Becker cpa

Becker CPA Review Course Registered to: FEI SHAN

Distributed by DeVry Educational Products, Inc. Copyright © 2009 DeVry/Becker Educational Development Corp. All rights reserved.

Question CPA-03785

Given that demand exceeds capacity, that there is no spoilage or waste, and that there is full utilization of a constant number of assembly hours, the number of components needed for an assembly operation with an 80 percent learning curve shouldI. Increase for successive periods.II. Decrease per unit of output.

a. I only.b. II only.c. Both I and II.d. Neither I nor II.

Explanation

Choice "a" is correct. The learning curve relates to the efficiency with which productive resources, typically labor, are employed, and it suggests that productivity will increase over time. Therefore, the number of components needed for an assembly operation with an 80 percent learning curve will increase for successive periods to accommodate increased production, assuming demand exceeds capacity, there is no spoilage and that there is full utilization of a constant number of assembly hours.

Choice "b" is incorrect. The learning curve relates to the efficiency with which productive resources, typically labor, are employed. Assuming constant hours and no spoilage, the number of components per unit of output will remain unchanged, but productivity will increase. This in turn will cause the number of components needed for assembly to increase for successive periods, to accommodate increased production.

Choice "c" is incorrect. Only the number of units will increase to accommodate increased production. The number of components per unit of output will not decrease since we assume that there is not spoilage or waste. Yield per direct material is unchanged, yield per hour of work and, by extension, demand for components (direct material), will increase.

Choice "d" is incorrect. The number of units will increase to accommodate increased production, but the number of components per unit of output will not decrease since we assume that there is not spoilage or waste. Yield per direct material is unchanged, yield per hour of work and, by extension, demand for components (direct material), will increase.



Question CPA-03786

Multiple regression differs from simple regression in that it:

a. Provides an estimated constant term.b. Has more dependent variables.c. Allows the computation of the coefficient of determination.d. Has more independent variables.

Explanation

Choice "d" is correct. Multiple regression analysis is an expansion of simple regression because it allows consideration of more than one independent variable. The other elements are consistent in simple and multiple regression analysis.

Choices "a", "b", and "c" are incorrect based on the above explanation.



Question CPA-03788

Probability (risk) analysis is:

a. Used only for situations involving five or fewer possible outcomes.b. Used only for situations in which the summation of probability weights is greater than one.c. An extension of sensitivity analysis.d. Incompatible with sensitivity analysis.

Explanation

Choice "c" is correct. Probability (risk) analysis is used to examine the possible outcomes given different alternatives. Sensitivity analysis uses a trial and error method in which the sensitivity of the solution to changes in variables is calculated. Therefore, probability analysis is an extension of sensitivity analysis.

Choice "a" is incorrect. Probability analysis is not limited to five or fewer possible outcomes.

Choice "b" is incorrect. The summation of the probability weights must equal one.

Choice "d" is incorrect. Probability analysis is compatible with sensitivity analysis.



Question CPA-03789

Using regression analysis, Fairfield Co. graphed the following relationship of its cheapest product line's sales with its customers' income levels:

If there is a strong statistical relationship between the sales and customers' income levels, which of the following numbers best represents the correlation coefficient for this relationship?

a. - 9.00b. - 0.93c. +0.93d. +9.00

Explanation

Choice "b" is correct. The correlation coefficient measures the strength of the relationship between variables. It is a number between -1 and +1. If the relationship is strong, it will have a coefficient near +1 or -1 depending on the slope of the relationship. In this case, the descending relationship has a negative slope. The correlation coefficient will be close to -1, or -0.93 as given.

Choice "a" is incorrect. The correlation coefficient is a number between +1 and -1.

Choice "c" is incorrect. The relationship between sales and income levels is downward sloping, indicating a negative relationship, not a positive one.

Choice "d" is incorrect. The correlation coefficient is a number between +1 and -1.



Question CPA-03905

A cost driver is defined as:

a. The largest cost in a manufacturing process.b. The significant factor in the development of a new product.c. An indirect cost that cannot be traced to a particular cost objective but is essential to the business.d. A causal factor that increases the total cost of a cost objective.

Explanation

Choice "d" is correct. A cost driver is a causal factor (the cause) that increases the cost (the effect) of a cost objective.

Choices "a", "b", and "c" are incorrect, per the above definition.



Question CPA-03907

Inventoriable costs:

a. Include only the prime costs of manufacturing a product.b. Include only the conversion costs of manufacturing a product.c. Are regarded as assets before the products are sold.d. Exclude fixed factory overhead.

Explanation

Choice "c" is correct. Inventoriable costs are assets until sold, when they become "cost of goods sold."

Choice "a" is incorrect. Prime costs include direct materials and direct labor, but not factory overhead.

Choice "b" is incorrect. Conversion costs are direct labor and overhead, but exclude direct material.

Choice "d" is incorrect. Fixed factory overhead is capitalized as part of inventoriable costs.



Question CPA-03908

Cost drivers are:

a. Activities that cause costs to increase as the activity increases.b. Accounting measurements used to evaluate whether or not performance is proceeding according to plan.c. A mechanical basis, such as machine hours, computer time, size of equipment, or square footage of factory,

used to assign to activities.d. Costs linked to two or more other costs.

Explanation

Choice "a" is correct. Cost drivers are activities that cause costs to increase as the activity increases. The cost driver is often non-financial.

Choice "b" is incorrect. Cost drivers are not accounting measurements; often they are non-financial-for example, the number of parts ordered rather than the dollar value.

Choice "c" is incorrect. Often cost drivers are a mechanical basis used to assign costs, but they may also have a financial basis.

Choice "d" is incorrect. Cost drivers are not necessarily cost, but the cause of costs being incurred.



Question CPA-03910

The difference between the sales price and total variable costs is:

a. Gross operating profit.b. The break-even point.c. The contribution margin.d. Cost-volume-profit analysis.

Explanation

Choice "c" is correct. The contribution margin is the difference between the sales price and total variable costs.

Choice "a" is incorrect. Gross operating profit is the difference between total sales and total operating expenses.

Choice "b" is incorrect. The breakeven point determines the sales (in dollars or units) required to have no profit or loss from operations.

Choice "d" is incorrect. Cost-volume-profit analysis examines the effect that volume changes have on variable and fixed costs and the resulting profit or loss.



Question CPA-03911

Conversion costs do not include:

a. Direct materials.b. Indirect labor.c. Indirect materials.d. Direct labor.

Explanation

Choice "a" is correct. Conversion costs consist of direct labor and overhead. Accordingly, conversion costs include all product costs except direct materials.

Choice "b" is incorrect. Indirect labor is overhead.

Choice "c" is incorrect. Indirect materials is overhead.

Choice "d" is incorrect. Conversion costs include direct labor.



Question CPA-03912

Contribution margin is the excess of revenues over:

a. Cost of goods sold.b. Manufacturing cost.c. Direct cost.d. All variable costs.

Explanation

Choice "d" is correct. Contribution margin is the excess of revenues over all variable costs.

Choice "a" is incorrect. Cost of (finished) goods sold, when deducted from net sales, results in gross margin.

Choice "b" is incorrect. Manufacturing cost includes direct materials, direct labor, and indirect manufacturing costs (fixed and variable).

Choice "c" is incorrect. Direct cost is a cost that can be identified with or traced to a given cost object.



Question CPA-03913

Which of the following is the best example of a committed cost?

a. Advertising expenses.b. Company picnic.c. Business license cost.d. Travel expense.

Explanation

Choice "c" is correct. Committed costs are those costs necessary to operate at the present level that cannot be changed in the short-run. Because a business must have a license to legally operate, it is not a cost that can be done away with in the short-run.

Choice "a" is incorrect. While advertising may be necessary for the long-term survival of the company, it can be eliminated in the short term.

Choices "b" and "d" are incorrect. Both of these costs could be eliminated in the short-run.



Question CPA-03914

In managerial accounting, the term "relevant range" is often used to describe:

a. The theoretical maximums and minimum ranges the company could operate in.b. The range over which costs fluctuate.c. The range over which relevant costs are incurred.d. The range over which cost relationships are valid.

Explanation

Choice "d" is correct. Relevant range is the range of activity within which the relationships of fixed costs and variable costs are meaningful and valid.

Choice "a" is incorrect. Theoretical maximums and minimums may have nothing to do with actual operating characteristics of a given firm.

Choice "b" is incorrect. For most companies, costs fluctuate over the entire range of operations.

Choice "c" is incorrect. Costs are incurred at every possible operating point.



Question CPA-03915

Which one of the following best describes direct labor?

a. A prime cost.b. A product cost.c. Both a period cost and a prime cost.d. Both a product cost and a prime cost.

Explanation

Choice "d" is correct. Direct labor is a prime cost, a conversion cost and a product cost. "d" is the best answer because it includes two of these costs.

Choice "a" is incorrect. Prime cost is the sum of direct labor and direct material.

Choice "b" is incorrect. Product costs are direct material, direct labor and overhead.

Choice "c" is incorrect. Direct labor is not a period cost.



Question CPA-03916

Which one of the following is correct regarding a relevant range?

a. Total variable costs will not change.b. Total fixed costs will not change.c. The relevant range cannot be changed after being established.d. The relevant range will remain the same as long as prices do not change.

Explanation

Choice "b" is correct. The relevant range is the range within which the relationship between a cost and its cost driver remain valid. Within this range the fixed cost will remain fixed and the variable cost per unit will not change.

Choice "a" is incorrect. While cost per unit does not change within the relevant range, total variable cost does change.

Choice "c" is incorrect. The relevant range will change when cost relationships change or when additional capacity is added to production.

Choice "d" is incorrect. Cost relationships determine when the relevant range will change, not prices.



Question CPA-03917

A cost that is fixed per unit is an example of a:

a. Fixed cost.b. Variable cost.c. Mixed cost.d. Direct cost.

Explanation

Choice "b" is correct. A variable cost is one that varies in total but is fixed per unit. For example, if a starter is needed in the manufacture of an automobile, the cost of starters varies with the number of automobiles. The more automobiles, the greater the cost of starters. However, the cost for each starter remains constant.

Choice "a" is incorrect. A fixed cost is one that is fixed in total but varies per unit.

Choice "c" is incorrect. A mixed cost is one that contains both fixed and variable costs.

Choice "d" is incorrect. A direct cost can be either fixed or variable.



Question CPA-03918

During May 1990, Mercer Company completed 50,000 units costing $600,000, exclusive of spoilage allocation. Of these completed units, 25,000 were sold during the month. An additional 10,000 units, costing $80,000, were 50 percent complete at May 31. All units are inspected between the completion of manufacturing and transfer to finished goods inventory. Normal spoilage for the month was $20,000, and abnormal spoilage of $50,000 was also incurred during the month.The portion of total spoilage that should be charged against revenue in May is:

a. $50,000b. $20,000c. $70,000d. $60,000

Explanation

Choice "d" is correct.

Normal spoilage is allocated to good production

(Normal spoilage) × (Percent sold)$20,000 50% = $10,000

Abnormal spoilage is charged to the income statementAbnormal spoilage 50,000

$60,000

Note that since inspection of units does not occur until the completion of manufacturing, none of the spoilage is allocated to the partially completed units.




Question CPA-03923

Conversion cost pricing:

a. Places minimal emphasis on the cost of materials used in manufacturing a product.b. Could be used when the customer furnishes the material used in manufacturing a product.c. Places heavy emphasis on indirect costs and disregards consideration of direct costs.d. Places heavy emphasis on direct costs and disregards consideration of indirect costs.

Explanation

Choice "b" is correct. Conversion cost pricing could be used when the customer furnishes the material used in manufacturing a product.

Choice "a" is incorrect. Conversion cost pricing places no (not minimal) emphasis on the cost of materials used in manufacturing a product.

Choices "c" and "d" are incorrect. Conversion cost pricing places heavy emphasis on indirect (overhead) costs and direct labor, but disregards consideration of direct materials.



Question CPA-03924

A cost that bears an observable and known relationship to a quantifiable activity base is a(n):

a. Engineered cost.b. Indirect cost.c. Target cost.d. Fixed cost.

Explanation

Choice "a" is correct. An engineered cost bears an observable and known relationship to a quantifiable activity base.

Choice "b" is incorrect. Indirect costs (overhead costs) are all manufacturing costs other than direct material and direct labor.

Choice "c" is incorrect. A target cost is carefully predetermined standard cost that should be attained.

Choice "d" is incorrect. Fixed costs are all those organization and plant costs that continue to be incurred and cannot be reduced without damaging the organization's ability to meet long-range goals.



Question CPA-03925

Which of the following costs are not included in inventoriable costs under a variable (or direct) costing system?

a. Direct material.b. Direct labor.c. Variable overhead.d. Fixed overhead.

Explanation

Choice "d" is correct. Variable (or direct) costing systems capitalize as a part of product or inventoriable cost only variable cost. On the CPA exam, direct material and direct labor are presumed to be variable unless otherwise stated.

Choices "a", "b", and "c" are incorrect, per above.



Question CPA-03928

Which of the following costs are included in product or inventoriable costs in an absorption costing system?

a. Direct material, direct labor and variable overhead.b. Direct material, direct labor and all overhead.c. Direct material, direct labor, all overhead, and selling expenses.d. Direct material, direct labor, all overhead, and all period expenses.

Explanation

Choice "b" is correct. In an absorption costing system, all product costs and no period expenses are put into product cost.

Choice "a" is incorrect. Fixed overhead is a product cost under absorption costing. This would be the correct answer if the question had used a direct or variable costing system.

Choice "c" is incorrect. Selling expenses are period costs and would not be included in product cost.

Choice "d" is incorrect, per above. No period expenses are capitalized in either absorption or variable costing.



Question CPA-03930

The method of inventory costing in which direct manufacturing costs and manufacturing overhead costs, both variable and fixed, are considered as inventoriable costs is best described as:

a. Direct costing.b. Variable costing.c. Absorption costing.d. Conversion costing.

Explanation

Choice "c" is correct. Absorption costing (required for external reporting) charges direct material, direct labor, variable overhead and fixed overhead as inventoriable costs.

Choices "a" and "b" are incorrect. Direct costing (also called variable costing) is the same as absorption costing except that it does not consider fixed manufacturing overhead as an inventoriable cost.

Choice "d" is incorrect. Conversion costing does not include direct material in inventoriable cost.



Question CPA-03932

There are a variety of ways of classifying costs of an object as either fixed or variable. The most accurate method is considered to be:

a. The engineering method.b. The account analysis method.c. The high-low method.d. The regression analysis method.

Explanation

Choice "d" is correct. Regression analysis is a statistical method that fits a line to the data by the method of least squares. It is the most accurate way to classify costs of an object as either fixed or variable.

Choice "a" is incorrect. The engineering method uses such methods as time and motion study to classify costs. It can only be used where there is an observable relationship between the inputs and the outputs.

Choice "b" is incorrect. The account analysis method is merely a review of all the accounts by someone knowledgeable of the activities of the firm. It is only as good as the person making the judgments.

Choice "c" is incorrect. The high-low method is a simplified approach that uses only the points of highest and lowest activity. The regression method considers every point of activity.



Question CPA-03933

An operation costing system is:

a. Identical to a process costing system except that actual cost is used for manufacturing overhead.b. The same as a process costing system except that materials are allocated on the basis of batches of

production.c. The same as a job order costing system except that materials are accounted for in the same way as they are

in a process costing system.d. The same as a job order costing system except that no overhead allocations are made as actual costs are

used throughout.

Explanation

Choice "b" is correct. Operation costing is process costing applied on individual batches.

Choice "a" is incorrect. In both operation costing and process costing, overhead is applied on an average cost per unit basis.

Choice "c" is incorrect. Materials are accounted for differently in a process costing system than they are in an operation costing system. An operation costing system allocates materials on the basis of batches of production. This is similar to the method used in job costing.

Choice "d" is incorrect. Overhead allocations are still made.



Question CPA-03935

Which of the following is a true statement regarding operation costing?

a. Operation costing has features of both job and process costing.b. It is a hybrid system that is usually applied to batches of similar products.c. It is similar to process costing except that materials are allocated on the basis of batches of production.d. All of the above are true statements about operation costing.

Explanation

Choice "d" is correct. Operation costing is a hybrid system that is usually applied to batches of similar products. In that way it is similar to process costing. The difference, however, is that materials are allocated on the basis of batches of production in a manner similar to job costing. Because of this, operation costing has features of both job and process costing.




Question CPA-03936

Smile Labs develops 35mm film using a four-step process that moves progressively through four departments. The company specializes in overnight service and has the largest drug store chain as its primary customer. Currently, direct labor, direct materials, and overhead are accumulated by department. The cost accumulation system that best describes the system Smile Labs is using is:

a. Operation costing.b. Activity-based costing.c. Job order costing.d. Process costing.

Explanation

Choice "d" is correct. Process costing is a method of allocating production costs to products and services by averaging the cost over the total units produced. Costs are usually accumulated by department rather than by job.

Choice "a" is incorrect. Operation costing is a hybrid system that allows the company to use job order costing for some costs of production and process costing for other costs.

Choice "b" is incorrect. Activity-based costing is a system that accumulates all costs of overhead for each of the activities of the organization and then allocates those activity costs to the cost objects that caused the activity.

Choice "c" is incorrect. Job order costing is a method of allocating production costs to products and services that are identifiable as separate units and require greater or lesser amounts of work to complete.



Question CPA-03938

Because of changes that are occurring in the basic operations of many firms, all of the following represent trends in the way indirect costs are allocated, except:

a. Using throughput time as an application base to increase awareness of the costs associated with lengthened throughput time.

b. Preferring plant-wide application rates that are applied to machine hours rather than incurring the cost of detailed allocations.

c. Using several machine cost pools to measure product costs on the basis of time in a machine center.d. Using cost drivers as application bases to increase the accuracy of reported product costs.

Explanation

Choice "b" is correct. Plant-wide application rates applied to machine hours is a traditional costing approach. More detailed cost allocations are now preferred.

Choices "a", "c", and "d" are incorrect. These are all trends in the revolution occurring in cost accounting (in the manufacturing environment).



Question CPA-03940

The distribution of overhead costs is known as:

a. Cost allocation.b. Cost management.c. Burden distribution.d. Uncontrollable cost allocation.

Explanation

Choice "a" is correct. Cost allocation is the distribution of overhead or support costs based on any one of a variety of methods.

Choice "b" is incorrect. Cost management refers to the control of costs.

Choice "c" is incorrect. Although the term is descriptive, it is not used.

Choice "d" is incorrect. Overhead costs are not "uncontrollable."



Question CPA-03941

Costs are allocated to cost objectives in many ways and for many reasons. Which one of the following is a purpose of cost allocation?

a. Evaluating revenue center performance.b. Measuring income and assets for external reporting.c. Aiding in variable costing for internal reporting.d. Implementing activity-based costing.

Explanation

Choice "b" is correct. Cost allocation is essential for measuring income and assets for external reporting.

Choice "a" is incorrect. Revenue centers are responsible for revenues only. Cost allocation is not relevant.

