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INTRODUCTION TO MANAGEMENT ACCOUNTING 16TH EDITION By HORNGREN – TEST BANK A+

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INTRODUCTION TO MANAGEMENT ACCOUNTING 16TH EDITION By HORNGREN – TEST BANK A+

Introduction to Management Accounting, 16e (Horngren)

Sample Chapter

Chapter 6 Relevant Information for Decision Making with a Focus on Operational Decisions

6.1 Questions

1) Differential cost is the difference in ________ between two alternatives.

1. A) average cost
2. B) marginal cost
3. C) median cost
4. D) total cost

Diff: 1

LO: 6-1

AACSB: Reflective thinking skills

Learning Outcome: Use incremental analysis to make short-term decisions

2) Differential revenue is the difference in ________ between two alternatives.

1. A) average revenue
2. B) marginal revenue
3. C) median revenue
4. D) total revenue

Diff: 1

LO: 6-1

AACSB: Reflective thinking skills

Learning Outcome: Use incremental analysis to make short-term decisions

3) Incremental costs are the ________ generated by a proposed alternative.

2. B) additional revenues or reduced costs
3. C) reduced costs
4. D) additional costs or reduced revenues

Diff: 2

LO: 6-1

AACSB: Reflective thinking skills

Learning Outcome: Use incremental analysis to make short-term decisions

4) Incremental benefits are the ________ generated by a proposed alternative.

1. A) reduced revenues
4. D) additional revenues or reduced costs

Diff: 2

LO: 6-1

AACSB: Reflective thinking skills

Learning Outcome: Use incremental analysis to make short-term decisions

5) Johnston Company wants to double production of Product X from 1,000 units to 2,000 units. The variable manufacturing cost per unit is \$10. The variable nonmanufacturing cost per unit is \$20. There are no fixed costs. The selling price per unit is \$50. What is the incremental cost of the proposed change?

1. A) \$10,000
2. B) \$20,000
3. C) \$30,000
4. D) \$60,000

Diff: 2

LO: 6-1

AACSB: Analytic skills

Learning Outcome: Use incremental analysis to make short-term decisions

6) Jeffrey Company wants to double production of Product X from 1,000 units to 2,000 units. The variable manufacturing cost per unit is \$10. The variable nonmanufacturing cost per unit is \$20. There are no fixed costs. The selling price per unit is \$50. What is the incremental revenue of the proposed change?

1. A) \$10,000
2. B) \$20,000
3. C) \$30,000
4. D) \$50,000

Diff: 2

LO: 6-1

AACSB: Analytic skills

Learning Outcome: Use incremental analysis to make short-term decisions

7) Marjorie Company has an idle machine that originally cost \$200,000. The book value of the machine is \$100,000. The company is considering three alternative uses of the idle machine:

Alternative 1: Disposal of machine. Disposal value of machine is \$50,000.

Alternative 2: Use the idle machine to increase production of Product A. Contribution margin from additional sales of Product A is estimated to be \$60,000.

Alternative 3: Use the idle machine to increase production of Product B. Contribution margin from additional sales of Product B is estimated to be \$70,000.

When considering Alternative 3, what is the opportunity cost of the idle machine?

1. A) \$50,000
2. B) \$60,000
3. C) \$70,000
4. D) \$110,000

Diff: 2

LO: 6-1

AACSB: Analytic skills

Learning Outcome: Use incremental analysis to make short-term decisions

8) Marianne Company has an idle machine that originally cost \$200,000. The book value of the machine is \$100,000. The company is considering three alternative uses of the idle machine:

Alternative 1: Disposal of machine. Disposal value of machine is \$50,000.

Alternative 2: Use the idle machine to increase production of Product A. Contribution margin from additional sales of Product A is estimated to be \$60,000.

Alternative 3: Use the idle machine to increase production of Product B. Contribution margin from additional sales of Product B is estimated to be \$70,000.

When considering Alternative 2, what is the opportunity cost of the idle machine?

1. A) \$50,000
2. B) \$60,000
3. C) \$70,000
4. D) \$110,000

Diff: 2

LO: 6-1

AACSB: Analytic skills

Learning Outcome: Use incremental analysis to make short-term decisions

9) Nancy Company has an idle machine that originally cost \$200,000. The book value of the machine is \$100,000. The company is considering three alternative uses of the idle machine:

Alternative 1: Disposal of machine. Disposal value of machine is \$50,000.

Alternative 2: Use the idle machine to increase production of Product A. Contribution margin from additional sales of Product A is estimated to be \$60,000.

Alternative 3: Use the idle machine to increase production of Product B. Contribution margin from additional sales of Product B is estimated to be \$70,000.

When considering the opportunity cost of the idle machine, what is the net financial benefit from Alternative 3?

1. A) \$10,000
2. B) \$20,000
3. C) \$50,000
4. D) \$70,000

Diff: 2

LO: 6-1

AACSB: Analytic skills

Learning Outcome: Use incremental analysis to make short-term decisions

10) When evaluating alternative uses of a capital asset, equivalent decisions are reached using the opportunity cost approach and ________.

1. A) cost-volume-profit analysis
2. B) contribution margin approach
3. C) absorption costing approach
4. D) incremental analysis

Diff: 1

LO: 6-1

AACSB: Reflective thinking skills

Learning Outcome: Use incremental analysis to make short-term decisions

11) A proposed project will require the use of ten machines in a company. Each machine has five alternative uses. What is the simplest way to evaluate the desirability of the project?

1. A) incremental analysis
2. B) cost-volume-profit analysis
3. C) opportunity cost approach
4. D) scarce resource approach

Diff: 2

LO: 6-1

AACSB: Reflective thinking skills

Learning Outcome: Use incremental analysis to make short-term decisions

12) The key to determining the financial difference between two alternative courses of action is to identify the ________.

1. A) opportunity cost of each alternative
2. B) marginal cost
3. C) differential costs and revenues
4. D) joint cost of both alternatives

Diff: 1

LO: 6-1

AACSB: Reflective thinking skills

Learning Outcome: Use incremental analysis to make short-term decisions

13) The term opportunity cost applies to a resource that a company ________.

3. C) has committed to purchase only
4. D) already owns or has committed to purchase

Diff: 1

LO: 6-1

AACSB: Reflective thinking skills

Learning Outcome: Use incremental analysis to make short-term decisions

14) An opportunity cost is ________.

1. A) the additional costs generated by a proposed alternative
2. B) the difference in total cost between two alternatives
3. C) a cash disbursement in the future
4. D) the maximum available benefit foregone by using a resource for a particular purpose instead of the best alternative use

Diff: 1

LO: 6-1

AACSB: Reflective thinking skills

Learning Outcome: Use incremental analysis to make short-term decisions

15) The salary foregone by a person who quits a job to start a business is an example of a(n) ________.

1. A) sunk cost
2. B) opportunity cost
3. C) depreciable cost
4. D) outlay cost

Diff: 2

LO: 6-1

AACSB: Analytic skills

Learning Outcome: Use incremental analysis to make short-term decisions

16) Nestle Company paid \$130,000 for a machine used to mill oats. The annual contribution margin from oat sales is \$60,000. The machine could be sold for \$80,000. The opportunity cost of producing the oats is ________.

1. A) \$20,000
2. B) \$60,000
3. C) \$80,000
4. D) \$130,000

Diff: 2

LO: 6-1

AACSB: Analytic skills

Learning Outcome: Use incremental analysis to make short-term decisions

17) Sue is considering leaving her current position to open a coffee shop. Sue’s current annual salary is \$83,000. Annual coffee shop revenue and costs are estimated at \$260,000 and \$210,000, respectively. What is Sue’s opportunity cost of staying at her current work position?

1. A) \$50,000
2. B) \$83,000
3. C) \$210,000
4. D) \$343,000

Diff: 2

LO: 6-1

AACSB: Analytic skills

Learning Outcome: Use incremental analysis to make short-term decisions

18) Mary is considering leaving her current position to open an ice cream shop. Mary’s current annual salary is \$77,000. Annual ice cream shop revenue and costs are estimated at \$260,000 and \$210,000, respectively. What is Mary’s annual opportunity cost of starting the ice cream shop?

1. A) \$50,000
2. B) \$77,000
3. C) \$210,000
4. D) \$260,000

Diff: 2

LO: 6-1

AACSB: Analytic skills

Learning Outcome: Use incremental analysis to make short-term decisions

19) Determining the opportunity cost of a project depends on the alternatives available.

Diff: 1

LO: 6-1

AACSB: Reflective thinking skills

Learning Outcome: Use incremental analysis to make short-term decisions

20) Opportunity costs and outlay costs are widely used synonyms.

Diff: 1

LO: 6-1

AACSB: Reflective thinking skills

Learning Outcome: Use incremental analysis to make short-term decisions

21) Opportunity costs apply to resources that a company has committed to purchase.

Diff: 2

LO: 6-1

AACSB: Reflective thinking skills

Learning Outcome: Use incremental analysis to make short-term decisions

6.2 Questions

1) In a make-or-buy decision for a part for a product, which of the following qualitative factors play a role?

1. A) quality of purchased part
2. B) credit terms offered by supplier of part
3. C) timeliness of delivery of purchased part by supplier
4. D) all of the above

Diff: 2

LO: 6-2

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

2) What is the most common value-chain function outsourced in most businesses?

1. A) production process
2. B) research and development
3. C) product design
4. D) corporate support

Diff: 2

LO: 6-2

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

3) In make-or-buy decisions for a part for a product, relevant costs include ________.

1. A) some variable costs of making the part
2. B) all variable costs of making the part
3. C) fixed costs that can be avoided in the future if the part is purchased
4. D) B and C

Diff: 2

LO: 6-2

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

4) In a make-or-buy decision, which of the following is the fundamental question that is asked in making the decision?

1. A) What is the difference in present costs between the two alternatives?
2. B) What is the difference in present revenues between the two alternatives?
3. C) What is the difference in future revenues between the two alternatives?
4. D) What is the difference in future costs between the two alternatives?

Diff: 2

LO: 6-2

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

5) Bonneville Company is producing a subassembly used in the production of a product. The costs incurred for the subassembly follow:

Per Unit

Direct materials \$6.00

Direct labor 4.00

Fixed supervisor salary 3.00

Depreciation expense on factory equipment 2.00

General fixed factory overhead allocated 5.00

Total costs \$21.00

The above per unit costs are based on 8,000 units. An outside supplier will provide 8,000 subassemblies for \$19 per unit. The supervisor will be terminated if the subassemblies are not produced in house. The idle factory will be used to manufacture another product with a contribution margin of \$60,000. What should Bonneville do?

1. A) make the subassemblies and save \$20,000
2. B) make the subassemblies and save \$40,000
3. C) buy the subassemblies and save \$20,000
4. D) buy the subassemblies and save \$40,000

Diff: 2

LO: 6-2

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

6) Blue Company is a small company with limited expertise with customer service. Blue Company has a contract with New Company to handle all of Blue Company’s customer service needs. For Blue Company, this is an example of ________.

1. A) technology transfer
2. B) technology osmosis
3. C) outsourcing
4. D) none of the above

Diff: 1

LO: 6-2

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

7) Fixed overhead costs that will continue regardless of a make-or-buy decision are ________ to the make-or-buy decision.

1. A) relevant
2. B) irrelevant
3. C) opportunity costs
4. D) incremental costs

Diff: 2

LO: 6-2

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

8) When making a make-or-buy decision for a part used in a product, which of the following item is relevant to the decision?

