Professional Documents
Culture Documents
2. Management and financial accounting are used for which of the following purposes?
a. internal external
b. external internal
c. internal internal
d. external external
5. Management accounting
a. is more concerned with the future than is financial accounting.
b. is less concerned with segments of a company than is financial accounting.
c. is more constrained by rules and regulations than is financial accounting.
d. all of the above are true.
ANS: A DIF: Easy OBJ: 1-1
11. The process of ___________ causes the need for cost accounting.
a. Conversion
b. Sales
c. Controlling
d. Allocating
ANS: A DIF: Easy OBJ: 1-1
13. Financial accounting and cost accounting are both highly concerned with
a. preparing budgets.
b. determining product cost.
c. providing managers with information necessary for control purposes.
d. determining performance standards.
ANS: B DIF: Easy OBJ: 1-1
14. Which of the following topics is of more concern to management accounting than to cost accounting?
a. generally accepted accounting principles
b. inventory valuation
c. cost of goods sold valuation
d. impact of economic conditions on company operations
ANS: D DIF: Moderate OBJ: 1-1
3. When cost relationships are linear, total variable prime costs will vary in proportion to changes in
a. direct labor hours.
b. total material cost.
c. total overhead cost.
d. production volume.
ANS: D DIF: Easy OBJ: 2-1
4. Which of the following would not generally be considered a fixed overhead cost?
a. no no no
b. yes no yes
c. yes yes no
d. no yes no
6. A cost that remains constant in total but varies on a per-unit basis with changes in activity is called a(n)
a. expired cost.
b. fixed cost.
c. variable cost.
d. mixed cost.
ANS: B DIF: Easy OBJ: 2-1
8. When the number of units manufactured increases, the most significant change in unit cost will be
reflected as a(n)
a. increase in the fixed element.
b. decrease in the variable element.
c. increase in the mixed element.
d. decrease in the fixed element.
ANS: D DIF: Easy OBJ: 2-1
a. yes yes
b. yes no
c. no yes
d. no no
a. yes no yes
b. no yes yes
c. no no no
d. yes yes yes
18. The indirect costs of converting raw material into finished goods are called
a. period costs.
b. prime costs.
c. overhead costs.
d. conversion costs.
ANS: C DIF: Easy OBJ: 2-2
21. The distinction between direct and indirect costs depends on whether a cost
a. is controllable or non-controllable.
b. is variable or fixed.
c. can be conveniently and physically traced to a cost object under consideration.
d. will increase with changes in levels of activity.
ANS: C DIF: Moderate OBJ: 2-2
22. Broussard Company is a construction company that builds houses on special request. What is the proper
classification of the carpenters' wages?
a. yes yes no
b. yes no yes
c. no no no
d. no yes yes
23. Broussard Company is a construction company that builds houses on special request. What is the proper
classification of the cost of the cement building slab used?
Direct Fixed
a. no no
b. no yes
c. yes yes
d. yes no
a. no no no
b. no yes yes
c. yes yes yes
d. yes no no
25. Which of the following costs would be considered overhead in the production of chocolate chip cookies?
a. flour
b. chocolate chips
c. sugar
d. oven electricity
ANS: D DIF: Easy OBJ: 2-2
a. no yes no
b. yes yes no
c. yes no yes
d. no yes yes
31. In a perpetual inventory system, the sale of items for cash consists of two entries. One entry is a debit to
Cash and a credit to Sales. The other entry is a debit to
a. Work in Process Inventory and a credit to Finished Goods Inventory.
b. Finished Goods Inventory and a credit to Cost of Goods Sold.
c. Cost of Goods Sold and a credit to Finished Goods Inventory.
d. Finished Goods Inventory and a credit to Work in Process Inventory.
ANS: C DIF: Easy OBJ: 2-4
33. The final figure in the Schedule of Cost of Goods Manufactured represents the
a. cost of goods sold for the period.
b. total cost of manufacturing for the period.
c. total cost of goods started and completed this period.
d. total cost of goods completed for the period.
ANS: D DIF: Easy OBJ: 2-5
35. Which of the following replaces the retailing component "Purchases" in computing Cost of Goods Sold
for a manufacturing company?
a. direct material used
b. cost of goods manufactured
c. total prime cost
d. cost of goods available for sale
ANS: B DIF: Easy OBJ: 2-5
36. Costs that are incurred to preclude defects and improper processing are:
a. prevention costs c. appraisal costs
b. detection costs d. failure costs
ANS: A DIF: Moderate OBJ: 2-4
37. Costs that are incurred for monitoring and inspecting are:
a. prevention costs c. appraisal costs
b. detection costs d. failure costs
ANS: C DIF: Moderate OBJ: 2-4
Wilson Company
The following information has been taken from the cost records of Wilson Company for the past year:
40. Refer to Wilson Company. Direct labor cost charged to production during the year was
a. $135.
b. $216.
c. $225.
d. $360.
ANS: C
Brandt Company.
Brandt Company manufactures wood file cabinets. The following information is available for June 2001:
Beginning Ending
Raw Material Inventory $ 6,000 $ 7,500
Work in Process Inventory 17,300 11,700
Finished Goods Inventory 21,000 16,300
43. Refer to Brandt Company. Direct labor is $9.60 per hour and overhead for the month was $9,600.
Compute total manufacturing costs for June, if there were 1,500 direct labor hours and $21,000 of raw
material was purchased.
a. $58,500
b. $46,500
c. $43,500
d. $43,100
ANS: C
45. Refer to Brandt Company. Direct labor is paid $9.60 per hour and overhead for the month was $9,600. If
there were 1,500 direct labor hours and $21,000 of raw material purchased, Cost of Goods Manufactured
is:
a. $49,100.
b. $45,000.
c. $51,000.
d. $49,500.
ANS: A
Beginning WIP Inventory $ 17,300
Raw Materials $ 19,500
Direct Labor 14,400
Factory Overhead 9,600 43,500
Ending WIP Inventory (11,700)
Cost of Goods Manufactured $ 49,100
47. Davis Company manufacturers desks. The beginning balance of Raw Material Inventory was $4,500; raw
material purchases of $29,600 were made during the month. At month end, $7,700 of raw material was on
hand. Raw material used during the month was
a. $26,400.
b. $34,100.
c. $37,300.
d. $29,600.
