Managerial Accounting Exam 1

Managerial accounting is the provision of accounting for a company's external users.

False

Providing an analysis for a company regarding adding a particular product line, retracting sales markets, or dealing with risks or opportunities are some of the responsibilities of managerial accountants.

True

Which of the following is referred to as controlling?

A.The provision of accounting information for a company's internal users.

B.The process of choosing among competing alternatives.

C.The managerial activity of monitoring a plan's implementation and taking corrective action as needed.

D.The detailed formulation of action to achieve a particular end.

C. The managerial activity of monitoring a plan's implementation and taking corrective action as needed.

The management activity called _____ is detailed formulation of action to achieve a particular end.

A. planning

B. controlling

C. decision making

D. none of the above

A. planning

Which of the following is a standard of ethical conduct for managerial accountants as per the Institute of Management Accountants?

A. Competence

B. Confidence

C. Performance

D. Respect for others

A. Competence

The Statement of Ethical Professional Practice is issued by the:

A. U.S. Congress.

B. Securities and Exchange Commission.

C. New York Stock Exchange.

D. Institute of Management Accountants.

D. Institute of Management Accountants.

The provision of accounting information for internal users is known as

a.accounting.

b.financial accounting.

c.managerial accounting.

d.information provision.

e.accounting for planning and control.

c. managerial accounting.

The process of choosing among competing alternatives is called

a.administering.

b.decision making.

c.controlling.

d.performance evaluation.

e.None of these choices are correct.

b. decision making.

Which of the following is a characteristic of managerial accounting?

a.There is an internal focus.

b.Subjective information may be used.

c.There is an emphasis on the future.

d.It is broad-based and multidisciplinary.

e.All of these.

e. All of these.

An effective managerial accounting system should track information about an organization's activities in which of the following areas?

a.Development

b.Marketing

c.Production

d.Design

e.All of these.

e. All of these.

An effective managerial accounting system should track information about an organization's activities in which of the following areas?

a.HR Administration

b.Sales and Advertising

c.Purchasing

d.Manufacturing

e.All of these.

e. All of these.

In terms of strategic positioning, which two general strategies may be chosen by a company?

a.Revenue production and cost enhancement

b.Activity-based costing and value chain emphasis

c.Increasing customer value and decreasing supplier orientation

d.Cost leadership and product differentiation

e.Product differentiation and cost enhancement

d. Cost leadership and product differentiation

Which of the following is not a common form of certification for managerial accountants?

a.Certificate in Internal Auditing

b.Certificate in External Auditing

c.Certificate in Public Accounting

d.Certificate in Management Accounting

b. Certificate in External Auditing

Which of the following is not a common form of certification for managerial accountants?

a.Certificate in Public Accounting

b.Certificate in Inventory Control

c.Certificate in Management Accounting

d.Certificate in Internal Auditing

b. Certificate in Inventory Control

Laboratory Manager: An HMO approached me recently and offered us its entire range of blood tests. It provided a price list revealing the amount it is willing to pay for each test. In many cases, the prices are below what we normally charge. I need to know the costs of the individual tests to assess the feasibility of accepting its offer and perhaps suggest price adjustments on some of the tests.

Decision Making

Operating Manager: This report indicates that we have 30% more defects than originally targeted. An investigation into the cause has revealed the problem. We were using a lower-quality material than expected, and the waste has been higher than normal. By switching to the quality level originally specified, we can reduce the defects to the planned level.

Controlling

Divisional Manager: Our market share has increased because of higher-quality products. Current projections indicate that we should sell 25% more units than last year. I want a projection of the effect that this increase in sales will have on profits. I also want to know our expected cash receipts and cash expenditures on a month-by-month basis. I have a feeling that some short-term borrowing may be necessary.

Planning

Plant Manager: Foreign competitors are producing goods with lower costs and delivering them more rapidly than we can to customers in our markets. We need to decrease the cycle time and increase the efficiency of our manufacturing process. There are two proposals that should help us accomplish these goals, both of which involve investing in computer-aided manufacturing. I need to know the future cash flows associated with each system and the effect each system has on unit costs and cycle time.

Decision Making

Manager: At the last board meeting, we established an objective of earning a 25% return on sales. I need to know how many units of our product we need to sell to meet this objective. Once I have the estimated sales in units, we need to outline a promotional campaign that will take us where we want to be. However, in order to compute the targeted sales in units, I need to know the expected unit price and a lot of cost information.

Planning

Manager: Perhaps the Harrison Medical Clinic should not offer a full range of medical services. Some services seem to be having a difficult time showing any kind of profit. I am particularly concerned about the mental health service. It has not shown a profit since the clinic opened. I want to know what costs can be avoided if I drop the service. I also want some assessment of the impact on the other services we offer. Some of our patients may choose this clinic because we offer a full range of services.

Decision Making

Customer Value, Strategic Positioning

Adriana Alvarado has decided to purchase a personal computer. She has narrowed the choices to two: Drantex and Confiar. Both brands have the same processing speed, 6.4 gigabytes of hard-disk capacity, two USB ports, and a DVDRW drive, and each comes with the same basic software support package. Both come from mail-order companies with good reputations. The selling price for each is identical. After some review, Adriana discovers that the cost of operating and maintaining Drantex over a 3-year period is estimated to be $300. For Confiar, the operating and maintenance cost is $600. The sales agent for Drantex emphasized the lower operating and maintenance costs. The agent for Confiar, however, emphasized the service reputation of the product and the faster delivery time (Confiar can be purchased and delivered 1 week sooner than Drantex). Based on all the information, Adriana has decided to buy Confiar.