1. A) variable costs of making the part
2. B) contribution margin on new products manufactured in idle area not used for making part
3. C) rental income from idle plant when not making the part
4. D) all of the above

Diff: 2

LO: 6-2

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

9) Buddy Company manufactures a part for its production cycle. The costs per unit for 5,000 units of the part are as follows:

Per Unit

Direct materials \$3.00

Direct labor 5.00

Total costs \$16.00

The fixed factory overhead costs are avoidable. Spalding Company has offered to sell 5,000 units of the same part to Buddy Company for \$15 per unit. Assuming no other use for the facilities, Buddy Company should ________.

1. A) make the part to save \$5,000
2. B) make the part to save \$15,000
3. C) buy the part from Spalding Company to save \$5,000
4. D) buy the part from Spalding Company to save \$15,000

Diff: 2

LO: 6-2

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

10) Benton Company manufactures a part for its production cycle. The costs per unit for 38,000 units of the part are as follows:

Per Unit

Direct materials \$3.00

Direct labor 5.00

Total costs \$15.00

The fixed factory overhead costs are unavoidable. Assume no other use for the facilities. What is the highest price Benton Company should pay for the part from an outside supplier?

1. A) \$8
2. B) \$11
3. C) \$12
4. D) \$15

Diff: 2

LO: 6-2

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

11) Christian Company manufactures a part for its production cycle. The annual costs per unit for 5,000 units of the part are as follows:

Per Unit

Direct materials \$3.00

Direct labor 5.00

Total costs \$14.00

The fixed factory overhead costs are unavoidable. Another company has offered to sell 5,000 units of the same part to Christian Company for \$15 per unit. The facilities currently used to make the part could be rented out to another manufacturer for \$20,000 a year. Christian Company should ________.

1. A) make the part to save \$5,000
2. B) make the part to save \$15,000
3. C) buy the part and rent facilities to save \$5,000
4. D) buy the part and rent facilities to save \$15,000

Diff: 2

LO: 6-2

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

12) Laskowski Company manufactures a part for its production cycle. The annual costs per unit for 5,000 units of the part are as follows:

Per Unit

Direct materials \$3.00

Direct labor 5.00

Total costs \$14.00

The fixed factory overhead costs are unavoidable. Hendricks Company has offered to sell 5,000 units of the same part to Laskowski Company for \$14 per unit. The facilities currently used for the part could be used to make 5,000 units annually of a new product that would contribute \$5 a unit to fixed expenses. No additional fixed costs would be incurred with the new product. Laskowski Company should ________.

1. A) make the part to save \$5,000
2. B) make the part to save \$15,000
3. C) make the new product and buy the part to save \$5,000
4. D) make the new product and buy the part to save \$15,000

Diff: 2

LO: 6-2

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

13) Krakowski Company manufactures a part for its production cycle. The costs per unit for 10,000 units of the part are as follows:

Per Unit

Direct materials \$20.00

Direct labor 15.00

Total costs \$61.00

The fixed factory overhead costs are unavoidable. Winters Company has offered to sell 10,000 units of the same part to Krakowski Company for \$55 per unit. Assuming no other use for the facilities, Krakowski Company should ________.

1. A) make the part to save \$40,000
2. B) make the part to save \$60,000
3. C) buy the part from Winters Company to save \$40,000
4. D) buy the part from Winters Company to save \$60,000

Diff: 2

LO: 6-2

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

14) Corrao Company manufactures a part for its production cycle. The costs per unit for 10,000 units of the part are as follows:

Per Unit

Direct materials \$20.00

Direct labor 13.00

Total costs \$62.00

The fixed factory overhead costs are unavoidable. Assuming no other use for the facilities, what is the highest price that Corrao Company should be willing to pay for the part?

1. A) \$33
2. B) \$47
3. C) \$48
4. D) \$62

Diff: 2

LO: 6-2

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

15) Potter Company manufactures a part for its production cycle. The annual costs per unit for 10,000 units of the part are as follows:

Per Unit

Direct materials \$20.00

Direct labor 15.00

Total costs \$61.00

The fixed factory overhead costs are unavoidable. Paulson Company has offered to sell 10,000 units of the same part to Potter Company for \$60 per unit. The facilities currently used to make the part could be rented out to another manufacturer for \$100,000 per year. Potter Company should ________.

1. A) make the part to save \$10,000
2. B) make the part to save \$25,000
3. C) buy the part and rent the facilities to save \$10,000
4. D) buy the part and rent the facilities to save \$25,000

Diff: 2

LO: 6-2

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

16) Golden Company manufactures a part for its production cycle. The annual costs per unit for 10,000 units of the part are as follows:

Per Unit

Direct materials \$20.00

Direct labor 15.00

Total costs \$51.00

The fixed factory overhead costs are unavoidable. Olson Company has offered to sell 10,000 units of the same part to Golden Company for \$55 per unit. The facilities currently used to make the part could be used to make 10,000 units per year of a new product that has a contribution margin of \$20 per unit. No additional fixed costs would be incurred with the new product. Golden Company should ________.

1. A) make the part to save \$40,000
2. B) make the part to save \$140,000
3. C) make the new product and buy the part to save \$60,000
4. D) make the new product and buy the part to save \$140,000

Diff: 2

LO: 6-2

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

17) Kaiman Company currently produces a key part at a total cost of \$210,000. Annual variable costs are \$170,000. Of the annual fixed costs, \$10,000 relate specifically to this part. The remaining fixed costs are unavoidable.

Another manufacturer has offered to supply the part annually for \$200,000. The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of \$30,000 per year. Alternatively, the facilities could be rented out at \$60,000 per year. Given all of these alternatives, what is Kaiman Company’s lowest net relevant cost for the parts?

1. A) \$130,000
2. B) \$140,000
3. C) \$170,000
4. D) \$180,000

Diff: 3

LO: 6-2

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

18) Dolphin Company currently produces 10,000 units of a key part at a total cost of \$512,000 annually. Variable costs are \$300,000 annually. Of the annual fixed costs, \$140,000 relate specifically to this part. The remaining fixed costs are unavoidable.

Another manufacturer has offered to supply the part for \$48 per unit. The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of \$30,000 per year. Alternatively, the facilities could be rented out at \$60,000 per year. Given all of these alternatives, what is Dolphin Company’s lowest net relevant cost for the parts?

1. A) \$420,000
2. B) \$440,000
3. C) \$450,000
4. D) \$480,000

Diff: 3

LO: 6-2

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

19) Thompson Company currently produces 10,000 units of a key part at a total cost of \$512,000 annually. Annual variable costs are \$300,000. Of the annual fixed costs, \$140,000 relate specifically to this part. The remaining fixed costs are unavoidable.

Another manufacturer has offered to supply the part for \$48 per unit. The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of \$60,000 annually. Alternatively, the facilities could be rented out at \$70,000 annually. If Thompson Company makes the part, what is the annual opportunity cost of the facilities?

1. A) \$13,000
2. B) \$28,000
3. C) \$60,000
4. D) \$70,000

Diff: 3

LO: 6-2

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

20) Madison Company produces a part that is used in the manufacture of one of its products. The costs associated with the production of 5,000 units of this part are as follows:

Direct materials \$108,000

Direct labor 156,000

Total costs \$504,000

Of the fixed factory overhead costs, \$72,000 are avoidable. Middleton Company has offered to sell 5,000 units of the same part to Madison for \$87.00 per unit. Assuming there is no other use for the facilities, Madison Company should ________.

1. A) make the part to save \$24,000
2. B) make the part to save \$27,000
3. C) buy the part to save \$24,000
4. D) buy the part to save \$27,000

Diff: 2

LO: 6-2

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

21) Davidson Company produces a part that is used in the manufacture of one of its products. The costs associated with the production of 5,000 units of this part are as follows:

Direct materials \$108,000

Direct labor 156,000

Total costs \$502,000

Of the fixed factory overhead costs, \$72,000 are avoidable. Assuming there is no other use for the facilities. What is the highest price Davidson Company should be willing to pay for 5,000 units of the part?

1. A) \$264,000
2. B) \$334,000
3. C) \$406,000
4. D) \$502,000

Diff: 2

LO: 6-2

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

22) Gonzalez Company produces a part that is used in the manufacture of one of its products. The annual costs associated with the production of 5,000 units of this part are as follows:

Direct materials \$100,000

Direct labor 56,000

Total costs \$396,000

Of the fixed factory overhead costs, \$72,000 are avoidable. Another company has offered to sell 5,000 units of the same part to Gonzalez for \$70.00 per unit. The facilities currently used to make the part can be rented out to another manufacturer for \$72,000 per year. What should Gonzalez Company do?

1. A) Make the part to save \$22,000.
2. B) Make the part to save \$50,000.
3. C) Buy the part and rent the facilities to save \$22,000.
4. D) Buy the part and rent the facilities to save \$72,000.

Diff: 2

LO: 6-2

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

23) Fast Company has just decided to outsource the production of a part for a product. Assume Fast Company leaves the area of the manufacturing plant idle where it was producing the outsourced part. It has no alternative uses of the plant. What is the opportunity cost of the idle area of the manufacturing plant to Fast Company?

1. A) zero
2. B) definitely a negative number
3. C) the disposal value of the entire manufacturing plant
4. D) none of the above

Diff: 3

LO: 6-2

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

24) Outsourcing is the purchase of products or services by a company from an outside supplier.

Diff: 1

LO: 6-2

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

25) Qualitative factors do not affect a make-or-buy decision.

Diff: 1

LO: 6-2

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

26) In a make-or-buy decision, if plant facilities will remain idle when the decision is made to outsource a part used in a product, then the opportunity cost of the plant facilities is zero. Assume there are no alternative uses of the plant facilities available.

Diff: 2

LO: 6-2

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

27) Each year, Madsen Company purchases 8,000 units of a part that it needs for production of its product. The supplier notified Madsen Company that a price increase will take effect shortly, which will bring the price of the part to \$25 per part. Madsen Company is considering the use of idle facilities to produce the part. The annual production costs to produce the needed 8,000 parts are as follows:

Direct materials \$17,500

Direct labor 30,000

Variable indirect production costs 14,000

Fixed indirect production costs 33,500

The idle facilities could also be rented out at an annual rent of \$99,000. All the fixed indirect production costs are avoidable.

Required:

Determine if Madsen Company should buy the part or produce it internally.

Buy Part: \$25 × 8,000 units = \$200,000

Buy Part and Rent Facilities: (\$25 × 8,000) – \$99,000 = \$101,000

Make Part: (\$17,500 + \$30,000 + \$14,000 + \$33,500) = \$95,000

Conclusion:

The lowest cost alternative is to make the part. Madsen Company should make the part.

Diff: 2

LO: 6-2

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

28) Andrea Company manufactures a part for its production cycle. The annual costs per unit for 20,000 units of this part are as follows:

Direct materials \$15

Direct labor 12

Variable indirect production costs 19

Fixed indirect production costs 16

Total cost \$62

Andrea Company has been approached by a supplier who will sell 20,000 units of the same part for \$940,000. All the fixed indirect production costs are unavoidable if Andrea Company ceases production of the part.

Required:

1. A) Assuming there is no alternative use for the facilities, should Andrea Company buy or make the part?
2. B) Assume the facilities can be rented out for \$100,000 per year. Should Andrea Company buy the part? If so, how much money will be saved?

A)

Alternatives:

Make part: (\$15 + \$12 + \$19) × 20,000 = \$920,000

Conclusion:

The least costly alternative is to make the part.

B)

Alternatives:

Make part: \$920,000

Buy part and rent out facilities: \$940,000 – \$100,000 = \$840,000

Conclusion:

The least costly alternative is to buy the part and rent out the facilities. In contrast to making the part, the company would save \$80,000 (\$920,000 – \$840,000) per year.