ANS: A
Beginning RM Inventory + Purchases - Ending RM Inventory = RMaterials Used
$4,500 + 29,600 - 7,700 = X
X = $26,400
48. Urban Company manufacturers tables. If raw material used was $80,000 and Raw Material Inventory at
the beginning and end of the period, respectively, was $17,000 and $21,000, what was amount of raw
material was purchased?
a. $76,000
b. $118,000
c. $84,000
d. $101,000
ANS: C
Beginning RM Inventory + Purchases - Ending RM Inventory = RMaterials Used
$17,000 + X - 21,000 = $80,000
X = $84,000
X = $70,000
Sharp Enterprises
50. Refer to Sharp Enterprises. For March, prime cost incurred was
a. $75,000.
b. $69,000.
c. $45,000.
d. $39,000.
ANS: A
Begin Inv Purch Ending Inv
Raw Materials $18,000.00 $42,000.00 $(15,000.00) $45,000.00
Rate Hours
Direct Labor $ 7.50 4,000 30,000.00
$75,000.00
52. Refer to Sharp Enterprises. For March, Cost of Goods Manufactured was
a. $118,000.
b. $115,000.
c. $112,000.
d. $109,000.
ANS: A
Beginning WIP Inventory $ 9,000
Raw Materials $ 45,000
Direct Labor 30,000
Factory Overhead 40,000 115,000
Ending WIP Inventory (6,000)
$ 118,000
26. The measure of activity that allows for routine variations in manufacturing activity is:
a. theoretical capacity c. normal capacity
b. practical capacity d. expected capacity
ANS: B DIF: Moderate OBJ: 3-3
27. The measure of production that considers historical and estimated future production levels and cyclical
fluctuations is referred to as:
a. theoretical capacity c. normal capacity
b. practical capacity d. expected capacity
ANS: C DIF: Moderate OBJ: 3-3
28. A short-run measure of activity that represents a firms anticipated activity level for an upcoming period
based upon expected demand is referred to as:
a. theoretical capacity c. normal capacity
b. practical capacity d. expected capacity
ANS: D DIF: Moderate OBJ: 3-3
29.An item or event that has a cause-effect relationship with the incurrence of a variable cost is called a
a. mixed cost.
b. predictor.
c. direct cost.
d. cost driver.
ANS: D DIF: Easy OBJ: 3-2
30. Furman Tailors has gathered information on utility costs for the past year. The controller has decided that
utilities are a function of the hours worked during the month. The following information is available and
representative of the companys utility costs:
If 1,425 hours are worked in a month, total utility cost (rounded to the nearest dollar) using the high-low
method should be
a. $947.
b. $954.
c. $959.
d. $976.
ANS: C
Variable portion:
Fixed Portion
903 - 0.45 ( 1,300) = $318
31. Reno Corporation uses a predetermined overhead application rate of $.30 per direct labor hour. During the
year it incurred $345,000 dollars of actual overhead, but it planned to incur $360,000 of overhead. The
company applied $363,000 of overhead during the year. How many direct labor hours did the company
plan to incur?
a. 1,150,000
b. 1,190,000
c. 1,200,000
d. 1,210,000
ANS: C
$360,000 / .30 = 1,200,000 direct labor
hours
Assume that management expects 500 machine hours in October. Using the high-low method, calculate
Octobers power cost using machine hours as the basis for prediction.
a. $700
b. $705
c. $710
d. $1,320
ANS: A
Variable portion:
Fixed portion:
33. Gary Corporation has developed the following flexible budget formula for monthly overhead:
How much overhead should Gary expect if the firm plans to produce 200,000 units?
a. $52,600
b. $59,000
c. $196,600
d. $203,000
ANS: D
$43,000 + $0.80(200,000) = $43,000 + $160,000 =
$203,000
Fixed component:
Burke Corporation
Burke Corporation has the following data for use of its machinery
35. Refer to Burke Corporation. Using the high-low method, compute the variable cost element.
a. $1.02
b. $.98
c. $1.31
d. $1.19
ANS: B
Zenith Corporation
The records of Zenith Corporation revealed the following data for the current year.
37. Refer to Zenith Corporation. Assume, for this question only, actual overhead is $98,700 and applied
overhead is $93,250. Manufacturing overhead is:
a. overapplied by $12,900.
b. underapplied by $18,350.
c. overapplied by $5,450.
d. underapplied by $5,450.
ANS: D
$98,700 - $93,250 = $5,450 underapplied
38. Refer to Zenith Corporation. Assume that Zenith has underapplied overhead of $37,200 and that this
amount is material. What journal entry is needed to close the overhead account? (Round decimals to
nearest whole percent.)
a. Debit Work in Process $8,456; Finished Goods $13,294; Cost of Goods Sold $15,450 and
credit Overhead $37,200
b. Debit Overhead $37,200 and credit Work in Process $8,456; Finished Goods $13,294;
Cost of Goods Sold $15,450
c. Debit Work in Process $37,200 and credit Overhead $37,200
d. Debit Cost of Goods Sold $37,200 and credit Overhead $37,200
ANS: A
WIP: 73,150/321,800 = $ 8,456
FG: 115,000/321,800 = $13,294
EI: 133,650/321,800 = $15,450
40. Refer to Zenith Corporation. Assume that Zenith has overapplied overhead of $25,000 and that this
amount is material. What is the balance in Cost of Goods Sold after the overapplied overhead is closed?
a. $123,267
b. $144,033
c. $158,650
d. $108,650
ANS: A
$133,650/$321,800 * $25,000 = $10,383
$133,650-$10,383 = $123,267
41. Aztec Company is relocating its facilities. The company estimates that it will take three trucks to move
office contents. If the per truck rental charge is $1,000 plus 25 cents per mile, what is the expected cost to
move 800 miles?
a. $1,000
b. $1,200
c. $2,400
d. $3,600
ANS: D
3 trucks * ($1,000 + $0.25(800)) = 3 * $1,200 = $3,600
In a high-low model, which months' observations would be used to compute the model's parameters?
a. 2 and 5
b. 1 and 6
c. 2 and 6
d. 4 and 5
ANS: A DIF: Easy OBJ: 3-4
43. Consider the following three product costing alternatives: process costing, job order costing, and standard
costing. Which of these can be used in conjunction with absorption costing?
a. job order costing
b. standard costing
c. process costing
d. all of the above
ANS: D DIF: Easy OBJ: 3-6
45. If a firm produces more units than it sells, absorption costing, relative to variable costing, will result in
a. higher income and assets.
b. higher income but lower assets.
c. lower income but higher assets.
d. lower income and assets.
ANS: A DIF: Moderate OBJ: 3-6
46. Under absorption costing, fixed manufacturing overhead could be found in all of the following except the
a. work-in-process account.
b. finished goods inventory account.
c. Cost of Goods Sold.
d. period costs.
