1) Which criterion for allocation of overhead (indirect) costs most likely promotes acceptance of the allocation?
A. Direct cause-and-effect relationship
B. Benefit-received relationship.
C. Ability-to-bear relationship.
D. Arbitrary allocation.
2) Brownstone Corp. production cost structure consists of both fixed and variable cost components. Using the high-low method their cost equation is: y = $150,000 + $112(x) where x is equal to the number of machine hours. Using regression analysis the cost equation is: y = $122,000 + $148(x) where x is the number of machine hours. Brownstone is considering adding more machines and permanently lay off a significant number of direct-laborers (full-time employees). If Brownstone makes this change, the most likely outcome will be to
A) increase the variable cost amount of $148 using regression analysis
B) reduce the fixed cost amount of $150,000 using the high-low method
C) reduce the cost of jobs that require a significant amount of machine hour time
D) increase the total fixed cost amounts under both the high-low and regression methods
3) The general term used to identify both the tracing and the allocation of accumulated costs to a cost object is:
A) cost accumulation
B) cost assignment
C) cost tracing
D) conversion costing
4) Kelly Company sells its only product for $9 per unit, variable production costs are $3 per unit, and selling and administrative costs are $1.50 per unit. Fixed production costs for 10,000 units are $5,000; fixed selling and administrative costs for 10,000 units are $7,000. The contribution margin is:
A) $6 per unit
B) $4.50 per unit
C) $5.50 per unit
D) $4 per unit
5) Cooper Can Catch Corporation determined their b(X) = $9(X) where X is the number of direct labor hours (DLH). They computed the variable rate using the high-low method rather than regression analysis. The high activity was 5,000 DLH and $90,000; the low activity was 2,000 DLH. What was the cost at the low activity level used to calculate the variable rate?
A) $60,000
B) $63,000
C) $67,000
D) none of the above (A, B, or C)
6) Activity-based costing is most likely to yield benefits for companies with all of the following characteristics except:
A) numerous products that consume different amounts of resources
B) a highly competitive environment, where cost control is critical
C) accessible accounting and information systems expertise to maintain the system
D) operations that remain fairly consistent
7) Grandma's Basket Company is currently using the weighted-average method to account for their production under a process costing system. Their material and overhead costs have been fluctuating and they are considering changing to the FIFO method for process costing. All direct materials are added at the beginning of the process. If direct material costs are increasing, the FIFO method will report
A) a lesser equivalent unit cost for direct materials under weighted average than FIFO.
B) a greater equivalent unit cost for direct materials under weighted average than FIFO.
C) the same equivalent unit cost using weighted average or FIFO.
D) cannot be determined with the information given.
8) Unlucky Fowler Inc. is deciding whether or not to close one of their divisions. Currently the division is generating sales of $6,800,000. Their contribution margin is $700,000. Fixed costs include $630,000 allocated corporate costs that will remain if the division is closed. Fixed costs traced directly to the operating division include $148,000 of depreciation for equipment that will remain if the division is closed. If the division is closed Unlucky Fowler Inc. will
A) save $148,000
B) save $70,000
C) lose S700,000
D) lose $78,000
9) Browns Manufacturing Inc. decided to prorate their under-or over-applied overhead. Actual total overhead costs amounted to $80,000; applied overhead amounted to $81,000. The proration will likely result in
A) a greater amount of costs of goods sold than what would be reported if they close all of the under- or over-applied overhead to cost of goods sold
B) a lesser amount of costs of goods sold than what would be reported if they close all of the under- or over-applied overhead to cost of goods sold
C) the same amount of work-in-process (W-I-P) would be reported if the prorate or close all of the under- or over-applied overhead to cost of goods sold
D) cannot be determined with the information given
10) Which of the following statements refers to management accounting information?
A) There are no regulations governing the reports.
B) The reports are generally delayed and historical.
C) The audience tends to be stockholders, creditors, and tax authorities.
D) It primarily measures and records business transactions.
Problem II - 15 Points
Doc Reefy Inc. is a manufacturing firm that uses job-order costing. The company applies overhead to jobs using a predetermined overhead rate based on machine-hours. At the beginning of the year in determining their predetermined overhead rate, they estimated that they would work 31,000 machine hours and incur $248,000 in overhead costs.
Required:
Prepare journal entries in good form for only the following transactions that occurred during the year. If no entry is required write the word "None." Omit journal entry explanations.