Diff: 2

LO: 6-2

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

29) Jeff Company produces a part that is used in the manufacture of one of its products. The annual costs associated with the production of 11,000 units of this part are as follows:

Direct materials \$25,000

Direct labor 34,000

Variable indirect production costs 65,000

Fixed indirect production costs 40,000

Total costs \$164,000

A supplier is willing to sell 11,000 units of the part to Jeff Company for \$12.50 per unit. When examining the fixed indirect production costs, Jeff Company determines \$10,000 is avoidable.

Required:

1. A) If there are no alternative uses for the facilities, should Jeff Company take advantage of the supplier’s offer?
2. B) If Jeff Company decides to buy the part from the supplier, Jeff Company can rent out the idle facilities for \$50,000 per year. Should Jeff Company take advantage of the supplier’s offer?

A)

Alternatives:

Make part: (\$25,000 + \$34,000 + \$65,000 + \$10,000) = \$134,000

Buy part: (\$12.50 × 11,000) = \$137,500

Conclusion:

The least costly alternative is to make the part. Jeff should not accept the supplier’s offer.

B)

Alternatives:

Make part: \$134,000

Buy part and rent out facilities: \$137,500 – \$50,000 = \$87,500

Conclusion:

The least costly alternative is to buy the part and rent out the facilities.

Diff: 2

LO: 6-2

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

6.3 Questions

1) If a department in a department store is under consideration to be eliminated, unavoidable fixed expenses are ________ to the decision.

1. A) incremental
2. B) marginal
3. C) relevant
4. D) irrelevant

Diff: 2

LO: 6-3

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

2) Department A covers one section of a large factory building. Which of the following costs is relevant to the decision to eliminate Department A?

1. A) Heating expenses of building allocated to Department A
2. B) General corporate overhead allocated to Department A
3. C) Depreciation Expense on store building allocated to Department A
4. D) Salary Expense of Supervisor in Department A; he only works in Department A

Diff: 1

LO: 6-3

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

3) If a department in a grocery store is under consideration to be eliminated, which of the following cost(s) is(are) NOT relevant to the decision?

1. A) avoidable fixed expenses
2. B) unavoidable costs
3. C) common costs
4. D) B and C

Diff: 2

LO: 6-3

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

4) If a department in a department store is eliminated, ________ costs will not continue.

1. A) unavoidable
2. B) common
3. C) corporate
4. D) avoidable

Diff: 1

LO: 6-3

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

5) Central Industries has three product lines: A, B and C. The following information is available:

Product A Product B Product C

Sales \$100,000 \$90,000 \$44,000

Variable costs 76,000 48,000 35,000

Contribution margin 24,000 42,000 9,000

Avoidable fixed costs 9,000 18,000 3,000

Unavoidable fixed costs 6,000 9,000 7,700

Operating income(loss) \$9,000 \$15,000 \$(1,700)

Central Industries is thinking about dropping Product C because it is reporting a loss. Assume Central Industries drops Product C and does not replace it. What will happen to operating income?

1. A) increase by \$600
2. B) increase by \$2,400
3. C) decrease by \$6,000
4. D) decrease by \$9,000

Diff: 2

LO: 6-3

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

6) Sahara Industries has three product lines: A, B and C. The following annual information is available:

Product A Product B Product C

Sales \$100,000 \$90,000 \$88,000

Variable costs 76,000 48,000 79,000

Contribution margin 24,000 42,000 9,000

Avoidable fixed costs 9,000 18,000 3,000

Unavoidable fixed costs 6,000 9,000 9,400

Operating income(loss) \$9,000 \$15,000 \$(3,400)

Sahara Industries is thinking about dropping Product C because it is reporting a loss. Assume Sahara Industries drops Product C and the space formerly used to produce Product C is rented out for \$15,000 per year. What will happen to operating income?

1. A) increase by \$6,600
2. B) increase by \$9,000
3. C) increase by \$14,400
4. D) increase by \$15,000

Diff: 2

LO: 6-3

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

7) Cesar Company has three product lines: A, B and C. The following annual information is available:

Product A Product B Product C

Sales \$100,000 \$90,000 \$44,000

Variable costs 76,000 48,000 35,000

Contribution margin 24,000 42,000 9,000

Avoidable fixed costs 9,000 18,000 3,000

Unavoidable fixed costs 6,000 9,000 7,700

Operating income(loss) \$9,000 \$15,000 \$(1,700)

Assume Cesar Company drops Product C. Cesar Company then doubles the production and sales of Product B without increasing fixed costs. What will happen to operating income?

1. A) increase by \$15,000
2. B) increase by \$24,000
3. C) increase by \$36,000
4. D) increase by \$42,000

Diff: 3

LO: 6-3

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

8) Bally Company has three product lines: A, B and C. The following annual information is available:

Product A Product B Product C

Sales \$60,000 \$90,000 \$24,000

Variable costs 36,000 48,000 20,000

Contribution margin 24,000 42,000 4,000

Avoidable fixed costs 9,000 18,000 3,000

Unavoidable fixed costs 6,000 9,000 2,400

Operating income(loss) \$9,000 \$15,000 \$(1,400)

Assume Bally Company drops Product C. What will happen to operating income?

1. A) increase by \$1,400
2. B) increase by \$3,800
3. C) decrease by \$1,000
4. D) decrease \$1,400

Diff: 2

LO: 6-3

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

9) The most recent income statement for the Venetian Branch of Palm Harbor Bank is presented below:

Sales \$57,000

Variable costs 31,500

Contribution margin 25,500

Avoidable fixed costs 13,500

Unavoidable fixed costs 20,000

Operating loss \$(8,000)

Palm Harbor Bank is thinking about eliminating the Venetian Branch. If the branch is eliminated, Palm Harbor Bank’s operating income will ________.

1. A) increase by \$8,000
2. B) increase by \$25,500
3. C) decrease by \$12,000
4. D) decrease by \$31,500

Diff: 1

LO: 6-3

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

10) The most recent income statement for the South Branch of First Financial Bank is presented below:

Sales \$57,000

Variable costs 31,500

Contribution margin 25,500

Avoidable fixed costs 13,500

Unavoidable fixed costs 18,000

Operating loss \$(6,000)

First Financial Bank is thinking about eliminating the South Branch. If the branch is eliminated, First Financial Bank’s operating income will ________.

1. A) increase by \$6,000
2. B) increase by \$25,500
3. C) decrease by \$12,000
4. D) decrease by \$31,500

Diff: 1

LO: 6-3

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

11) ________ are relevant in deciding whether to add or delete a department from a department store.

1. A) Avoidable fixed expenses
2. B) Common costs
3. C) Unavoidable fixed expenses
4. D) None of the above

Diff: 1

LO: 6-3

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

12) In deciding whether to add or delete a product or service, common costs are probably ________.

1. A) relevant and avoidable
2. B) relevant and unavoidable
3. C) irrelevant and avoidable
4. D) irrelevant and unavoidable

Diff: 2

LO: 6-3

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

13) When deciding whether to add or delete a department, managers should keep the department as long as ________ from the department exceeds ________.

1. A) contribution margin; variable costs
2. B) contribution margin; common costs
3. C) contribution margin; avoidable fixed costs
4. D) contribution margin; unavoidable fixed costs

Diff: 2

LO: 6-3

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

14) In deciding whether to add or delete a product, the insurance expense associated with the custom-built equipment used to produce the product is an ________ cost. Assume the equipment will be sold if the company discontinues the product.

1. A) avoidable fixed
2. B) avoidable variable
3. C) unavoidable fixed
4. D) unavoidable variable

Diff: 2

LO: 6-3

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant cost, Use incremental analysis to make short-term decisions

15) In deciding whether to add or delete a product, the salary of the plant manager is an ________. Assume the plant manager supervised the production of several products.

1. A) avoidable fixed cost
2. B) avoidable variable cost
3. C) unavoidable fixed cost
4. D) unavoidable variable cost

Diff: 2

LO: 6-3

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

16) Variable expenses are divided into avoidable and unavoidable costs.

Diff: 1

LO: 6-3

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

17) Unavoidable costs are never relevant in deciding whether to eliminate a product or department.

Diff: 2

LO: 6-3

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

18) Heating and air conditioning costs are examples of common costs to the different departments in a retail store.

Diff: 2

LO: 6-3

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

19) When adding or dropping a product line, variable costs are the only relevant costs.

Diff: 2

LO: 6-3

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

20) When adding or dropping a product line, fixed avoidable costs may be relevant costs.

Diff: 2

LO: 6-3

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

21) Qualitative information can influence decisions to add or drop a department.

Diff: 2

LO: 6-3

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

22) Freedom Company has three departments. Data for the most recent year are presented below:

Dept. X Dept. Y Dept. Z

Sales \$400 \$200 \$80

Variable expenses 128 52 34

Unavoidable fixed expenses 96 52 12

Avoidable fixed expenses 116 104 54

Required:

2. B) Compute the contribution margin for each department.
3. C) Compute the operating income for each department.
4. D) Which department(s) should be eliminated? Why?

A)

Sales \$680

Variable expenses (214)

Avoidable fixed expenses (274)

Unavoidable fixed expenses (160)

Operating income \$32

B)

Dept. X: \$400 – \$128 = \$272

Dept. Y: \$200 – \$52 = \$148

Dept. Z: \$80 – \$34 = \$46

C)

Dept. X: \$272 – \$212 = \$60

Dept. Y: \$148 – \$156 = \$(8)

Dept. Z: \$46 – \$66 = \$(20)

D)

Dept. Z should be eliminated because the contribution margin of \$46 is less than avoidable fixed expenses of \$54. Dept. Y should not be eliminated because the contribution margin of \$148 exceeds the avoidable fixed expenses of \$104. Dept. X should not be eliminated because the contribution margin of \$272 exceeds the avoidable fixed expenses of \$116.

Diff: 2

LO: 6-3

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

23) Olson Company has three departments. Data for the most recent year is presented below:

Dept. C Dept. A Dept. T

Sales \$4,000 \$1,920 \$2,240

Variable expenses 3,280 1,420 520

Unavoidable fixed expenses 480 180 440

Avoidable fixed expenses 555 265 360

Operating income (loss) \$(315) \$55 \$920

Olson Company is considering eliminating Dept. C because it is operating at a loss.

Required:

1. A) Compute the change in operating income if Olson Company eliminates Dept. C and does not replace it.
2. B) Compute the change in operating income if Olson Company eliminates Dept. C and doubles the sales of Dept. T without increasing fixed costs.

1. A) Operating income will decrease by \$165. \$4,000 – (\$3,280 + \$555) = \$165
2. B) Operating income will increase by \$1,555. \$2,240 – (\$520 + \$165) = \$1,555

Diff: 3

LO: 6-3

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

6.4 Questions

1) A company can sell any mix of Product A and Product B at full capacity. The company has 100,000 hours of capacity. The demand for each product exceeds the capacity. It takes one hour to make one unit of Product A and two hours to make one unit of Product B. The following information is available:

Product A Product B

Units produced from capacity available 100,000 50,000

Contribution margin per unit \$20 \$30

If capacity is the limiting factor, which product should be produced?