Choice "c" is incorrect. Variable costing matches costs directly variable with volume to the items produced or sold. Costs are not allocated as it is clear to which items they relate.

Choice "d" is incorrect. Cost allocation will not aid in implementing ABC. ABC requires determining the cost drivers (cause) and cost (effect).



Question CPA-03943

Multiple or departmental overhead rates are considered preferable to a single or plant-wide overhead rate when:

a. Various products are manufactured that do not pass through the same departments or use the same manufacturing techniques.

b. Cost drivers, such as direct labor, are the same over all processes.c. Individual cost drivers cannot accurately be determined with respect to cause-and-effect relationships.d. The single or plant-wide rate is related to several identified cost drivers.

Explanation

Choice "a" is correct. When various products are manufactured, multiple overhead rates are preferable to a single overhead rate. Activity-based costing would be better still.

Choice "b" is incorrect. If cost drivers were the same over all processes, a single rate could be used.

Choice "c" is incorrect. If individual cost drivers cannot be determined, multiple overhead rates will be meaningless.

Choice "d" is incorrect. If a single or plant-wide rate is related to several identified cost drivers, then the single rate is accurate and appropriate.



Question CPA-03945

The appropriate method for the disposition of underapplied or overapplied factory overhead:

a. Is to cost of goods sold only.b. Is to finished goods inventory only.c. Is apportioned to cost of goods sold and finished goods inventory.d. Depends on the significance of the amount.

Explanation

Choice "d" is correct. The appropriate method for the disposition of underapplied or overapplied factory overhead depends on the significance of the amount. If insignificant, it goes to cost of goods sold only. If it is significant, it must be apportioned to cost of goods sold and finished goods inventory.

Choice "a" is incorrect. Cost of goods sold is only appropriate if the under/overapplied factory overhead is insignificant.

Choice "b" is incorrect. Finished goods inventory only is not appropriate.

Choice "c" is incorrect. Under/overapplied factory overhead is only apportioned between cost of goods sold and finished goods inventory if it is significant; otherwise it goes entirely to cost of good sold.



Question CPA-03946

Which of the following would cause overhead to be overapplied?

a. Actual overhead is greater than overhead applied.b. Actual overhead is less than overhead applied.c. Actual overhead was equal to the budgeted amount but fewer items were manufactured.d. The number of units produced was the budgeted amount but a larger amount of overhead was actually

incurred.

Explanation

Choice "b" is correct. Overapplied overhead occurs when the amount of overhead applied exceeds the actual amount of overhead incurred.

Choices "a", "c", and "d" are incorrect. Each of these would cause overhead to be underapplied.



Question CPA-03947

Generally, individual departmental rates rather than a plant-wide rate for applying overhead would be used if:

a. A company's manufacturing operations are all highly automated.b. A company's manufacturing operations are basically labor based.c. Manufacturing overhead is the largest cost component of its product cost.d. The manufactured products differ in the resources consumed from the individual departments in the plant.

Explanation

Choice "d" is correct. Generally, individual departmental rates (rather than a plant-wide rate for applying overhead) would be used if the manufactured products differ in the resources consumed from the individual departments in the plant.

Choice "a" is incorrect. Plant-wide rates would probably be used if a company's manufacturing operations are all highly automated.

Choice "b" is incorrect. Plant-wide rates would probably be used if a company's manufacturing operations are basically labor based.

Choice "c" is incorrect. Plant-wide rates would probably be used if manufacturing overhead is the largest cost component of its product cost.



Question CPA-03950

In allocating factory service department costs to producing departments, which one of the following items would most likely be used as an activity base?

a. Units of product sold.b. Salary of service department employees.c. Units of electrical power consumed.d. Direct materials usage.

Explanation

Choice "c" is correct. Units of electrical power consumed would be a good indication of producing departments' demand on the service department.

Choice "a" is incorrect. Units sold is not a good base with which to allocate to production departments. It relates more to a sales department.

Choice "b" is incorrect. The salaries of service department employees represent the costs to be allocated, not the activity base on which to base the allocation.

Choice "d" is incorrect. Although direct materials are used in production, they may not be the best base for allocation because they do not always have a direct relationship to the incurrence of service department costs.



Question CPA-03952

Alex Company had the following inventories at the beginning and end of the month of January.

January 1 January 31Finished Goods $125,000 $117,000Work-in-process 235,000 251,000Direct materials 134,000 124,000

The following additional manufacturing data was available for the month of January.

Direct materials purchased $189,000Purchase returns and allowances 1,000Transportation in 3,000Direct labor 300,000Actual factory overhead 175,000

Alex Company applies factory overhead at a rate of 60 percent of direct labor cost, and any overapplied or underapplied factory overhead is deferred until the end of the year, December 31.Alex Company's prime cost for January was:

a. $501,000b. $489,000c. $201,000d. $499,000

Explanation

Choice "a" is correct. Prime costs are direct materials and direct labor:

Beginning inventory, direct materials $134,000Purchases during January 189,000Less: purchase returns and allowances (1,000)Add: transportation in 3,000

Total direct materials available $325,000Less: ending inventory, direct materials (124,000)

Direct materials used during January $201,000Add: direct labor cost 300,000

Total prime cost $501,000

Choices "b", "c", and "d" are incorrect based on the above explanation.



Question CPA-03953





Alex Company applies factory overhead at a rate of 60 percent of direct labor cost, and any overapplied or underapplied factory overhead is deferred until the end of the year, December 31.Alex Company's total manufacturing cost for January was:

a. $681,000b. $669,000c. $671,000d. $679,000

Explanation

Choice "a" is correct. $681,000. Note that applied overhead is determined as 60% of direct labor, and actual overhead is irrelevant until over- or underapplications are handled in December.

Direct materials used $201,000 [Note A]Direct labor 300,000Factory overhead ($300,000 × .6) 180,000Total manufacturing cost $681,000

Note A:Beginning inventory, direct materials $134,000Purchases during January 189,000Less: purchase returns and allowances (1,000)Add: transportation in 3,000


Direct materials used during January $201,000




Question CPA-03954





Alex Company applies factory overhead at a rate of 60 percent of direct labor cost, and any overapplied or underapplied factory overhead is deferred until the end of the year, December 31.Alex Company's cost of goods manufactured for January was:

a. $665,000b. $689,000c. $663,000d. $687,000

Explanation

Choice "a" is correct. $665,000.

Total manufacturing cost $681,000 [Note A]Add: beginning WIP 235,000Less: ending WIP (251,000)Cost of goods manufactured 665,000

Note A:Applied overhead is determined as 60% of direct labor, and actual overhead is irrelevant until over- or underapplications are handled in December.

Direct materials used $201,000 [Note 1]Direct labor 300,000Factory overhead ($300,000 × .6) 180,000Total manufacturing cost $681,000

Note 1:Beginning inventory, direct materials $134,000Purchases during January 189,000Less: purchase returns and allowances (1,000)Add: transportation in 3,000






Question CPA-03956





Alex Company applies factory overhead at a rate of 60 percent of direct labor cost, and any overapplied or underapplied factory overhead is deferred until the end of the year, December 31.Alex Company's cost of goods sold for January was:

a. $681,000b. $673,000c. $657,000d. $671,000

Explanation

Choice "b" is correct. $673,000.

Cost of goods manufactured $ 665,000 [Note A]Add: beginning finished goods inventory 125,000Less: ending finished goods inventory (117,000)Cost of goods sold 673,000

Note A:

Total manufacturing cost $ 681,000 [Note 1]Add: beginning WIP 235,000Less: ending WIP (251,000)Cost of goods manufactured 665,000

Note 1:Applied overhead is determined as 60% of direct labor, and actual overhead is irrelevant until over- or underapplications are handled in December.

Direct materials used $201,000 [Note a]Direct labor 300,000Factory overhead ($300,000 × .6) 180,000Total manufacturing cost $681,000

Note a:Beginning inventory, direct materials $134,000Purchases during January 189,000Less: purchase returns and allowances (1,000)Add: transportation in 3,000



Choices "a", "c", and "d" are incorrect based on the above explanation.



Question CPA-03959

Zeta Company is preparing its annual profit plan. As part of its analysis of the profitability of individual products, the controller estimates the amount of overhead that should be allocated to the individual product lines from the information given below.

Wall SpecialtyMirrors Windows

Units produced 25 25Material moves per product line 5 15Direct labor hours per unit 200 200

Budgeted materials handling costs $50,000

Under a costing system that allocates overhead on the basis of direct labor hours, the materials handling costs allocated to one unit of wall mirrors would be:

a. $1,000b. $500c. $2,000d. $5,000

Explanation


Wall mirrors − 25 units × 200 hours per unit 5,000 hoursSpecialty windows − 25 units × 200 hours per unit 5,000 hoursTotal hours 10,000 hoursBudgeted materials handling costs $50,000Divided by total hours ÷10,000Materials handling cost per hour $ 5Hours per unit × 200Costs allocated to one unit $ 1,000




Question CPA-03961

Zeta Company is preparing its annual profit plan. As part of its analysis of the profitability of individual products, the controller estimates the amount of overhead that should be allocated to the individual product lines from the information given below.

Wall SpecialtyMirrors Windows

Units produced 25 25Material moves per product line 5 15Direct labor hours per unit 200 200

Budgeted materials handling costs $50,000

Under activity-based costing (ABC), the materials handling costs allocated to one unit of wall mirrors would be:

a. $1,000b. $500c. $1,500d. $2,500

Explanation

Choice "b" is correct. $500.

Activity-based costing allocates costs based on the activity driving those costs (material moves in this example). In comparing the activity required for wall mirrors and specialty windows, an allocation factor can be developed:

Total material moves: 5 + 15 = 20Percentage of moves related to wall mirrors: 5 ÷ 20 = 25%Percentage of moves related to specialty windows: 15 ÷ 20 = 75%

Budgeted materials handling costs $50,000Allocation factor × .25Costs allocated to wall mirrors $12,500Units produced ÷ 25Costs allocated to one wall mirror $ 500

Choices "a", "c", and "d" are incorrect based on the above explanation.



Question CPA-03963

The benefit that management can expect from traditional costing includes which of the following:

a. Leads to a more competitive position by evaluating cost drivers, i.e., costs associated with the complexity of the transaction rather than the production volume.

b. Streamlines production processes by reducing non-value adding activities, e.g., reduced set-up times, optimal plant layout, and improved quality.

c. Provides management with a more thorough understanding of product costs and product profitability for strategies and pricing decisions.

d. Uses a common departmental or factory wide measure of activity, such as direct labor hours or dollars to distribute manufacturing overhead to products.

Explanation

Choice "d" is correct. The benefit that management can expect from traditional costing includes using a common departmental or factory wide measure of activity, such as direct labor hours or dollars, to distribute manufacturing overhead to products.

Choices "a", "b", and "c" are incorrect. They are characteristics of activity-based costing.



Question CPA-03964

Activity based costing refines product cost information because the cost system:

a. Was designed to value inventory in the aggregate and not relate to product cost information.b. Uses a common departmental or factory wide measure of activity, such as direct labor hours or dollars to

distribute manufacturing overhead to products.c. Emphasizes long-term product analysis (when fixed costs become variable costs).d. Causes managers, who are aware of distortions in the traditional cost system, to make intuitive, imprecise

adjustments to the traditional cost information without understanding the complete impact.

Explanation

Choice "c" is correct. Activity-based costing refines product cost information because the cost system emphasizes long-term product analysis (when fixed costs become variable costs).

Choices "a", "b", and "d" are incorrect. They are characteristics of traditional cost systems.



Question CPA-03965

The steps that a company, using a traditional cost system, would take to implement activity-based costing include:I. Evaluation of the existing system to assess how well the system supports the objective of an activity-based

cost system.II. Identification of the activities for which cost information is needed with differentiation between value adding

and non-value adding activities.

a. Only I.b. Both I and II.c. Only II.d. Neither I nor II.

Explanation

Choice "b" is correct. Both steps are essential to implementing activity-based costing.



Question CPA-03966

The costing method that is properly classified for both external and internal reporting purposes is:External Internal

Reporting Reporting

a. Activity-based costing. No Yesb. Job costing. No Yesc. Variable costing. Yes Nod. Process costing. No Yes

Explanation

Choice "a" is correct. Activity-based costing uses cause and effect relationships to capitalize costs to inventory. This is not acceptable for external reporting and useful for internal reporting to management.

Choice "b" is incorrect. Job costing (a simple accumulation of cost associated with a specific job) is acceptable for both internal and external purposes.

Choice "c" is incorrect. Variable costing does not capitalize fixed factory overhead into inventory. It is not acceptable for external reporting but is often used for internal purposes.

Choice "d" is incorrect. Process costing is acceptable for both internal and external purposes. It is an averaging of actual costs.



Question CPA-03967

Under ABC, the allocation of costs to particular cost objectives allows a firm to analyze all of the following, except:

a. Whether a particular department should be expanded.b. Why the sales of a particular product have increased.c. Whether a product line should be discontinued.d. Whether a particular manager earns a bonus.

Explanation

Choice "b" is correct. Cost allocation and analysis will not explain a sales increase.

Choices "a", "c", and "d" are incorrect. Analysis of each of these is facilitated by allocating costs to particular cost objectives via activity-based costing.



Question CPA-03968

An accounting system that collects financial and operating data on the basis of the underlying nature and extent of the cost drivers is:

a. Direct costing.b. Activity-based costing.c. Target costing.d. Variable costing.

Explanation

Choice "b" is correct. Activity-based costing is an accounting system that collects financial and operating data on the basis of the underlying nature and extent of the cost drivers.

Choices "a" and "d" are incorrect. Direct costing (more accurately called variable or marginal costing) capitalizes only the variable production costs (direct materials, direct labor, and variable overhead) to inventory (product costs), while fixed costs are expensed.

Choice "c" is incorrect. Target costing carefully predetermines standard costs that should be attained.



Question CPA-03970

New-Rage Cosmetics has used a traditional cost accounting system to apply quality control costs uniformly to all products at a rate of 14.5 percent of direct labor costs. Monthly direct labor cost for Satin Sheen makeup is $27,500. In an attempt to more equitably distribute quality control costs, New-Rage is considering activity-based costing. The monthly data shown in the chart below have been gathered for Satin Sheen makeup.

Quantity forActivity Cost Driver Cost Rates Satin SheenIncoming Type of $11.50 12material material per type types

inspection

In-process Number $0.14 17,500inspection of units per unit units

Product Per $77 25certification order per order orders

The monthly quality control cost assigned to Satin Sheen makeup using activity-based costing is:

a. $88.64 per order.b. $525.50 lower than the cost using the traditional system.c. $525.50 higher than the cost using the traditional system.d. $3,987.50

Explanation

Choice "c" is correct. Activity-based costing of $4,513.00 is $525.50 higher than the $3,987.50 cost using the traditional system.

Cost TotalRates Quantity Costs

Incoming material inspection $11.50 × 12 = $ 138.00In-process inspection $ 0.14 × 17,500 = 2,450.00Product certification $77.00 × 25 = 1,925.00

Total activity-based cost (ABC) 4,513.00Traditional cost 14.5% × $27,500 = 3,987.50

Excess of ABC over traditional $ 525.50

Choice "a" is incorrect. The cost rates should not be added, but rather should be applied to the related activity to determine allocated costs.

Choice "b" is incorrect. The traditional costing system results in a lower cost, as shown above.

Choice "d" is incorrect. $3,987.50 is the cost using the traditional system.



Question CPA-03972

The use of activity-based costing normally results in:

a. Substantially greater unit costs for low-volume products than is reported by traditional product costing.b. Substantially lower unit costs for low-volume products than is reported by traditional product costing.c. Decreased set-up costs being charged to low-volume products.d. Equalizing set-up costs for all product lines.

Explanation

Choice "a" is correct. The use of activity-based costing normally results in substantially greater unit costs for low-volume products than is reported by traditional product costing.

Choice "b" is incorrect, per "a" above.

Choice "c" is incorrect. Increased (not decreased) set-up costs are charged to low-volume products under activity-based costing.

Choice "d" is incorrect. Activity-based costing does not equalize set-up costs for all product lines.



Question CPA-03976

Lucy Sportswear manufactures a specialty line of T-shirts using a job order cost system. During March, the following costs were incurred in completing Job ICU2: direct materials $13,700; direct labor $4,800; administrative $1,400; and selling $5,600. Factory overhead was applied at the rate of $25 per machine hour, and Job ICU2 required 800 machine hours. If Job ICU2 resulted in 7,000 good shirts, the cost of goods sold per unit would be:

a. $6.50b. $6.00c. $5.70d. $5.50

Explanation

Choice "d" is correct. $5.50 cost of goods sold ($38,500 ÷ 7,000 units).

Total Good UnitJob ICU2 Costs Costs Units Cost

Direct materials $13,700Direct labor 4,800Factory overhead 800 hrs × $25 = 20,000

Total mfg cost 38,500 ÷ 7,000 = $5.50 DSelling 5,600Administrative 1,400

Total cost $45,500 ÷ 7,000 = $6.50 Not A




Question CPA-03978

Which one of the following alternatives correctly classifies the business application to the appropriate costing system?

Job ProcessCosting System Costing System

a. Wallpaper manufacturer Oil refineryb. Aircraft assembly Public accounting firmc. Paint manufacturer Retail bankingd. Print shop manufacturer Beverage drink

Explanation

Choice "d" is correct. A print shop would use a job costing system, while a beverage drink manufacturer would use a process costing system.

Job costing is used in the production of tailor-made or unique goods, including:

Construction of buildings or shipsAircraft assemblyPrintingSpecial-purpose machinery (microcomputer manufacturer)Public accounting firmManagement consulting firmRepair shopsIndustrial research projects

Process costing is used where the product is composed of mass produced homogeneous units such as:

Gasoline and oilChemicalsSteelTextiles (wallpaper)PlasticsPaintsFlourMeatpackingCanneriesRubberLumberFood processing (beverage drink manufacturer)GlassMiningCementCheck clearing in banksMail sorting in post officesFood preparation in fast-food outletsPremium handling in insurance companies




Question CPA-03982

The definition of economic cost is:

a. All the dollar costs employers pay for all inputs purchased.b. The opportunity cost of all inputs minus the dollar cost of those inputs.c. The difference between all implicit and explicit costs of the business firm.d. The sum of all explicit and implicit costs of the business firm.

Explanation

Choice "d" is correct. The definition of economic cost is the sum of all explicit and implicit (opportunity) costs of the business firm.

Choices "a", "b", and "c" are incorrect. They are "far-out distractors."



Question CPA-03985

The goals and objectives upon which an annual profit plan is most effectively based are:

a. Quantitative measures such as growth in unit sales, number of employees, and manufacturing capacity.b. Qualitative measures of organizational activity such as product innovation leadership, product quality levels,

and product safety.c. Financial and quantitative measures.d. A combination of financial, quantitative, and qualitative measures.

Explanation

Choice "d" is correct. The goals and objectives upon which an annual profit plan (also known as budgeted, targeted or estimated financial statements) is most effectively based are a combination of financial, quantitative (number of units), and qualitative (e.g., to be the best) measures. Not all goals and objectives can be quantified.