1. What is the total product purchased by Adriana?

The product, its features , services and delivery speed

2. CONCEPTUAL CONNECTION How does the strategic positioning differ for the two companies?

Dantex is emphasizing low costs, and Confiar is attempting to differentiate its PC by offering faster delivery and higher-quality service.

3. CONCEPTUAL CONNECTION When asked why she decided to buy Confiar, Adriana responded, "I think that Confiar offers more value than Drantex." What are the possible sources of this greater value? What implications does this have for the managerial accounting information system?

The Confiar service component and its delivery time appear to be better than Drantex's . Thus, the realization of these features appears to outweigh the additional sacrifice (the additional operating and maintenance cost) associated with the Confiar PC. The implications for management accounting are straightforward. The management accounting information system should collect and report information about customer realization and sacrifice. Much of this information is external to the firm but clearly needed by management.

4. CONCEPTUAL CONNECTION Suppose that Adriana's decision was prompted mostly by the desire to receive the computer quickly. Informed that it was losing sales because of the longer time to produce and deliver its products, the management of the company producing Drantex decided to improve delivery performance by improving its internal processes. These improvements decreased the number of defective units and the time required to produce its product. Consequently, delivery time and costs both decreased, and the company was able to lower its prices on Drantex. Explain how these actions translate into strengthening the competitive position of the Drantex PC relative to the Confiar PC. Also discuss the implications for the managerial accounting information system.

Better quality and shorter delivery time increase the value of what the customer receives, while lowering the price decreases the amount paid. In total, customer value has increased, and presumably, this should make the Drantex PC much more competitive. This example illustrates how quality, time, and costs are essential competitive weapons. It also illustrates how critical it is for the management accounting system to collect and report data concerning these three dimensions.

The managerial activity of monitoring a plan's implementation and taking corrective action as needed is referred to as decision making.

False (The managerial activity of monitoring a plan's implementation and taking corrective action as needed is referred to as controlling.)

Managerial accounting information is not important for not-for-profit organizations.

False (Managerial accounting information is important for all types of organizations.)

Financial accounting is governed by GAAP.

True (Financial accounting is subject to externally imposed rules (e.g., GAAP and SEC regulations).)

Time is not a crucial element in all phases of the value chain.

False (Time is a crucial element in all phases of the value chain.)

The purpose of the Certificate in Public Accounting is to provide minimal professional qualification for external auditors.

True (The Certificate in Public Accounting is the oldest and most well-known certification in accounting. The purpose of the certificate is to provide minimal professional qualification for external auditors.)

The belief that each member of a group bears no responsibility for the well-being of other members is a common principle underlying all ethical systems.

False (The belief that each member of a group bears some responsibility for the well-being of other members is a common principle underlying all ethical systems.)

Positions that have direct responsibility for the basic objectives of an organization are referred to as line positions.

True (positions that have direct responsibility for the basic objectives of an organization are referred to as line positions.)

Which of the following functions is an example of the management activity referred to as planning?

a.Tracking the cost of employee absence

b.Ensuring that the most competent candidates are recruited by a company

c.Developing a strategy for disposing of hazardous waste

d.All of these items are correct.

c .Developing a strategy for disposing of hazardous waste (The detailed formulation of action to achieve a particular end is the management activity called planning. Planning requires setting objectives and identifying methods to achieve those objectives. Hence, developing a strategy for disposing of hazardous waste is a planning activity.)

Which of the following statements is true of managerial accounting?

a.Managerial accounting is the provision of accounting information for a company's external users.

b.Managerial accounting attempts to provide information for controlling the organization's actions.

c.Managerial accounting is subject to rules for external financial reporting.

d.Managerial accounting provides historical information

b. Managerial accounting attempts to provide information for controlling the organization's actions. (Managerial accounting identifies, collects, measures, classifies, and reports financial and nonfinancial information that is useful to internal users in planning, controlling, and decision making.)

Investigating production variances and adjusting the production process are examples of:

a.controlling.

b.planning.

c.decision making.

d.All of these choices are correct.

a. controlling. (The managerial activity of monitoring a plan's implementation and taking corrective action as needed is referred to as controlling. Control is usually achieved by comparing actual performance with expected performance. This information can be used to evaluate or to correct the steps being taken to implement a plan. Investigating production variances and adjusting the production process are examples of controlling.)

In the United States, individuals who provide assurance service are designated as:

a.Certified Public Accountants.

b.Certified Management Accountants.

c.Certified Financial Accountants.

d.Chartered Accountants.

a. Certified Public Accountants. (Only a Certified Public Accountant (CPA) is permitted by law to serve as an external auditor. The responsibility of auditors is to provide assurance concerning the reliability of a firm's financial statements. CPAs must pass a national examination and be licensed by the state in which they practice.)

