actual direct labor hours worked$443,900
Overhead rate (variable $8; fixed $1) at normal capacity of 52,600 direct labor hours $9
Standard hours allowed for work done 49,530

Compute the total overhead variance.

Total overhead variance:
Actual Overhead

Overhead Budgeted
=
$443,900 – $445,770* = $1,870 Favorable

*(49,530 x $9) = $445,770

Voorhees, Inc. reports the following financial information.
Average operating assets $2,996,800
Controllable margin $749,200
Minimum rate of return 8 %
Compute the return on investment and the residual income.
Controllable Margin
÷
Average Operating Assets
=
ROI
$749,200
÷ $2,996,800
= 25%Controllable Margin
– (Minimum Rate of Return x Average Operating Assets)
= Residual Income
$749,200 – (8% x $2,996,800)
= Residual Income
$749,200- $239,744 = $509,456
Calculate the net present value and profitability index of each machine. Assume a 9% discount rate.
Machine B
Cash Flows x 9% Discount
Factor =Present
Value
Present value of net annual cash flows $30,600×5.53482 =$169,365
Present value of salvage value 0×.50187=0
169,365
-Capital investment 181,700
Net present value ($12,335 )
Calculate the internal rate of return on this new machine.
$430,700/$98,892 = 4.35526

By tracing across on the 6-year row, we see that the discount factor for 10% is 4.35526. Thus, the internal rate of return on this project is approximately 10%. Since this is above the company’s required rate of return, the project should be accepted.

project has annual income exclusive of depreciation of $80,000. The annual rate of return is 15% and annual depreciation is $20,000. There is no salvage value. The internal rate of return is 12%. The initial cost of the project was
$800,000.
A company is considering purchasing factory equipment that costs $480,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $135,000 and annual operating expenses exclusive of depreciation expense are expected to be $39,000. The straight-line method of depreciation would be used.

If the equipment is purchased, the annual rate of return expected on this equipment is

15.0%.
Project Soup Project Nuts
Initial investment $400,000 $600,000
Annual net income 30,000 46,000
Net annual cash inflow 110,000 146,000
Estimated useful life 5 years 6 years
Salvage value -0- -0-

The cash payback period for Project Soup is?

3.6 years.
A company has a minimum required rate of return of 9%. It is considering investing in a project that costs $210,000 and is expected to generate cash inflows of $84,000 at the end of each year for three years. The net present value of this project is?
$2,604.
If a project costing $40,000 has a profitability index of 1.00 and the discount rate was 8%, then the project’s internal rate of return was?
Equal to 8%
Initial investment $95,000
Net annual cash inflow 20,000
Net present value 36,224
Salvage value 10,000
Useful life 10 yrs.

The potential investment’s profitability index is?

1.38
Selma Inc. is comparing several alternative capital budgeting projects as shown below:

Projects
A B C
Initial investment $80,000 $120,000 $160,000
Net cash flows 90,000 110,000 200,000
How many of the projects are acceptable?

2
A company has a minimum required rate of return of 8%. It is considering investing in a project that costs $91,116 and is expected to generate cash inflows of $36,000 each year for three years. The approximate internal rate of return on this project is?

Present Value of an Annuity of 1 at 9% is 2.531

9%
Johnson Corp. has an 8% required rate of return. It’s considering a project that would provide annual cost savings of $50,000 for 5 years. The most that Johnson would be willing to spend on this project is.
Present Value
of 1 at 8% is .681 and 3.993
$199,650.
A project that cost $75,000 has a useful life of 5 years and a salvage value of $3,000. The internal rate of return is 12% and the annual rate of return is 18%. The amount of the annual net income was?
$7,020
Naples, Inc. recorded operating data for its shoe division for the year.

Sales $750,000
Contribution margin 135,000
Total fixed costs 90,000
Average total operating assets 300,000
How much is ROI for the year if management is able to identify a way to improve the contribution margin by $30,000, assuming fixed costs are held constant?

25%
Stone Industries uses flexible budgets. At normal capacity of 16,000 units, budgeted manufacturing overhead is: $48,000 variable and $270,000 fixed. If Stone had actual overhead costs of $321,000 for 18,000 units produced, what is the difference between actual and budgeted costs?
$3,000 favorable.
Griffin Corp. is evaluating its Piquette division, an investment center. The division has a $60,000 controllable margin and $400,000 of sales. How much will Griffin’s average operating assets be when its return on investment is 10%?
$600,000
A department has budgeted monthly manufacturing overhead cost of $540,000 plus $3 per direct labor hour. If a flexible budget report reflects $1,044,000 for total budgeted manufacturing cost for the month, the actual level of activity achieved during the month was?
168,000 direct labor hours.
Lew Co. had sales of $400,000, variable costs of $200,000, and direct fixed costs totaling $100,000. The company’s operating assets total $800,000, and its required return is 10%. How much is the residual income?
$20,000
Trails and Paths, Inc. had average operating assets of $6,000,000 and sales of $3,000,000 in 2013. If the controllable margin was $600,000, the ROI was?
10%
In the Goblette Manufacturing Company, indirect labor is budgeted for $108,000 and factory supervision is budgeted for $36,000 at normal capacity of 160,000 direct labor hours. If 180,000 direct labor hours are worked, flexible budget total for these costs is:
$157,500
The following information is available for Halle Department Stores:

Average operating assets $600,000
Controllable margin 60,000
Contribution margin 150,000
Minimum rate of return 8%
How much is Halle’s residual income?