ANS: D DIF: Easy OBJ: 3-6
47. If a firm uses absorption costing, fixed manufacturing overhead will be included
a. only on the balance sheet.
b. only on the income statement.
c. on both the balance sheet and income statement.
d. on neither the balance sheet nor income statement.
ANS: C DIF: Easy OBJ: 3-6
48. Under absorption costing, if sales remain constant from period 1 to period 2, the company will report a
larger income in period 2 when
a. period 2 production exceeds period 1 production.
b. period 1 production exceeds period 2 production.
c. variable production costs are larger in period 2 than period 1.
d. fixed production costs are larger in period 2 than period 1.
ANS: A DIF: Moderate OBJ: 3-7
49. The FASB requires which of the following to be used in preparation of external financial statements?
a. variable costing
b. standard costing
c. activity-based costing
d. absorption costing
ANS: D DIF: Easy OBJ: 3-6
51. Absorption costing differs from variable costing in all of the following except
a. treatment of fixed manufacturing overhead.
b. treatment of variable production costs.
c. acceptability for external reporting.
d. arrangement of the income statement.
ANS: B DIF: Easy OBJ: 3-6
54. Profit under absorption costing may differ from profit determined under variable costing. How is this
difference calculated?
a. Change in the quantity of all units in inventory times the relevant fixed costs per unit.
b. Change in the quantity of all units produced times the relevant fixed costs per unit.
c. Change in the quantity of all units in inventory times the relevant variable cost per unit.
d. Change in the quantity of all units produced times the relevant variable cost per unit.
ANS: A DIF: Easy OBJ: 3-6
55. What factor, related to manufacturing costs, causes the difference in net earnings computed using
absorption costing and net earnings computed using variable costing?
a. Absorption costing considers all costs in the determination of net earnings, whereas
variable costing considers fixed costs to be period costs.
b. Absorption costing allocates fixed overhead costs between cost of goods sold and
inventories, and variable costing considers all fixed costs to be period costs.
c. Absorption costing "inventories" all direct costs, but variable costing considers direct costs
to be period costs.
d. Absorption costing "inventories" all fixed costs for the period in ending finished goods
inventory, but variable costing expenses all fixed costs.
ANS: B DIF: Easy OBJ: 3-7
56. The costing system that classifies costs by functional group only is
a. standard costing.
b. job order costing.
c. variable costing.
d. absorption costing.
ANS: D DIF: Easy OBJ: 3-6
58. The costing system that classifies costs by both functional group and behavior is
a. process costing.
b. job order costing.
c. variable costing.
d. absorption costing.
ANS: C DIF: Easy OBJ: 3-6
59. Under variable costing, which of the following are costs that can be inventoried?
a. variable selling and administrative expense
b. variable manufacturing overhead
c. fixed manufacturing overhead
d. fixed selling and administrative expense
ANS: B DIF: Easy OBJ: 3-6
60. Consider the following three product costing alternatives: process costing, job order costing, and standard
costing. Which of these can be used in conjunction with variable costing?
a. job order costing
b. standard costing
c. process costing
d. all of them
ANS: D DIF: Easy OBJ: 3-6
62. If a firm uses variable costing, fixed manufacturing overhead will be included
a. only on the balance sheet.
b. only on the income statement.
c. on both the balance sheet and income statement.
d. on neither the balance sheet nor income statement.
ANS: B DIF: Easy OBJ: 3-6
64. How will a favorable volume variance affect net income under each of the following methods?
Absorption Variable
a. reduce no effect
b. reduce increase
c. increase no effect
d. increase reduce
ANS: C DIF: Easy OBJ: 3-7
65. Variable costing considers which of the following to be product costs?
a. yes no yes no
b. yes no yes yes
c. no no yes yes
d. no no yes no
66. The variable costing format is often more useful to managers than the absorption costing format because
a. costs are classified by their behavior.
b. costs are always lower.
c. it is required for external reporting.
d. it justifies higher product prices.
ANS: A DIF: Easy OBJ: 3-6
67. The difference between the reported income under absorption and variable costing is attributable to the
difference in the
a. income statement formats.
b. treatment of fixed manufacturing overhead.
c. treatment of variable manufacturing overhead.
d. treatment of variable selling, general, and administrative expenses.
ANS: B DIF: Easy OBJ: 3-7
68. Which of the following costs will vary directly with the level of production?
a. total manufacturing costs
b. total period costs
c. variable period costs
d. variable product costs
ANS: D DIF: Easy OBJ: 3-6
69. On the variable costing income statement, the difference between the "contribution margin" and "income
before income taxes" is equal to
a. the total variable costs.
b. the Cost of Goods Sold.
c. total fixed costs.
d. the gross margin.
ANS: C DIF: Easy OBJ: 3-7
70. For financial reporting to the IRS and other external users, manufacturing overhead costs are
a. deducted in the period that they are incurred.
b. inventoried until the related products are sold.
c. treated like period costs.
d. inventoried until the related products have been completed.
ANS: B DIF: Easy OBJ: 3-6
72. A basic tenet of variable costing is that period costs should be currently expensed. What is the rationale
behind this procedure?
a. Period costs are uncontrollable and should not be charged to a specific product.
b. Period costs are generally immaterial in amount and the cost of assigning the amounts to
specific products would outweigh the benefits.
c. Allocation of period costs is arbitrary at best and could lead to erroneous decision by
management.
d. Because period costs will occur whether production occurs, it is improper to allocate these
costs to production and defer a current cost of doing business.
ANS: D DIF: Moderate OBJ: 3-6
73. Which of the following is a term more descriptive of the term "direct costing"?
a. out-of-pocket costing
b. variable costing
c. relevant costing
d. prime costing
ANS: B DIF: Easy OBJ: 3-6
74. What costs are treated as product costs under variable (direct) costing?
a. only direct costs
b. only variable production costs
c. all variable costs
d. all variable and fixed manufacturing costs
ANS: B DIF: Easy OBJ: 3-6
75. Which of the following must be known about a production process in order to institute a variable costing
system?
a. the variable and fixed components of all costs related to production
b. the controllable and non-controllable components of all costs related to production
c. standard production rates and times for all elements of production
d. contribution margin and break-even point for all goods in production
ANS: A DIF: Easy OBJ: 3-6
76. Why is variable costing not in accordance with generally accepted accounting principles?
a. Fixed manufacturing costs are treated as period costs under variable costing.
b. Variable costing procedures are not well known in industry.
c. Net earnings are always overstated when using variable costing procedures.
d. Variable costing ignores the concept of lower of cost or market when valuing inventory.