1. Raw materials amounting to $409,000 were used in production. $388,000 of the raw materials are classified as direct materials and $21,000 are classified as indirect materials.
2. Factory utility costs amounting to $12,000 were incurred and paid.
3. Direct labor costs were $145,000, indirect labor costs amounted to $61,000, and selling and administrative salaries were $190,000. All labor and salary costs were paid in cash.
4. The actual level of machine hours for the year was 29,000.
5. Sales for the year amounted to $500,000 all on account, and the cost of goods sold were $300,000. A periodic inventory system was used.
Problem III - 10 Points
Scherff Inc. produces a product which goes through three processes - Process 1, Process 2, and Process 3. Process 1 is the Mixing Department; Process 2 is the Blending Department; and Process 3 is Pouring Department. The following information pertains to the Mixing Department to the units and costs for the month of October (% is the percentage completed):
Direct Materials Conversion
Beginning Inventory 1000 units, 50% 1000 units, 25%
$10,000 $20,000
Started this Period 20,000 units 20,000 units
$400,000 $1,600,000
Ending Inventory 2000 units, 75% 2000 units, 50%
Required:
1. Prepare a complete production report for the month of October using the FIFO technique.
2. Prepare the journal entry transferring the goods to the Blending Department from the Mixing Department.
Problem IV - 10 Points
Williams Inc. manufactures quality clothing. The company uses a normal costing system, using a predetermined overhead rate to charge overhead cost to production. The overhead rate for the current month was based on estimated overhead costs of $24,000, and 6,000 machine hours. The following data relate to the activities for the month of December, 2016.
Manufacturing overhead costs incurred:
Property taxes............................. $ 1,600
Utilities, factory......................... 2,600
Depreciation, factory.................. 13,000
Insurance, factory........................ 4,500
Indirect labor............................ 5,100
Other costs incurred:
Purchase of raw materials......... $15,000
Direct labor cost................... 2,000
Selling and administrative costs... 99,000
Inventories:
Raw materials, beginning............ $ 5,000
Raw materials, ending............... 4,400
Work in process, beginning.......... 3,500
Work in process, ending............. 4,500
Actual machine hours................... 7,000
Required:
1. Compute the predetermined overhead rate.
2. Compute the amount of applied overhead cost for the month of December.
3. Prepare the journal entry to dispose of the under- or over-applied overhead. The amount is considered immaterial and not prorated. Omit the journal entry explanation.
Problem V -
The Brown's Draft Bust Company sells ten different styles of relatively inexpensive football jerseys with identical purchase costs and selling prices. Brown is trying to determine the desirability of opening another store, which would have the following expense and revenue relationships (variable data on a per unit basis, fixed expenses in total):
Variable data: Selling Price $40.00; Cost of Shirt $18.00; Sales Commissions $7.00
Annual fixed expenses: Rent $80,000; Salaries $150,000; Other fixed expenses $70,000
Required:
1. What is the annual breakeven point in dollar sales and units?
2. If Brown has an effective tax rate of 40%, how many jerseys must they sell to make $80,000 after taxes?
3. Ignoring income taxes, If 21,000 jerseys are sold, what would be the stores operating income (loss)?
4. Refer to the original data. If Brown decided to do away with sales commissions and increase salespersons salaries by $140,000 per year, what would be the point of indifference, in units, between the two alternatives?
5. Brown has been approached by the Bear Advertising Agency to do their advertising. If Brown signs a contract for $150,000 for Bear to handle their account, how many additional units will have to be sold to cover the cost?
Problem VI - 10 Points
The No-Win Company makes 20,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:
Direct materials.................. $24.70
Direct labor...................... 16.30
Variable manufacturing overhead... 2.30
Fixed manufacturing overhead...... 13.40
Unit product cost.............. $56.70
An outside supplier has offered to sell the company all of these parts it needs at $51.80 a unit. If No-Win accepts this offer, the facilities now being used to make the part could be leased to another company. The incremental contribution margin from leasing the space would be $44,000 per year.
If the part were purchased from the outside supplier, all of the variable costs of the part would be avoided. However, $5.10 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost ($5.10) would be applied to the company's remaining products. Ignore income taxes and the time value of money in this problem.
Required:
1. How much of the unit product cost of $56.70 is relevant in the decision of whether to make or buy the part?
2. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?
3. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 20,000 units required each year? They will still lease the facility if they purchase from an outside supplier.