Choice "a" is incorrect. To ignore qualitative measures is to miss many important items.

Choice "b" is incorrect. Qualitative measures are important, but financial and quantitative measures are important, too.

Choice "c" is incorrect. Qualitative measures should not be ignored.



Question CPA-03988

The Yummy Dog Bone Company is anticipating that a major supplier might experience a strike this year. Because of the nature of the product and emphasis on quality, extra production cannot be stored as finished goods inventory. When developing a contingency budget that would anticipate a raw material buildup, the two most significant items that will be affected are:

a. Production volume and raw material.b. Production and cash flow.c. Raw material and cash flow.d. Production volume and sales.

Explanation

Choice "c" is correct. The two most significant items affected are raw material (to be built up) and cash flow (needed to pay for the build up).

Choices "a" and "b" are incorrect. Production volume will not be affected, because the question states that extra production cannot be stored as finished goods inventory. This implies that the company will need to store the additional raw materials purchased, as opposed to using them to increase production.

Choice "d" is incorrect. Production volume will not be affected, because the question states that extra production cannot be stored as finished goods inventory. This implies that the company will need to store the additional raw materials purchased, as opposed to using them to increase production. Sales will also be unaffected by the increase in raw materials purchased.



Question CPA-03990

Organizations focus on both financial and non-financial features of their operations to evaluate the degree to which they will be successful in their strategies. These financial and non-financial dimensions of their operations are sometimes referred to as:

a. The total quality management continuum.b. Critical success factors.c. Balanced scorecards.d. Benchmarks.

Explanation

Choice "b" is correct. Financial and non-financial features of an organization that contribute to its success in achieving strategy are referred to as critical success factors and are normally classified as:

1. Financial solvency and return2. Customer satisfaction3. Internal business processes4. Human resource innovation

Choice "a" is incorrect. The term total quality management continuum is a distracter.

Choice "c" is incorrect. Balanced scorecards serve to document the measurements of critical success factors. Although balanced scorecards include measurements that are classified by critical success factors, they are not, themselves, the features of the organization that contribute to its success.

Choice "d" is incorrect. Benchmarks represent the best practices within an industry or within a function. They may serve as the individual standards that serve to evaluate the achievement of goals classified within the context of critical success factors but they are not, themselves, the features that an organization must possess to accomplish their strategy.



Question CPA-03993

The process of developing plans for a company's expected operations and controlling the operations to help carry out those plans is known as:

a. Preparing a period budget.b. Preparing a master budget.c. Budgetary control.d. Participative budgeting.

Explanation

Choice "c" is correct. Budgetary control is the process of developing plans for a company's expected operations and controlling the operations to help carry out those plans.

Choice "a" is incorrect. All budgets are for a "period."

Choice "b" is incorrect. The master budget is the quantification of the company's overall plan. The budget does not provide the "controlling of operations" aspect that the question asks for.

Choice "d" is incorrect. Participative budgeting involves people throughout the organization in the budgetary process.



Question CPA-03995

When comparing performance report information for top management with that for lower-level management:

a. Lower-level management reports are typically for longer time periods.b. Top management reports show control over fewer costs.c. Lower-level management reports are likely to contain more quantitative data and less financial data.d. Top management reports are usually not of the exception type but present a complete analysis of all

variances.

Explanation

Choice "c" is correct. Lower level management reports are likely to include more quantitative data (units, time, etc.), which is more detailed. Financial data provides a broader overview.

Choice "a" is incorrect. Lower-level management reports are typically for shorter time periods.

Choice "b" is incorrect. Top management reports show control over a greater number of costs.

Choice "d" is incorrect. Top management would actually typically receive exception type reports.



Question CPA-03996

Performance reports should be formatted and designed to meet organizational needs. In this regard, performance reports normally include all of the following, except:

a. Exceptional items that are controllable.b. Specific time horizons.c. A user focus.d. Strategic plans.

Explanation

Choice "d" is correct. Strategic plans are broad-based and long-term in nature. Performance reports are much more specific and shorter term. A performance report would not normally include strategic plans.

Choices "a", "b", and "c" are incorrect. All of these items would be included in performance reports.



Question CPA-04000

A budget manual, which enhances the operation of a budget system, is most likely to include:

a. A chart of accounts.b. Distribution instructions for budget schedules.c. Documentation of the accounting system software.d. Company policies regarding the authorization of transactions.

Explanation

Choice "b" is correct. The budget manual provides guidance during the preparation of the budgets. Among other things, the budget manual would include instructions on the distribution of budget schedules.

Choices "a", "c", and "d" are incorrect. These items are not likely to be incuded in the budget manual.



Question CPA-04001

The process of creating a formal plan and translating goals into a quantitative format is:

a. Activity-based costing.b. Job order costing.c. Budgeting.d. Variance analysis.

Explanation

Choice "c" is correct. Budgeting is the process of creating a formal plan and translating goals into a quantitative format.

Choice "a" is incorrect. Activity-based costing is costing based on activities (cost drivers) and cost pools.

Choice "b" is incorrect. Job order costing is costing by specific identification; it is the opposite of process costing.

Choice "d" is incorrect. Variance analysis is the comparison of actual and budgeted results.



Question CPA-04002

Strategic Business Units (SBUs) are classified into different types based on the responsibility levels assigned to their managers. Each of the following items are reasons for classifying Strategic Business Units as cost, revenue, profit, or investment, except to:

a. Promote goal congruence.b. Communicate segment goals to managers for improved operational and financial control.c. Highlight different responsibility levels among managers in highly centralized organizations.d. Isolate financial measurement for segment performance.

Explanation

Choice "c" is correct. Strategic Business Units are established in a decentralized environment not a centralized environment. Highlighting different responsibility levels in centralized environments is not a reason for using cost, revenue, profit and investment SBUs.

Choice "a" is incorrect. Goal congruence is a valid reason for SBU classification.

Choice "b" is incorrect. Improved operational and financial control is a valid reason for classification of SBUs by type.

Choice "d" is incorrect. Isolating the relevant measure of financial performance is appropriate to SBU classification.



Question CPA-04003

Organic Enterprises cultivates potted plants and hybrids. Management conducted a careful engineering study of product requirements and has developed standards to control production. Standards of this type are also referred to as:

a. Authoritative standards.b. Participative standards.c. Ideal standards.d. Attainable standards.

Explanation

Choice "a" is correct. Standards imposed by management without employee input are referred to as authoritative standards.

Choice "b" is incorrect. Standards imposed by management without employee input are referred to as authoritative standards. Standards developed in collaboration with employees involved with the work are referred to as participative standards.

Choice "c" is incorrect. Ideal standards are based on optimum conditions. The question gives no indication whether the assumptions used by the engineering group were based on optimal, normal, or less than optimal conditions.

Choice "d" is incorrect. Attainable standards represent per unit budgets that assume normal conditions. The question gives no indication whether the assumptions used by the engineering group were based on optimal, normal, or less than optimal conditions.



Question CPA-04004

All of the following are considered operating/financial budgets, except the:

a. Cash budget.b. Sales budget.c. Production budget.d. Capital budget.

Explanation

Choice "d" is correct. Operating budgets describe the plan for revenue and expenses and the supporting schedules that go with them. Examples include sales, materials, labor, overhead, production, purchases and the forecasting of cash that will be necessary to pay for them. Capital budgets plan for the purchase of capital assets, which will only affect the operating budget through their subsequent effect on expense via depreciation.




Question CPA-04005

For the month of December, Crystal Clear Bottling expects to sell 12,500 cases of Cranberry Sparkling Water at $24.80 per case and 33,100 cases of Lemon Dream Cola at $32.00 per case. Sales personnel receive 6 percent commission on each case of Cranberry Sparkling Water and 8 percent commission on each case of Lemon Dream Cola. In order to receive a commission on a product, the sales personnel team must meet the individual product revenue quota. The sales quota for Cranberry Sparkling Water is $500,000, and the sales quota for Lemon Dream Cola is $1,000,000. The sales commission that should be budgeted for December is:

a. $4,736b. $82,152c. $84,736d. $103,336

Explanation

Choice "c" is correct. $84,736 budgeted sales commission.

Lemon dream cola:Projected case sales 33,100Price per case × $32Sales $1,059,200Commission rate × 8%Budgeted sales commission $ 84,736 C

Note: Sales of cranberry sparkling water (12,500 cases × $24.80 = $310,000) are not expected to reach the sales quota of $500,000.

Choices "a", "b", and "d" are incorrect based on the above explanation.



Question CPA-04007

Wellfleet Company manufactures recreational equipment and prepares annual operational budgets for each department. The Purchasing Department is finalizing plans for the fiscal year ending June 30, 1994, and has gathered the following information regarding two of the components used in both tricycles and bicycles. Wellfleet uses the first-in, first-out inventory method.

Tri- Bi-A19 B12 cycles cycles

Beginning inventory July 1, 1993 3,500 1,200 800 2,150

Ending inventory June 30, 1994 2,000 1,800 1,000 900

Unit cost $1.20 $4.50 $54.50 $89.60

Projected 1993-94 unit sales - - 96,000 130,000Component usage: Tricycles 2/unit 1/unit - - Bicycles 2/unit 4/unit - -

The budgeted dollar value of Wellfleet Company's purchases of Component A19 for the fiscal year ending June 30, 1994 is:

a. $538,080b. $540,600c. $2,022,300d. $2,027,250

Explanation

Choice "a" is correct. $538,080 purchases for the fiscal year ending 6-30-94.

Production of tricycles/bicycles:Trikes Bikes

Projected sales 96,000 130,000Desired ending inventory 1,000 900

Required units 97,000 130,900Less: beginning inventory (800) (2,150)

Required production 96,200 128,750

Required units of A19 to meet production budget: Tricycles − 96,200 × 2 192,400 Bicycles − 128,750 × 2 257,500

Total units required to meet production 449,900

Purchases of A19:A19

Units required to meet production 449,900Desired ending inventory 2,000Total units required 451,900Less: beginning inventory (3,500)Units to be purchased 448,400

Budgeted purchases = 448,400 units × $1.20 per unit = $538,080




Question CPA-04008

Wellfleet Company manufactures recreational equipment and prepares annual operational budgets for each department. The Purchasing Department is finalizing plans for the fiscal year ending June 30, 1994, and has gathered the following information regarding two of the components used in both tricycles and bicycles. Wellfleet uses the first-in, first-out inventory method.

Tri- Bi-A19 B12 cycles cycles

Beginning inventory July 1, 1993 3,500 1,200 800 2,150

Ending inventory June 30, 1994 2,000 1,800 1,000 900

Unit cost $1.20 $4.50 $54.50 $89.60

Projected 1993-94 unit sales − − 96,000 130,000Component usage: Tricycles 2/unit 1/unit − − Bicycles 2/unit 4/unit − −

If the economic order quantity of Component B12 is 70,000 units, the number of times that Wellfleet Company should purchase this component during the fiscal year ended June 30, 1994 is:

a. Five times.b. Seven times.c. Eight times.d. Nine times.

Explanation

Choice "d" is correct. Nine times.

Production of tricycles/bicycles:Trikes Bikes

Projected sales 96,000 130,000Desired ending inventory 1,000 900

Required units 97,000 130,900Less: beginning inventory (800) (2,150)

Required production 96,200 128,750

Required units of B12 to meet production budget: Tricycles − 96,200 × 1 96,200 Bicycles − 128,750 × 4 515,000

Total units required to meet production 611,200

Purchases of B12:A19

Units required to meet production 611,200Desired ending inventory 1,800Total units required 613,000Less: beginning inventory (1,200)Units to be purchased 611,800

611,800 ÷ 70,000 EOQ = 8.74 orders; round up to 9




Question CPA-04010

Rokat Corporation is a manufacturer of tables sold to schools, restaurants, hotels, and other institutions. The tabletops are manufactured by Rokat, but the table legs are purchased from an outside supplier. The Assembly Department takes a manufactured tabletop and attaches the four purchased table legs. It takes 20 minutes of labor to assemble a table. The company follows a policy of producing enough tables to insure that 40 percent of next month's sales are in the finished goods inventory. Rokat also purchases sufficient raw materials to insure that raw materials inventory is 60 percent of the following month's scheduled production. Rokat's sales budget in units for the next quarter is as follows.

July 2,300August 2,500September 2,100

Rokat's ending inventories in units for June 30, 1995, are:

Finished goods 1,900Raw materials (legs) 4,000

The number of tables to be produced during August 1995 is:

a. 2,340 tables.b. 1,440 tables.c. 1,600 tables.d. 2,380 tables.

Explanation

Choice "a" is correct. 2,340 tables to be produced during August 1995.

UnitsBudgeted sales - August 2,500Desired ending inventory, 8/31 (40% × 2,100 Sept. sales) 840Total required 3,340Less: beginning inventory 8/1 (40% × 2,500 Aug. Sales) (1,000)Production 2,340




Question CPA-04012





Disregarding your response to Item J95 - 1.14, assume the required production for August and September is 1,600 and 1,800 units, respectively, and the July 31, 1995, raw materials inventory is 4,200 units. The number of table legs to be purchased in August is:

a. 6,520 legs.b. 5,080 legs.c. 6,400 legs.d. 6,840 legs.

Explanation

Choice "a" is correct. 6,520 legs to be purchased in August.

Note that August and September production is provided as 1,600 and 1,800 units, respectively. This translates (at 4 legs per table) into 6,400 and 7,200 required table legs. Also, the company wishes to maintain an August ending inventory sufficient to meet 60% of September's production, or 4,320 legs (7,200 x .6 = 4,320).

Raw Material(Legs)

Legs required to produce 1,600 tables in August 6,400Desired ending inventory, 8/31: 4,320Total required table legs 10,720Less: beginning inventory, 8/1 (given) (4,200)

Table legs to be purchased 6,520




Question CPA-04013

There are various budgets within the master budget cycle. One of these budgets is the production budget. Which one of the following best describes the production budget?

a. It includes required direct labor hours.b. It includes required material purchases.c. It aggregates the monetary details of the operating budget.d. It is calculated from the desired ending inventory and the sales forecast.

Explanation

Choice "d" is correct. The production budget is based on the sales budget (or forecast), with modification for increases or decreases in inventory levels.

Choice "a" is incorrect. The production budget does include direct labor hours, but it also includes much more.

Choice "b" is incorrect. The production budget does include the cost of materials used in production, but it also includes much more.

Choice "c" is incorrect. The operating budget includes all budgets (except capital purchases and cash) and includes the pro forma income statement; it goes beyond the production budget.



Question CPA-04016

A plan that is created using budgeted revenue and costs but is based on the actual units of output is known as a:

a. Continuous budget.b. Flexible budget.c. Static budget.d. Master budget.

Explanation

Choice "b" is correct. A flexible budget uses budgeted revenue and costs per unit, but it is adjusted based on actual units of output.

Choice "a" is incorrect. A continuous (or rolling) budget continues to add an addition period with the passage of each period.

Choice "c" is incorrect. A static budget is based on one level of activity, and it is not adjusted for actual units.

Choice "d" is incorrect. A master (comprehensive) budget is the quantification of the company's overall plan and consists of many small budgets.



Question CPA-04017

Jordan Auto has developed the following production plan.

Month UnitsJanuary 10,000February 8,000March 9,000April 12,000

Each unit contains three pounds of raw material. The desired raw material ending inventory each month is 120 percent of the next month's production, plus 500 pounds. (The beginning inventory meets this requirement.) Jordan has developed the following direct labor standards for production of these units.

Department 1 Department 2Hours per unit 2.0 0.5Hourly rate $6.75 $12.00

How much raw material should Jordan Auto purchase in March?

a. 32,900 pounds.b. 36,000 pounds.c. 37,800 pounds.d. 43,700 pounds.

Explanation

Choice "c" is correct. 37,800 pounds must be purchased in March:

3/1 Begin bal. (9,000 × 120% × 3) + 500 = 32,900Purchases (squeeze) 37,800Subtotal 70,700Transfer out (9000 × 3) (27,000)

3/31 End bal. (12,000 × 120% × 3) + 500 = $43,700

Choices "a", "b", and "d" are incorrect, per the above calculation.



Question CPA-04019





Assume that Rokat Corporation will produce 1,800 units in the month of September 1995. How many employees will be required for the Assembly Department? (Fractional employees are acceptable since employees can be hired on a part-time basis. Assume a 40-hour week and a 4-week month.)

a. 15 employees.b. 3.75 employees.c. 60 employees.d. 1.5 employees.

Explanation

Choice "b" is correct. 3.75 employees required.

Units produced 1,8003 per hour (20 mins. Ea.) ÷ 3Hours required 600Monthly hours per employee (40 × 4) ÷ 160Employees needed 3.75 B

Choices "a", "c", and "d" are incorrect, per the above calculation.



Question CPA-04021

Individual budget schedules are prepared to develop an annual comprehensive or master budget. The budget schedule that would provide the necessary input data for the Direct Labor Budget would be the:

a. Sales forecast.b. Raw materials purchases budget.c. Schedule of manufacturing overhead.d. Production budget.

Explanation

Choice "d" is correct. The production budget (which includes projected units to be produced) would provide the necessary input data for the direct labor budget.

Choices "a", "b", and "c" are incorrect, per the above information.



Question CPA-04022

Jordan Auto has developed the following production plan.

Month UnitsJanuary 10,000February 8,000March 9,000April 12,000

Each unit contains three pounds of raw material. The desired raw material ending inventory each month is 120 percent of the next month's production, plus 500 pounds. (The beginning inventory meets this requirement.) Jordan has developed the following direct labor standards for production of these units.

Department 1 Department 2Hours per unit 2.0 0.5Hourly rate $6.75 $12.00

Jordan Auto's total budgeted direct labor dollars for February usage should be:

a. $156,000b. $165,750c. $175,500d. $210,600

Explanation

Choice "a" is correct. $156,000 budgeted direct labor dollars for February, calculated as follows:

8,000 units × 2.0 hrs × $6.75 = $108,0008,000 units × 0.5 hrs × $12.00 = 48,000Total budgeted direct labor dollars for February $156,000

Choices "b", "c", and "d" are incorrect, per the above calculation.



Question CPA-04023

The information contained in a cost of goods manufactured budget would most directly relate to the:

a. Materials used, direct labor, overhead applied, and work-in-process inventories budgets.b. Materials used, direct labor, overhead applied, work-in-process inventories, and finished goods inventories

budgets.c. Materials used, direct labor, overhead applied, and finished goods inventories budgets.d. Materials used, direct labor, overhead applied, unit production, and raw materials inventories budgets.

Explanation

Choice "a" is correct. Materials, labor, and overhead applied are all "inputs" to the cost of goods manufactured. Work-in-process affects both inputs (for beginning W-I-P) and outputs (for ending W-I-P).

Choice "b" is incorrect. Finished goods inventory is not necessary for the determination of cost of goods manufactured.