ANS: A DIF: Easy OBJ: 3-6
77. Which of the following is an argument against the use of direct (variable) costing?
a. Absorption costing overstates the balance sheet value of inventories.
b. Variable factory overhead is a period cost.
c. Fixed manufacturing overhead is difficult to allocate properly.
d. Fixed manufacturing overhead is necessary for the production of a product.
ANS: D DIF: Easy OBJ: 3-6
78. Which of the following statements is true for a firm that uses variable costing?
a. The cost of a unit of product changes because of changes in the number of units
manufactured.
b. Profits fluctuate with sales.
c. An idle facility variation is calculated.
d. None of the above.
ANS: B DIF: Easy OBJ: 3-6
79. An income statement is prepared as an internal report. Under which of the following methods would the
term contribution margin appear?
a. no no
b. no yes
c. yes no
d. yes yes
80. In an income statement prepared as an internal report using the variable costing method, fixed
manufacturing overhead would
a. not be used.
b. be used in the computation of operating income but not in the computation of the
contribution margin.
c. be used in the computation of the contribution margin.
d. be treated the same as variable manufacturing overhead.
ANS: B DIF: Easy OBJ: 3-7
81. Variable costing has an advantage over absorption costing for which of the following purposes?
a. analysis of profitability of products, territories, and other segments of a business
b. determining the CVP relationship among the major factors of selling price, sales mix, and
sales volume
c. minimizing the effects of inventory changes on net income
d. all of the above
ANS: D DIF: Easy OBJ: 3-6
82. In the variable costing income statement, which line separates the variable and fixed costs?
a. selling expenses
b. general and administrative expense
c. product contribution margin
d. total contribution margin
ANS: D DIF: Easy OBJ: 3-6
83. A firm presently has total sales of $100,000. If its sales rise, its
a. net income based on variable costing will go up more than its net income based on
absorption costing.
b. net income based on absorption costing will go up more than its net income based on
variable costing.
c. fixed costs will also rise.
d. per unit variable costs will rise.
ANS: A DIF: Moderate OBJ: 3-7
Langley Corporation
Langley Corporation has the following standard costs associated with the manufacture and sale of one of
its products:
During its first year of operations Langley manufactured 51,000 units and sold 48,000. The
selling price per unit was $25. All costs were equal to standard.
84. Refer to Langley Corporation. Under absorption costing, the standard production cost per unit for the
current year was
a. $11.30.
b. $ 7.30.
c. $11.55.
d. $13.05.
ANS: A
DM + DL + VFOH + FFOH = Standard Cost per Unit
$3.00 + $2.50 + $1.80 + $4.00 = $11.30
85. Refer to Langley Corporation. The volume variance under absorption costing is
a. $8,000 F.
b. $4,000 F.
c. $4,000 U.
d. $8,000 U.
ANS: B
1,000 favorable units production variance * $4.00 fixed factory overhead = $4,000 F
DIF: Moderate OBJ: 3-7
86. Refer to Langley Corporation. Under variable costing, the standard production cost per unit for the
current year was
a. $11.30.
b. $7.30.
c. $7.55.
d. $11.55.
ANS: B
87. Refer to Langley Corporation. Based on variable costing, the income before income taxes for the year
was
a. $570,600.
b. $560,000.
c. $562,600.
d. $547,500.
ANS: C
Sales: $1,200,000
Variable Expenses 362,400
Contribution Margin $ 837,600
Fixed Expenses
Overhead $ 200,000
75,000
Net Income $ 562,600
=========
The following information is available for Ford Company for its first year of operations:
89. Refer to Ford Company. What was the total amount of Selling,General and Administrative expense
incurred by Ford Company?
a. $30,000
b. $62,500
c. $6,000
d. can't be determined from the information given
ANS: B
Sales $200,000
COGS 107,500
Gross Profit 92,500
SG&A X
Net Income $ 30,000
X = $62,500
90. Refer to Ford Company. If Ford Company were using variable costing, what would it show as the value
of ending inventory?
a. $120,000
b. $64,500
c. $27,000
d. $24,000
ANS: C
3,000 units * $9.00/unit = $27,000
Clinton Corporation
The following information has been extracted from the financial records of Clinton Corporation for its
first year of operations:
91. Refer to Clinton Corporation. Based on absorption costing, Clinton Corporation's income in its first year
of operations will be
a. $21,000 higher than it would be under variable costing.
b. $70,000 higher than it would be under variable costing.
c. $30,000 higher than it would be under variable costing.
d. higher than it would be under variable costing, but the exact difference cannot be
determined from the information given.
ANS: A
3,000 unsold units * $7.00 fixed overhead/unit = $21,000 higher under absorption costing.
93. Refer to Clinton Corporation. Based on absorption costing, what amount of period costs will Clinton
Corporation deduct?
a. $70,000
b. $79,000
c. $30,000
d. $58,000
ANS: D
Period costs = Variable SG&A + Fixed SG&A
$58,000 = (7,000 * $4) + $30,000
94. For its most recent fiscal year, a firm reported that its contribution margin was equal to 40 percent of sales
and that its net income amounted to 10 percent of sales. If its fixed costs for the year were $60,000, how
much were sales?
a. $150,000
b. $200,000
c. $600,000
d. can't be determined from the information given
ANS: B
Let S = Sales
Let CM = .40S
Let NI = .10S
FC = .30S
$60,000 = .30S
S = $200,000
Under variable costing every dollar of sales will increase net income by $0.25.
96. The following information regarding fixed production costs from a manufacturing firm is available for the
current year:
Enigma Corporation
The following information was extracted from the first year absorption-based accounting records of
Enigma Corporation
98. Refer to Enigma Corporation. If Enigma Corporation had used variable costing in its first year of
operations, how much income (loss) before income taxes would it have reported?
a. ($6,000)
b. $54,000
c. $26,000
d. $2,000
ANS: D
Sales $144,000
Less: Variable Costs
Manufacturing $20,000 * 60% 12,000
Period Costs $30,000 30.000
Contribution Margin $102,000
Fixed Costs 100,000
Variable Costing Net Income 2,000
======
99. Refer to Enigma Corporation. Based on variable costing, if Enigma had sold 12,001 units instead of
12,000, its income before income taxes would have been
a. $9.50 higher.
b. $11.00 higher.
c. $8.50 higher.
d. $8.33 higher.