Which of the following areas is not emphasized by the Certified Management Accountant (CMA) examination?

a.Economics, finance, and management

b.Management reporting, analysis, and behavioral issues

c.External auditing and internal control

d.Decision analysis and information systems

c. External auditing and internal control (The following four areas are emphasized by the CMA examination:

Economics, finance, and management

Financial accounting and reporting

Management reporting, analysis, and behavioral issues

Decision analysis and information systems)

Which of the following statements is true of profit maximization?

a.Profit maximization should be achieved through legal and ethical means.

b.Profit maximization is achieved by considering the financial measures focused only on efficiency.

c.Profit maximization results in maximum cost to and maximum production by a company.

d.Profit maximization is an objective of financial accounting but not managerial accounting.

a. Profit maximization should be achieved through legal and ethical means. (The objective of profit maximization should be constrained by the requirement that profits be achieved through legal and ethical means.)

Who among the following would occupy a line position in a hospital?

a.The manager of the cafeteria

b.The chief of surgery

c.A hospital administrator

d.None of these choices are correct.

b. The chief of surgery (Positions that have direct responsibility for the basic objectives of an organization are referred to as line positions. In a hospital, the chief of surgery would hold a line position.)

Which of the following statements is true of total quality management?

a.It is a management philosophy in which manufacturers strive to create an environment that will enable workers to manufacture zero-defect products.

b.It has replaced the acceptable quality attitudes of the past.

c.It emphasizes the elimination of waste.

d.All of these statements are correct.

d. All of these statements are correct. (A philosophy of total quality management, in which manufacturers strive to create an environment that will enable workers to manufacture zero-defect products, has replaced the acceptable quality attitudes of the past. Total quality management lays emphasis on elimination of waste.)

Cost objects do not need to be considered for all business and personal decisions.

False

When providing cost estimates, it is essential to know the decision to which the cost object is related.

True

Product costs include:

A. direct materials, direct labor, and manufacturing overhead.

B. the benefit given up when one alternative is chosen over another.

C. the cost that does not change in total as output changes.

D. the cost associated with storing and delivering the product.

A. direct materials, direct labor, and manufacturing overhead.

Which of the following is true of direct materials cost?

A. It is a part of the final product and can be directly traced to the goods being produced.

B. It is a manufacturing overhead that cannot be traced to the cost object of interest.

C. It is a period cost for running a company that is not carried in the inventory.

D. It is a cost that cannot be assigned to products or appear as part of the reported values of inventories on the balance sheet.

A. It is a part of the final product and can be directly traced to the goods being produced.

Which of the following is the mathematical expression for calculating the cost of goods sold?

A. Cost of Goods Sold = Cost of Goods Manufactured + Beginning Finished Goods Inventory - Ending Finished Goods Inventory

B. Cost of Goods Sold = Beginning Finished Goods Inventory + Ending Finished Goods Inventory - Cost of goods manufactured

C. Cost of Goods Sold = Beginning WIP + Ending WIP - Cost of Goods Manufactured

D. Cost of Goods Sold = Cost of Goods Manufactured + Beginning WIP - Ending WIP

A. Cost of Goods Sold = Cost of Goods Manufactured + Beginning Finished Goods Inventory - Ending Finished Goods Inventory

In June, Macro Company purchased materials costing $24,000 and incurred direct labor cost of $20,000. Manufacturing overhead was $34,000 for the month. Inventory information is as follows:

June 1June 30Materials$8,000$9,000Work in process8002,000Finished goods4,0003,000

Calculate the cost of direct materials used in production for the month of June.

A. $27,000

B. $23,000

C. $25,800

D. $28,590

B. $23,000

Fred Inc. manufactures computers. Last month, direct materials costing $600,000 were put into production. Direct labor of $900,000 was incurred, manufacturing overhead equaled $500,000, and selling and administrative costs totaled $400,000. The company manufactured 9,000 television sets during the month. Assume that there was beginning work-in-process inventory of $80,000 and there was no ending work-in-process inventory. Calculate the cost of goods manufactured.

A. $2,760,000

B. $2,080,000

D. $1,580,000

C. $2,000,000

B. $2,080,000

Accumulating costs means that

a.costs must be summed and entered on the income statement.

b.each cost must be linked to some cost object.

c.costs must be measured and tracked.

d.costs must be allocated to units of production.

e.costs have expired and must be transferred from the balance sheet to the income statement.

c. costs must be measured and tracked.

Product (or manufacturing) costs consist of

a.direct materials, direct labor, and selling costs.

b.direct materials, direct labor, manufacturing overhead, and operating expense.

c.administrative costs and conversion costs.

d.prime costs and manufacturing overhead.

e.selling and administrative costs.

d. prime costs and manufacturing overhead.

Wachman Company produces a product with the following per-unit costs:

Direct materials$15Direct labor6Manufacturing overhead19

Last year, Wachman produced and sold 2,000 units at a price of $75 each. Total selling and administrative expense was $30,000.

Refer to the information for Wachman Company above. Conversion cost per unit was

a.$21.

b.$25.

c.$34.

d.$40.

e.None of these choices are correct.

b.$25.

The accountant in a factory that produces biscuits for fast-food restaurants wants to assign costs to boxes of biscuits. Which of the following costs can be traced directly to boxes of biscuits?

a.The cost of flour and baking soda

b.The wages of the mixing labor

c.The cost of the boxes

d.The cost of packing labor

e.All of these.

e.All of these.