1. A) 0 units of Product A and 50,000 units of Product B
2. B) 20,000 units of Product A and 30,000 units of Product B
3. C) 30,000 units of Product A and 20,000 units of Product B
4. D) 100,000 units of Product A and 0 units of Product B

Diff: 1

LO: 6-4

AACSB: Reflective thinking skills

Learning Outcome: None

2) A company has 100,000 hours of capacity and manufactures two products, Product X and Product Z. Neither product has enough demand to utilize the entire capacity, but the combined demand of both products exceeds the capacity of the plant. It takes one hour to make one unit of Product X and two hours to make one unit of Product Z. The following information is available:

Product X Product Z

Units produced from capacity available 100,000 50,000

Contribution margin per unit \$20 \$30

What product or products should be made?

1. A) only make Product X
2. B) only make Product Z
3. C) make Product X to meet customer demand and then make Product Z
4. D) make Product Z to meet customer demand and then make Product X

Diff: 1

LO: 6-4

AACSB: Reflective thinking skills

Learning Outcome: None

3) A company has 10,000 hours of capacity and manufactures two products. Product 1 takes 2 hours per unit. Product 2 takes 3 hours per unit. The contribution margin per unit for Product 1 is \$5. The contribution margin per unit for Product 2 is \$6. The demand for either product exceeds the factory capacity. Which product or products should be manufactured?

1. A) 3,000 units of Product 1 and 2,000 units of Product 2
2. B) 2,500 units of Product 1 and 3,333 units of Product 2
3. C) make 5,000 units of Product 1 and 0 units of Product 2
4. D) make 3,333 units of Product 2 and 0 units of Product 1

Diff: 1

LO: 6-4

AACSB: Reflective thinking skills

Learning Outcome: None

4) A company has 10,000 hours of capacity and manufactures two products. Product 1 takes 2 hours per unit. Product 2 takes 3 hours per unit. The contribution margin per unit for Product 1 is \$5. The contribution margin per unit for Product 2 is \$6. Neither product has enough demand to use all of the plant capacity, but the demand for both products exceeds the plant capacity. Which product or products should be manufactured?

1. A) 5,000 units of Product 1 and 0 units of Product 2
2. B) 0 units of Product 1 and 5,000 units of Product 2
3. C) make Product 1 first until meet customer demand, then make Product 2
4. D) make Product 2 first until meet customer demand, then make Product 1

Diff: 1

LO: 6-4

AACSB: Reflective thinking skills

Learning Outcome: None

5) ________ is the item that restricts or constrains the production or sale of a product.

1. A) A limiting factor
2. B) A scarce resource
3. C) Floor space
4. D) All of the above

Diff: 1

LO: 6-4

AACSB: Analytic skills

Learning Outcome: None

6) If demand is the limiting factor, and there are no other scarce resources, managers should emphasize the product with ________.

1. A) the highest selling price per unit
2. B) the lowest variable costs per unit
3. C) the highest contribution margin per unit
4. D) the highest contribution margin per hour

Diff: 2

LO: 6-4

AACSB: Reflective thinking skills

Learning Outcome: None

7) Bronski Corporation manufactures two products, Simple and Complex. The following information was gathered:

Simple Complex

Selling price per unit \$37.00 \$26.00

Variable cost per unit 32.00 22.00

Total fixed costs are \$18,000. Assume demand for either product exceeds the factory’s capacity. It takes one hour of production time to make Simple and two hours to make Complex. The annual capacity of the plant is 10,000 hours. How many units of Simple and Complex should Bronski Corporation produce and sell to maximize profits?

1. A) 0 units of Simple and 5,000 units of Complex
2. B) 6,000 units of Simple and 3,000 units of Complex
3. C) 10,000 units of Simple and 0 units of Complex
4. D) 3,000 units of Simple and 6,000 units of Complex

Diff: 2

LO: 6-4

AACSB: Analytic skills

Learning Outcome: None

8) Watson Corporation manufactures two products, Simple and Complex. The following annual information was gathered:

Simple Complex

Selling price per unit \$47.00 \$26.00

Variable cost per unit 42.00 22.00

Total annual fixed costs are \$18,000. Assume demand for either product exceeds the factory’s capacity. It takes one hour to make one unit of Complex. However, Simple takes 50% longer to manufacture when compared to Complex. Only 120,000 hours of plant capacity are available. How many units of Simple and Complex should Watson Corporation produce and sell in a year to maximize profits?

1. A) an equal number of Simple and Complex
2. B) 80,000 units of Simple and 0 units of Complex
3. C) 0 units of Simple and 120,000 units of Complex
4. D) either Simple or Complex; it does not matter

Diff: 2

LO: 6-4

AACSB: Analytic skills

Learning Outcome: None

9) A scarce resource restricts or constrains the production or sale of a product.

Diff: 1

LO: 6-4

AACSB: Reflective thinking skills

Learning Outcome: None

10) Scarce resources include labor hours.

Diff: 1

LO: 6-4

AACSB: Reflective thinking skills

Learning Outcome: None

11) In retail sales, the limiting resource is often floor space.

Diff: 1

LO: 6-4

AACSB: Reflective thinking skills

Learning Outcome: None

12) If the limiting factor is demand, the most profitable product is the one with the highest contribution margin per unit.

Diff: 2

LO: 6-4

AACSB: Reflective thinking skills

Learning Outcome: None

13) Inventory turnover is the number of times the average inventory is sold per year.

Diff: 1

LO: 6-4

AACSB: Reflective thinking skills

Learning Outcome: None

6.5 Questions

1) Which of the following is(are) characteristic(s) of joint products?

1. A) when two or more products can be identified before the split-off point.
2. B) when two or more products have significant sales value.
3. C) when two or more products are not separately identifiable as individual products until the split-off point.
4. D) B and C

Diff: 2

LO: 6-5

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

2) When manufacturing multiple products that are not initially separately identifiable, manufacturing costs incurred after the split-off point are known as ________ costs.

1. A) joint
2. B) product
3. C) split-off
4. D) separable

Diff: 1

LO: 6-5

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

3) The ________ is the juncture in manufacturing where the joint products become individually identifiable.

1. A) joint processing juncture
2. B) split-off point
3. C) common point
4. D) joint processing point

Diff: 1

LO: 6-5

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

4) ________ costs are costs of manufacturing two or more products that are not separately identifiable as individual products until their split-off point.

1. A) Separable
2. B) Joint
3. C) Incremental
4. D) Sunk

Diff: 1

LO: 6-5

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

5) Which of the following item is irrelevant to the decision whether to process joint products beyond the split-off point?

1. A) separable costs
2. B) additional costs from further processing beyond the split-off point
3. C) additional revenue from further processing beyond the split-off point
4. D) joint costs

Diff: 2

LO: 6-5

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

6) Which of the following cost is relevant to the decision whether to process joint products beyond the split-off point?

1. A) joint costs
2. B) allocated joint costs
3. C) separable costs
4. D) additional revenue from further processing beyond split-off point

Diff: 2

LO: 6-5

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

7) Joint products should be processed beyond the split-off point if ________.

1. A) sale of the products are guaranteed
2. B) additional revenue from further processing exceeds additional expenses from further processing
3. C) additional revenue from further processing exceeds the joint costs
4. D) the marginal revenue of the joint products before the split-off point exceeds the marginal cost of the joint products

Diff: 2

LO: 6-5

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

8) Uptown Corporation has a joint process that produces three products: P, G and A. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to \$20,000. Other data follows:

Sales Value Separable Processing Sales Value

Product at Split-Off Costs after Split-Off at Completion

P \$32,000 \$5,000 \$39,000

G 16,500 7,500 29,000

A 6,400 8,000 10,000

Processing Product P beyond the split-off point will cause profits to ________.

1. A) be unchanged
2. B) increase by \$2,000
3. C) increase by \$3,000
4. D) increase by \$7,000

Diff: 2

LO: 6-5

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

9) Mayfair Corporation has a joint process that produces three products: P, G and A. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to \$15,000. Other data follows:

Sales Value Separable Processing Sales Value

Product at Split-Off Costs after Split-Off at Completion

P \$62,000 \$5,000 \$88,000

G 12,500 6,500 19,500

A 9,400 5,000 12,000

Processing Product G beyond the split-off point will cause profits to ________.

1. A) be unchanged
2. B) increase by \$500
3. C) increase by \$1,000
4. D) increase by \$7,000

Diff: 2

LO: 6-5

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

10) Southridge Corporation has a joint process that produces two products: A and B. Each product may be sold at the split-off point or processed further and then sold. Joint-processing costs for a year are \$20,000.

Product A can be sold at the split-off point for \$32,000. Alternatively, Product A can be processed further and sold for \$40,000. Additional processing costs are \$5,000.

When deciding whether to sell Product A at the split-off point or to process further, the ________ is NOT relevant.

1. A) joint processing cost of \$20,000
2. B) sales value at split-off of \$32,000
3. C) sales value at completion of \$40,000
4. D) additional processing cost of \$5,000

Diff: 2

LO: 6-5

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

11) Brookfield Corporation has a joint process that produces three products: X, Y and Z. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to \$100,000. Other data follows:

Sales Value Separable Processing Sales Value

Product at Split-Off Costs after Split-Off at Completion

X \$128,000 \$16,000 \$150,000

Y 75,000 26,000 99,000

Z 32,600 20,000 50,000

Processing Product X beyond the split-off point will cause profits to ________.

1. A) be unchanged
2. B) increase by \$6,000
3. C) increase by \$16,000
4. D) increase by \$22,000

Diff: 2

LO: 6-5

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

12) Boston Corporation has a joint process that produces three products: X, Y and Z. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to \$100,000. Other data follows:

Sales Value Separable Processing Sales Value

Product at Split-Off Costs after Split-Off at Completion

X \$128,000 \$16,000 \$160,000

Y 50,000 25,000 77,000

Z 25,600 20,000 40,000

Processing Product Y beyond the split-off point will cause profits to ________.

1. A) be unchanged
2. B) increase by \$1,000
3. C) increase by \$2,000
4. D) increase by \$27,000

Diff: 2

LO: 6-5

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

13) Cleveland Corporation has a joint process that produces three products: X, Y and Z. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to \$100,000. Other data follows:

Sales Value Separable Processing Sales Value

Product at Split-Off Costs after Split-Off at Completion

X \$128,000 \$16,000 \$140,000

Y 50,000 27,000 76,000

Z 25,600 10,000 40,000

To maximize profits, the corporation should process ________ further.

1. A) Product Z only
2. B) Product Y only
3. C) Product X only
4. D) Products X, Y and Z

Diff: 2

LO: 6-5

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

14) Chicago Corporation has a joint process that produces three products: X, Y and Z. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to \$100,000. Other data follows:

Sales Value Separable Processing Sales Value

Product at Split-Off Costs after Split-Off at Completion

X \$128,000 \$16,000 \$152,000

Y 50,000 26,000 76,000

Z 25,600 20,000 40,000

Processing Product X beyond the split-off point will cause profits to ________.

1. A) be unchanged
2. B) increase by \$8,000
3. C) increase by \$24,000
4. D) decrease by \$24,000

Diff: 2

LO: 6-5

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

15) DesPlaines Corporation has a joint process that produces three products: P, G and A. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to \$25,000. The production level for each product is 10,000 units. Other data follows:

Sales Value Separable Processing Sales Value

Product at Split-Off Costs after Split-Off at Completion

P \$12 \$8 \$20

G 10 4 17

A 15 6 19

If Product P is processed beyond the split-off point, profits will ________.

1. A) increase by \$90,000
2. B) increase by \$120,000
3. C) increase by \$210,000
4. D) remain the same

Diff: 2

LO: 6-5

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

16) Lisle Corporation has a joint process that produces three products: P, G and A. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to \$25,000. The production level for each product is 10,000 units. Other data follows:

Sales Value Separable Processing Sales Value

Product at Split-Off Costs after Split-Off at Completion

P \$12 \$9 \$21

G 10 3 17

A 15 6 19

Product G ________.