ANS: C
Sales Price per Unit: $12.00
Variable Costs per Unit ($50,000 / 20,000) 2.50
Contribution Margin $ 8.50
======
King Corporation produces a single product. The following cost structure applied to its first year of
operations:
Variable costs:
SG&A $2 per unit
Production $4 per unit
Fixed costs (total cost incurred for the year):
SG&A $14,000
Production $20,000
100. Refer to King Corporation. Assume for this question only that during the current year King Corporation
manufactured 5,000 units and sold 3,800. There was no beginning or ending work-in-process inventory.
How much larger or smaller would King Corporation's income be if it uses absorption rather than variable
costing?
a. The absorption costing income would be $6,000 larger.
b. The absorption costing income would be $6,000 smaller.
c. The absorption costing income would be $4,800 larger.
d. The absorption costing income would be $4,000 smaller.
ANS: C
Add back fixed manufacturing portion of units unsold (1,200/5,000) * $20,000 = $4,800.
101. Refer to King Corporation. Assume for this question only that King Corporation manufactured and sold
5,000 units in the current year. At this level of activity it had an income of $30,000 using variable costing.
What was the sales price per unit?
a. $16.00
b. $18.80
c. $12.80
d. $14.80
ANS: B
Sales--5,000 units * $18.80/unit $94,000
Variable Costs:
Manufacturing 20,000
SG&A 10,000
Contribution Margin $64,000
Fixed Costs
Manufacturing 14,000
SG&A 20,000
Net Income $30,000
=====
103. Refer to King Corporation. Assume for this question only that King Corporation manufactured 5,000
units and sold 4,000 in the current year. If King employs a costing system based on variable costs, the
company would end the current year with a finished goods inventory of
a. $4,000.
b. $8,000.
c. $6,000.
d. $5,000.
ANS: A
1,000 units * $4.00 variable cost per unit = $4,000
Companies R, S, and T
Three new companies (R, S, and T) began operations on January 1 of the current year. Consider the
following operating costs that were incurred by these companies during the complete calendar year:
104. Refer to Companies R, S, and T. Based on sales of 7,000 units, which company will report the greater
income before income taxes if absorption costing is used?
a. Company R
b. Company S
c. Company T
d. All of the companies will report the same income.
ANS: D
Under absorption costing, the net income for all three companies is the same.
DIF: Moderate OBJ: 3-7
105. Refer to Companies R, S, and T. Based on sales of 7,000 units, which company will report the greater
income before income taxes if variable costing is used?
a. Company R
b. Company S
c. Company T
d. All of the companies will report the same income.
ANS: A
Since Company R has the largest variable manufacturing costs, income will increase by the
amount that was held in finished goods inventory.
106. Refer to Companies R, S, and T. Based on sales of 10,000 units, which company will report the greater
income before income taxes if variable costing is used?
a. Company R
b. Company S
c. Company T
d. All of the companies will report the same income before income taxes.
ANS: D
Since all the companies have the same net income and all had the same amount of sales, all
three companies would have the same net income under variable costing.
107. A firm has fixed costs of $200,000 and variable costs per unit of $6. It plans on selling 40,000 units in the
coming year. To realize a profit of $20,000, the firm must have a sales price per unit of at least
a. $11.00.
b. $11.50.
c. $10.00.
d. $10.50.
ANS: B
Sales--40,000 units * $11.50/unit $460,000
Variable Costs:
Manufacturing 240,000
Contribution Margin $220,000
Fixed Costs 200,000
Net Income $ 20,000
=====
Bennett Corporation produces a single product that sells for $7.00 per unit. Standard capacity is 100,000
units per year; 100,000 units were produced and 80,000 units were sold during the year. Manufacturing
costs and selling and administrative expenses are presented below.
There were no variances from the standard variable costs. Any under- or overapplied overhead is written
off directly at year-end as an adjustment to cost of goods sold.
108. Refer to Bennett Corporation. In presenting inventory on the balance sheet at December 31, the unit cost
under absorption costing is
a. $2.50.
b. $3.00.
c. $3.50.
d. $4.50.
ANS: D
109. Refer to Bennett Corporation. What is the net income under variable costing?
a. $50,000
b. $80,000
c. $90,000
d. $120,000
ANS: A
Sales $560,000
Variable Costs:
Materials $120,000
Labor 80,000
Overhead 40,000
Selling and Administrative 40,000
Contribution Margin $280,000
Fixed Costs
Overhead 150,000
Selling and Administrative 80,000
Net Income $ 50,000
=======
DIF: Moderate OBJ: 3-7
110. Refer to Bennett Corporation. What is the net income under absorption costing?
a. $50,000
b. $80,000
c. $90,000
d. $120,000
ANS: B
Sales $560,000
Cost of Goods Sold:
Materials $120,000
Labor 80,000
Overhead (Variable and Fixed) 160,000
Gross Profit $200,000
Fixed Costs:
Selling and Administrative $120,000
Net Income $ 80,000
=======
49.The cost of abnormal losses (net of disposal costs) should be written off as
a. yes no
b. yes yes
c. no yes
d. no no
50. In a job order costing system, the net cost of normal spoilage is equal to
a. estimated disposal value plus the cost of spoiled work.
b. the cost of spoiled work minus estimated spoilage cost.
c. the units of spoiled work times the predetermined overhead rate.
d. the cost of spoiled work minus the estimated disposal value.
ANS: D DIF: Moderate OBJ: 4-8
51. If abnormal spoilage occurs in a job order costing system, has a material dollar value, and is related to a
specific job, the recovery value of the spoiled goods should be
debited to credited to
52. In a job order costing system, the net cost of normal spoilage is equal to
a. estimated disposal value plus the cost of spoiled work.
b. the cost of spoiled work minus estimated spoilage cost.
c. the units of spoiled work times the predetermined overhead rate.
d. the cost of spoiled work minus the estimated disposal value.
ANS: D DIF: Moderate OBJ: 4-8
57. Which of the following would fall within the range of tolerance for a production cycle?
a. yes yes
b. yes no
c. no no
d. no yes
58. The net cost of normal spoilage in a job order costing system in which spoilage is common to all jobs
should be
a. assigned directly to the jobs that caused the spoilage.
b. charged to manufacturing overhead during the period of the spoilage.
c. charged to a loss account during the period of the spoilage.
d. allocated only to jobs that are completed during the period.