Choice "c" is incorrect. Finished goods inventory is not necessary for the determination of cost of goods manufactured. WIP inventoiry IS necessary to calculate cost if goods manufactured.

Choice "d" is incorrect. Raw materials inventory is not sufficient information to assist in the calculatation cost of goods manufactured, nor is units of production. WIP inventory is necessary.



Question CPA-04024

Karmee Company has been accumulating operating data in order to prepare an annual profit plan. Details regarding Karmee's sales for the first six months of the coming year are as follows.

Estimated Monthly Sales Type of Monthly SaleJanuary $600,000 Cash sales 20%February 650,000 Credit sales 80%March 700,000April 625,000May 720,000June 800,000

Collection Pattern for Credit SalesMonth of sale 30%One month following sale 40%Second month following sale 25%

Karmee's cost of goods sold average 40 percent of the sales value. Karmee's objective is to maintain a target inventory equal to 30 percent of the next month's sales. Purchases of merchandise for resale are paid for in the month following the sale.The variable operating expenses (other than cost of goods sold) for Karmee are 10 percent of sales and are paid for in the month following the sale. The annual fixed operating expenses are presented below. All of these are incurred uniformly throughout the year and paid monthly except for insurance and property taxes. Insurance is paid quarterly in January, April, July, and October. Property taxes are paid twice a year in April and October.

Annual Fixed Operating CostsAdvertising $ 720,000Depreciation 420,000Insurance 180,000Property taxes 240,000Salaries 1,080,000

The amount for cost of goods sold that will appear on Karmee Company's pro forma income statement for the month of February will be:

a. $254,000b. $266,000c. $260,000d. $272,000

Explanation

Choice "c" is correct. $260,000. Cost of goods sold for February:

Estimated sales $650,000Cost% 40%Cost of sales $260,000




Question CPA-04030






Karmee Company's total cash receipts for the month of April will be:

a. $504,000b. $629,000c. $653,000d. $665,400

Explanation

Choice "b" is correct. 629,000 cash receipts for April:

April cash sales $625,000 × 20% = $125,000Credit sales collected − April − $625,000 × 80% × 30% = 150,000March − $700,000 × 80% × 40% = 224,000February − $650,000 × 80% × 25% = 130,000Total $629,000




Question CPA-04039

Which one of the following statements regarding selling and administrative budgets is most accurate?

a. Selling and administrative budgets are fixed in nature.b. Selling and administrative budgets are difficult to allocate by month and are best presented as one number for

the entire year.c. Selling and administrative budgets should be a certain percentage of sales, and should be developed using a

bottom-up approach.d. Selling and administrative budgets need to be detailed in order that the key assumptions can be better

understood.

Explanation

Choice "d" is correct. Selling and administrative budgets, like any budgets, need to be detailed in order that the key assumptions are better understood.

Choice "a" is incorrect. Selling and administrative budgets are not fixed in nature; they generally are related to sales volume.

Choice "b" is incorrect. Selling and administrative budgets are usually based on sales and easy to allocate by month.

Choice "c" is incorrect. Selling and administrative budgets are often, but not always, a percentage of sales. When a fixed percentage is used, it is usually determined by top management.



Question CPA-04040

A firm develops an annual cash budget in order to:

a. Support the preparation of its cash flow statement for the annual report.b. Ascertain which capital expenditure projects are feasible and which capital expenditure projects should be

deferred.c. Balance the noncash and cash activities of the company.d. Avoid the opportunity costs of noninvested excess cash and minimize the cost of interim financing.

Explanation

Choice "d" is correct. The main reason for preparing a cash budget is to anticipate cash flows so that excess cash can be invested and to minimize the need for interim financing.

Choices "a" and "c" are incorrect. A budget would not be used to support the statement of cash flows or balance noncash and cash activities of the company (which are based on actual uses of cash, not budgeted).

Choice "b" is incorrect. Capital projects often require the use of various types of financing. The annual cash budget, while it considers these issues in determining the amount of external financing to obtain, is not specifically developed to ascertain which capital expenditure projects are feasible, etc. The capital expenditure budget must be done before the cash budget can be prepared.



Question CPA-04041

Midwest Fabricators is building a corporate planning model to predict cash flows. The company maintains end-of-the-month inventories that cover 20 percent of the following month's sales. Merchandise costs average 55 percent of selling prices, and payment is made at the time of purchase. If Sn = sales in month n, an appropriate notation for total monthly cash payments for merchandise purchases would be:

a. 0.11Sn + 1b. 0.11Sn − 1c. 0.44Sn + 0.11Sn + 1d. 0.44Sn + 0.11Sn − 1

Explanation

Choice "c" is correct. 0.445n + 0.11Sn + 1

Monthly Cash = 80% for current month's salesPayments + 20% for next month's sales

Cost Complement = 55%

Monthly Cash = (80% × 55%) Sn + (20% × 55%) Sn + 1Payments

= 0.445Sn + 0.11Sn + 1




Question CPA-04043

The cash budget is a useful tool in the planning process. Which of the following is not a true statement relating to the preparation of a cash budget?

a. The cash budget is usually broken down into monthly periods.b. The cash budget shows itemized cash receipts and disbursements during the period, including the financing

activities and the beginning and ending cash balances.c. The cash budget is typically done before all other budgets.d. The cash budget alerts management to periods when there will be excess cash available for investment.

Explanation

Choice "c" is correct. The cash budget is done after all budgets have been prepared.

Choices "a", "b", and "d" are incorrect. They are all true.



Question CPA-04045

The cash budget provides management with information. Which of the following is not an example of information a cash budget provides?

a. Availability of funds for distribution to owners.b. The need for internal financing.c. Availability of funds for the repayment of debt.d. Availability of funds for investment purposes.

Explanation

Choice "b" is correct. The cash budget provides information concerning the need for external financing, not internal financing.

Choices "a", "c", and "d" are incorrect. They are all examples of information a cash budget provides.



Question CPA-04047

Super Drive, a computer disk storage and back-up company, uses accrual accounting. The company's Statement of Financial Position for the year ended November 30, 1994, is shown below.

Super DriveStatement of Financial Position

November 30, 1994AssetsCash $ 52,000Accounts receivable, net 150,000Inventory 315,000Property, plant, and equipment 1,000,000

Total assets $1,517,000

LiabilitiesAccounts payable $ 175,000Common stock 900,000Retained earnings $ 442,000

Total liabilities and shareholders' equity $1,517,000

Additional information regarding Super Drive's operations includes the following.

• Sales are budgeted at $520,000 for December 1994 and $500,000 for January 1995.• Collections are expected to be 60 percent in the month of sale and 40 percent in the month following the sale.• Eighty percent of the disk drive components are purchased in the month prior to the month of sale, and 20

percent are purchased in the month of sale. Purchased components comprise 40 percent of the cost of goods sold.

• Payment for the components is made in the month following the purchase.• Cost of goods sold is 80 percent of sales.

The budgeted cash collections for the month of December 1994 are:

a. $520,000b. $402,000c. $312,000d. $462,000

Explanation

Choice "d" is correct. $462,000 cash collections for December 1994:

December sales $520,000 × 60% = $312,000November sales (11/30 AR) 150,000Cash collections for December $462,000

Note: The November sales were 60% collected in November. The remaining 40% ($150,000 net) will be collected in December.

Choices "a", "b", and "c" are incorrect, per the above calculation.



Question CPA-04054











The projected balance in accounts payable on December 31, 1994, is:

a. $161,280b. $326,400c. $165,120d. $403,200

Explanation

Choice "a" is correct. $161,280 projected accounts payable on 12/31/94:

Dec JanBudgeted sales $520,000 $500,000Cost of goods % 80% 80%Cost of goods sold 416,000 400,000Purchased % 40% 40%Purchased components 166,400 160,00020% current month, 80% prior month 20% 80%Payable at 12/31/94 $ 33,280 $128,000

$33,280 + $128,000 = $161,280




Question CPA-04064











The projected gross profit for the month ending December 31, 1994, is:

a. $416,000b. $104,000c. $134,000d. $0

Explanation

Choice "b" is correct. $104,000 gross profit for December 1994:

% AmountProjected sales 100% $520,000Cost of goods sold 80% (416,000)Gross profit 20% $104,000




Question CPA-04070

KAB, Inc., a small retail store, had the following results of operations for May 1995. The budget for June and July 1995 are also given.

May June JulySales $ 42,000 $ 40,000 $ 45,000Cost of sales ( 21,000) ( 20,000) ( 22,500) Gross margin 21,000 20,000 22,500Other cash expenses ( 20,000) ( 20,000) ( 20,000) Operating income $ 1,000 $ 0 $ 2,500

Sales are collected 80 percent in the month of the sale and the balance in the month following the sale. The goods contained in cost of sales were purchased in the month prior to the month of sale, and vendor payment is in the month following the sale. All other cash expenses are paid in the month of the sale.The amount of cash collected during the month of June 1995 will be:

a. $40,000b. $40,400c. $41,000d. $41,600

Explanation

Choice "b" is correct. $40,400 cash collected during June 1995:

June sales − $40,000 × 80% collected in mo. of sale = $32,000May sales − $42,000 × 20% collected 1 month later = 8,400Total cash collected in June $40,400 B




Question CPA-04085

KAB, Inc., a small retail store, had the following results of operations for May 1995. The budget for June and July 1995 are also given.

May June JulySales $42,000 $40,000 $45,000Cost of sales 21,000 20,000 22,500 Gross margin 21,000 20,000 22,500Other cash expenses 20,000 20,000 20,000 Operating income $ 1,000 $ 0 $ 2,500

Sales are collected 80 percent in the month of the sale and the balance in the month following the sale. The goods contained in cost of sales were purchased in the month prior to the month of sale, and vendor payment is in the month following the sale. All other cash expenses are paid in the month of the sale.Cash disbursements for KAB, Inc. for the month of June 1995 will be:

a. $20,000b. $40,000c. $41,000d. $42,500

Explanation

Choice "c" is correct. $41,000 cash disbursements during June 1995:

May cost of sales (paid 1 month later) $21,000June other cash expenses (paid in month of sale) 20,000Total disbursements in June 1995 $41,000 C




Question CPA-04094

The cash receipts budget includes:

a. Funded depreciation.b. Extinguishment of debt.c. Interest expense.d. Loan proceeds.

Explanation

Choice "d" is correct. The cash receipts budget includes loan proceeds.

Choices "a", "b", and "c" are incorrect. All of these would be cash disbursements.



Question CPA-04095

The cash budget must be prepared before you can complete the:

a. Capital expenditure budget.b. Forecasted balance sheet.c. Production budget.d. Forecasted income statement.

Explanation

Choice "b" is correct. The cash budget must be prepared before you can complete the forecasted balance sheet.

Choice "a" is incorrect. The capital expenditure budget must be done before the cash budget.

Choice "c" is incorrect. The production budget must be done before purchases, labor and overhead budgets can be prepared, all of which impact the cash budget.

Choice "d" is incorrect. The forecasted income statement may be prepared before the cash budget.



Question CPA-04097

Trumbull Company budgeted sales on account of $120,000 for July, $211,000 for August, and $198,000 for September. Collection experience indicates that 60 percent of the budgeted sales will be collected the month after the sale, 36 percent the second month, and 4 percent will be uncollectible. The cash receipts from accounts receivable that should be budgeted for September would be:

a. $169,800b. $147,960c. $197,880d. $194,760

Explanation

Choice "a" is correct. $169,800 cash receipts budgeted for September:

July sales: $120,000 × 36% = $ 43,200Aug. Sales: $211,000 × 60% = 126,600

$169,800 A




Question CPA-04098






The amount of cash collected in March for Karmee Company from the sales made during March will be:

a. $140,000b. $210,000c. $308,000d. $350,000

Explanation

Choice "c" is correct. $308,000 cash collected in March from March sales:

Cash sales ($700,000 × 20% =) $140,000Credit sale collections ($700,000 × 80% × 30% =) 168,000Total $308,000




Question CPA-04100






The total cash disbursements that Karmee Company will make for the operating expenses (expenses other than the cost of goods sold) during the month of April will be:

a. $290,000b. $377,500c. $385,000d. $420,000

Explanation

Choice "c" is correct. $385,000. Cash disbursements for April operating expenses:

Variable operating expenses − $700,000 × 10% = $ 70,000Advertising − $720,000 × 1/12 = 60,000Insurance − $180,000 × 1/4 45,000Property tax − $240,000 × 1/2 = 120,000Salaries − $1,080,000 × 1/12 = 90,000Total $385,000

Note: Variable operating expense disbursements are based on March expenses. Depreciation is a non-cash expense.




Question CPA-04103

Which one of the following items would have to be included for a company preparing a schedule of cash receipts and disbursements for the calendar year 1996?

a. A purchase order issued in December 1996 for items to be delivered in February 1997.b. Dividends declared in November 1996 to be paid in January 1997 to shareholders of record as of December

1996.c. The amount of uncollectible customer accounts for 1996.d. Borrowing funds from a bank on a note payable taken out in June 1996 and agreeing to pay the principal and

interest in June 1997.

Explanation

Choice "d" is correct. Borrowing funds on a note in June 1996 would be a cash inflow in 1996 and would have to be included in a schedule of cash receipts and disbursements for 1996. The repayment would be a cash outflow in 1997.

Choice "a" is incorrect. A purchase order is a commitment, but not a cash event.

Choice "b" is incorrect. Dividends declared are a non-cash item until paid in 1997.

Choice "c" is incorrect. Uncollectible accounts are a non-cash item.



Question CPA-04105

Historically, Pine Hill Wood Products has had no significant bad debt experience with its customers. Cash sales have accounted for ten percent of total sales and payments for credit sales have been received as follows.

40% of credit sales in the month of the sale.30% of credit sales in the first subsequent month.25% of credit sales in the second subsequent month.5% of credit sales in the third subsequent month.

The forecast for both cash and credit sales is as follows.

Month SalesJanuary $95,000February 65,000March 70,000April 80,000May 85,000

What is the forecasted cash inflow for Pine Hill Wood Products for May?

a. $70,875b. $76,500c. $79,375d. $82,100

Explanation

Choice "c" is correct. $79,375 cash inflow for May:

Cash sales − $85,000 × 10% = $ 8,500Collection Of Credit Sales:

May $85,000 × 90% × 40% = 30,600Apr $80,000 × 90% × 30% = 21,600Mar $70,000 × 90% × 25% = 15,750Feb $65,000 × 90% × 5% = 2,925

Total cash inflow for May $79,375




Question CPA-04107

Historically, Pine Hill Wood Products has had no significant bad debt experience with its customers. Cash sales have accounted for ten percent of total sales and payments for credit sales have been received as follows.

40% of credit sales in the month of the sale.30% of credit sales in the first subsequent month.25% of credit sales in the second subsequent month.5% of credit sales in the third subsequent month.

The forecast for both cash and credit sales is as follows.

Month SalesJanuary $95,000February 65,000March 70,000April 80,000May 85,000

Due to deteriorating economic conditions, Pine Hill Wood Products has now decided that its cash forecast should include a bad debt adjustment of two percent of credit sales, beginning with sales for the month of April. Because of this policy change, the total expected cash inflow related to sales made in April will:

a. Decrease by $1,210.50.b. Decrease by $1,345.00.c. Decrease by $1,440.00.d. Decrease by $1,600.00.

Explanation

Choice "c" is correct. Cash inflow related to sales made in April will decrease by $1,440.00:

April total sales $80,000Credit sales percentage 90%Credit sales 72,000Bad debt estimate × 2%Decrease in collections $ 1,440




Question CPA-04110

Pro forma financial statements are part of the budgeting process. Normally, the last pro forma statement prepared is:

a. Capital expenditure plan.b. Income statement.c. Statement of cost of goods sold.d. Statement of cash flows.

Explanation

Choice "d" is correct. The statement of cash flows is usually the last pro forma statement prepared. This is because everything affects cash. Only when everything else has been estimated can cash flow be projected.

Choices "a", "b", and "c" are incorrect, per the above explanation.



Question CPA-04112

The first step in the sales planning process is to:

a. Assemble all the data that are relevant in developing a comprehensive sales plan.b. Develop management guidelines specific to sales planning, including the sales planning process and planning

responsibilities.c. Prepare a sales forecast consistent with specified forecasting guidelines, including assumptions.d. Apply management evaluation and judgment to develop a comprehensive sales plan.

Explanation

Choice "b" is correct. The first step in the sales planning process is to develop management guidelines specific to sales planning, including the sales planning process and planning responsibilities.

Choice "a" is incorrect. While this has appeal because it is nonspecific, it is not correct because you cannot assemble the needed data until you know what data is needed. Furthermore, until responsibilities are assigned, it is unclear who will gather what data.

Choice "c" is incorrect. A sales forecast consistent with specified guidelines cannot be gathered until the guidelines are developed.

Choice "d" is incorrect. Management cannot judge and evaluate a sales plan until the guidelines for the plan have been developed.



Question CPA-04113

The benefits a company could realize from improved cash budgeting include:I. Displaying the cash effects of the master budget on the actual cash inflows and outflows from operations.II. Determining when additional sources of financing (either short-term or long-term) are necessary and planning

cash expenditures with cash availability.III. The optimal use of trade credit.

a. I and II.b. II and III.c. I and III.d. I, II, and III.

Explanation

Choice "d" is correct. I, II, and III.




Question CPA-04114

In developing a comprehensive profit planning and control system, the best chronological order of significant components of the system is to develop:

a. Long-range goals and objectives, long-range profit plan, short-range profit plan, and then establish a system of performance reports.

b. Long-range profit plan, system of performance reports, short-range profit plan, and then long-range goals and objectives.

c. System of performance reports, long-range profit plan, long-range goals and objectives, and the short-range profit plan.

d. Long-range profit plan, long-range goals and objectives, system of performance reports, and short-range profit plan.

Explanation

Choice "a" is correct. Long-range objectives, including a long-range profit plan, must be set before short-range objectives and profit plans can be made. Once short-range tactics and profit plans are set, a system of performance reporting can be established.

Choices "b", "c", and "d" are incorrect, per above.



Question CPA-04115

The financial budget process includes:

a. The cash budget.b. The budgeted statement of cash flows.c. The budgeted balance sheet.d. All of the above.

Explanation

Choice "d" is correct. All of the above.

The financial budget process includes:

1. Cash and capital purchases budgets.2. Balance sheet and statement of cash flows.

The operating budget process includes:

1. All budgets except cash and capital purchases.2. The pro forma income statement.




Question CPA-04117

When preparing the series of annual operating budgets, management usually starts the process with the:

a. Balance sheet.b. Capital budget.c. Sales budget.d. Production budget.

Explanation

Choice "c" is correct. The budgeting process usually begins with the sales budget.

Choices "a", "b", and "d" are incorrect, per the master budget flow chart:



Question CPA-04118

Which one of the following items should be done first when developing a comprehensive budget for a manufacturing company?

a. Determination of the advertising budget.b. Development of a sales budget.c. Determination of equipment acquisitions.d. Preparation of a pro forma income statement.

Explanation

Choice "b" is correct. The first step in developing a comprehensive budget is development of a sales budget.