Total Product Cost and Per-Unit Product Cost

Morning Smiles Coffee Company manufactures Stoneware French Press coffee makers for use in dorm rooms, apartments, homes, and travel situations where customers desire high-quality coffee in small amounts. Last week, direct materials (stoneware, paint, enamel, and steel) costing $100,000 were put into production. Direct labor of $18,000 (10 workers × 100 hours × $18 per hour) was incurred. Manufacturing overhead equaled $50,000. By the end of the week, Morning Smiles had manufactured 2,000 Stoneware French Press coffee makers.

Required:

1. Calculate the total product cost for last week.

2. Calculate the per-unit cost of one coffee maker that was produced last week.

1. $168,000

2. $84

Direct Materials Used in Production

Morning Smiles Coffee Company manufactures Stoneware French Press coffee makers. On March 1, Morning Smiles had $25,000 of materials in inventory. During the month of March, the company purchased $350,000 of materials. On March 31, materials inventory equaled $40,000.

Required:

Calculate the direct materials used in production for the month of March.

$335,000

Cost of Goods Manufactured

Morning Smiles Coffee Company manufactures Stoneware French Press coffee makers. During the month of March, the company purchased $350,000 of materials. Also during the month of March, Morning Smiles incurred direct labor cost of $74,000 and manufacturing overhead of $190,000. Inventory information is as follows:

March 1March 31Materials$25,000$40,000Work in process55,00046,500

Required:

1. Calculate the cost of goods manufactured for the month of March.

2. Calculate the cost of one coffee maker assuming that 8,100 coffee makers were completed during March.

1. $607,500

2. $75 per unit

Manufacturing Firm Income Statement

Morning Smiles Coffee Company manufactures Stoneware French Press coffee makers and sold 8,000 coffee makers during the month of March at a total cost of $612,500. Each coffee maker sold at a price of $100. Morning Smiles also incurred two types of selling costs: commissions equal to 5% of the sales price and other selling expense of $45,000. Administrative expense totaled $47,500.

Required:

Prepare an income statement for Morning Smiles for the month of March. Enter all amount as positive number.

Image 2.1

Assigning Costs to a Cost Object, Direct and Indirect Costs

Hummer Company uses manufacturing cells to produce its products (a cell is a manufacturing unit dedicated to the production of subassemblies or products). One manufacturing cell produces small motors for lawn mowers. Suppose that the motor manufacturing cell is the cost object. Assume that all or a portion of the following costs must be assigned to the cell.

Required:

Classify each of the costs as a direct cost or an indirect cost to the motor manufacturing cell.

a. Salary of cell supervisor Direct

b. Power to heat and cool the plant in which the cell is located Indirect

c. Materials used to produce the motors Direct

d. Maintenance for the cell's equipment (provided by the maintenance department) Indirect

e. Labor used to produce motors Direct

f. Cafeteria that services the plant's employees Indirect

g. Depreciation on the plantIndirect

h. Depreciation on equipment used to produce the motors Direct

i. Ordering costs for materials used in production Indirect

j. Engineering support (provided by the engineering department) Indirect

k. Cost of maintaining the plant and grounds Indirect

l. Cost of the plant's personnel office Indirect

m. Property tax on the plant and land Indirect

Jasper Company provided the following information for last year:

Costs

Amount

Sales in units310,000

Selling price$15

Direct materials$170,000

Direct labor$499,000

Manufacturing overhead$110,000

Selling expense$423,000

Administrative expense$863,000

Sales revenue: $4,650,000.00

Income Statement: Image 2.2

Laworld Inc. manufactures small camping tents. Last year, 200,000 tents were made and sold for $60 each. Each tent includes the following costs:

Direct materials $18

Direct labor 12

Manufacturing overhead 16

The only selling expenses were a commission of $2 per unit sold and advertising totaling $100,000. Administrative expenses, all fixed, equaled $300,000. There were no beginning or ending finished goods inventories. There were no beginning or ending work-in-process inventories.

Required:1. Calculate (a) the product cost for one tent and (b) the total product cost for last year.

2. CONCEPTUAL CONNECTION: (a) Prepare an income statement for external users. (b) Did you need to prepare a supporting statement of cost of goods manufactured? Explain.

3. CONCEPTUAL CONNECTION: Suppose 200,000 tents were produced (and 200,000 sold) but that the company had a beginning finished goods inventory of 10,000 tents produced in the prior year at $40 per unit. The company follows a first-in, first-out policy for its inventory (meaning that the units produced first are sold first for purposes of cost flow). (a) What effect does this have on the income statement? (b) Prepare a cost of goods sold statement.

Cost for 1 tent: $46

Total cost for last year: $9,200,000

2. Image 2.3

3. Image 2.4

On a manufacturer's income statement expenses are separated into the following three categories:

a.production, period, and indirect.

b.variable, fixed, and direct.

c.production, selling, and administrative.

d.materials, work in process, and finished goods.

c. production, selling, and administrative (On a manufacturer's income statement, expenses are separated into three categories: production (cost of goods sold), selling, and administrative.)