ANS: B DIF: Moderate OBJ: 4-8
Smithson Company
Smithson Company produces two products (A and B). Direct material and labor costs for Product A total
$35 (which reflects 4 direct labor hours); direct material and labor costs for Product B total $22 (which
reflects 1.5 direct labor hours). Three overhead functions are needed for each product. Product A uses 2
hours of Function 1 at $10 per hour, 1 hour of Function 2 at $7 per hour, and 6 hours of Function 3 at $18
per hour. Product B uses 1, 8, and 1 hours of Functions 1, 2, and 3, respectively. Smithson produces 800
units of A and 8,000 units of B each period.
70. Refer to Smithson Company If total overhead is assigned to A and B on the basis of units produced,
Product A will have an overhead cost per unit of
a. $ 88.64.
b. $123.64.
c. $135.00.
d. None of the responses are correct.
ANS: A
Total Overhead
Product A Function Hourly Hours Total
Rate
1 $ 10 2 $ 20
2 $ 7 1 $ 7
3 $ 18 6 $ 108
Totals 9 $ 135
Product B Function Hourly Hours Total
Rate
1 $ 10 1 $ 10
2 $ 7 8 $ 56
3 $ 18 1 $ 18
Totals 10 $ 84
72. Refer to Smithson Company If total overhead is assigned to A and B on the basis of direct labor hours,
Product A will have an overhead cost per unit of
a. $51.32.
b. $205.28.
c. $461.88.
d. None of the responses are correct.
ANS: B
74. Refer to Smithson Company If total overhead is assigned to A and B on the basis of overhead activity
hours used, the total product cost per unit assigned to Product A will be
a. $86.32.
b. $95.00.
c. $115.50.
d. None of the responses are correct.
ANS: C
75. Refer to Smithson Company If total overhead is assigned to A and B on the basis of overhead activity
hours used, the total product cost per unit assigned to Product B will be
a. $115.50.
b. $73.32.
c. $34.60.
d. None of the responses are correct.
ANS: D
Phelps Company produces 50,000 units of Product Q and 6,000 units of Product Z during a period. In that
period, four set-ups were required for color changes. All units of Product Q are black, which is the color
in the process at the beginning of the period. A set-up was made for 1,000 blue units of Product Z; a set-
up was made for 4,500 red units of Product Z; a set-up was made for 500 green units of Product Z. A set-
up was then made to return the process to its standard black coloration and the units of Product Q were
run. Each set-up costs $500.
76. Refer to Phelps Company. If set-up cost is assigned on a volume basis for the department, what is the
approximate per-unit set-up cost for Product Z?
a. $.010.
b. $.036.
c. $.040.
d. None of the responses are correct.
ANS: B
Total setup cost: $500 x 4 = $2,000
$2,000/56,000 = $0.0357
77. Refer to Phelps Company. If set-up cost is assigned on a volume basis for the department, what is the
approximate per-unit set-up cost for the red units of Product Z?
a. $.036.
b. $.111.
c. $.250.
d. None of the responses are correct.
ANS: A
Total setup cost: $500 x 4 = $2,000
$2,000/56,000 = $0.0357
78. Refer to Phelps Company. Assume that Phelps Company has decided to allocate overhead costs using
levels of cost drivers. What would be the approximate per-unit set-up cost for the blue units of Product Z?
a. $.04.
b. $.25.
c. $.50.
d. None of the responses are correct.
ANS: C
Setup cost for blue units = $500.00
$500/1,000 = $.50
DIF: Moderate OBJ: 5-3
79. Refer to Phelps Company. Assume that Phelps Company has decided to allocate overhead costs using
levels of cost drivers. What would be the approximate per-unit set-up cost for the green units of Product
Z?
a. $1.00.
b. $0.25.
c. $0.04.
d. None of the responses are correct.
ANS: A
$500.00/500 = $1.00/unit
Lafayette Savings and Loan had the following activities, traceable costs, and
physical flow of driver units:
The above activities are used by the Jennings branch and the Crowley branch:
Jennings Crowley
80. Refer to Lafayette Savings and Loan. What is the cost per driver unit for new account activity?
a. $0.09 c. $30.00
b. $0.075 d. $50.00
ANS: D
$50,000 / 1,000 = $50.00 per account
a. $0.09 c. $30.00
b. $0.075 d. $50.00
ANS: A
$36,000/400,000 = $0.09
82. Refer to Lafayette Savings and Loan. What is the cost per driver unit for the withdrawal activity?
a. $0.09 c. $30.00
b. $0.075 d. $50.00
ANS: B
$15,000/200,000 = $0.075
83. Refer to Lafayette Savings and Loan. What is the cost per driver unit for the loan application activity?
a. $0.09 c. $30.00
b. $0.075 d. $50.00
ANS: C
$27,000/900 = $30.00
84. Refer to Lafayette Savings and Loan. How much of the loan application cost will be assigned to the
Jennings branch?
a. $3,000 c. $ 7,800
b. $4,800 d. $27,000
ANS: A
$30.00 x 100 = $3,000
85. Refer to Lafayette Savings and Loan. How much of the deposit cost will be assigned to the Crowley
branch?
a. $1,800 c. $ 5,400
b. $3,600 d. $36,000
ANS: A
$0.09 * 20,000 = $1,800
Hazel Company uses activity-based costing. The company produces two products: coats and hats. The
annual production and sales volume of coats is 8,000 units and of hats is 6,000 units. There are three
activity cost pools with the following expected activities and estimated total costs:
87. Refer to Hazel Company. Using ABC, the cost per unit of coats is approximately:
a. $2.40 c. $ 6.60
b. $3.90 d. $10.59
ANS: C
Activity Cost Allocation Cost per Unit
1 $20,000 * 100/500 = $ 4,000 / 8,000 $0.50
2 $37,000 * 800/1,000 = $29,600 / 8,000 3.70
3 $91,200 * 800/3,800 = $19,200 / 8,000 2.40
Total Cost per Unit 6.60
88. Refer to Hazel Company. Using ABC, the cost per unit of hats is approximately:
a. $2.40 c. $12.00
b. $3.90 d. $15.90
ANS: D
Activity Cost Allocation Cost per Unit
1 $20,000 * 400/500 = $ 16,000 / 6,000 $2.67
2 $37,000 * 200/1,000 = $ 7,400/ 6,000 1.23
3 $91,200 * 3,000/3,800 = $72,000 / 6,000 12.00
Total Cost per Unit 15.90
5. Which is the best cost accumulation procedure to use for continuous mass production of like units?
a. actual
b. standard
c. job order
d. process
ANS: D DIF: Easy OBJ: 6-1
8. The weighted average method is thought by some accountants to be inferior to the FIFO method because
it
a. is more difficult to apply.
b. only considers the last units worked on.
c. ignores work performed in subsequent periods.
d. commingles costs of two periods.