Choice "a" is incorrect. An advertising budget is usually based on sales.

Choice "c" is incorrect. Determination of equipment acquisitions is part of the capital budget.

Choice "d" is incorrect. Preparation of a pro forma income statement is one of the last steps in a comprehensive budget.



Question CPA-04121

Which one of the following items is the last schedule to be prepared in the normal budget preparation process?

a. Cash budget.b. Cost of goods sold budget.c. Manufacturing overhead budget.d. Selling expense budget.

Explanation

Choice "a" is correct. When preparing a budget, the last schedule to be prepared is the cash budget. Sometimes, pro forma accrual financial statements are prepared after this last schedule.

Choices "b", "c", and "d" are incorrect. The cost of good sold budget, direct labor budget, manufacturing overhead budget, and selling expense budget are all intermediate steps in the budgeting process.



Question CPA-04122

After the goals of the company have been established and communicated, the next step in the planning process would be the development of the:

a. Production budget.b. Capital expenditure budget.c. Selling and administrative budget.d. Sales budget.

Explanation

Choice "d" is correct. The sales budget is usually the first budget prepared.

Choice "a" is incorrect. The production budget is based on the sales budget, with adjustment for any changes in planned inventory levels.

Choice "b" is incorrect. The capital expenditure budget is developed independently but must take into account the cash available.

Choice "c" is incorrect. The selling and administrative budget is based on the sales budget.



Question CPA-04123

Often a manager cannot wait for accounting reports to make necessary changes. Which of the following steps might a manager take to analyze the performance of a production line?

a. Physical observations of the process.b. Measurements of percentage of defects.c. Measurements of production schedule attainment.d. All of the above.

Explanation

Choice "d" is correct. A good production manager who is knowledgeable of the process will closely observe it to identify defects, attainment of production schedule and take other such measurements as needed to evaluate the performance of a line. Additional measurements might include overtime usage, scrap rates, downtime, etc.

Choices "a", "b", and "c" are incorrect. They are all suitable steps to take in performance evaluation.



Question CPA-04124

Which of the following is a true statement regarding nonfinancial measures of a process?

a. They are best viewed as attention directors.b. They are best viewed as problem solvers.c. They are an effective substitute for financial measures.d. All of the above are true.

Explanation

Choice "a" is correct. Nonfinancial measures are an effective way to observe problems as they occur. Thus, some action can be taken prior to the release of financial information.

Choice "b" is incorrect. While nonfinancial measures are good at directing management to a problem, they often do not serve as good problem solvers.

Choice "c" is incorrect. Nonfinancial measures are a good complement to financial measures but they are not a substitute.

Choice "d" is incorrect, per above.



Question CPA-04126

Which of the following will most likely encourage the use of nonfinancial measures by a manager?

a. Tying incentives to the overall profit of the firm.b. Tying incentives to the manager's individual effort.c. Tying incentives to the salary level of the manager.d. All of the above can be equally effective.

Explanation

Choice "b" is correct. Managers are more likely to react to incentives where the manager can control the outcome. They therefore have less risk to them.

Choice "a" is incorrect. Tying incentives to the overall profit of the firm means the individual manager has less control of the outcome and may not be as motivated.

Choice "c" is incorrect. While a bonus on salary is often very effective, tying the bonus to the salary often makes persons in lower paying jobs feel they are being treated unfairly and that their supervisor will reap the rewards of their hard work.

Choice "d" is incorrect, per above.



Question CPA-04127

A budget that accommodates many levels of production volume is a:

a. Flexible budget.b. Zero based budget.c. Cash budget.d. Sales budget.

Explanation

Choice "a" is correct. A flexible budget has fixed and variable components and can accommodate many levels of production.

Choice "b" is incorrect. Zero-based budgeting requires justification of all expenditures each year.

Choice "c" is incorrect. Cash budgets are done after all other budgets are completed; it budgets cash flow.

Choice "d" is incorrect. Sales budgets don't forecast production.



Question CPA-04128

When preparing a performance report for a cost center using flexible budgeting techniques, the "planned cost" column should be based on the:

a. Budgeted amount in the original budget prepared before the beginning of the year.b. Budget adjusted to the actual level of activity for the period being reported.c. Budget adjusted to the planned level of activity for the period being reported.d. Costs incorporated in the master budget.

Explanation

Choice "b" is correct. Planned cost using a flexible budget is adjusted to the actual level of activity.

Choices "a", "c", and "d" are incorrect, per the above explanation.



Question CPA-04132

Which one of the following statements regarding the difference between a flexible budget and a static budget is correct?

a. A flexible budget primarily is prepared for planning purposes while a static budget is prepared for performance evaluation.

b. A flexible budget provides cost allowances for different levels of activity whereas a static budget provides costs for one level of activity.

c. A flexible budget includes only variable costs whereas a static budget includes only fixed costs.d. A flexible budget is established by operating management while a static budget is determined by top

management.

Explanation

Choice "b" is correct. A flexible budget provides cost allowances (adjustments) for different levels of activity. A static budget provides costs for one level of activity.

Choice "a" is incorrect. Both types of budgets are used for planning. A flexible budget is better than a static budget for performance evaluation since it can be adjusted to the actual production level.

Choice "c" is incorrect. Both flexible and static budgets include both variable and fixed costs.

Choice "d" is incorrect. Both flexible and static budgets can be prepared at any level of management.



Question CPA-04133

Based on past experience, a company has developed the following budget formula for estimating its shipping expenses. The company's shipments average 12 pounds per shipment.

Shipping costs = $16,000 + ($0.50 × pounds shipped)

The planned activity and actual activity regarding orders and shipments for the current month are given in the following schedule.

Plan ActualSales orders 800 780Shipments 800 820Units shipped 8,000 9,000Sales $120,000 $144,000Total pounds shipped 9,600 12,300

The actual shipping costs for the month amounted to $21,000. The appropriate monthly flexible budget allowance for shipping costs for the purpose of performance evaluation would be:

a. $20,920b. $20,800c. $21,000d. $22,150

Explanation

Choice "d" is correct. $22,150 monthly flexible budget allowance for shipping costs:

$16,000 + ($0.50 × 12,300 pounds shipped)$16,000 + $6,150 = $22,150




Question CPA-04135

Comparing actual results with a budget based on achieving volume is possible with the use of a:

a. Step budget.b. Master budget.c. Rolling budget.d. Flexible budget.

Explanation

Choice "d" is correct. A flexible budget allows comparison of actual results with a budget based on achieved volume. The flexible nature of this type of budget allows adjustment to the actual volume.

Choice "a" is incorrect. Step budget is a distractor.

Choice "b" is incorrect. A master budget is comprehensive and consists of many small budgets.

Choice "c" is incorrect. A rolling or continuous budget continuously adds a future period so that a time period (often a year) is always projected into the future.



Question CPA-04137

Which is the true statement regarding flexible budgets?

a. They are designed to accommodate changes in the inflation rate.b. They are designed to accommodate changes in the activity level.c. They are budgets used to evaluate capacity utilization.d. They are similar to static budgets but are adjusted for inflation.

Explanation

Choice "b" is correct. A flexible budget is one where the budgeted amounts are adjusted for the actual level of activity.

Choice "a" is incorrect. Flexible budgets are adjusted for inflation the same way as static budgets.

Choice "c" is incorrect. Flexible budgets cannot be used to evaluate capacity utilization.

Choice "d" is incorrect. Flexible budgets are not similar to a static budget, which cannot adjust (flex) to accommodate changes in the activity level.



Question CPA-04139

In general, the purchasing manager is held responsible for unfavorable material price variances. Causes of these variances include all of the following, except:

a. Failure to correctly forecast price increases.b. Purchasing nonstandard or uneconomical lots.c. Purchasing from suppliers other than those offering the most favorable terms.d. Inadequate supervision.

Explanation

Choice "d" is correct. Inadequate supervision pertains to management of employees, materials, and equipment by the production manager, and results in material usage variances.

Choices "a", "b", and "c" are incorrect. All of these are causes of unfavorable material price variances.



Question CPA-04140

In general, the production manager or foreman is held responsible for unfavorable labor efficiency variances. Causes of these variances include all of the following, except:

a. Poorly trained labor.b. Substandard or inefficient equipment.c. Inadequate supervision.d. High hourly rates.

Explanation

Choice "d" is correct. High hourly rates are the responsibility of the Personnel Dept, and pertain to labor rate variances.

Choices "a", "b", and "c" are incorrect. All of these are causes of unfavorable labor efficiency variances.



Question CPA-04142

Folsom Fashions sells a line of women's dresses. Folsom's performance report for November 1991 follows.

Actual BudgetDresses sold 5,000 6,000Sales $235,000 $300,000Variable costs 145,000 180,000Contribution margin 90,000 120,000Fixed costs 84,000 80,000Operating income $ 6,000 $ 40,000

The company uses a flexible budget to analyze its performance and to measure the effect on operating income of the various factors affecting the difference between budgeted and actual operating income.The effect of the sales volume variance on the contribution margin for November is:

a. $30,000 unfavorable.b. $18,000 unfavorable.c. $20,000 unfavorable.d. $15,000 unfavorable.

Explanation

Choice "c" is correct. $20,000 unfavorable.

Variance in units sold (6,000 − 5,000) 1,000Contribution margin per unit (120,000 ÷ 6,000) × $20Variance due to sales volume variance $20,000




Question CPA-04144

Folsom Fashions sells a line of women's dresses. Folsom's performance report for November 1991 follows.

Actual BudgetDresses sold 5,000 6,000Sales $235,000 $300,000Variable costs 145,000 180,000Contribution margin 90,000 120,000Fixed costs 84,000 80,000Operating income $ 6,000 $ 40,000

The company uses a flexible budget to analyze its performance and to measure the effect on operating income of the various factors affecting the difference between budgeted and actual operating income.The sales price variance for November is:

a. $30,000 unfavorable.b. $18,000 unfavorable.c. $20,000 unfavorable.d. $15,000 unfavorable.

Explanation

Choice "d" is correct. $15,000 unfavorable.

Budgeted sales price ($300,000 ÷ 6,000) $ 50Actual sales price ($235,000 ÷ 5,000) 47Variance per unit 3Actual unit sales × 5,000Variance due to sales price $15,000




Question CPA-04145

In analyzing company operations, the controller of the Jason Corporation found a $250,000 favorable flexible-budget revenue variance. The variance was calculated by comparing the actual results with the flexible budget. This variance can be wholly explained by:

a. The total flexible budget variance.b. The total sales volume variance.c. Changes in unit selling prices.d. Changes in the number of units sold.

Explanation

Choice "c" is correct. A revenue variance (also known as a sales price variance) is due to a change in unit selling prices.

Choice "a" is incorrect. A flexible budget variance deals with costs, not revenues.

Choice "b" is incorrect. A sales volume variance results from a change in the number of units sold. A flexible budget adjusts for this volume change.

Choice "d" is incorrect. A change in the number of units sold is compensated for by the flex in the flexible budget.



Question CPA-04147

ChemKing uses a standard costing system in the manufacture of its single product. The 35,000 units of raw material in inventory were purchased for $105,000, and two units of raw material are required to produce one unit of final product. In November, the company produced 12,000 units of product. The standard allowed for material was $60,000, and there was an unfavorable quantity variance of $2,500.The materials price variance for the units used in November was:

a. $2,500 unfavorable.b. $11,000 unfavorable.c. $12,500 unfavorable.d. $2,500 favorable.

Explanation

Choice "c" is correct. $12,500 unfavorable materials price variance.

Standard price per unit $60,000 ÷ 12,000 units = $ 2.50Actual price per unit $105,000 ÷ 35,000 units = 3.00Unfavorable price variance per unit .50Actual units of material ×25,000Unfavorable materials price variance $12,500

From our SAD DADS mnemonics, we know that the material price variance is calculated as follows:

P = D x A

Price variance = Difference in price x Actual units

We also know that the difference is "SAD", as follows:

S - A = D

Actual Amount of Materials Used:The actual amount of materials used is actually calculated in a separate question (D93-1.23). The calculated units actually used is 25,000. We know that the usage variance is unfavorable $2,500. So, we solve for the "difference in usage" as follows:

U = D x S($2,500) = D x $2.50

($2,500) / $2.50 = D(1,000) = D

So, the unfavorable units used amounted to 1,000. The facts of the question tell us that 12,000 units were produced in November. At two units of raw materials per unit produced, that’s a standard of 24,000 units of raw materials. Actual units used (S - A = D) are then 25,000 units to produce the unfavorable usage variance of $2,500 (alternatively, 24,000 standard units plus 1,000 unfavorable units used = 25,000 units used).

Standard units − 12,000 × 2 per unit = 24,000Unfavorable quantity variance of %

$2,500 ÷ $2.50 per unit standard = 1,000Actual units used to produce non output 25,000

So, we have the "A" amount for the actual amount used.

Standard Cost Per UnitThe standard cost per unit is actually calculated in a separate question (D93-1.22). The calculated standard cost per unit is $2.50. The standard allowed for the material was $60,000, and 12,000 units were produced in November. Therefore, the materials cost on the "standard" was $5.00 per unit [$60,000/12,000 units]. However, we are told that it takes two units of raw material to make one unit of completed goods. So, the standard price for



one unit of material is $2.50 [$5.00/2].

We have the "S" now.

Final StepAll that is left if to calculate the "D", and the only part of it we need is the actual price per unit paid. We know that 35,000 units of material was purchased for $105,000, so the actual cost per unit was $105,000/35,000, or $3.00/unit. Now, we can calculate the "difference" as follows:

S - A = D$2.50 - $3.00 = D

($0.50) = D

Putting this into the PURE mnemonic, we get the following:

P = D x AP = ($0.50) x 25,000 units

P = ($12,500)

NOTE: Typically, the materials price variance is based on units purchased (35,000 in this case); however, in this case, the question specifically asks for the materials price variance for units USED (25,000 in this case).



Question CPA-04149

Under a standard cost system, the material price variances are usually the responsibility of the:

a. Production manager.b. Cost accounting manager.c. Purchasing manager.d. Industrial engineering manager.

Explanation

Choice "c" is correct. The purchasing manager would usually be responsible for a material price variance.

Choices "a", "b", and "d" are incorrect. All these people have no control over how the price of materials purchased differs from standard.



Question CPA-04150

Under a standard cost system, labor price variances are usually not attributable to:

a. Union contracts approved before the budgeting cycle.b. Labor rate predictions.c. The use of a single average standard rate.d. The payment of hourly rates instead of prescribed piecework rates.

Explanation

Choice "a" is correct. Labor price variances would not be attributable to union contracts approved before the budgeting cycle. If the contracts are approved before, they would be used as the basis for the budget.

Choice "b" is incorrect. Labor rate predictions, if wrong, will cause a labor price variance.

Choice "c" is incorrect. A single average standard rate will cause variances when compared to actual rates.

Choice "d" is incorrect. Payment of hourly rates rather than prescribed piecework rates will usually result in labor price variances. Standards will be based on an amount per piece.



Question CPA-04152

A favorable material price variance coupled with an unfavorable material usage variance would most likely result from:

a. Machine efficiency problems.b. Product mix production changes.c. The purchase and use of higher than standard quality material.d. The purchase of lower than standard quality material.

Explanation

Choice "d" is correct. The purchase of lower than standard quality material will often result in an unfavorable material usage variance (the inferior material causes more waste) and a favorable material price variance (the inferior material costs less).

Choice "a" is incorrect. Machine efficiency problems would not affect the price variance.

Choice "b" is incorrect. Product mix changes would affect sales volumes, not material price or production efficiency.

Choice "c" is incorrect. Higher than standard material would likely lead to unfavorable price variances and favorable efficiency variances.



Question CPA-04154

The best basis upon which cost standards should be set to measure controllable production inefficiencies is:

a. Normal capacity.b. Recent average historical performance.c. Engineering standards based on attainable performance.d. Practical capacity.

Explanation

Choice "c" is correct. The best basis for setting standards is engineering standards based on attainable performance. Tight standards are good, but if unattainable, employees will not be motivated.

Choice "a" is incorrect. Normal capacity may be inefficient.

Choice "b" is incorrect. Historical performance may be poor.

Choice "d" is incorrect. Practical capacity is close, but may be too low to serve as the standard.



Question CPA-04156

An unfavorable direct labor efficiency variance could be caused by a(n):

a. Unfavorable variable overhead spending variance.b. Unfavorable material usage variance.c. Unfavorable fixed overhead volume variance.d. Favorable variable overhead spending variance.

Explanation

Choice "b" is correct. An unfavorable direct labor efficiency variance could be caused by an unfavorable material usage variance. Poor quality materials could mean unfavorable material usage and cause inefficient labor usage.

Choices "a", "c", and "d" are incorrect. Overhead variances would not affect the direct labor variance.



Question CPA-04158

Water Control, Inc. manufactures water pumps and uses a standard cost system. The standard factory overhead costs per water pump are based on direct labor hours and are shown below.

Variable overhead (4 hours at $8/hour) $32Fixed overhead (4 hours at $5*/hour) 20 Total overhead cost per unit $52

*Based on a capacity of 100,000 direct labor hours per month.

The following additional information is available for the month of November.

• 22,000 pumps were produced although 25,000 had been scheduled for production.• 94,000 direct labor hours were worked at a total cost of $940,000.• The standard direct labor rate is $9 per hour.• The standard direct labor time per unit is four hours.• Variable overhead costs were $740,000.• Fixed overhead costs were $540,000.

The variable overhead efficiency variance for November was:

a. $48,000 unfavorable.b. $60,000 favorable.c. $96,000 favorable.d. $32,000 favorable.

Explanation

Choice "a" is correct. $48,000 unfavorable variable overhead efficiency variance:

Flexible budget based on actual DL hours: 94,000 × $8/hr. $752,000Flexible budget based on standard DL hours: 22,000 units × $4 hrs/unit × $8/hr. 704,000Unfavorable variance $ 48,000

See the following through method displayed below:




Question CPA-04163






The direct labor price variance for November was:

a. $54,000 favorable.b. $94,000 unfavorable.c. $60,000 favorable.d. $40,000 unfavorable.

Explanation

Choice "b" is correct. $94,000 unfavorable direct labor price variance.

Actual labor price − $940,000 ÷ 94,000 hours = $10 per hrStandard labor price 9 per hrVariance per hour $ 1Direct labor hours worked × 94,000Direct labor price variance - unfavorable $ 94,000




Question CPA-04164






The direct labor efficiency variance for November was:

a. $108,000 favorable.b. $60,000 favorable.c. $54,000 unfavorable.d. $60,000 unfavorable.

Explanation

Choice "c" is correct. $54,000 unfavorable direct labor efficiency variance:

Direct labor hours worked 94,000Standard direct labor hours 22,000 pumps × 4 hours 88,000Excess labor hours 6,000Standard labor rate × $9Direct labor efficiency variance − Unfavorable $54,000




Question CPA-04166

Blaster, Inc., a manufacturer of portable radios, purchases the components from subcontractors to use to assemble into a complete radio. Each radio requires three units each of Part XBEZ52, which has a standard cost of $1.45 per unit. During May 1995, Blaster experienced the following with respect to part XBEZ52.