$12,000
Dillon has a standard of 1.5 pounds of materials per unit, at $6 per pound. In producing 2,000 units, Dillon used 3,100 pounds of materials at a total cost of $18,135. Dillon’s materials price variance is?
$465 F.
Edgar, Inc. has a materials price standard of $2.00 per pound. Six thousand pounds of materials were purchased at $2.20 a pound. The actual quantity of materials used was 6,000 pounds, although the standard quantity allowed for the output was 5,400 pounds.

Edgar, Inc.’s materials quantity variance is

$1,200 U.
A company developed the following per unit materials standards for its product: 3 pounds of direct materials at $5 per pound. If 12,000 units of product were produced last month and 37,500 pounds of direct materials were used, the direct materials quantity variance was?
$7,500 unfavorable.
If 10,000 pounds of direct materials are purchased for $9,300 on account and the standard cost is $.90 per pound, the journal entry to record the purchase is?
Raw Materials Inventory 9,000
Materials Price Variance 300
Accounts Payable 9,300
Shipp, Inc. manufactures a product requiring two pounds of direct material. During 2013, Shipp purchases 24,000 pounds of material for $99,200 when the standard price per pound is $4. During 2013, Shipp uses 22,000 pounds to make 12,000 products. The standard direct material cost per unit of finished product is?
$8.00
Budgeted overhead for Haft, Inc. at normal capacity of 60,000 direct labor hours is $3 per hour variable and $2 per hour fixed. In May, $310,000 of overhead was incurred in working 63,000 hours when 64,000 standard hours were allowed. The overhead volume variance is?
$8,000 favorable
Oxnard Industries produces a product that requires 2.6 pounds of materials per unit. The allowance for waste and spoilage per unit is .3 pounds and .1 pounds, respectively. The purchase price is $2 per pound, but a 2% discount is usually taken. Freight costs are $.10 per pound, and receiving and handling costs are $.07 per pound. The hourly wage rate is $12.00 per hour, but a raise which will average $.30 will go into effect soon. Payroll taxes are $1.20 per hour, and fringe benefits average $2.40 per hour. Standard production time is 1 hour per unit, and the allowance for rest periods and setup is .2 hours and .1 hours, respectively. The standard direct materials price per pound is?
$2.13
Information on Jayhawk’s direct labor costs for the month of August is as follows:

Actual rate $10
Standard hours 11,000
Actual hours 10,000
Direct labor price variance—unfavorable $4,000

What was the standard rate for August?

$9.60
Oxnard Industries produces a product that requires 2.6 pounds of materials per unit. The allowance for waste and spoilage per unit is .3 pounds and .1 pounds, respectively. The purchase price is $2 per pound, but a 2% discount is usually taken. Freight costs are $.10 per pound, and receiving and handling costs are $.07 per pound. The hourly wage rate is $12.00 per hour, but a raise which will average $.30 will go into effect soon. Payroll taxes are $1.20 per hour, and fringe benefits average $2.40 per hour. Standard production time is 1 hour per unit, and the allowance for rest periods and setup is .2 hours and .1 hours, respectively. The standard direct labor hours per unit is?
1.3hrs
Denmark Corporation’s variance report for the purchasing department reports 1,000 units of material A purchased and 2,400 units of material B purchased. It also reports standard prices of $2 for Material A and $3 for Material B. Actual prices reported are $2.10 for Material A and $2.80 for Material B. Denmark should report a total price variance of
$380 F
Benet Division of United Refinery Company’s operating results include: controllable margin, $200,000; sales $2,200,000; and operating assets, $800,000. The Benet Division’s ROI is 25%. Management is considering a project with sales of $100,000, variable expenses of $60,000, fixed costs of $40,000; and an asset investment of $150,000. Should management accept this new project?
No, since ROI will be lowered.
Betsy Union is the Pika Division manager and her performance is evaluated by executive management based on Division ROI. The current controllable margin for Pika Division is $46,000. Its current operating assets total $210,000. The division is considering purchasing equipment for $40,000 that will increase sales by an estimated $10,000, with annual depreciation of $10,000. If the equipment is purchased, what will happen to the return on investment for the division?
A decrease of 3.5%
When a job is completed and all costs have been accumulated on a job cost sheet, the journal entry that should be made is?
Finished Goods Inventory
Work In Process Inventory
In a manufacturing company, the cost of factory labor consists of all of the following except?
Net earnings of factory workers.
Factory labor costs
Include sick pay earned by factory workers.
Which one of the following should be equal to the balance of the Work In Process Inventory account at the end of the period?
The sum of the costs shown on the job cost sheets of unfinished jobs.
A process cost system would be used for all of the following except the?
Printing of wedding invitations.
At the end of the year, any balance in the Manufacturing Overhead account is generally eliminated by adjusting
Cost of Goods Sold.
A process cost system would most likely be used by a company that makes.
Breakfast cereal.
The labor costs that have been identified as indirect labor should be charged to?
Manufacturing overhead.
The Raw Materials Inventory account is?
Debited for invoice costs and freight costs chargeable to the purchaser.
Overhead application is recorded with a?
Credit to Manufacturing Overhead.
If the Manufacturing Overhead account has a debit balance at the end of a period, it means that?
Actual overhead costs were greater than overhead costs applied to jobs.
Cost of raw materials is debited to Raw Materials Inventory when the?
Materials are received.
In a job order cost system, it would be correct in recording the purchase of raw materials to debit?
Raw Materials Inventory.
If Manufacturing Overhead has a credit balance at the end of the period, then?
Overhead has been over applied.
Which of the following is not a control account?
Factory Labor.
A characteristic of products that are mass-produced in a continuous fashion is that?
The products are identical or very similar in nature.