1. A) should be sold at split-off point to maximize profits
2. B) should be processed further to increase profits by \$30,000
3. C) should be processed further to increase profits by \$40,000
4. D) should be processed further to increase profits by \$70,000

Diff: 2

LO: 6-5

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

17) Downers Grove Corporation has a joint process that produces three products: P, G and A. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to \$25,000. The production level for each product is 10,000 units. Other data follows:

Sales Value Separable Processing Sales Value

Product at Split-Off Costs after Split-Off at Completion

P \$12 \$10 \$21

G 12 4 17

A 10 6 19

To maximize profits, Downers Grove Corporation should process ________ further.

1. A) Product P only
2. B) Product G only
3. C) Product A only
4. D) Products G and A only

Diff: 2

LO: 6-5

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

18) Naperville Corporation has a joint process that produces three products: P, G and A. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to \$25,000. The production level for each product is 10,000 units. Other data follows:

Sales Value Separable Processing Sales Value

Product at Split-Off Costs after Split-Off at Completion

P \$12 \$8 \$21

G 10 4 17

A 15 6 19

Processing Product P beyond the split-off point will cause profits to ________.

1. A) be unchanged
2. B) increase by \$10,000
3. C) increase by \$80,000
4. D) increase by \$90,000

Diff: 2

LO: 6-5

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

19) Woodridge Corporation has a joint process that produces three products: P, G and A. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to \$25,000. The production level for each product is 1,000 units. Other data follows:

Sales Value Separable Processing Sales Value

Product at Split-Off Costs after Split-Off at Completion

P \$12 \$9 \$21

G 10 4 17

A 15 6 19

Assume Woodridge Corporation processes the joint products beyond the split-off point that will maximize net income. Woodridge Corporation’s net income is ________.

1. A) \$12,000
2. B) \$15,000
3. C) \$17,000
4. D) \$25,000

Diff: 3

LO: 6-5

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

20) Separable costs are part of a joint process and cannot be exclusively identified with individual products.

Diff: 2

LO: 6-5

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

21) The split-off point is the juncture in manufacturing where the joint products become individually identifiable.

Diff: 2

LO: 6-5

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

22) The relevant information for a sell or process further decision for joint products includes the costs incurred before the split-off point.

Diff: 2

LO: 6-5

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

23) It is profitable to extend processing or to incur additional costs on a joint product if the additional revenue exceeds the joint cost.

Diff: 2

LO: 6-5

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

24) The allocation of joint costs to joint products should affect the decision to sell or process the joint products further.

Diff: 2

LO: 6-5

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

25) Foster Corporation has a joint process, which produces three products, A, B and C. Each product may be sold at split-off or processed further and then sold. Joint processing costs for a year are \$40,000. Other relevant data are:

Sales Value Separable Processing Sales Value

Product at Split-Off Costs After Split-Off at Completion

A \$15,500 \$2,200 \$17,700

B 18,000 8,000 23,000

C 24,000 11,500 37,500

Required:

1. A) Which products should be processed further? Why?
2. B) If the Foster Company maximizes profits, what is the operating income?

1. A) Only Product C should be processed further. The additional revenues (\$37,500 – \$24,000) exceed the additional costs (\$11,500) of further processing.
2. B) Product A Revenue \$15,500

Product B Revenue 18,000

Product C Revenue 37,500

Less: Joint Costs (40,000)

Less: Product C Addtl. Costs (11,500)

Operating income \$19,500

Diff: 3

LO: 6-5

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

26) Sealy Company has a joint process, which produces three products called A, B and C. Each product may be sold at split-off or processed further and then sold. Joint processing costs for a year are \$20,000. Other relevant data are:

Sales Value Separable Processing Sales Value

Product at Split-Off Costs After Split-Off at Completion

A \$94,000 \$28,000 \$115,000

B 60,000 10,000 82,000

C 66,000 14,000 79,000

Required:

1. A) Which products should be processed further? Why?
2. B) If the Sealy Company maximizes profits, what is the operating income?

1. A) Only Product B should be processed further. The additional revenues (\$82,000 – \$60,000) exceed the additional costs (\$10,000) of further processing.
2. B) Product A Revenue \$94,000

Product B Revenue 82,000

Product C Revenue 66,000

Less: Joint Costs (20,000)

Less: Product B Addtl. Costs (10,000)

Operating income \$212,000

Diff: 3

LO: 6-5

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

6.6 Questions

1) Equipment to be sold has a book value of \$4,000. The cost of the equipment is \$10,000. The cash received at sale is \$2,000. What is the gain or loss on disposal of the equipment?

1. A) loss on disposal of \$2,000
2. B) loss on disposal of \$4,000
3. C) loss on disposal of \$6,000
4. D) gain on disposal of \$2,000

Diff: 2

LO: 6-6

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

2) When considering the replacement of old equipment, which of the following item is relevant?

1. A) loss on disposal of old equipment
2. B) book value of old equipment
3. C) accumulated depreciation on old equipment
4. D) future maintenance costs of old equipment

Diff: 2

LO: 6-6

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

3) Book value on a depreciable asset is defined as ________.

1. A) residual value less cost
2. B) residual value less accumulated depreciation
3. C) cost less accumulated depreciation
4. D) residual value

Diff: 1

LO: 6-6

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

4) Which of the following costs is NOT relevant to an equipment replacement decision?

1. A) cost of new equipment
2. B) operating cost of new equipment
3. C) operating cost of old equipment(several years left)
4. D) cost of old equipment

Diff: 2

LO: 6-6

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

5) Which of the following cost is relevant to an equipment replacement decision?

1. A) cost of old equipment
2. B) cost of new equipment
3. C) book value of old equipment
4. D) depreciation expense on old equipment

Diff: 2

LO: 6-6

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

6) BEE Company is considering the replacement of a machine that is presently used in production. Which of the following items are irrelevant to the replacement decision?

1. A) annual operating cost of the old machine (2 years left)
2. B) original cost of the new machine
3. C) disposal value of the old machine at time of replacement
4. D) original cost of old machine

Diff: 2

LO: 6-6

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

7) Ernie Company is considering replacing a machine that is currently used in the production process. The ________ is irrelevant to the replacement decision.

1. A) cost of the new machine
2. B) disposal value of old machine
3. C) book value of old machine
4. D) annual operating cost of old machine (2 years left)

Diff: 2

LO: 6-6

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

8) Benson Company is considering the replacement of a machine that is presently used in production. The following data are available:

Old Machine New Machine

Original cost \$57,000 \$35,000

Useful life in years 17 5

Current age in years 12 0

Book value \$39,000 –

Disposal value now \$8,000 –

Disposal value in 5 years 0 0

Annual cash operating costs \$7,000 \$4,000

Adding all five years together, the total relevant costs to consider if the new machine is purchased is ________.

1. A) \$12,000
2. B) \$27,000
3. C) \$47,000
4. D) \$55,000

Diff: 2

LO: 6-6

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

9) Gray Lake Company is considering the replacement of a machine that is presently used in production. The following data are available:

Old Machine New Machine

Original cost \$57,000 \$35,000

Useful life in years 17 5

Current age in years 12 0

Book value \$39,000 –

Disposal value now \$8,000 –

Disposal value in 5 years 0 0

Annual cash operating costs \$7,000 \$4,000

Adding all five years together, the total relevant costs to consider if the old machine is not replaced is ________.

1. A) \$22,000
2. B) \$31,000
3. C) \$35,000
4. D) \$39,000

Diff: 2

LO: 6-6

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

10) Inverness Company is considering the replacement of a machine that is presently used in production. The following data are available:

Old Machine New Machine

Original cost \$57,000 \$35,000

Useful life in years 17 5

Current age in years 12 0

Book value \$39,000 –

Disposal value now \$8,000 –

Disposal value in 5 years 0 0

Annual cash operating costs \$7,000 \$4,000

Adding all five years together, what is the difference in total relevant costs between the old machine and the new machine?

1. A) \$12,000
2. B) \$15,000
3. C) \$22,000
4. D) \$37,000

Diff: 2

LO: 6-6

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

11) Amanda Company is considering the replacement of a machine that is presently used in production. The following data are available:

Old Machine New Machine

Original cost \$200,000 \$160,000

Useful life in years 10 5

Current age in years 5 0

Book value \$100,000 –

Disposal value now \$32,000 –

Disposal value in 5 years 0 0

Annual cash operating costs \$20,000 \$14,000

Adding all five years together, the total relevant costs to consider if the new machine is purchased is ________.

1. A) \$70,000
2. B) \$100,000
3. C) \$198,000
4. D) \$230,000

Diff: 2

LO: 6-6

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

12) Park Ridge Company is considering the replacement of a machine that is presently used in production. The following data are available:

Old Machine New Machine

Original cost \$200,000 \$160,000

Useful life in years 10 5

Current age in years 5 0

Book value \$100,000 –

Disposal value now \$32,000 –

Disposal value in 5 years 0 0

Annual cash operating costs \$20,000 \$14,000

Adding all five years together, the total relevant costs to consider if the old machine is kept is ________.

1. A) \$32,000
2. B) \$68,000
3. C) \$80,000
4. D) \$100,000

Diff: 2

LO: 6-6

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

13) Gurnee Company is considering the replacement of a machine that is presently used in production. The following data are available:

Old Machine New Machine

Original cost \$200,000 \$160,000

Useful life in years 10 5

Current age in years 5 0

Book value \$100,000 –

Disposal value now \$32,000 –

Disposal value in 5 years 0 0

Annual cash operating costs \$20,000 \$14,000

Adding all five years together, what is the difference in total relevant costs between the old and new machines?

1. A) \$12,000
2. B) \$30,000
3. C) \$98,000
4. D) \$130,000

Diff: 2

LO: 6-6

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

14) The gain or loss on the disposal of equipment is determined by ________.

1. A) subtracting the book value of the old equipment to the cost of the new equipment
2. B) subtracting the disposal value of the old equipment to the book value of the old equipment
3. C) subtracting the book value of the old equipment from the cash received for the old equipment
4. D) subtracting the book value of the old equipment from the cost of the new equipment

Diff: 2

LO: 6-6

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

15) Sunbury Company is considering the replacement of a machine that is presently used in production. The following data are available:

Old Machine New Machine

Original cost \$60,000 \$35,000

Useful life in years 10 5

Current age in years 5 0

Book value \$25,000 –

Disposal value now \$8,000 –

Disposal value in 5 years 0 0

Annual cash operating costs \$12,000 \$4,000

Adding all five years together, the total relevant costs to consider if the old machine is kept are ________.

1. A) \$30,000
2. B) \$50,000
3. C) \$52,000
4. D) \$60,000

Diff: 2

LO: 6-6

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

16) The disposal value of old equipment is relevant in equipment replacement decisions.

Diff: 2

LO: 6-6

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

17) Sunk cost is used to describe a historical cost or past cost.

Diff: 1

LO: 6-6

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

18) When making a decision to replace some old equipment with new equipment, the book value of the old equipment is irrelevant information.

Diff: 2

LO: 6-6

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

19) An equipment’s book value is the original cost plus accumulated depreciation.

Diff: 2

LO: 6-6

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

20) The cost of new equipment is relevant in deciding whether to keep or replace old equipment.

Diff: 2

LO: 6-6

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

21) Past costs are irrelevant in equipment replacement decisions.