UnitsPurchases ($18,000) 12,000Consumed in manufacturing 10,000Radios manufactured 3,000

During May 1995, Blaster Inc. incurred a purchase price variance of:

a. $450 unfavorable.b. $450 favorable.c. $600 unfavorable.d. $600 favorable.

Explanation

Choice "c" is correct. $600 unfavorable purchase price variance.




Question CPA-04168

Blaster, Inc., a manufacturer of portable radios, purchases the components from subcontractors to use to assemble into a complete radio. Each radio requires three units each of Part XBEZ52, which has a standard cost of $1.45 per unit. During May 1995, Blaster experienced the following with respect to part XBEZ52.

UnitsPurchases ($18,000) 12,000Consumed in manufacturing 10,000Radios manufactured 3,000

During May 1995, Blaster, Inc. incurred a material efficiency variance of:

a. $1,450 unfavorable.b. $1,450 favorable.c. $4,350 unfavorable.d. $4,350 favorable.

Explanation

Choice "a" is correct. $1,450 unfavorable material efficiency variance.




Question CPA-04170

Price variances and efficiency variances can be key to the performance measurement within a company. In evaluating the performance within a company, a material efficiency variance can be caused by all of the following, except the:

a. Actions of the Purchasing Department.b. Design of the product.c. Skill level of the labor force.d. Sales volume of the product.

Explanation

Choice "d" is correct. Material efficiency variance cannot be caused by sales volume of the product.

Material efficiency variance can be caused by:

a. Actions of the purchasing department.b. Design of the product.c. Skill level of the labor force.




Question CPA-04172

For a company that produces more than one product, the sales volume variance can be divided into which two of the following additional variances?

a. Sales price variance and flexible budget variance.b. Sales efficiency variance and sales price variance.c. Sales quantity variance and sales mix variance.d. Sales mix variance and production volume variance.

Explanation

Choice "c" is correct. For a company that produces more than one product, the sales volume variance can be divided into sales quantity variance and sales mix variance.

Choice "a" is incorrect. Sales price variance is not part of sales volume variance; and flexible budget variance part of overhead volume variance.

Choice "b" is incorrect. Sales efficiency variance is not part of sales volume variance; and sales price variance is not.

Choice "d" is incorrect. Sales mix variance is part of sales volume variance; but production volume variance is part of overhead volume variance.



Question CPA-04173

The production volume variance is due to:

a. Inefficient or efficient use of direct labor hours.b. Efficient or inefficient use of variable overhead.c. Difference from the planned level of the base used for overhead allocation and the actual level achieved.d. A significant shift in the mix and yield of direct labor relative to the static budget.

Explanation

Choice "c" is correct. The production volume variance is due to difference from:

1000 Planned level of the base used for overhead allocation800 Actual level achieved200 Production volume variance (difference)

Choice "a" is incorrect. Direct labor efficiency variance is due to inefficient or efficient use of direct labor hours.

Choice "b" is incorrect. Variable overhead efficiency variance is due to efficient or inefficient use of variable overhead.

Choice "d" is incorrect. A significant shift in the mix of direct labor relative to the flexible (not static) budget would result in labor rate variance, while a significant shift in the yield of direct labor would result in labor efficiency variance.



Question CPA-04175

The variance that arises solely because the quantity actually sold differs from the quantity budgeted to be sold is:

a. Static budget variance.b. Sales mix variance.c. Sales volume variance.d. Flexible budget variance.

Explanation

Choice "c" is correct. Sales volume variance arises solely because the quantity actually sold differs from the quantity budgeted to be sold.

Choice "a" is incorrect. Static budget variance does not occur when a flexible budget is used, and variance analysis usually requires use of a flexible budget.

Choice "b" is incorrect. For a company that produces more than one product, the sales volume variance can be divided into sales quantity variance and sales mix variance.

Choice "d" is incorrect. Flexible budget variance deals with costs, not revenues. It is the difference between the actual amounts and the flexible budget amounts for the actual output achieved.



Question CPA-04176

Variable overhead is applied on the basis of standard direct labor hours. If for a given period, the direct labor efficiency variance is unfavorable, the variable overhead efficiency variance will be:

a. Favorable.b. Unfavorable.c. The same amount as the labor efficiency variance.d. Indeterminable since it is not related to the labor efficiency variance.

Explanation

Choice "b" is correct. If variable overhead is applied on the basis of standard direct labor hours, and direct labor efficiency variance is unfavorable, the variable overhead efficiency will (also) be unfavorable.

Choices "a", "c", and "d" are incorrect, per the above.



Question CPA-04177

The difference between the actual amounts and the flexible budget amounts for the actual output achieved is the:

a. Production volume variance.b. Flexible budget variance.c. Sales volume variance.d. Standard cost variance.

Explanation

Choice "b" is correct. Flexible budget variance is the difference between the actual amounts and the flexible budget amounts for the actual output achieved.

Choice "a" is incorrect. Production volume variance is the variance in an absorption costing system that measures the departure from the denominator level of activity that was used to set the fixed overhead rate.

Choice "c" is incorrect. Sales volume variance arises solely because the quantity actually sold differs from the quantity budgeted to be sold.

Choice "d" is incorrect. Standard cost variance is the net difference between total actual cost and standard cost.



Question CPA-04178

The variance in an absorption costing system that measures the departure from the denominator level of activity that was used to set the fixed overhead rate is the:

a. Efficiency variance.b. Sales volume variance.c. Production volume variance.d. Flexible budget variance.

Explanation

Choice "c" is correct. Production volume variance is the variance in an absorption costing system that measures the departure from the denominator level of activity that was used to set the fixed overhead rate.

Choice "a" is incorrect. Efficiency variance = (STD hours required − actual hours) × STD variable OH rate

Choice "b" is incorrect. Sales volume variance = (budgeted unit sales) − (actual unit sales) × budgeted contribution margin

Choice "d" is incorrect. Flexible budget variance is the difference between the actual amounts and the flexible budget amounts for the actual output achieved.



Question CPA-04180

Which one of the following variances is most controllable by the production control supervisor?

a. Material usage variance.b. Variable overhead spending variance.c. Fixed overhead budget variance.d. Fixed overhead volume variance.

Explanation

Choice "a" is correct. Material usage variance is most controllable by the production control supervisor.

Choice "b" is incorrect. Variable overhead spending variance is most controllable by the plant manager and somewhat by production control.

Choice "c" is incorrect. Fixed overhead budget variance is most controllable by other than production control.

Choice "d" is incorrect. Fixed overhead volume variance is most controllable by other than production control.



Question CPA-04181

Ardmore Enterprises uses a standard cost system in its small appliance division. The standard cost of manufacturing one unit of Zeb is as follows:

Materials [60 pounds at $1.50 per pound] $ 90Labor [3 hours at $12 per hour] 36Factory overhead [3 hours at $8 per hour] 24

Total standard cost per unit $150

The budgeted variable factory overhead rate is $3 per labor hour and the budgeted fixed factory overhead is $27,000 per month. During May, Ardmore produced 1,650 units of Zeb compared to a normal capacity of 1,800 units. The actual cost per unit was as follows:

Materials (purchased and used)[58 pounds at $1.65 per pound] $ 95.70

Labor [3.1 hours at $12 per hour] 37.20Factory overhead [$39,930 per 1,650 units] 24.20

Total actual cost per unit $157.10

The total material quantity variance for May is:

a. $14,850 favorable.b. $14,850 unfavorable.c. $4,950 favorable.d. $4,950 unfavorable.

Explanation

Choice "c" is correct. Quantity variance is the difference between the amount of direct materials that should have been used and the amount of materials actually used times the standard price per unit.

Amount required for actual output (60 PDS × 1650) 99,000 PDSAmount actually used (58 PD. × 1650) (95,700) PDS

Difference 3,300 PDSTimes the standard price × 1.50 per PD

Material quantity variance $4,950

Because less material was used than standard, the variance is favorable.

Use the mnemonics you learned!

The difference is always "SAD"-and it would be sad if you forgot that!

99,000 - 95,700 = 3,300 difference

U = D x S

U = 3,300 x $1.50

U = $4,950 FAVORABLE




Question CPA-04182








The material price variance for May is:

a. $14,355 unfavorable.b. $14,850 unfavorable.c. $14,355 favorable.d. $14,850 favorable.

Explanation

Choice "a" is correct. Price variance is the difference between the standard price and the actual price times the actual quantity used.

Standard price $ 1.50Actual price 1.65

Difference .15Times the actual quantity (58 PDS × 1,650) 95,700 PDS

Material price variance $ 14,355

Because the price paid for the material was higher than standard, the variance is unfavorable.



$1.50 - $1.65 = ($0.15) difference

P = D x A

P = ($0.15) x 95,700

P = ($14,355) UNFAVORABLE

Choices "b", "c", and "d" are incorrect, per above.



Question CPA-04184





Materials (purchased and used) [58 pounds at $1.65 per pound] $ 95.70



The labor rate variance for May is:

a. $1,650 unfavorable.b. $0c. $3,300 unfavorable.d. $3,300 favorable.

Explanation

Choice "b" is correct. The labor rate variance is the difference between the standard rate and the actual rate times the actual hours of labor.

Standard rate $12Actual rate 12

Difference 0Times the actual hours worked

(3.1 × 1,650) 51,150 hourLabor rate variance 0

Since there is no difference between the rates, the variance is neither favorable nor unfavorable.



$12.00 - $12.00 = $0 difference

R = D x A

R = $0 x 51,150

R = $0

Choices "a", "c", and "d" are incorrect, per the above calcuations.



Question CPA-04185








The flexible budget overhead variance for May is:

a. $2,250 unfavorable.b. $2,250 favorable.c. $1,920 unfavorable.d. $1,920 favorable.

Explanation

Choice "d" is correct. The flexible budget variance is the difference between the actual cost and the amount that would be arrived at using the flexible budget formula.

Flexible budget formulaFixed overhead (given) $27,000

Variable overhead ($3 per hour ×3 hrs × 1,650) 14,850

Flexible budget for overhead $ 41,850

Actual amount spent for overhead (39,930)Flexible budget variance for overhead $ 1,920

Because the actual amount spent is lower than the standard amount, the variance is favorable.




Question CPA-04186

The controller for Durham Skates is reviewing the production cost report for July. An analysis of direct material costs reflects an unfavorable flexible budget variance of $25. The plant manager believes this is excellent performance on a flexible budget for 5,000 units of direct material. However, the production supervisor is not pleased with this result as he claims to have saved $1,200 in material cost on actual production using 4,900 units of direct material. The standard material cost is $12 per unit. Actual material used for the month amounted to $60,025.If the direct material variance was investigated further, it would reflect a price variance of:

a. $850 unfavorable.b. $1,200 favorable.c. $1,225 unfavorable.d. $2,500 favorable.

Explanation

Choice "c" is correct. The price variance is the difference between the standard price and the actual price times the actual volume.

Standard price (given) $ 12.00Actual price (determined above) 12.25

Difference $ .25Times actual volume 4,900.00Equals price variance $1,225.00



$12.00 - $12.25 = ($0.25) difference

P = D x A

P = ($0.25) x 4,900

P = ($1,225) UNFAVORABLE

Choices "a", "b", and "d" are incorrect, per the above calculations.



Question CPA-04189

ChemKing uses a standard costing system in the manufacture of its single product. The 35,000 units of raw material in inventory were purchased for $105,000, and two units of raw material are required to produce one unit of final product. In November, the company produced 12,000 units of product. The standard allowed for material was $60,000, and there was an unfavorable quantity variance of $2,500.ChemKing's standard price for one unit of material is:

a. $2.00b. $2.50c. $3.00d. $5.00

Explanation

Choice "b" is correct. $2.50 standard price for one unit of material.

The standard allowed for the material was $60,000, and 12,000 units were produced in November. Therefore, the materials cost on the "standard" was $5.00 per unit [$60,000/12,000 units]. However, we are told that it takes two units of raw material to make one unit of completed goods. So, the standard price for one unit of material is $2.50 [$5.00/2].

$60,000 / 12,000 units of finished goods = $5$5 / 2 units of direct material = $2.50 per unit




Question CPA-04190

ChemKing uses a standard costing system in the manufacture of its single product. The 35,000 units of raw material in inventory were purchased for $105,000, and two units of raw material are required to produce one unit of final product. In November, the company produced 12,000 units of product. The standard allowed for material was $60,000, and there was an unfavorable quantity variance of $2,500.The units of material used to produce November output totaled:

a. 12,000 units.b. 12,500 units.c. 24,000 units.d. 25,000 units.

Explanation

Choice "d" is correct. 25,000 units used to produce November output.

Mnemonic:

P Price variance (for DM)U Usage (quantity) variance (for DM) R Rate variance (for DL)E Efficiency variance (for DL)

Memorize how these variances are calculated:

Your dad always gave you advice about life, and memorizing variance formulas is easy if you remember him! Apply "DADS" twice to set up a schedule you cannot forget!

DA Difference x ActualDS Difference x StandardDA Difference x ActualDS Difference x Standard

Easy Schedule

P D x AU D x S R D x AE D x S

The facts for the question tell us that the quantity (usage) variance is an unfavorable $2,500. How is the materials usage variance calculated? Take a look at PURE with DADS twice, and don't forget the difference is SAD!!!

U = D x S

Usage variance = difference in usage x standard price

Standard price per unit:

The standard price per unit ($2.50) is actually calculated in a separate question (D93-1.22), but the explanation is included here as well. The standard allowed for the material was $60,000, and 12,000 units were produced in November. Therefore, the materials cost on "standard" was $5.00 per unit [$60,000/12,000 units]. However, we are told that it takes two units of raw material to make one unit of completed goods. So, the standard price for one unit of material is $2.50 [$5.00/2].

We also know that the usage variance is unfavorable $2,500. So, we solve for the "difference in usage" as follows:

U = D x S($2,500) = D x $2.50

($2,500) / $2.50 = D



(1,000) = D

So, the unfavorable units used amounted to 1,000. The facts of the question tell us that 12,000 units were produced in November. At two units of raw materials per unit produced, that's a standard of 24,000 units of raw materials. Actual units used (S - A = D) are then 25,000 units to produce the unfavorable usage variance of $2,500 (alternatively, 24,000 standard units plus 1,000 unfavorable units used = 25,000 units used).

Standard units − 12,000 × 2 per unit = 24,000Unfavorable quantity variance of %

$2,500 ÷ $2.50 per unit standard = 1,000Actual units used to produce non output 25,000



Question CPA-04191

Tower Company planned to produce 3,000 units of its single product, Titactium, during November. The standard specifications for one unit of Titactium includes six pounds of materials at $.30 per pound. Actual production in November was 3,100 units of Titactium. The accountant computed a favorable materials purchase price variance of $380 and an unfavorable materials quantity variance of $120. Based on these variances, one could conclude that:

a. More materials were purchased than were used.b. More materials were used than were purchased.c. The actual cost of materials was less than the standard cost.d. The actual usage of materials was less than the standard allowed.

Explanation

Choice "c" is correct. The favorable materials purchase price variance means that the actual cost of materials was less than the standard cost:

Standard = 3100 units × 6# = 18600# × $.30 = $5,580

Unfavorable quantity variance = $120 ÷ $.30 std. Cost = 400 units

Favorable purchase price variance:Standard units 18,600Add unfavorable quantity units 400Actual units purchased 19,000

$380 ÷ 19,000 = $.02 per unit.

Choices "a" and "b" are incorrect. Materials purchased and used were the same.

Choice "d" is incorrect. The unfavorable quantity variance means more were used than standard allowed.



Question CPA-04192

A standard costing system is most often used by a firm in conjunction with:

a. Management by objectives.b. Participative management programs.c. Flexible budgets.d. Job order cost systems.

Explanation

Choice "c" is correct. A standard costing system is most often used by a firm in conjunction with flexible budgets.

Choice "a" is incorrect. Management by objectives simply requires that objectives be defined before resources are used to achieve them.

Choice "b" is incorrect. Participative management programs bring "managers" and "workers" together to participate in management decisions.

Choice "d" is incorrect. Job order cost systems may use standard costs.



Question CPA-04195

The controller for Durham Skates is reviewing the production cost report for July. An analysis of direct material costs reflects an unfavorable flexible budget variance of $25. The plant manager believes this is excellent performance on a flexible budget for 5,000 units of direct material. However, the production supervisor is not pleased with this result as he claims to have saved $1,200 in material cost on actual production using 4,900 units of direct material. The standard material cost is $12 per unit. Actual material used for the month amounted to $60,025.The actual average cost per unit for materials was:

a. $12.00b. $12.01c. $12.24d. $12.25

Explanation

Choice "d" is correct. If material cost for the month is $60,025 for 4,900 units, the average cost is $60,025 ÷ 4,900 = $12.25.




Question CPA-04197

The upper limit of a company's productive output capacity given its existing resources is called:

a. Excess capacity.b. Relevant range capacity.c. Practical capacity.d. Theoretical capacity.

Explanation

Choice "d" is correct. Theoretical capacity is the level of production capacity that occurs at maximum efficiency all of the time. Accordingly, it is the upper limit of a company's productive output capacity given its existing resources.

Choice "a" is incorrect. Excess capacity is the difference between the capacity available and the capacity required to meet product demand.

Choice "b" is incorrect. The relevant range is the area over which a specific cost function is valid. While relevant range is not tied specifically to capacity, it does normally represent the range over which the company is likely to actually operate.

Choice "c" is incorrect. Practical capacity is the theoretical capacity minus the capacity lost for unavoidable delays such as maintenance, worker inefficiencies, etc.



Question CPA-04198

Fabro, Inc. produced 1,500 units of Product RX-6 last week. The inputs to the production process for Product RX-6 were as follows.

450 pounds of Material A at a cost of $1.50 per pound.300 pounds of Material Z at a cost of $2.75 per pound.300 labor hours at a cost of $15.00 per hour.

What is the total factor productivity for Product RX-6?

a. 1.00 unit per dollar input.b. 5.00 units per hour.c. 0.25 units per dollar input.d. 0.33 units per dollar input.

Explanation

Choice "c" is correct. Total factor productivity is 0.25 units per dollar input.

450 pounds of Material A @ $1.50/lb $ 675300 pounds of Material Z @ $2.75/lb 825300 hours @ $15.00/hr 4,500Total dollars input $6,000

1,500Units produced .25Total dollars input $6,000=




Question CPA-04200

Fabro, Inc. produced 1,500 units of Product RX-6 last week. The inputs to the production process for Product RX-6 were as follows.

450 pounds of Material A at a cost of $1.50 per pound.300 pounds of Material Z at a cost of $2.75 per pound.300 labor hours at a cost of $15.00 per hour.

What is the best productivity measure for the first-line supervisor in Fabro, Inc.'s production plant?

a. 5.00 units per labor hour.b. 0.33 units per dollar input.c. 2.00 units per pound.d. $15.00 per labor hour.