ANS: D DIF: Moderate OBJ: 6-3
9. The first step in determining the cost per EUP per cost component under the weighted average method is
to
a. add the beginning Work in Process Inventory cost to the current period's production cost.
b. divide the current period's production cost by the equivalent units.
c. subtract the beginning Work in Process Inventory cost from the current period's production
cost.
d. divide the current period's production cost into the EUP.
ANS: A DIF: Moderate OBJ: 6-3
10. The difference between EUP calculated using FIFO and EUP calculated using weighted average is the
equivalent units
a. started and completed during the period.
b. residing in beginning Work in Process Inventory.
c. residing in ending Work in Process Inventory.
d. uncompleted in Work in Process Inventory.
ANS: B DIF: Moderate OBJ: 6-3,6-4
11. EUP calculations for standard process costing are the same as
a. the EUP calculations for weighted average process costing.
b. the EUP calculations for FIFO process costing.
c. LIFO inventory costing for merchandise.
d. the EUP calculations for LIFO process costing.
ANS: B DIF: Moderate OBJ: 6-5
12. In a FIFO process costing system, which of the following are assumed to be completed first in the current
period?
a. units started this period
b. units started last period
c. units transferred out
d. units still in process
ANS: B DIF: Easy OBJ: 6-4
13. To compute equivalent units of production using the FIFO method of process costing, work for the
current period must be stated in units
a. completed during the period and units in ending inventory.
b. completed from beginning inventory, units started and completed during the period, and
units partially completed in ending inventory.
c. started during the period and units transferred out during the period.
d. processed during the period and units completed during the period.
ANS: B DIF: Moderate OBJ: 6-4
14. The FIFO method of process costing will produce the same cost of goods transferred out amount as the
weighted average method when
a. the goods produced are homogeneous.
b. there is no beginning Work in Process Inventory.
c. there is no ending Work in Process Inventory.
d. beginning and ending Work in Process Inventories are each 50 percent complete.
ANS: B DIF: Easy OBJ: 6-4
15. The primary difference between the FIFO and weighted average methods of process costing is
a. in the treatment of beginning Work in Process Inventory.
b. in the treatment of current period production costs.
c. in the treatment of spoiled units.
d. none of the above.
ANS: A DIF: Easy OBJ: 6-3,6-4
16. Material is added at the beginning of a process in a process costing system. The beginning Work in
Process Inventory for the process was 30 percent complete as to conversion costs. Using the FIFO method
of costing, the number of equivalent units of material for the process during this period is equal to the
a. beginning inventory this period for the process.
b. units started this period in the process.
c. units started this period in the process plus the beginning Work in Process Inventory.
d. units started and completed this period plus the units in ending Work in Process Inventory.
ANS: D DIF: Moderate OBJ: 6-3,6-4
17. In a cost of production report using process costing, transferred-in costs are similar to the
a. cost of material added at the beginning of production.
b. conversion cost added during the period.
c. cost transferred out to the next department.
d. cost included in beginning inventory.
ANS: A DIF: Easy OBJ: 6-3
18. In a process costing system, the journal entry to record the transfer of goods from Department #2 to
Finished Goods Inventory is a
a. debit Work in Process Inventory #2, credit Finished Goods Inventory.
b. debit Finished Goods Inventory, credit Work in Process Inventory #1.
c. debit Finished Goods Inventory, credit Work in Process Inventory #2.
d. debit Cost of Goods Sold, credit Work in Process Inventory #2.
ANS: C DIF: Easy OBJ: 6-3
20. Which of the following is(are) the same between the weighted average and FIFO methods of calculating
EUPs?
a. no yes no
b. yes yes yes
c. yes no no
d. yes no yes
22. Averaging the total cost of completed beginning inventory and units started and completed over all units
transferred out is known as
a. strict FIFO.
b. modified FIFO.
c. weighted average costing.
d. normal costing.
ANS: B DIF: Moderate OBJ: 6-3
a. no no
b. no yes
c. yes yes
d. yes no
a. yes yes
b. no no
c. yes no
d. no yes
28. Which of the following is subtracted from weighted average EUP to derive FIFO EUP?
a. beginning WIP EUP completed in current period
b. beginning WIP EUP produced in prior period
c. ending WIP EUP not completed
d. ending WIP EUP completed
ANS: B DIF: Easy OBJ: 6-2,6-4
continuous discrete
a. yes no
b. no no
c. yes yes
d. no yes
ANS: C DIF: Easy OBJ: 6-8
31. When the cost of lost units must be assigned, and those same units must be included in an equivalent unit
schedule, these units are considered
a. normal and discrete.
b. normal and continuous.
c. abnormal and discrete.
d. abnormal and continuous.
ANS: D DIF: Moderate OBJ: 6-8
38. When the cost of lost units must be assigned, and those same units must be included in an equivalent unit
schedule, these units are considered
a. normal and discrete.
b. normal and continuous.
c. abnormal and discrete.
d. abnormal and continuous.
ANS: D DIF: Moderate OBJ: 6-8
39. Which of the following accounts is credited when abnormal spoilage is written off in an actual cost
system?
a. Miscellaneous Revenue
b. Loss from Spoilage
c. Finished Goods
d. Work in Process
ANS: D DIF: Easy OBJ: 6-8
a. yes yes
b. no no
c. yes no
d. no yes
ANS: D DIF: Easy OBJ: 6-8
41. Which of the following statements is false? The cost of rework on defective units, if
a. abnormal, should be assigned to a loss account.
b. normal and if actual costs are used, should be assigned to material, labor and overhead
costs of the good production.
c. normal and if standard costs are used, should be considered when developing the overhead
application rate.
d. abnormal, should be prorated among Work In Process, Finished Goods, and Cost of Goods
Sold.
ANS: D DIF: Moderate OBJ: 6-8
42. If normal spoilage is detected at an inspection point within the process (rather than at the end), the cost of
that spoilage should be
a. included with the cost of the units sold during the period.
b. included with the cost of the units completed in that department during the period.
c. allocated to ending work in process units and units transferred out based on their relative
values.
d. allocated to the good units that have passed the inspection point.
ANS: D DIF: Moderate OBJ: 6-8
43. Taylor Co. has a production process in which the inspection point is at 65 percent of conversion. The
beginning inventory for July was 35 percent complete and ending inventory was 80 percent complete.