Diff: 1

LO: 6-6

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

22) Jorgensen Company is considering the replacement of equipment used in operations. The following data are available:

Old Equipment New Equipment

Original cost \$210,000 \$40,000

Useful life in years 12 7

Current age in years 5 0

Book value \$65,000 –

Disposal value now \$30,000 –

Disposal value in 7 years 0 0

Annual cash operating costs \$9,000 \$8,000

Required:

1. A) Prepare a cost comparison for replacing the old equipment. Use only relevant items and add the items together for the next 7 years.
2. B) Should the old equipment be replaced?

A)

Keep Replace Difference

Cash operating costs \$63,000 \$56,000 \$7,000

Disposal value old equip. (30,000) 30,000

New equipment, cost ______ 40,000 (40,000)

Total relevant costs \$63,000 \$66,000 \$(3,000)

1. B) The old equipment should not be replaced.

Diff: 2

LO: 6-6

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

23) Mueller Company is considering the replacement of equipment used in operations. The following data are available:

Old Equipment New Equipment

Original cost \$93,000 \$60,000

Useful life in years 13 6

Current age in years 7 0

Book value \$57,000 –

Disposal value now \$50,000 –

Disposal value in 6 years 0 0

Annual cash operating costs \$14,000 \$11,000

Required:

1. A) Prepare a cost comparison for replacing the old equipment. Use only relevant items and add the items together for the next 6 years.
2. B) Should the old equipment be replaced?

A)

Keep Replace Difference

Cash operating costs \$84,000 \$66,000 \$18,000

Disposal value of old equip. (50,000) 50,000

New equipment, cost ______ 60,000 (60,000)

Total relevant costs \$84,000 \$76,000 \$8,000

1. B) The old equipment should be replaced.

Diff: 2

LO: 6-6

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

6.7 Questions

1) When choosing between two alternatives, what of the following are relevant costs?

1. A) future variable costs that are the same under two alternatives
2. B) future variable costs that are different under two alternatives
3. C) future fixed costs that are different under two alternatives
4. D) B and C

Diff: 2

LO: 6-7

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs

2) The following is a useful rule of thumb when making operational decisions. Managers should NOT use ________.

1. A) variable cost per unit
2. B) total variable costs
3. C) fixed cost per unit
4. D) total fixed costs

Diff: 2

LO: 6-7

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs

3) LL Company produces and sells a product that has variable costs of \$9 per unit and fixed costs of \$200,000 per year. If production decreases from 50,000 to 40,000 units, the total cost per unit will ________.

1. A) increase by \$1
2. B) increase by \$13
3. C) decrease by \$1
4. D) decrease by \$14

Diff: 1

LO: 6-7

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs

4) Melissa Company produces and sells a product that has variable costs of \$8 per unit and fixed costs of \$240,000 per year. If 20,000 units are produced and sold in a year, what is the total cost per unit?

1. A) \$5
2. B) \$8
3. C) \$12
4. D) \$20

Diff: 1

LO: 6-7

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs

5) Zach Company produces and sells a product that has variable costs of \$7 per unit and fixed costs of \$200,000 per year. If 40,000 units are produced and sold in a year, what is the total cost per unit?

1. A) \$7
2. B) \$10
3. C) \$12
4. D) \$17

Diff: 1

LO: 6-7

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs

6) Joshua Company produces and sells a product that has variable costs of \$7 per unit and fixed costs of \$200,000 per year. If production increases from 20,000 units to 25,000 units, the total cost will ________.

1. A) increase by \$35,000
2. B) decrease by \$2 per unit
3. C) decrease by \$8 per unit
4. D) stay the same

Diff: 1

LO: 6-7

AACSB: Analytic skills

Learning Outcome: Distinguish between relevant and irrelevant costs

7) When analyzing alternatives, it is not advisable to use fixed costs per unit because a new fixed cost per unit must be calculated for every different volume of production.

Diff: 2

LO: 6-7

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs

8) Future costs are irrelevant if they are the same under all feasible alternatives.

Diff: 2

LO: 6-7

AACSB: Reflective thinking skills

Learning Outcome: Distinguish between relevant and irrelevant costs

6.8 Questions

1) Managers may be tempted to make decisions that are not in the best interests of the company because ________.

1. A) performance measures in use reward them for decisions that are in the best interests of the company
2. B) performance measures in use reward them for decisions that are not in the best interests of the company
3. C) the managers do not understand the use of decision-making tools
4. D) the managers are evaluated several times each year

Diff: 2

LO: 6-8

AACSB: Reflective thinking skills

Learning Outcome: None

2) A widespread problem in practice is that the decision model used by managers for ________ and the model used by their superiors in ________ are different.

1. A) outsourcing; incremental analysis
2. B) outsourcing; differential analysis
3. C) decision making; performance evaluation
4. D) operational decisions; joint costing

Diff: 2

LO: 6-8

AACSB: Reflective thinking skills

Learning Outcome: None

3) Since managers are usually evaluated based on the operating results in one year, they do not usually consider the long range impact of their decisions.

Diff: 2

LO: 6-8

AACSB: Reflective thinking skills

Learning Outcome: None

4) Conflicts in the decision-making process can arise when superiors evaluate a manager’s performance using a model consistent with the decision model used by the manager.

Diff: 2

LO: 6-8

AACSB: Reflective thinking skills

Learning Outcome: None

5) Generally, companies use aggregate measures of performance when conducting performance evaluations of managers.

Diff: 2

LO: 6-8

AACSB: Reflective thinking skills

Learning Outcome: None

Introduction to Management Accounting, 16e (Horngren)

Chapter 7 Introduction to Budgets and Preparing the Master Budget

7.1 Questions

1) Which of the following statements about budgets and budgeting is FALSE?

1. A) Budgets help coordinate financial and operational activities.
2. B) The vast majority of managers use budgeting as an effective cost management tool.
3. C) Budgeting is the process of formulating an organization’s plans.
4. D) Managers do not use budgets for performance evaluation.

Diff: 2

LO: 7-1

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

2) In practice, when developing a budget, two extremes used for guidance are ________ and ________.

1. A) participative budget; zero-base budget
2. B) strategic budget; long-range budget
3. C) financial planning budget; strategic budget
4. D) zero-base budget; activities of current or prior period

Diff: 2

LO: 7-1

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

3) A major benefit of effective budgeting is that ________.

1. A) it compels managers to think ahead
2. B) it aids managers in communicating objectives to employees
3. C) it provides benchmarks to evaluate subsequent performance
4. D) all of the above

Diff: 1

LO: 7-1

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

4) A(n) ________ starts with the assumption that current activities in a company will not automatically continue in the next period.

1. A) activity-based budget
2. B) strategic budget
3. C) master budget
4. D) zero-base budget

Diff: 2

LO: 7-1

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

5) The most effective budget processes facilitate communication from top management to ________ and from lower level managers and employees to ________.

1. A) the SEC; the audit committee
2. B) stockholders; creditors
3. C) lower level managers and employees; top management
4. D) creditors; stockholders

Diff: 1

LO: 7-1

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

6) Potential problems that can limit the benefits of budgeting do NOT include ________.

1. A) low levels of employee participation in the budget process
2. B) incentives to lie and cheat in the budget process
3. C) difficulties in obtaining accurate sales forecasts
4. D) an emphasis on functional budgeting

Diff: 1

LO: 7-1

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

7) A major drawback of using historical results for judging current performance is that ________.

1. A) past results may be inaccurate
2. B) results may refer to a different manager
3. C) inefficiencies may be concealed in past results
4. D) managers may have cooked the books

Diff: 2

LO: 7-1

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

8) A budget is an example of an informal business plan.

Diff: 1

LO: 7-1

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

9) A budget is a qualitative expression of a plan of action.

Diff: 1

LO: 7-1

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

10) There are fewer benefits from budgeting in companies with uncertain or complicated environments.

Diff: 2

LO: 7-1

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

11) Budgeted performance goals generally provide a better basis for evaluating actual performance than past performance.

Diff: 2

LO: 7-1

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

12) A major drawback of using historical results for judging current performance is that inefficiencies may be concealed in past performance.

Diff: 2

LO: 7-1

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

13) An effective budget process communicates from the top down, but not from the bottom up.

Diff: 2

LO: 7-1

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

7.2 Questions

1) Factors that affect employee acceptance of budgets include ________.

1. A) perceived attitude of top management towards budgeting
2. B) level of participation by employees in budget process
3. C) degree of alignment between budget and employees’ performance goals
4. D) all of the above

Diff: 1

LO: 7-2

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

2) Misalignment between the ________ stressed in budgets and ________ used to reward employees and managers can limit the advantages of budgeting.

1. A) performance goals; participative goals
2. B) performance goals; performance measures
3. C) sales goals; bonuses
4. D) resource goals; bonuses

Diff: 1

LO: 7-2

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

3) One way to reduce negative attitudes of managers toward budgets is by ________.

1. A) zero-based budgeting
2. B) activities-based budgeting
3. C) long range planning
4. D) participative budgeting

Diff: 1

LO: 7-2

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

4) ________ budgeting is when budgets are formulated with the active involvement of all affected employees.

1. A) Rolling
2. B) Team
3. C) Participative
4. D) Zero-based

Diff: 1

LO: 7-2

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

5) The effectiveness of any budgeting system depends directly on the attitudes of top management toward the budgeting system.

Diff: 2

LO: 7-2

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

6) Participative budgeting is the active participation of all affected employees in the formulation of the budget.

Diff: 1

LO: 7-2

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

7.3 Questions

1) Budgeting can result in incentives to lie and cheat that undermine ________.

1. A) a company’s ethical standards
2. B) a company’s value chain
3. C) standard of objectivity promulgated by the Institute of Management Accountants
4. D) none of the above

Diff: 1

LO: 7-3

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

2) Managers may ________ their budgeted costs or ________ their budgeted revenue to create a budget target that is easier to achieve.

1. A) understate; overstate
2. B) overstate; understate
3. C) understate; understate
4. D) overstate; overstate

Diff: 1

LO: 7-3

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

3) Which of the following is NOT a reason for budgetary slack?

1. A) to buffer managers from budget cuts imposed by top management
2. B) to provide protection against cost increases or revenue shortfalls due to unforeseen events
3. C) to facilitate attainment of performance goals
4. D) to impose a formal structure for planning purposes

Diff: 1

LO: 7-3

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

4) Misuse of budgets can lead to incentives to cheat and lie. Cheating and lying may take the form of ________.

1. A) making short-run decisions to increase profits that are not in the company’s best long-run interests
2. B) budgetary slack
3. C) decreasing profits when actual profits significantly exceed the profit target
4. D) all of the above

Diff: 2

LO: 7-3

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

5) How can a company avoid lying by employees when preparing a budget?

1. A) reward good budget forecasts
2. B) reward good performance against the budget
3. C) reward good budget forecasts and reward good performance against the budget
4. D) reward good recipes for cooking the books

Diff: 1

LO: 7-3

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

6) Managers may lie to increase the resources allocated to their departments.

Diff: 2

LO: 7-3

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

7) Budgetary slack helps buffer managers from budget cuts imposed by higher-level management.

Diff: 2

LO: 7-3

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

8) “Cooking the books” refers to recording fictitious sales or omitting costs.

Diff: 2

LO: 7-3

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

7.4 Questions

1) Where does a company find forecasted financial statements for a five to ten year period?

1. A) strategic plan
2. B) master budget
3. C) rolling budget
4. D) long-range plan

Diff: 1

LO: 7-4

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

2) A company identifies the following goals and objectives:

Increase sales 10 percent each year.

Increase profits 5 percent each year.

Increase total plant assets 5 percent each year.

Which of the following budgets identifies the overall goals and objectives of an organization?