Explanation

Choice "a" is correct. The best productivity measure for the production supervisor is 5.00 units per labor hour. This measures the efficiency and productivity of plant labor, which is within the supervisor's control.

Choice "b" is incorrect. Most of the cost factors are outside the control of the production supervisor.

Choice "c" is incorrect. The supervisor can affect the efficiency of material usage but not the units per pound.

Choice "d" is incorrect. The supervisor has no control over the hourly cost of labor.



Question CPA-04202

In a standard cost system, the investigation of an unfavorable material use variance should begin with the:

a. Production manager only.b. Purchasing manager only.c. Production manager and/or the purchasing manager.d. Engineering manager and/or the purchasing manager.

Explanation

Choice "c" is correct. In a standard cost system, the investigation of an unfavorable material use variance should begin with the production manager and/or the purchasing manager.

Choice "a" is incorrect. Purchasing manager may also be involved because quality of material purchased may be the cause of the material usage variance.

Choice "b" is incorrect. Production manager may also be involved because material usage may be the result of poor production work - too much scrap.

Choice "d" is incorrect. Engineering manager may be consulted by purchasing or production, but does not initiate the investigation.



Question CPA-04204

David Rogers, purchasing manager at Fairway Manufacturing Corporation, was able to acquire a large quantity of raw material from a new supplier at a discounted price. Marion Conner, inventory supervisor, is concerned because the warehouse has become crowded and some things had to be rearranged. Brian Jones, vice president of production, is concerned about the quality of the discounted material. However, the Engineering Department had tested the new raw material and indicated that it is of acceptable quality. At the end of the month, Fairway experienced a favorable material usage variance, a favorable labor usage variance, and a favorable material price variance. The usage variances were solely the result of a higher yield from the new raw material. The favorable material price variance would be considered the responsibility of the:

a. Purchasing manager.b. Inventory supervisor.c. Vice president of production.d. Engineering manager.

Explanation

Choice "a" is correct. The purchasing manager would be responsible for a price variance.

Choices "b", "c", and "d" are incorrect. None of these parties are responsible for making purchases, so they are not responsible for material price variances.



Question CPA-04205

The inventory control supervisor at Wilson Manufacturing Corporation reported that a large quantity of a part purchased for a special order that was never completed remains in stock. The order was not completed because the customer defaulted on the order. The part is not used in any of Wilson's regular products. After consulting with Wilson's engineers, the vice president of production approved the substitution of the purchased part for a regular part in a new product. Wilson's engineers indicated that the purchased part could be substituted providing it was modified. The units manufactured using the substituted part required additional direct labor hours resulting in an unfavorable direct labor efficiency variance in the Production Department. The unfavorable direct labor efficiency variance resulting from the substitution of the purchased part in inventory would best be assigned to the:

a. Sales manager.b. Engineering manager.c. Production manager.d. Vice president of production.

Explanation

Choice "d" is correct. The direct labor efficiency variance was expected once the vice president of production made the decision to substitute the non-standard part.

Choices "a", "b", and "c" are incorrect. All of these parties had input to the decision, but the responsibility belongs to the vice president of production.



Question CPA-04207

Which is not an example of responsibility accounting?

a. Cost center.b. Profit center.c. Product center.d. Investment center.

Explanation

Choice "c" is correct. Product center does not refer to any responsibility or decision center.

Choice "a" is incorrect. Cost centers are responsible for costs only.

Choice "b" is incorrect. Profit centers are responsible for revenues and expenses.

Choice "d" is incorrect. Investment centers are responsible for revenues, expenses and invested capital.



Question CPA-04209

Fairmount, Inc. uses an accounting system that charges costs to the manager who has been delegated the authority to make the decisions incurring the costs. For example, if the sales manager accepts a rush order that will result in higher than normal manufacturing costs, these additional costs are charged to the sales manager because the authority to accept or decline the rush order was given to the sales manager. This type of accounting system is known as:

a. Responsibility accounting.b. Functional accounting.c. Transfer price accounting.d. Contribution accounting.

Explanation

Choice "a" is correct. Responsibility accounting is a system of accounting that recognizes various responsibility or decision centers throughout an organization and reflects the plans and actions of each of these centers by assigning particular revenues and costs to the one having the responsibility for making decisions about these revenues and costs.

Choice "b" is incorrect. This term is not defined.

Choice "c" is incorrect. Transfer pricing deals with prices charged by one business segment to another within a company.

Choice "d" is incorrect. Contribution accounting measures performance based on the contribution of a business segment.



Question CPA-04210

Many firms have made significant strides in reducing their inventories. Which of the following would be least likely to encourage managers to reduce inventory?

a. Using variable costing.b. Using absorption costing.c. Using throughput costing.d. Instituting a charge against the budget for managers based on the size of the inventory.

Explanation

Choice "b" is correct. Absorption costing (as the name implies) absorbs fixed overhead cost into the units produced. Those units placed in inventory can absorb some of the manager's cost and raise profits. This method encourages larger inventories.

Choice "a" is incorrect. Variable costing places only variable costs into products and all fixed overhead is charged to cost of goods sold. This does not give an incentive to overproduce.

Choice "c" is incorrect. Throughput costing is an inventory costing method that places only variable direct material in inventoriable cost. All other costs are treated as costs of the period. This also does not give an incentive to overproduce.

Choice "d" is incorrect. Clearly, putting a charge against the budget for inventory will discourage excess inventory.



Question CPA-04212

The purpose of identifying manufacturing variances and assigning their responsibility to a person/department should be to:

a. Use the knowledge about the variances to promote learning and continuous improvement in the manufacturing operations.

b. Trace the variances to finished goods so that the inventory can be properly valued at year-end.c. Determine the proper cost of the products produced so that selling prices can be adjusted accordingly.d. Pinpoint fault for operating problems in the organization.

Explanation

Choice "a" is correct. The purpose of identifying and assigning responsibility for a variance to a person/department should be to use the knowledge to promote learning and continuous improvement.

Choice "b" is incorrect. Proper valuation of inventory can occur without assigning responsibility to a person or department.

Choice "c" is incorrect. Selling prices depend on the market, not cost variances.

Choice "d" is incorrect. Pinpointing fault is not productive.



Question CPA-04214

The advantages of using cash flow as a basis for the evaluation of the performance of a business segment include the following:I. Assesses the organization's liquidity position and the ability to pay liabilities, indicating cash payment capacity

constraints.II. Provides a means for evaluating the effects of, and needs for, additional sources of financing.III. Involves the complex understanding necessary to evaluate the organization based on the accrual method of

accounting.

a. I and II.b. I and III.c. II and III.d. I, II, and III.

Explanation

Choice "a" is correct. Both I and II are advantages, but III is not.

Choices "b", "c", and "d" are incorrect. An advantage of using cash flow as a basis for the evaluation of the performance of a business segment does not involve the complex understanding necessary to evaluate the organization based on the accrual method of accounting.



Question CPA-04216

The disadvantages of using cash flow as a basis for the evaluation of the performance of a business segment include the following:I. The focus is on the long-term and not on the short-term, and can be misleading when evaluating an

organization's profitability. Short-term cash allotments are distorted by long-term cash outlays (capital purchases).

II. Cash flows related to normal operations could be confused with the cash flows from other activities (e.g., financing), leading to the misinterpretation of results.

III. Other information besides cash flow needs to be considered when comparing one organization's financial position to other organizations.

a. I and II.b. II and III.c. I and III.d. I, II, and III.

Explanation

Choice "b" is correct. Only II and III are correct.

Choices "a", "c", and "d" are incorrect. A disadvantage of using cash flow as a basis for the evaluation of the performance of a business segment is that the focus is on the short-term (cash flow) - not long-term - and not on the longevity of the organization, and can be misleading when evaluating an organization's profitability. Short-term cash allotments are distorted by long-term cash outlays (capital purchases).



Question CPA-04218

Quality programs normally include a number of techniques to find and analyze problems. The technique commonly used to rank and analyze the individual and cumulative causes of defects is called a:

a. Control Chart.b. Pareto Diagram.c. Fishbone Diagram.d. Value Chain Analysis.

Explanation

Choice "b" is correct. A Pareto diagram represents an individual and cumulative graphical analysis of errors by type. Individual error types are represented on a histogram (bar graph) while the cumulative number of errors is presented on a line graph. The Pareto diagram is used to prioritize process improvement efforts.

Choice "a" is incorrect. A control chart shows the performance of a particular process in relation to acceptable upper and lower limits of deviation. Performance within the limits is termed statistical control. Processes are designed to ensure that performance consistently falls within the acceptable range of error.

Choice "c" is incorrect. A fishbone diagram describes a process, the contributions to the process and the potential problems that could occur at each phase of a process. The chronological sequence of events is represented by a single horizontal line while the contributions to the process are represented by diagonal lines that create the image of a fishbone.

Choice "d" is incorrect. A value chain analysis is a macro level flowchart that shows the relationship between broad functional areas, the product delivered by the organization and manner in which value is added at each link in the chain.



Question CPA-04221

Quality programs that demand compliance with the most rigorous standards apply the concept of:

a. Goalpost conformance.b. Absolute conformance.c. Conforming costs.d. Nonconforming costs.

Explanation

Choice "b" is correct. Absolute conformance is the most rigorous standard of quality because it represents a perfect, or ideal, level of compliance.

Choice "a" is incorrect. Goalpost conformance assumes a range of acceptable results. Because it represents achievement of compliance within an established range of tolerable error, goalpost conformance is considered less rigorous than absolute conformance.

Choice "c" is incorrect. Conforming costs are those preventative and appraisal costs invested to detect and prevent errors and do not represent quality standards.

Choice "d" is incorrect. Nonconforming costs are those internal and external failures associated with correcting quality errors associated with non-compliance and do not represent quality standards.



Question CPA-04224

The basic difference between a master budget and a flexible budget is that a master budget is:

a. Based on one specific level of production and a flexible budget can be prepared for any production level within a relevant range.

b. Only used before and during the budget period and a flexible budget is only used after the budget period.c. Based on a fixed standard, whereas a flexible budget allows management latitude in meeting goals.d. For an entire production facility whereas a flexible budget is applicable to single departments only.

Explanation

Choice "a" is correct. The master budget is based on one production level and a flexible budget is designed to reflect any production level within a relevant range of production activities.

Choice "b" is incorrect. The flexible budget is used before and during the budget period.

Choice "c" is incorrect. The flexible budget is based on fixed standards which are appropriately developed for the relevant range of production activity.

Choice "d" is incorrect. The flexible budget is developed for single departments and for the production facility as a whole.



Question CPA-04237

The most direct way to prepare a cash budget for a manufacturing firm is to include:

a. Projected sales, credit terms, and net income.b. Projected net income, depreciation, and goodwill amortization.c. Projected purchases, percentages of purchases paid, and net income.d. Projected sales and purchases, percentages of collections, and terms of payments.

Explanation

Choice "d" is correct. The simplest (most direct) cash budget would include the components of cash collections (sales and percentage of collection) and cash disbursements (purchases and terms of payment).

Choices "a", "b", and "c" are incorrect, per answer above.



Question CPA-04238

Management accountants are frequently asked to analyze various decision situations including the following.I. The cost of a special device that is necessary if a special order is accepted.II. The cost proposed annually for the plant service for the grounds at corporate headquarters.III. Joint production costs incurred, to be considered in a sell-at-split versus a process-further decision.IV. The costs associated with alternative uses of plant space, to be considered in a make/buy decision.V. The cost of obsolete inventory acquired several years ago, to be considered in a keep-versus-disposal

decision.

The costs described in situations III and V above are:

a. Prime costs.b. Sunk costs.c. Discretionary costs.d. Relevant costs.

Explanation

Choice "b" is correct. Sunk costs are costs previously incurred, unavoidable, and not relevant to decision-making. Joint production costs, before split-off, are considered sunk. The cost of obsolete inventory is also a sunk cost.

Choice "a" is incorrect. Prime costs include direct material and direct labor.

Choice "c" is incorrect. Discretionary costs are avoidable. Neither III nor V describe costs that are avoidable.

Choice "d" is incorrect. Relevant costs are the opposite of sunk costs.



Question CPA-04241

In a decision analysis situation, which one of the following costs is not likely to contain a variable cost component?

a. Labor.b. Overhead.c. Depreciation.d. Selling.

Explanation

Choice "c" is correct. Depreciation is not likely to contain a variable cost component in a decision analysis situation.

All of the following costs could contain a variable cost component in a decision analysis situation:

a. Labor.b. Overhead.d. Selling.



Question CPA-04243

The term that best refers to past costs that have been incurred and are not relevant to any future decisions is:

a. Discretionary costs.b. Full absorption costs.c. Incurred marginal costs.d. Sunk costs.

Explanation

Choice "d" is correct. Sunk costs refer to past costs that have been incurred and are not relevant to any future decisions.

Choice "a" is incorrect. Discretionary costs are costs arising from periodic budgeting decisions by management to spend in certain areas not directly related to manufacturing.

Choice "b" is incorrect. Full absorption costs are fixed and variable costs related to production and inventory.

Choice "c" is incorrect. Incurred marginal costs are the sum of variable and avoidable fixed costs necessary to have a one-unit increase in activity.



Question CPA-04245

American Coat Company estimates that 60,000 special zippers will be used in the manufacture of men's jackets during the next year. Reese Zipper Company has quoted a price of $.60 per zipper. American would prefer to purchase 5,000 units per month, but Reese is unable to guarantee this delivery schedule. In order to ensure availability of these zippers, American is considering the purchase of all 60,000 units at the beginning of the year. Assuming American can invest cash at eight percent, the company's opportunity cost of purchasing the 60,000 units at the beginning of the year is?

a. $1,320b. $1,440c. $1,500d. $2,640

Explanation

Choice "a" is correct.

Cost to purchase 60,000 zippers:

60,000 × .60 = $36,000

The opportunity cost is the forgone interest on the $33,000 cash payment (the first $3,000 would have had to be paid in either case).

The $33,000 cash payment made evenly throughout the period is the same as making the total payment in the middle of the period. The solution is:

Principal Rate Time Interest33,000 × .08 × 1/2 = $1,320

Another way to express the formula is as follows:

[($3,000 x 1/12) + ($3,000 x2/12) + ($3,000 x 3/12 ... + ($3,000 x 11/12) x .08 =

$3,000 x [1/12 + 2/12 + 3/12 ... + 11/12] x .08 =

$3,000 x (66/12) x .08 =

$3,000 x 66/6 x 1/2 x .08 =

$33,000 x .08 x 1/2 = $1,320

The computation represents the weighted average of the payments throughout the time period.



Question CPA-04249

The opportunity cost of making a component part in a factory with no excess capacity is the:

a. Fixed manufacturing cost of the component.b. Cost of the production given up in order to manufacture the component.c. Net benefit given up from the best alternative use of the capacity.d. Total manufacturing cost of the component.

Explanation

Definition: Opportunity cost is the maximum benefit foregone by using a scarce resource for a given purpose. It is the benefit provided by the next best use of that resource.

Choice "c" is correct. Opportunity cost is the net benefit given up from the best alternative use of the capacity.

Choices "a", "b", and "d" are incorrect, per above definition.



Question CPA-04251

The opportunity cost of making a component part where there is no alternative use for the factory is:

a. The total manufacturing cost of the component.b. The total variable cost of the component.c. The fixed manufacturing cost of the component.d. Zero.

Explanation

Choice "d" is correct. Zero. If there is excess capacity, then it is not possible to have an opportunity cost because nothing is being foregone.




Question CPA-04252

An important concept in decision-making is described as "the contribution to income that is foregone by not using a limited resource to its best alternative use." This concept is called:

a. Marginal cost.b. Incremental cost.c. Opportunity cost.d. Irrelevant cost.

Explanation

Choice "c" is correct. Opportunity cost is the contribution to income that is foregone by not using a limited resource for its best alternative use.

Choice "a" is incorrect. Marginal costs are the sum of the variable and avoidable fixed costs necessary to have a one-unit increase in activity.

Choice "b" is incorrect. Incremental costs (differential costs) are future costs that will vary with the course of action taken. They refer to additional costs to make more products.

Choice "d" is incorrect. An irrelevant cost (sunk cost) is a past cost that will not influence future decisions.



Question CPA-04253

Almo developed its business plan based on the assumption that canopies would sell at a price of $400 each. The variable costs for each canopy were projected at $200, and the annual fixed-costs were budgeted at $100,000. Almo's after-tax profit objective was $240,000; the company's effective tax rate is 40 percent. If no changes are made to the selling price or cost structure, determine the number of units that Almo Company must sell in order to break-even.

a. 167 units.b. 250 units.c. 500 units.d. 750 units.

Explanation

Choice "c" is correct. 500 units must be sold to breakeven.

Total fixed cost $100,000 ÷ contribution margin per unit of $200 = 500 units to breakeven.




Question CPA-04254

Almo developed its business plan based on the assumption that canopies would sell at a price of $400 each. The variable costs for each canopy were projected at $200, and the annual fixed-costs were budgeted at $100,000. Almo's after-tax profit objective was $240,000; the company's effective tax rate is 40 percent. If no changes are made to the selling price or cost structure, determine the number of units that Almo Company must sell to achieve its after-tax profit objective.


Explanation

Choice "b" is correct. 2,500 units must be sold to achieve a profit of $240,000.

Target after-tax profit of $240,000 ÷ (1 − tax rate) =$240,000

.6 = $400,000

Total fixed cost + target after-tax profit ÷ contribution margin per unit =

+$100,000 400,000$200 = 2,500 units to achieve after-tax profit objective




Question CPA-04255

Assumptions underlying cost-volume-profit analysis include all of the following, except:

a. All costs can be divided into fixed and variable elements.b. Total costs are directly proportional to volume over the relevant range.c. Selling prices are to be unchanged.d. Volume is the only relevant factor affecting cost.

Explanation

Choice "b" is correct. Only total variable costs are directly proportional to volume over the relevant range.

Choices "a", "c", and "d" are incorrect, because all are underlying assumptions of cost-volume-profit.



Question CPA-04256

Delphi Company has developed a new product that will be marketed for the first time during the next fiscal year. Although the Marketing Department estimates that 35,000 units could be sold at $36 per unit, Delphi's management has allocated only enough manufacturing capacity to produce a maximum of 25,000 units of the new product annually. The fixed-costs associated with the new product are budgeted at $450,000 for the year, which includes $60,000 for depreciation on new manufacturing equipment. Data associated with each unit of product are presented below. Delphi is subject to a 40 percent income tax rate.

Variable CostsDirect material $ 7.00Direct labor 3.50Manufacturing overhead 4.00 Total variable manufacturing cost 14.50Selling expenses 1.50 Total variable cost $ 16.00

The number of units of the new product that Delphi Company must sell during the next fiscal year in order to break even is:

a. 20,930b. 18,140c. 22,500d. 19,500

Explanation

Choice "c" is correct. 22,500 units.