Emarson & Slater Inc. had materials inventory of $13,200 on July 1. The materials inventory on July 31 was $16,500, and the cost of direct materials used in production during the month was $22,000. What was the cost of materials purchased during the month?

a.$17,000

b.$20,000

c.$35,000

d.$25,300

d. $25,300 (SUPPORTING CALCULATIONS:

Materials inventory, July 1$13,200Purchases = (Materials available − Materials inventory, July 1) = ($38,500 − $13,200)25,300Materials available = (Materials used in production + Materials inventory, July 31) = ($22,000 + $16,500)$38,50

Knowles & Foreman Company took the following data from its income statement at the end of the current year:Per-unit product cost$35Gross margin percentage41.20%Selling and administrative expenses$30,900Operating income$10,300What was gross the margin for the year?

a.$60,000

b.$41,200

c.$100,000

d.None of these choices are correct.

b. $41,200

(SUPPORTING CALCULATIONS:

Operating income$10,300

Selling and administrative expenses 30,900

Gross margin$41,200)

A(n) __________ is any item, such as a product, customer, department, project, geographic region, and so on, for which costs are measured and assigned.

Cost object

(A cost object is any item, such as a product, customer, department, project, geographic region, plant, and so on, for which costs are measured and assigned.)

The process of assigning an indirect cost to a cost object by using a reasonable and convenient method is called _________ .

Allocation

(Allocation means that an indirect cost is assigned to a cost object by using a reasonable and convenient method.)

Indirect costs are costs that are not easily and accurately traced to a cost object.

True

A variable cost is one that does not increase in total as output increases and does not decrease in total as output decreases.

False

(A variable cost is one that increases in total as output increases and decreases in total as output decreases.)

A cost object is an item for which a company wants to know the cost.

True

(A cost object is any item, such as a product, customer, department, project, geographic region, plant, and so on, for which costs are measured and assigned.)

Expired costs are called assets.

False

(As costs are used up in the production of revenues, they are said to expire. Expired costs are called expenses.)

Any costs associated with storing, selling, and delivering the product are classified as product costs.

False

(Any costs associated with storing, selling, and delivering the product are classified as period costs.)

Which of the following statements is true of price?

a.Price is the difference between gross margin and the cost of goods sold.

b.Price is a dollar measure of the resources used to achieve a given benefit.

c.Price is the difference between selling cost per unit and income per unit.

d.Price must be greater than cost for a firm to earn income

d. Price must be greater than cost for a firm to earn income

Which of the following is an example of a service and not a product?

a.A motorcycle

b.A television set

c.An eye exam

d.A car stereo

c. An eye exam

(Services are tasks or activities performed for a customer or an activity performed by a customer using an organization's products or facilities. Car rental, eye exam, video rental, and skiing are examples of services where the customer uses an organization's products or facilities.)

Which of the following items is not a period cost?

a.Advertising cost

b.Direct materials

c.Office supplies

d.Research and development

b .Direct materials

(Materials that become part of a product usually are classified as direct materials. Hence, direct materials are product costs and not period costs.)

Glue used in the manufacture of cabinets would be an example of a fixed cost.

False

(Glue used in the manufacture of cabinets would be an example of a variable cost. A variable cost is one that increases in total as output increases and decreases in total as output decreases.)

Product costs pertaining to the units that are not sold yet are reported as:

a.administrative costs on the income statement.

b.costs of goods sold on the balance sheet.

c.selling expenses on the income statement.

d.inventory on the balance sheet.

d. inventory on the balance sheet.

(Product costs initially are added to an inventory account and remain in inventory until the product is sold, at which time they are transferred to cost of goods sold (COGS).)

A semi-variable cost is a cost that in total increases or decreases as output volume increases or decreases.

False

Failing to recognize and predict semi-variable costs that increase at an increasing rate can lead to disastrous outcomes for businesses.

True

If ending inventory increases, absorption costing income will be higher than variable costing income.

True

If ending inventory decreases, absorption costing income will be lower than variable costing income.

True

Which of the following is a difference between fixed costs and variable costs?

A. Fixed costs per unit increases within a relevant range as the level of output increases, whereas variable costs are per unit decreases as the level of output decreases within a relevant range.

B. Fixed costs in total decreases within a relevant range as the level of output increases, whereas variable costs in total vary in direct proportion to changes in output within a relevant range.

C. Fixed costs per unit does not change within a relevant range as the level of output increases or decreases, whereas variable costs per unit vary in direct proportion to changes in output within a relevant range.

D. Fixed costs in total does not change within a relevant range as the level of output increases or decreases, whereas variable costs in total vary in direct proportion to changes in output within a relevant range.

D. Fixed costs in total does not change within a relevant range as the level of output increases or decreases, whereas variable costs in total vary in direct proportion to changes in output within a relevant range.

Which of the following is an example of a discretionary fixed cost?

A. Payment of interest on a bank loan whose term is for 10 years

B. Purchase of advertisement space in the local print media

C. Purchase of property, plant, and equipment

D. Payment of lease rentals of a warehouse

B. Purchase of advertisement space in the local print media

Which of the following is true of a committed cost?

A. A committed cost is a cost that often involves long-term contracts, thereby making it hard for the management to exercise control over such costs.

B. A committed cost is a cost that can be changed or avoided relatively easily at a management's discretion.

C. A committed cost includes costs that in total vary in direct proportion to changes in output within a relevant range.

D. A committed cost is a cost that involves the cost of producing and assembling finished goods for sale.

A. A committed cost is a cost that often involves long-term contracts, thereby making it hard for the management to exercise control over such costs.

Which of the following is a potential disadvantage of a management using the method of least squares for separating mixed costs into fixed and variable components?

A. The method of least square does not consider any outliers while choosing the best-fitting line for finding the best fitting line.

B. The method of least square is subjective in choosing the best-fitting line for finding the best fitting line.

C. The method of least squares is a relatively more complicated method to perform or explain to the managerial users of the regression output.