1. A) sales budget
2. B) master budget
3. C) strategic plan
4. D) financial planning model

Diff: 2

LO: 7-4

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

3) A manager has several forecasts of sales corresponding to different levels of advertising. The manager decides to implement \$1 million of advertising in the next fiscal year. At this level of advertising, the manager uses the ________ in the ________.

1. A) sales goal; sales forecast
2. B) sales budget; sales forecast
3. C) sales forecast; sales goal
4. D) sales forecast; sales budget

Diff: 1

LO: 7-4

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

4) Which schedule gives the expected sales under a given set of conditions?

1. A) sales goal
2. B) sales budget
3. C) sales forecast
4. D) master budget

Diff: 1

LO: 7-4

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

5) Important factors used to forecast sales for a company include all of the following items EXCEPT ________.

1. A) changes in firm’s prices
2. B) general economic conditions
3. C) changes in product mix
4. D) layout of production equipment

Diff: 1

LO: 7-4

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

6) Decisions made during long-range planning include ________.

1. A) addition or deletion of product line
2. B) location of new plant
3. C) purchase of equipment
4. D) all of the above

Diff: 2

LO: 7-4

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

7) No matter how many technical experts a company uses in forecasting, the sales budget should ultimately be the responsibility of the ________.

1. A) economists
2. B) CEO
3. C) line managers
4. D) market research staff

Diff: 1

LO: 7-4

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

8) Which of the following statements is FALSE about a strategic plan?

1. A) A strategic plan does not deal with a specific time period.
2. B) A strategic plan does not produce forecasted financial statements.
3. C) A strategic plan guides day-to-day operations.
4. D) A strategic plan provides an overall framework for a long-range plan.

Diff: 2

LO: 7-4

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

9) Which of the following statements about long-range plans is FALSE?

1. A) Long-range plans provide forecasted financial statements for five to ten year periods.
2. B) Long-range plans guide day-to-day operations.
3. C) Companies coordinate long-range plans with capital budgets.
4. D) A decision made during long-range planning is the acquisition of a plant building.

Diff: 2

LO: 7-4

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

10) Which of the following budgets identifies the overall goals and objectives of the organization?

1. A) capital budget
2. B) cash budget
3. C) master budget
4. D) strategic plan

Diff: 1

LO: 7-4

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

11) When examining a master budget, where does a company find the planned expenditures for facilities and equipment?

1. A) operating expense budget
2. B) capital budget
3. C) operating budget
4. D) purchases budget

Diff: 1

LO: 7-4

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

12) A sales budget is a prediction of sales under a given set of conditions.

Diff: 1

LO: 7-4

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

13) Accurate sales forecasting is essential to effective budgeting.

Diff: 1

LO: 7-4

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

14) Sales forecasts are usually prepared under the direction of the top sales executive.

Diff: 1

LO: 7-4

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

15) The sales budget should be the responsibility of line management.

Diff: 2

LO: 7-4

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

16) The most forward-looking and least detailed budget is the strategic plan.

Diff: 2

LO: 7-4

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

17) A decision made during long-range planning includes whether to delete a product from a company’s product line.

Diff: 2

LO: 7-4

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

7.5 Questions

1) Which budget guides day-to-day operations in a business?

1. A) sales budget
2. B) strategic plan
3. C) master budget
4. D) long-range plan

Diff: 1

LO: 7-5

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

2) In a master budget, the schedule of cash disbursements for operating expenses is used to prepare the ________.

1. A) capital budget
2. B) purchases and cost of goods sold budget
3. C) sales budget
4. D) cash budget

Diff: 2

LO: 7-5

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

3) In a master budget, the schedule of cash disbursements for purchases of inventory is used to prepare the ________.

1. A) operating expense budget
2. B) purchases budget
3. C) capital budget
4. D) cash budget

Diff: 2

LO: 7-5

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

4) In a master budget, a capital budget is used to prepare the ________.

1. A) sales budget
2. B) budgeted income statement
3. C) purchases and cost of goods sold budget
4. D) cash budget

Diff: 2

LO: 7-5

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

5) The master budget is a detailed and comprehensive analysis of the ________ of the ________ plan.

1. A) first month; activity-based strategic
2. B) first month; strategic
3. C) first year; continuous
4. D) first year; long-range

Diff: 1

LO: 7-5

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

6) The two main components of the master budget are the ________.

1. A) cash budget and the capital budget
2. B) purchases budget and the budgeted income statement
3. C) budgeted income statement and the budgeted balance sheet
4. D) operating budget and the financial budget

Diff: 2

LO: 7-5

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

7) The ________ budget focuses on the budgeted income statement and the supporting schedules.

1. A) financial
2. B) operating
3. C) operating expense
4. D) purchases and cost of goods sold

Diff: 1

LO: 7-5

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

8) Which of the following is NOT a component of the operating budget?

1. A) sales budget
2. B) operating expense budget
3. C) capital budget
4. D) budgeted income statement

Diff: 2

LO: 7-5

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

9) Which of the following is NOT a component of the operating budget?

1. A) capital budget
2. B) purchases and cost of goods sold budget
3. C) budgeted income statement
4. D) operating expense budget

Diff: 2

LO: 7-5

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

10) Which of the following is NOT a component of the financial budget?

1. A) capital budget
2. B) cash budget
3. C) budgeted balance sheet
4. D) budgeted income statement

Diff: 2

LO: 7-5

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

11) Which of the following is a component of the financial budget?

1. A) budgeted balance sheet
2. B) budgeted income statement
3. C) sales budget
4. D) purchases budget

Diff: 2

LO: 7-5

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

12) The financial budget includes ________.

1. A) the capital budget and the sales budget only
2. B) the capital budget and the budgeted income statement only
3. C) the capital budget, the cash budget and the budgeted balance sheet
4. D) the cash budget and the purchases budget only

Diff: 2

LO: 7-5

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

13) A cash budget is a business plan that includes a set of schedules and financial statements.

Diff: 2

LO: 7-5

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

14) The elements of a financial budget for a merchandising firm include the capital budget, the cash budget and the budgeted balance sheet.

Diff: 2

LO: 7-5

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

15) An operating budget is the major part of the master budget that focuses on the balance sheet and supporting schedules.

Diff: 2

LO: 7-5

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

7.6 Questions

1) The final output of the operating budget is ________.

1. A) budgeted statement of stockholders’ equity
2. B) budgeted balance sheet
3. C) budgeted income statement
4. D) budgeted statement of cash flows

Diff: 2

LO: 7-6

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

2) The final output of the financial budget is ________.

1. A) budgeted statement of stockholders’ equity
2. B) budgeted balance sheet
3. C) budgeted income statement
4. D) budgeted statement of cash flows

Diff: 2

LO: 7-6

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

3) What is the sequence of steps(order of preparation) for the operating budget?

1. A) sales budget, operating expense budget, purchases and cost of goods sold budget
2. B) sales budget, capital budget, operating expense budget
3. C) sales budget, purchases and cost of goods sold budget, schedule of cash collections from customers, operating expense budget
4. D) sales budget, schedule of cash collections from customers, purchases and cost of goods sold budget, schedule of cash disbursements for purchases, operating expense budget

Diff: 2

LO: 7-6

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

4) What is the sequence of steps(order of preparation) for the financial budget?

1. A) sales budget, capital budget, cash budget, budgeted income statement
2. B) sales budget, operating expense budget, purchases and cost of goods sold budget
3. C) capital budget, cash budget, budgeted balance sheet
4. D) disbursements for purchases, disbursements for operating expenses, cash budget

Diff: 2

LO: 7-6

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

5) What is the sequence of steps in preparing the master budget?

1. A) Output from the financial budget is used to prepare the operating budget.
2. B) Output from the operating budget is used to prepare the financial budget.
3. C) Output from the financial budget is used to prepare the budgeted income statement.
4. D) Output from the financial budget is used to prepare the operating expense budget.

Diff: 2

LO: 7-6

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

7.7 Questions

1) Which budget is used to develop the schedule of cash disbursements for operating expenses?

1. A) purchases and cost of goods sold budget
2. B) cash disbursements budget
3. C) operating expense budget
4. D) cash budget

Diff: 2

LO: 7-7

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

2) What item is NOT a line item on the purchases and cost of goods sold budget?

1. A) purchases of inventory
2. B) sales
3. C) beginning inventory
4. D) desired ending inventory

Diff: 2

LO: 7-7

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

3) The schedule of cash disbursements for purchases uses the ________.

1. A) sales budget
2. B) operating expense budget
3. C) schedule of cash disbursements for operating expenses
4. D) purchases and cost of goods sold budget

Diff: 2

LO: 7-7

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

4) The schedule of cash collections from customers has ________.

1. A) cash sales only
2. B) collections on credit sales only
3. C) A and B
4. D) budgeted purchases

Diff: 2

LO: 7-7

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

5) The schedule of cash disbursements for operating expenses does NOT have ________.

1. A) rent expense
2. B) insurance expense
3. C) wages expense
4. D) amortization expense on patents

Diff: 2

LO: 7-7

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

6) When preparing the budgeted income statement, which of the following is the source for the amount of Cost of Goods Sold?

1. A) sales budget
2. B) operating expense budget
3. C) schedule of disbursements for operating expense
4. D) purchases and cost of goods sold budget

Diff: 2

LO: 7-7

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

7) When preparing the budgeted income statement, which of the following is the source for the amount of operating expenses?

1. A) schedule of disbursements for operating expenses
2. B) purchases budget
3. C) schedule of disbursements for purchases
4. D) operating expense budget

Diff: 2

LO: 7-7

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

8) When preparing the budgeted income statement, which of the following is the source for the amount of sales?

1. A) sales budget
2. B) purchases budget
3. C) operating expense budget
4. D) schedule of cash collections from customers

Diff: 1

LO: 7-7

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

9) The first step in preparing the master budget is the ________.

1. A) cash budget
2. B) capital budget
3. C) operating expense budget
4. D) sales budget

Diff: 1

LO: 7-7

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

10) The first step in preparing the financial budget is the ________.

1. A) cash budget
2. B) capital budget
3. C) operating expense budget
4. D) sales budget

Diff: 1

LO: 7-7

AACSB: Reflective thinking skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

11) For next year, David Company has budgeted sales of 8,000 units, target ending inventory of 1,000 units and a beginning inventory of 300 units. How many units should be purchased?

1. A) 5,700
2. B) 6,300
3. C) 7,700
4. D) 8,700

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

12) Matthew Company has a sales budget for next month of \$400,000. Cost of goods sold is expected to be 40% of sales. All units are paid for in the month following purchase. The beginning inventory is \$5,000 and an ending inventory of \$12,000 is desired. Beginning accounts payable is \$76,000. The cost of goods sold for next month is ________.

1. A) \$140,000
2. B) \$160,000
3. C) \$172,000
4. D) \$220,000

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

13) Michael Company has a sales budget for next month of \$300,000. Cost of goods sold is expected to be 50% of sales. All units are paid for in the month following purchase. The beginning inventory is \$10,000 and an ending inventory of \$12,000 is desired. Beginning accounts payable is \$76,000. The purchases for next month are ________.

1. A) \$138,000
2. B) \$140,000
3. C) \$150,000
4. D) \$152,000

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

14) Benjamin Company has the following data:

Month Budgeted Sales

January \$108,000

February 132,000

March 144,000

April 120,000

Cost of goods sold average 60% of sales. The inventory at December 31 was \$19,440. Desired ending inventory levels are 20% of next month’s sales at cost. What is the desired ending inventory value at February 28?