Selling price $ 36.00Total variable cost 16.00

$ 20.00

Fixed costs ÷ contribution margin = breakeven units$450,000 ÷ $20.00 = 22,500 units




Question CPA-04257



The maximum after-tax profit that can be earned by Delphi Company from sales of the new product during the next fiscal year is:

a. $30,000b. $50,000c. $110,000d. $66,000

Explanation


Contribution margin per unit ($36 − $16) $ 20.00Maximum capacity allocated × 25,000Pretax contribution margin 500,000Less fixed costs (450,000)Pretax profit 50,000Less tax ($50,000 × 40%) (20,000)After-tax profit $ 30,000

Choices “b”, “c”, and “d” are incorrect, per the above calculation.



Question CPA-04258



Delphi Company's management has stipulated that it will not approve the continued manufacture of the new product after the next fiscal year unless the after-tax profit is at least $75,000 the first year. The unit selling price to achieve this target profit must be at least:

a. $36.60b. $34.60c. $41.40d. $39.00

Explanation

Choice "d" is correct. $39.00.

After-tax profit $ 75,000Reciprocal of tax rate (100% − 40%) ÷ 60%Pre-tax profit 125,000Fixed cost 450,000

575,000Maximum volume ÷ 25,000Required contribution margin per unit 23Variable cost per unit 16Required selling price $ 39




Question CPA-04259

Marston Enterprises sells three chemicals: petrol, septine, and tridol. Petrol is the company's most profitable product; tridol is the least profitable. Which one of the following events will definitely decrease the firm's overall breakeven point for the upcoming accounting period?

a. The installation of new computer-controlled machinery and subsequent layoff of assembly-line workers.b. An increase in the overall market for septine.c. An increase in anticipated sales of petrol relative to sales of septine and tridol.d. An increase in petrol's raw material cost.

Explanation

Choice "c" is correct. An increase in anticipated sales of petrol relative to sales of septine and tridol will decrease the breakeven point. This is because the product mix has changed in favor of the more profitable (higher contribution margin) products. The composite contribution margin is higher, and the breakeven point is lower.

Choice "a" is incorrect. The effect on breakeven cannot be determined.

Choice "b" is incorrect. An increase in market will not affect breakeven unless the price of the product changes.

Choice "d" is incorrect. An increase in material cost will decrease contribution margin and increase breakeven.



Question CPA-04260

The breakeven point in units increases when unit costs:

a. Increase and sales price remain unchanged.b. Remain unchanged and sales price increases.c. Decrease and sales price increases.d. Increase and sales price increases.

Explanation

Choice "a" is correct. The breakeven point in units will increase when units costs increase and sales price remain unchanged. Higher unit costs, without a change in sales price, will decrease contribution margin and increase the number of units required to break even.

Choice "b" is incorrect. If units costs are unchanged and sales price increases, contribution margin will increase and breakeven will decrease.

Choice "c" is incorrect. If unit costs decrease and sales price increase, contribution margin will increase and breakeven will go down.

Choice "d" is incorrect. If unit costs increase and sales price increases, the effect on contribution margin and breakeven point are uncertain.



Question CPA-04261

Bruell Electronics Co. is developing a new product, surge protectors for high-voltage electrical flows. The following cost information relates to the product.

Unit CostsDirect materials $3.25Direct labor 4.00Distribution .75

The company will also be absorbing $120,000 of additional fixed-costs associated with this new product. A corporate fixed charge of $20,000 currently absorbed by other products will be allocated to this new product.If the selling price is $14 per unit, the breakeven point in units (rounded to the nearest hundred) for surge protectors is:


Explanation

Choice "c" is correct. $20,000 units.

Price $ 14.00Direct materials (3.25)Direct labor (4.00)Distribution (.75)Contribution margin $ 6.00Additional "fixed" costs $120,000Contribution margin ÷ 6Units to breakeven 20,000

Note: The $20,000 of allocated fixed costs are irrelevant.




Question CPA-04262



The company will also be absorbing $120,000 of additional fixed-costs associated with this new product. A corporate fixed charge of $20,000 currently absorbed by other products will be allocated to this new product.How many surge protectors (rounded to the nearest hundred) must Bruell Electronics sell at a selling price of $14 per unit to gain $30,000 additional income before taxes?


Explanation

Choice "c" is correct. $25,000 units.

Price $ 14.00Direct materials (3.25)Direct labor (4.00)Distribution (.75)Contribution margin $ 6.00

Additional "fixed" costs $120,000Additional income before taxes 30,000

150,000Contribution margin ÷ 6Units to achieve + $30,000 25,000




Question CPA-04263



The company will also be absorbing $120,000 of additional fixed-costs associated with this new product. A corporate fixed charge of $20,000 currently absorbed by other products will be allocated to this new product.How many surge protectors (rounded to the nearest hundred) must Bruell Electronics sell at a selling price of $14 per unit to increase after-tax income by $30,000? Bruell Electronics' effective income tax rate is 40 percent.


Explanation

Choice "d" is correct. $28,300 units.

Price $ 14.00Direct materials (3.25)Direct labor (4.00)Distribution (.75)Contribution margin $ 6.00

Additional "fixed" costs $120,000Pretax profit − $30,000 ÷ 60% 50,000

170,000Contribution margin ÷ 6Units to achieve $30,000 additional after tax income 28,300




Question CPA-04264

When a multi-product plant operates at full capacity, quite often decisions must be made as to which products to emphasize. These decisions are frequently made with a short-run focus. In making such decisions, managers should select products with the:

a. Highest sales price per unit.b. Highest individual unit contribution margin.c. Highest contribution margin per unit of the constraining resource.d. Lowest variable cost per unit.

Explanation

Choice "c" is correct. In making decisions about which products to emphasize, managers should select products with the highest contribution margin per unit of the constraining resource.

Choice "a" is incorrect. Highest sales price per unit may be overshadowed by high cost of goods sold.

Choice "b" is incorrect. Highest individual unit contribution margin ignores the presence of constraining resources.

Choice "d" is incorrect. If selling price is quite low, even with the lowest variable cost per unit, contribution margin is quite low.



Question CPA-04265

Huron Industries has recently developed two new products, a cleaning unit for laser discs and a tape duplicator for reproducing home movies taken with a video camera. However, Huron has only enough plant capacity to introduce one of these products during the current year. The company controller has gathered the following data to assist management in deciding which product should be selected for production.Huron's fixed overhead includes rent and utilities, equipment depreciation, and supervisory salaries. Selling and administrative expenses are not allocated to products.

Tape Duplicator Cleaning UnitRaw materials $ 44.00 $ 36.00Machining @ $12/hr. 18.00 15.00Assembly @ $10/hr. 30.00 10.00Variable overhead @ $8/hr. 36.00 18.00Fixed overhead @ $4/hr. 18.00 9.00Total cost $ 146.00 $ 88.00Suggested selling price $ 169.95 $ 99.98Actual research and development costs $240,000 $175,000Proposed advertising and promotion costs $500,000 $350,000

The difference between the $99.98 suggested selling price for Huron's laser disc cleaning unit and its total unit cost of $88.00 represents the unit's:

a. Gross profit.b. Contribution.c. Gross profit margin ratio.d. Residual income.

Explanation

Choice "a" is correct. Gross profit is the difference between selling price and cost of goods sold, including overhead.

Choice "b" is incorrect. Contribution is sales price less variable costs.

Choice "c" is incorrect. Gross profit margin ratio is the complement of the cost of sales (absorption costing) ratio.

Choice "d" is incorrect. Residual income is income in excess of a fixed return on invested capital.



Question CPA-04266

Several surveys point out that most managers use full product costs, including unit fixed-costs and unit variable costs, in developing cost-based pricing. Which one of the following is least associated with cost-based pricing?

a. Price stability.b. Price justification.c. Target pricing.d. Fixed-cost recovery.

Explanation

Choice "c" is correct. Target pricing is least associated with (full) cost-based pricing.

Cost-based pricing is associated with:

a. Price stability.b. Price justification.d. Fixed-cost recovery.



Question CPA-04267

Kator Co. is a manufacturer of industrial components. One of their products that is used as a sub-component in auto manufacturing is KB-96. This product has the following financial structure per unit.

Selling Price $150

Direct materials $ 20Direct labor 15Variable manufacturing overhead 12Fixed manufacturing overhead 30Shipping and handling 3Fixed selling and administrative 10 Total costs $ 90

Kator Co. has received a special, one-time, order for 1,000 KB-96 parts. Assuming Kator has excess capacity, the minimum price that is acceptable for this one-time, special order is in excess of:

a. $47b. $50c. $60d. $90

Explanation

Choice "b" is correct. $50 (variable cost) is the minimum price that is acceptable for this one-time, special order, assuming excess capacity is available.

Variablecost

Selling price $150.00

Direct materials $ 20 20Direct labor 15 15Variable manufacturing overhead 12 12Fixed manufacturing overhead 30 −Shipping and handling 3 3Fixed selling and administrative 10 −Total costs $ 90 50




Question CPA-04268

Kator Co. has received a special, one-time, order for 1,000 KB-96 parts. Assume that Kator is operating at full capacity, and the next best alternative use of their capacity on existing equipment is LB-64 that would produce a contribution of $10,000. This product has the following financial structure per unit.

Selling Price $150

Direct materials $ 20Direct labor 15Variable manufacturing overhead 12Fixed manufacturing overhead 30Shipping and handling 3Fixed selling and administrative 10 Total costs $ 90

The minimum price that is acceptable for this one-time, special order is in excess of:

a. $57b. $60c. $70d. $87

Explanation

Choice "b" is correct. $60 is the minimum price that is acceptable, using the original data, for this one-time, special order.

$60 opportunity cost equals variable cost of $50 plus alternative use contribution of $10 ($10,000 profit + 1,000 units).

Direct materials 20Direct labor 15Variable Mfg OH 12Variable selling 3 Variable cost 50Alternative use contribution 10 Opportunity cost 60




Question CPA-04269

In joint-product costing and analysis, which one of the following costs is relevant when deciding the point at which a product should be sold in order to maximize profits?

a. Separable costs after the split-off point.b. Joint costs to the split-off point.c. Purchase costs of the materials required for the joint product.d. The company president's salary.

Explanation

Choice "a" is correct. Costs subsequent to split-off, and revenues, are relevant to maximizing profits.

Choice "b" is incorrect, since joint costs to the split-off point are unavoidable and irrelevant to one particular product.

Choice "c" is incorrect. Purchase cost of materials for joint products could not be separated for one product.

Choice "d" is incorrect. The president's salary is a fixed period cost.



Question CPA-04270

Absorption costing and variable costing are two different methods of assigning costs to units produced. Of the five cost items listed below, identify the one that is not correctly accounted for as a product cost.

Part of Product Cost UnderAbsorption Variable

Cost Cost

a. Manufacturing supplies. Yes Yesb. Insurance on factory. Yes Noc. Direct labor cost. Yes Yesd. Packaging and shipping costs. Yes Yes

Explanation

Choice "d" is correct. Shipping costs are not a part of product cost under absorption costing. Shipping costs are variable and would be a part of the calculation of contribution margin.

Choice "a" is incorrect. Manufacturing supplies are properly a part of product cost under both methods.

Choice "b" is incorrect. Insurance on factory is a product cost for absorption costing and a period cost for variable costing.

Choice "c" is incorrect. Direct labor is a product cost under both methods.



Question CPA-04271

Costs relevant to a make-or-buy decision include variable labor and variable materials as well as:

a. Depreciation.b. Factory management costs.c. Avoidable fixed-costs.d. Property taxes.

Explanation

Choice "c" is correct. Costs relevant to a make-or-buy decision include variable labor and variable materials as well as avoidable fixed costs. Avoidable fixed costs "attach" to a specific decision and are incurred only if that decision is taken. They are relevant in a marginal analysis.

The following are not relevant to a make-or-buy decision:

a. Depreciation.b. Factory management costs.d. Property taxes.



Question CPA-04272

In a make-versus-buy decision, the relevant costs include variable manufacturing costs as well as:

a. Factory management costs.b. Unavoidable costs.c. Avoidable fixed-costs.d. Depreciation costs.

Explanation

Choice "c" is correct. In a make-versus-buy decision, the relevant costs include variable manufacturing costs as well as avoidable fixed costs.

The following costs are not relevant in a make-versus-buy decision:

a. Factory management costs.b. Unavoidable costs.d. Depreciation costs.



Question CPA-04273

Copeland Inc. produces X-547 in a joint manufacturing process. The company is studying whether to sell X-547 at the split-off point or upgrade the product to become Xylene. The following information has been gathered.(1) Selling price per pound of X-547(2) Variable manufacturing costs of upgrade process.(3) Avoidable fixed-costs of upgrade process.(4) Selling price per pound of Xylene.(5) Joint manufacturing costs to produce X-547

Which items should be reviewed when making the upgrade decision?

a. 1, 2, 4b. 1, 2, 3, 4c. 1, 2, 3, 4, 5d. 1, 2, 4, 5

Explanation

Choice "b" is correct. (1), (2), (3), and (4) are all relevant to the decision. Item (5), joint costs, is not relevant. Any allocation of joint costs is arbitrary.



Question CPA-04276

Whitehall Corporation produces chemicals used in the cleaning industry. During the previous month Whitehall incurred $300,000 of joint costs in producing 60,000 units of AM-12 and 40,000 units of BM-36. Whitehall uses the units-of-production method to allocate joint costs. Currently, AM-12 is sold at split-off for $3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the production of AM-12 after further processing. The further processing will cost Whitehall $90,000.Concerning AM-12, which one of the following alternatives is most advantageous?

a. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $1.50, which covers the incremental costs.

b. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $3.00, which covers the joint costs.

c. Whitehall should continue to sell at split-off unless Flank offers at least $4.50 per unit after further processing, which covers Whitehall's total costs.

d. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $5.00.

Explanation

Choice "d" is correct. Whitehall should process further and sell to flank if the total selling price per unit after further processing is greater than $5.00.

Per unit TotalsAM-12 AM-12 BM-36 Combined

Units 1 60,000 40,000 100,000

Joint costs $3.00 $180,000 + $120,000 = $300,000

Further costs 1.50 90,000

Total costs 4.50 $270,000

Add gross margin at split-off:

($3.50 − 3.00) = .50Minimum $5.00




Question CPA-04277

Assume that Whitehall Corporation agreed to sell AM-12 to Flank Corporation after further processing for $5.50 per unit. During the first month of production, Whitehall sold 50,000 units with 10,000 units remaining in inventory at the end of the month. Joint costs attributable to AM-12 were $180,000, and costs of processing AM-12 further were $90,000. With respect to AM-12, which one of the following statements is correct?

a. The operating profit last month was $50,000 and the inventory value is $15,000b. The operating profit last month was $50,000 and the inventory value is $45,000c. The operating profit last month was $125,000 and the inventory value is $30,000d. The operating profit last month was $200,000 and the inventory value is $45,000

Explanation

Choice "b" is correct. The operating profit last month was $50,000, and the inventory value is $45,000.

Per Unit × Units = Income InventorySales $5.50 × 50,000 = $275,000Cost of goods sold 4.50 × 50,000 = 225,000Inventory 4.50 × 10,000 = 45,000Operating profit 50,000Inventory 45,000

50,000 unit sales + 10,000 inventory = 60,000 unit production$180,000 in joint costs divided by 60,000 units = 3.00 unit costs$90,000 further processing divided by 60,000 units = 1.50 unit costsTotal costs per unit 4.50




Question CPA-04278

In making capital budget decisions, management considers factors that are far broader than costs alone. Which one of the following factors is least likely to be considered a non-financial or qualitative factor?

a. Increase in manufacturing flexibility.b. Improved product delivery and service.c. Less scrap and rework.d. Reduction in new product development time.

Explanation

Choice "c" is correct. Less scrap and rework is least likely to be considered a non-financial or qualitative factor because it is the most easily quantifiable of the selections and therefore most likely to be included as a relevant avoidable cost in the capital budgeting analysis.

Choices "a", "b", and "d" are incorrect. All are important factors in a capital budgeting decision, but they can be difficult to quantify and therefore are more likely to be considered non-financial or qualitative factors.



Question CPA-04641

Day Mail Order Co. applied the high-low method of cost estimation to customer order data for the first 4 months of 2005. What was the variable order filling cost component per order?

Month Orders CostJanuary 1,200 $3,120February 1,300 3,185March 1,800 4,320April 1,700 3,895

a. $2.00b. $2.42c. $2.48d. $2.50

Explanation

Choice "a" is correct. The high-low method uses the high and the low activity levels (orders) in order to determine the equation of a straight line [Y=(VC * X) + FC], thus separating the total costs into variable and fixed costs.

$4,320 - $3,120 $2.00 per order1,800 -1,200

=

Choice "b" is incorrect. Total orders and total costs are not used. The high-low method uses the high and the low activity levels (orders) in order to determine the equation of a straight line [Y=(VC * X) + FC], thus separating the total costs into variable and fixed costs.

Choices "c" and "d" are incorrect. The high-low method uses the high and the low activity levels (orders) in order to determine the equation of a straight line [Y=(VC * X) + FC], thus separating the total costs into variable and fixed costs.



Question CPA-04642

Trijonis Company estimated its material handling costs at two activity levels, as follows:

Kilos Handled Cost80,000 $160,00060,000 $132,000

What is Trijonis’ estimated cost for handling 75,000 kilos?

a. $150,000b. $153,000c. $157,500d. $165,000

Explanation

Choice "b" is correct. Using the high-low method, the variable cost per kilo can be determined by dividing the change in cost ($160,000 - $132,000) by the change in volume (80,000 - 60,000):

=$160,000 - $132,000 $1.40 per kilo

80,000 - 60,000

The fixed portion of the cost can be determined by substituting the volume and variable in the equation Y = a + bx, or

Y = a + bx$160,000 = a + $1.40(80,000)

a = $48,000

At 75,000 kilos, the total cost would be:

Y = $48,000 + $1.40xY = $48,000 + $1,40(75,000)Y = $153,000

Choices "a", "c", and "d" are incorrect. Using the high-low method, the variable cost per kilo can be determined by dividing the change in cost by the change in volume. The fixed portion of the cost can be determined by substituting the volume and the variable in the equation Y = a + bx.



Question CPA-04843

Which of the following forecasting methods relies mostly on judgment?

a. Time series models.b. Econometric models.c. Delphi.d. Regression.

Explanation

Choice "c" is correct. The Delphi method of forecasting involves the use of multiple teams in geographically remote locations. Information is shared and gathered in a central point and compiled and then redistributed for comment. The method is highly interpersonal and requires significant judgment.

Choice "a" is incorrect. Although all forecast methods require some judgment regarding both variables used and the evaluation of results, quantitative methods, such as time series models, rely more heavily on mathematical relationships than pure judgment.

Choice "b" is incorrect. Although all forecast methods require some judgment regarding both variables used and the evaluation of results, quantitative methods, such as econometric models, rely more heavily on mathematical relationships than pure judgment.

Choice "d" is incorrect. Although all forecast methods require some judgment regarding both variables used and the evaluation of results, quantitative methods, such as regression analysis, rely more heavily on mathematical relationships than pure judgment.

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