D. The method of least squares is a more subjective method for separating mixed costs into fixed and variable components than the high-low or the scattergraph methods.

C. The method of least squares is a relatively more complicated method to perform or explain to the managerial users of the regression output.

Which of the following is an advantage of using the scattergraph method as a method for separating mixed costs into fixed and variable components?

A. The data presented always produces the same cost formula.

B. The scattergraph considers the high and low points of the concerned data while representing the data required to separate mixed costs into their fixed and variable components.

C. The scattergraph is an objective representation of the data required to separate mixed costs into their fixed and variable components.

D. The scattergraph provides a visual representation of the data required to separate mixed costs into their fixed and variable components.

D. The scattergraph provides a visual representation of the data required to separate mixed costs into their fixed and variable components.

A factor that causes or leads to a change in a cost or activity is a(n)

a.cost object.

b.transaction.

c.allocation.

d.slope.

e.driver.

e. driver.

Which of the following would probably be a variable cost in a soda bottling plant?

a.Bottles

b.Power to run the bottling machine

c.Direct labor

d.Carbonated water

e.All of these.

e. All of these.

An advantage of the scattergraph method is that it

a.is objective.

b.is easier to use than the high-low method.

c.is the most accurate method.

d.removes outliers.

e.is descriptive.

e. is descriptive.

Creating and Using a Cost Formula

Big Thumbs Company manufactures portable flash drives for computers. Big Thumbs incurs monthly depreciation costs of $16,000 on its plant equipment. Also, each drive requires materials and manufacturing overhead resources. On average, the company uses 11,500 ounces of materials to manufacture 4,600 flash drives per month. Each ounce of material costs $3.00. In addition, manufacturing overhead resources are driven by machine hours. On average, the company incurs $32,200 of variable manufacturing overhead resources to produce 4,600 flash drives per month.

In your calculations, round variable rate per flash drive to the nearest cent. If required, round final answers to the nearest cent.

Image 3.1

Using High-Low to Calculate Fixed Cost, Calculate the Variable Rate, and Construct a Cost Function

Pizza Vesuvio makes specialty pizzas. Data for the past 8 months were collected:

MonthLabor Cost($)Employee Hours January 9,590 510 February 7,100 590 March 7,631 620 April 8,240 470 May 9,887 550 June 8,590 430 July 12,746 700 August 7,600 390

Pizza Vesuvio's controller wants to calculate the fixed and variable costs associated with labor used in the restaurant.

In your calculations, round the variable rate per employee hour to the nearest cent. If required, round your final answers to the nearest cent.

image 3.2

Using High-Low to Calculate Predicted Total Variable Cost and Total Cost for Budgeted Output

Pizza Vesuvio makes specialty pizzas. Data for the past 8 months were collected:

MonthLabor CostEmployee Hours January $7,300 360 February $10,199 550 March $8,440 630 April $10,087 610 May $8,790 480 June $7,831 350 July $9,790 570 August $7,750 310

Assume that this information was used to construct the following formula for monthly labor cost.

Total Labor Cost = $7080 + ($2.16 x Employee Hours)

Image 3.3

Using High-Low to Calculate Predicted Total Variable Cost and Total Cost for Budgeted Output

Speedy Pete's is a small start-up company that delivers high-end coffee drinks to large metropolitan office buildings via a cutting-edge motorized coffee cart to compete with other premium coffee shops. Data for the past 8 months were collected as follows:

MonthDelivery CostNumber of DeliveriesMay$63,450 1,800 June67,120 2,010 July66,990 2,175 August68,020 2,200 September73,400 2,550 October72,850 2,630 November75,450 2,800 December73,300 2,725

Assume that this information was used to construct the following formula for monthly delivery cost.

Total Delivery Cost = $41,850 + ($12.00 × Number of Deliveries)

Image 3.4

Inventory Valuation under Absorption Costing

During the most recent year, Pelham Company had the following data associated with the product it makes:

Units in beginning inventory400Units produced14,000Units sold ($300 per unit)13,700Variable costs per unit: Direct materials$15Direct labor$36Variable overhead$9Fixed costs: Fixed overhead per unit produced$40Fixed selling and administrative$140,000

Image 3.5

Step Costs, Relevant Range

Bellati Inc. produces large industrial machinery. Bellati has a machining department and a group of direct laborers called machinists. Each machinist can machine up to 500 units per year. Bellati also hires supervisors to develop machine specification plans and oversee production within the machining department. Given the planning and supervisory work, a supervisor can oversee, at most, three machinists. Bellati's accounting and production history shows the following relationships between number of units produced and the annual costs of supervision and materials handling (by machinists):

Units ProducedDirect LaborSupervision0-500$ 36,000 $ 45,000 501-1,00072,000 45,000 1,001-1,500110,000 45,000 1,501-2,000146,000 86,000 2,001-2,500180,000 86,000 2,501-3,000216,000 86,000 3,001-3,500252,000 120,000 3,501-4,000288,000 120,000

Image 3.6

Mixed Costs and Cost Formula

Ben Palman owns an art gallery. He accepts paintings and sculpture on consignment and then receives 20% of the price of each piece as his fee. Space is limited, and there are costs involved, so Ben is careful about accepting artists. When he does accept one, he arranges for an opening show (usually for 3 hours on a weekend night) and sends out invitations to his customer list. At the opening, he serves wine, soft drinks, and appetizers to create a comfortable environment for prospective customers to view the new works and to chat with the artist. On average, each opening costs $800. Ben has given as many as 20 opening shows in a year. The total cost of running the gallery, including rent, furniture and fixtures, utilities, and a part-time assistant, amounts to $120,000 per year.