1. A) \$15,840
2. B) \$17,280
3. C) \$26,400
4. D) \$28,800

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

15) Downstairs Company has the following sales budget for the last six months of 2010:

July \$100,000

August 80,000

September 110,000

October 80,000

November 100,000

December 94,000

Historically, the cash collection of sales has been as follows:

65% of sales collected in month of sale

25% of sales collected in month following sale

8% of sales collected in second month following sale

2% of sales uncollectible

What are the expected cash collections of sales in October?

1. A) \$79,500
2. B) \$85,900
3. C) \$92,400
4. D) \$99,500

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

16) Upstairs Company has the following data:

Month Budgeted Sales

January \$108,000

February 132,000

March 144,000

April 120,000

The gross profit rate is 40% of sales and ending inventory at December 31 was \$19,440. Desired ending inventory levels are 30% of next month’s sales at cost. What are the expected total purchases for February?

1. A) \$79,200
2. B) \$81,360
3. C) \$102,960
4. D) \$105,120

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

17) Sebring Company has the following data:

Month Budgeted Sales

April \$40,000

May 44,000

June 50,000

July 52,000

August 48,000

The cost of goods sold percentage is 70% of sales and the desired ending inventory level is 25% of next month’s sales at cost. ________ was the beginning inventory on May 1.

1. A) \$3,300
2. B) \$7,700
3. C) \$8,750
4. D) \$11,000

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

18) Segal Company has the following data:

Month Budgeted Sales

May \$46,000

June 50,000

July 52,000

August 49,000

The cost of goods sold percentage is 80% of sales and the desired ending inventory level is 25% of next month’s sales at cost. What is the beginning inventory on August 1?

1. A) \$4,200
2. B) \$8,450
3. C) \$9,800
4. D) \$10,400

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

19) Bronkov Company has the following data:

Month Budgeted Sales

May \$46,000

June 50,000

July 52,000

August 48,000

The cost of goods sold percentage is 65% of sales and the desired ending inventory level is 25% of next month’s sales at cost. What are the expected total purchases for June?

1. A) \$17,500
2. B) \$32,500
3. C) \$32,825
4. D) \$40,950

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

20) Audrey Company has the following data:

Month Budgeted Sales

May \$46,000

June 50,000

July 52,000

August 48,000

The cost of goods sold percentage is 65% of sales and the desired ending inventory is 25% of next month’s sales at cost. What are the total purchases budgeted for July?

1. A) \$33,150
2. B) \$33,800
3. C) \$41,600
4. D) \$42,250

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

21) Santelle Company expects August sales to be \$30,000. Approximately 40% of sales are cash sales. Collection of credit sales are 50% in the month of sale, 40% in the month following sale and 5% two months following sale. The remaining 5% is uncollectible. ________ is the expected cash collection in August from August sales.

1. A) \$9,000
2. B) \$12,000
3. C) \$21,000
4. D) \$36,000

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

22) Hoover Company expects June sales to be \$30,000. Of these sales, credit sales are expected to be \$12,000. Collection of credit sales are 50% in the month of sale, 40% in the month following sale and 5% two months following sale. The remaining 5% is uncollectible. ________ is the expected cash collection in June from June sales.

1. A) \$9,200
2. B) \$14,000
3. C) \$17,200
4. D) \$24,000

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

23) Bush Company expects May sales to be \$20,000. Approximately 40% of sales are cash sales. Collection of credit sales are 50% in the month of sale, 40% in the month following sale and 5% two months following sale. The remaining 5% is uncollectible. ________ is the expected cash collection in May from May sales.

1. A) \$4,000
2. B) \$6,000
3. C) \$8,000
4. D) \$14,000

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

24) The following sales budget has been prepared:

Month Cash Sales Credit Sales

September \$167,000 \$123,000

October 225,000 180,000

November 330,000 210,000

December 135,000 190,000

Collections of credit sales are 50% in the month of sale, 40% in the month following sale, and 10% two months following sale. No uncollectible accounts are expected. What are the estimated cash collections in December?

1. A) \$135,000
2. B) \$197,000
3. C) \$325,000
4. D) \$332,000

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

25) Stickel Company has the following sales budget:

Month Cash Sales Credit Sales

September \$100,000 \$200,000

October 125,000 190,000

November 207,000 199,000

December 67,000 144,000

Collection of credit sales are 50% in the month of sale, 40% in the month following sale, and 10% two months following sale. No uncollectible accounts are expected. What is the expected balance of Accounts Receivable at October 31?

1. A) \$95,000
2. B) \$110,000
3. C) \$115,000
4. D) \$180,000

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

26) Slowinski Company has the following sales budget:

Month Cash Sales Credit Sales

September \$100,000 \$300,000

October 125,000 180,000

November 130,000 210,000

December 135,000 190,000

Collections of credit sales are 50% in the month of sale, 40% in the month following sale, and 10% two months following sale. No uncollectible accounts are expected. What are the estimated cash collections in November?

1. A) \$130,000
2. B) \$197,000
3. C) \$327,000
4. D) \$337,000

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

27) Corbin Company has prepared the following sales budget:

Month Cash Sales Credit Sales

September \$99,000 \$250,000

October 225,000 180,000

November 310,000 210,000

December 94,000 170,000

Collections of credit sales are 50% in the month of sale, 40% in the month following sale, and 10% two months following sale. No uncollectible accounts are expected. What is the expected balance in Accounts Receivable at November 30?

1. A) \$77,500
2. B) \$105,000
3. C) \$123,000
4. D) \$210,000

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

28) Dooley Company has prepared the following sales budget:

Month Cash Sales Credit Sales

September \$123,000 \$210,000

October 140,000 200,000

November 167,000 260,000

December 189,000 190,000

Collections of credit sales are 50% in the month of sale, 40% in the month following sale, and 10% two months following sale. No uncollectible accounts are expected. What are the estimated cash collections in October from October sales?

1. A) \$125,000
2. B) \$140,000
3. C) \$230,000
4. D) \$240,000

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

29) John Company has the following sales budget:

Month Cash Sales Credit Sales

September \$100,000 \$200,000

October 125,000 180,000

November 130,000 210,000

December 135,000 190,000

Collections of credit sales are 50% in the month of sale, 40% in the month following sale, and 10% two months following sale. No uncollectible accounts are expected. What is the expected balance in Accounts Receivable at December 31?

1. A) \$95,000
2. B) \$116,000
3. C) \$190,000
4. D) \$210,000

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

30) Rodney Company has the following sales budget:

Month Cash Sales Credit Sales

September \$100,000 \$250,000

October 125,000 180,000

November 130,000 210,000

December 135,000 190,000

Collections of credit sales are 50% in the month of sale, 40% in the month following sale, and 10% two months following sale. No uncollectible accounts are expected. What are the estimated cash collections in September from September sales?

1. A) \$100,000
2. B) \$200,000
3. C) \$225,000
4. D) \$250,000

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

31) Donnie Company has the following information:

Month Budgeted Sales

January \$80,000

February 85,000

March 92,000

April 79,000

Budgeted Operating Expenses Per Month

Wages \$15,000

Depreciation 3,000

Other expenses 4% of sales

All cash expenses are paid as incurred. What are the total operating expenses budgeted for the month of January?

1. A) \$30,000
2. B) \$30,040
3. C) \$31,200
4. D) \$33,200

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

32) Atkinson Company has the following information:

Month Budgeted Sales

January \$76,000

February 85,000

March 92,000

April 80,000

Budgeted Operating Expenses Per Month

Wages \$15,000

Depreciation 3,000

Other expenses 4% of sales

All cash expenses are paid as incurred. What are the total operating expenses budgeted for the month of April?

1. A) \$3,160
2. B) \$30,000
3. C) \$33,200
4. D) \$33,680

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

33) Jupiter Company has the following information:

Month Budgeted Sales

January \$76,000

February 85,000

March 100,000

April 79,000

Budgeted Operating Expenses Per Month

Wages \$15,000

Depreciation 3,000

Sales Commissions 4% of sales

All cash expenses are paid as incurred. What are the budgeted total cash disbursements for operating expenses in March?

1. A) \$3,680
2. B) \$30,000
3. C) \$31,000
4. D) \$34,000

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

34) Venus Company has the following information:

Month Budgeted Sales

January \$90,000

February 85,000

March 92,000

April 79,000

Budgeted Operating Expenses Per Month

Wages \$15,000

Depreciation 3,000

Sales Commission 4% of sales

All cash expenses are paid as incurred. What are the total cash disbursements budgeted for operating expenses for the month of January?

1. A) \$28,200
2. B) \$30,000
3. C) \$30,600
4. D) \$33,600

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

35) Paulson Company’s expected sales for April are \$29,000. Other information follows:

Budgeted Operating Expenses Amount

Wages \$4,000

Depreciation 1,440

Rent 2,560

Promotion 5% of sales

What are the total expected operating expenses for April?

1. A) \$6,240
2. B) \$9,680
3. C) \$9,690
4. D) \$11,130

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

36) Potter Company’s expected sales for April are \$29,000. Other information follows:

Budgeted Operating Expenses Amount

Wages \$4,000

Depreciation 1,440

Rent 2,560

Promotion 5% of sales

All cash expenses are paid as incurred. What are the expected total cash disbursements for operating expenses for April?

1. A) \$6,240
2. B) \$9,680
3. C) \$9,690
4. D) \$11,130

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

37) Paul Company’s expected sales for April are \$27,600. Other information follows:

Budgeted Operating Expenses Amount

Wages \$2,000

Patent amortization 1,440

Rent 2,560

Marketing 5% of sales

Which of the following operating expenses is a noncash expense?

2. B) Rent
3. C) Patent amortization
4. D) Wages

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

38) Mark Company has the following information:

Month Budgeted Purchases

January \$40,000

February 29,000

March 30,520

April 29,480

May 27,680

Purchases are paid as follows:

10% in the month of purchase

50% one month after purchase

40% two months after purchase

What is the estimated cash disbursement in March from January purchases?

1. A) \$3,052
2. B) \$12,000
3. C) \$14,500
4. D) \$16,000

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

39) Christian Company has the following information:

Month Budgeted Purchases

January \$26,800

February 29,000

March 30,520

April 29,480

May 27,680

Purchases are paid as follows:

10% in the month of purchase

50% one month after purchase

40% two months after purchase

What is the expected balance in Accounts Payable at March 31?

1. A) \$2,900
2. B) \$18,312
3. C) \$30,520
4. D) \$39,068

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

40) Healing Company has the following information:

Month Budgeted Purchases

January \$56,800

February 49,000

March 30,520

April 35,480

May 27,680

Purchases are paid as follows:

10% in the month of purchase

50% one month after purchase

40% two months after purchase

What is the estimated cash disbursement in May from April purchases?

1. A) \$11,072
2. B) \$11,792
3. C) \$13,840
4. D) \$17,740

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

41) May Company has the following information:

Month Budgeted Purchases

January \$33,000

February 37,000

March 31,000

April 30,000

May 27,680

Purchases are paid as follows:

75% in the month of purchase

25% one month after purchase

What is the expected balance in Accounts Payable on April 30?

1. A) 0
2. B) \$7,500
3. C) \$20,250
4. D) \$30,000

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

42) Marjorie Company has the following information:

Month Budgeted Purchases

January \$25,000

February 19,000

March 33,000

April 27,000

May 27,680

Purchases are paid as follows:

75% in the month of purchase

25% one month after purchase

What are the estimated cash disbursements in March?

1. A) \$22,500
2. B) \$24,750
3. C) \$29,500
4. D) \$39,000

Diff: 2

LO: 7-7

AACSB: Analytic skills

Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

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