Required:

1. Assume that the cost driver is number of opening shows. Develop the cost formula for the gallery's costs for a year.

2. Using the cost formula developed above, what is the total cost for Ben in a year with 12 opening shows?

Using the cost formula developed above, what is the total cost for Ben in a year with 14 opening shows?

1. Total cost = $120,000 + (800 x Number of opening shows)

2. $129,600

3. $131,200

High-Low Method

Luisa Crimini has been operating a beauty shop in a college town for the past 10 years. Recently, Luisa rented space next to her shop and opened a tanning salon. She anticipated that the costs for the tanning service would primarily be fixed, but found that tanning salon costs increased with the number of appointments. Costs for this service over the past 8 months are as follows:

Tanning Month Appointments Total CostJanuary 800 $1,745February 2,100 $2,150March 3,300 $2,720April 2,600 $2,400May 1,400 $1,700June 2,400 $2,265July 2,160 $2,100August 3,100 $2,670

Required:

1. Which month represents the high point? The low point?

High pointMarch Low pointJanuary

In your calculations, round per unit costs to the nearest cent.

2. Using the high-low method, compute the variable rate for tanning. Compute the fixed cost per month. Round the variable rate per tanning appointment to the nearest cent and use it in your further calculations. Round the fixed cost per month to the nearest dollar and use it in your further calculations.

Variable rate for tanning $fill in the blank 3 per tanning appointmentFixed cost per month$fill in the blank 4

3. Using the variable rate and fixed cost, what is the cost formula for tanning services?Total tanning service cost = $1433 + ($0.39 x Number of appointments)

4. Calculate the total predicted cost of tanning services for September for 2,400 appointments using the formula found in Requirement 3. Of that total cost, how much is the total fixed cost for September? How much is the total predicted variable cost for September? If required, round the final answers to the nearest dollar.

Total predicted cost for September$fill in the blank 6Total fixed cost for September$fill in the blank 7Total predicted variable cost for September$fill in the blank 8

5. Which of the following statements is correct when luisa uses the high-low method to estimate the costs?

All of the above.

Image 3.7

(Appendix 3A) Scattergraph, High-Low Method, Method of Least Squares, Use of Judgment

The management of Wheeler Company has decided to develop cost formulas for its major overhead activities. Wheeler uses a highly automated manufacturing process, and power costs are a significant manufacturing cost. Cost analysts have decided that power costs are mixed. The costs must be broken into their fixed and variable elements so that the cost behavior of the power usage activity can be properly described. Machine hours have been selected as the activity driver for power costs. The following data for the past 8 quarters have been collected:

Quarter Machine HoursPower Cost1 20,000 $26,0002 25,000 38,0003 30,000 42,5004 22,000 37,0005 21,000 34,0006 18,000 29,0007 24,000 36,0008 28,000 40,000

Note: For the following requirements, round the fixed cost to the nearest dollar, round the variable rates to three decimal places, and the R2 to two decimal places.

Required:

1. Prepare a scattergraph by plotting power costs against machine hours. Does the scattergraph show a linear relationship between machine hours and power cost? Yes

2. Using the high and low points (i.e., the high-low method), compute a power cost formula. (Note: Round variable rate to three decimal places.)

Total power cost = $fill in the blank 2 + ( $fill in the blank 3 x Number of machine hours )

3. Use the method of least squares to compute a power cost formula. Evaluate the coefficient of determination.

Variable rate (to two decimal places)$fill in the blank 4per machine hourFixed cost (to the nearest dollar)$fill in the blank 5 Coefficient of determination (R2) (to one decimal place).fill in the blank 6%

4. Conceptual Connection: Rerun the regression, and drop the point (20,000, $26,000) as an outlier. Compare the results from this regression to those for the regression in Requirement 3. Which is better? This regression looks better in terms of R squared.

9 Check My Works used

Image 3.8

Identifying Variable Costs, Committed Fixed Costs, and Discretionary Fixed Costs

Required:

Classify each of the following costs for a jeans manufacturing company as a variable cost, committed fixed cost, or discretionary fixed cost.

a. The cost of buttons. Variable cost

b. The cost to lease warehouse space for completed jeans—the lease contract runs for 2 years at $5,000 per year. Committed fixed cost

c. The salary of a summer intern. Discretionary fixed cost

d. The cost of landscaping and mowing the grass—the contract with a local mowing company runs from month to month. Discretionary fixed cost

e. Advertising in a national magazine for teenage girls. Discretionary fixed cost

f. Electricity to run the sewing machines. Variable cost

g. Oil and spare needles for the sewing machines. Variable cost

h. Quality training for employees—typically given for four hours at a time, every six months. Discretionary fixed cost

i. Food and beverages for the company Fourth of July picnic. Discretionary fixed cost

j. Natural gas to heat the factory during the winter. Variable cost

Cost Separation

About 8 years ago, Kicker faced the problem of rapidly increasing costs associated with work-place accidents. The costs included the following:

State unemployment insurance premiums $100,000Average cost per injury $ 1,500Number of injuries per year 15Number of serious injuries 4Number of workdays lost 30

A safety program was implemented with the following features: hiring a safety director, new employee orientation, stretching required four times a day, and systematic monitoring of adherence to the program by directors and supervisors. A year later, the indicators were as follows:

State unemployment insurance premiums$50,000Average cost per injury$50Number of injuries per year10Number of serious injuries0Number of workdays lost0Safety director's starting salary$60,000

Required:

1. Conceptual Connection: For each of the safety-related costs listed, indicate whether they are variable or fixed with respect to the speakers sold:

State unemployment insurance premiums Fixed Average

cost per injury Fixed

Safety director's starting salary Fixed

2. Conceptual Connection: Did the safety program pay for itself? Yes

Using High-Low to Calculate Predicted Total Variable Cost and Total Cost for a Time Period that Differs from the Data Period

Pizza Vesuvio makes specialty pizzas. Data for the past 8 months were collected:

MonthLabor CostEmployee HoursJanuary$6,800 410 February7,940 600 March9,699 720 April9,587 660 May8,290 530 June7,250 400 July9,290 620 August7,331 360

Assume that this information was used to construct the following formula for monthly labor cost.

Total Labor Cost = $4,963 + ($6.58 × Employee Hours)

This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below.

Open spreadsheet

Required:

Assume that 4,000 employee hours are budgeted for the coming year. Use the total labor cost formula to make the following calculations:

1.Calculate total variable labor cost for the coming year. Round your answer to the nearest dollar.$fill in the blank 2

2.Calculate total fixed labor cost for the coming year. Round your answer to the nearest dollar.$fill in the blank 3

3.Calculate total labor cost for the coming year. Round your answer to the nearest dollar.$fill in the blank 4

Image 3.9

(Appendix 3A) Separating Fixed and Variable Costs, Service Setting

Louise McDermott, controller for the Galvin plant of Veromar Inc., wanted to determine the cost behavior of moving materials throughout the plant. She accumulated the following data on the number of moves (from 100 to 800 in increments of 100) and the total cost of moving materials at those levels of moves:

Number of Moves Total Cost100 $ 3,000 200 4,650 300 3,400 400 8,500 500 10,000 600 12,600 700 13,600 800 14,560

Required:

1. Prepare a scattergraph based on the data above. Use cost for the vertical axis and number of moves for the horizontal. Based on an examination of the scattergraph, does there appear to be a linear relationship between the total cost of moving materials and the number of moves?Yes

2. Compute the cost formula for moving materials by using the high-low method. Calculate the predicted cost for a month with 550 moves by using the high-low formula. (Note: Round the answer for the variable rate to three decimal places and the answer for total fixed cost and total cost to the nearest dollar.)

Variable rate$fill in the blank 2 per moveFixed cost$fill in the blank 3Total cost$fill in the blank 4

3. Conceptual Connection: Compute the cost formula for moving materials using the method of least squares. (Note: For the method of least squares, round the variable rate to two decimal places and total fixed cost and total cost to the nearest dollar.) Using the regression cost formula, what is the predicted cost for a month with 550 moves?

Variable rate$fill in the blank 5 per moveFixed cost$fill in the blank 6Total cost$fill in the blank 7

4. Evaluate the cost formula using the least squares coefficients.Could it be improved?

Normally, we would prefer the least squares method since the data appear to be linear . However, the third observation may be an outlier. If the third observation (300 moves and $3,400 of cost) is dropped, the R² rises to 99%. The new cost formula would be: Total Cost = $1,411 + ($17.28 × Number of Moves)

14 Check My Works used

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Image 3.10

A discretionary fixed cost can be changed relatively easily in the short run at management discretion.

True

Fixed costs are costs that in total remain constant within the relevant range as the level of output increases or decreases.

True

Cost relationships may change at output levels outside of the relevant range.

True

(The relevant range is the range of output over which the assumed cost relationship is valid for the normal operations of a firm. The relevant range limits the cost relationship to the range of operations that the firm normally expects to occur. Cost relationships may change at output levels outside of the relevant range.)

Which of the following would not be an example of a fixed cost?

a.The rent paid for a warehouse

b.The straight-line depreciation on a factory building

c.The property taxes paid on real estate

d.The electricity bill paid for production machinery

d. The electricity bill paid for production machinery

(Fixed costs are costs that in total are constant within the relevant range as the level of output increases or decreases. The electricity bill paid for production machinery is not an example of a fixed cost as the electricity bill depends on the usage of the machine, which is variable in nature.)

A _____ is a causal factor that measures the output of the activity that causes costs to change.

a.fixed cost

b.mixed cost

c.cost commitment

d.cost driver

d. cost driver

(A cost driver is a causal factor that measures the output of the activity that causes costs to change. Identifying and managing drivers helps managers better predict and control costs.)

Which of the following takes place if output increases by 20% and is still within the relevant range?

a.Net income decreases by 40%.

b.Total variable costs increase by 20%.

c.Contribution margin decreases by 60%.

d.Total fixed costs increase by 20%.

b. Total variable costs increase by 20%.

(Fixed costs do not change in total as activity output changes. Variable costs are costs that in total vary in direct proportion to changes in output within the relevant range. Therefore, if output increases by 20% and is still within the relevant range, total variable costs increase by 20%.)