Normal spoilage costs would be assigned to which of the following groups of units, using FIFO costing?
a. no yes yes
b. yes yes yes
c. no no yes
d. yes no no
46. The addition of material in a successor department that causes an increase in volume is called
a. accretion.
b. reworked units.
c. complex procedure.
d. undetected spoilage.
ANS: A DIF: Easy OBJ: 6-8
47. Long Company transferred 5,500 units to Finished Goods Inventory during September. On September 1,
the company had 300 units on hand (40 percent complete as to both material and conversion costs). On
June 30, the company had 800 units (10 percent complete as to material and 20 percent complete as to
conversion costs). The number of units started and completed during September was:
a. 5,200.
b. 5,380.
c. 5,500.
d. 6,300.
ANS: A
Units Transferred Out 5,500
Less: Units in Beginning Inventory (300)
Units Started and Completed 5,200
49. Bush Company had beginning Work in Process Inventory of 5,000 units that were 40 percent complete as
to conversion costs. X started and completed 42,000 units this period and had ending Work in Process
Inventory of 12,000 units. How many units were started this period?
a. 42,000
b. 47,000
c. 54,000
d. 59,000
ANS: C
50. Dixie Company uses a weighted average process costing system. Material is added at the start of
production. Dixie Company started 13,000 units into production and had 4,500 units in process at the start
of the period that were 60 percent complete as to conversion costs. If Dixie transferred out 11,750 units,
how many units were in ending Work in Process Inventory?
a. 1,250
b. 3,000
c. 3,500
d. 5,750
ANS: D
52. Kerry Company makes small metal containers. The company began December with 250 containers in
process that were 30 percent complete as to material and 40 percent complete as to conversion costs.
During the month, 5,000 containers were started. At month end, 1,700 containers were still in process (45
percent complete as to material and 80 percent complete as to conversion costs). Using the weighted
average method, what are the equivalent units for conversion costs?
a. 3,450
b. 4,560
c. 4,610
d. 4,910
ANS: D
53. Mehta Company Co. uses a FIFO process costing system. The company had 5,000 units that were 60
percent complete as to conversion costs at the beginning of the month. The company started 22,000 units
this period and had 7,000 units in ending Work in Process Inventory that were 35 percent complete as to
conversion costs. What are equivalent units for material, if material is added at the beginning of the
process?
a. 18,000
b. 22,000
c. 25,000
d. 27,000
ANS: B
The material is added at the beginning of the process; therefore there are 22,000 equivalent units of
material.
54. Julia Company makes fabric-covered hatboxes. The company began September with 500 boxes in process
that were 100 percent complete as to cardboard, 80 percent complete as to cloth, and 60 percent complete
as to conversion costs. During the month, 3,300 boxes were started. On September 30, 350 boxes were in
process (100 percent complete as to cardboard, 70 percent complete as to cloth, and 55 percent complete
as to conversion costs). Using the FIFO method, what are equivalent units for cloth?
a. 3,295
b. 3,395
c. 3,450
d. 3,595
ANS: A
Reed Company
All material is added at the start of the process and all finished products are transferred out.
55. Refer to Reed Company. How many units were transferred out in November?
a. 15,500
b. 18,000
c. 21,500
d. 24,000
ANS: C
56. Refer to Reed Company. Assume that weighted average process costing is used. What is the cost per
equivalent unit for material?
a. $0.55
b. $1.05
c. $1.31
d. $1.83
ANS: D
Material Costs:
Beginning $ 23,400
Current Period 31,500
54,900 30,000 = $ 1.83
units
Conversion Costs:
Beginning (Ignored for FIFO) $ -
Current Period 76,956
$ 76,956
Equivalent Units
Beginning Inventory (6,000 * 1,800
30%)
Started and Completed (15,500) 15,500
Ending Inventory (8,500 * 10%) 850
18,150 equivalent units
Holiday Company
The Holiday Company makes wreaths in two departments: Forming and Decorating. Forming began the
month with 500 wreaths in process that were 100 percent complete as to material and 40 percent complete
as to conversion. During the month, 6,500 wreaths were started. At month end, Forming had 2,100
wreaths that were still in process that were 100 percent complete as to material and 50 percent complete
as to conversion. Assume Forming uses the weighted average method of process costing. Costs in the
Forming Department are as follows:
The Decorating Department had 600 wreaths in process at the beginning of the month that were 80
percent complete as to material and 90 percent complete as to conversion. The department had 300 units
in ending Work in Process that were 50 percent complete as to material and 75 percent complete as to
conversion. Decorating uses the FIFO method of process costing, and costs associated with Decorating
are:
Beginning WIP Inventory:
Transferred In $1,170
Material 4,320
Conversion 6,210
Current Period:
Transferred In ?
Material $67,745
Conversion 95,820
58. Refer to Holiday Company. How many units were transferred to Decorating during the month?
a. 600
b. 4,900
c. 5,950
d. 7,000
ANS: B
59. Refer to Holiday Company. What was the cost transferred out of Forming during the month?
a. $5,341
b. $6,419
c. $8,245
d. $8,330
ANS: D
Units
Transferred Cost per
Out Eq. Unit Total
4,900 1.70 $8,330
60. Refer to Holiday Company. Assume 8,000 units were transferred to Decorating. Compute the number of
equivalent units as to costs in Decorating for the transferred-in cost component.
a. 7,400
b. 7,700
c. 8,000
d. 8,600
ANS: C
The transferred-in cost component is the 8,000 units that were transferred in.
62. Refer to Holiday Company. Assume 8,000 units were transferred to Decorating. Compute the number of
equivalent units in Decorating for conversion.
a. 7,925
b. 7,985
c. 8,360
d. 8,465
ANS: B
64. Refer to Holiday Company. Assume that 8,000 units were transferred to Decorating at a total cost of
$16,000. What is the conversion cost per equivalent unit in Decorating?
a. $11.32
b. $11.46
c. $12.00
d. $12.78
ANS: C
65. Refer to Holiday Company. Assume the material cost per EUP is $8.00 and the conversion cost per EUP
is $15 in Decorating. What is the cost of completing the units in beginning inventory?
a. $ 960
b. $ 1,380
c. $ 1,860
d. $11,940
ANS: C
Ryan Company
Ryan Company adds material at the start to its production process and has the following information
available for March:
66. Refer to Ryan Company. Compute the number of units started and completed in March.
a. 29,500
b. 34,500
c. 36,500
d. 39,000
ANS: A
67. Refer to Ryan Company. Calculate equivalent units of production for material using FIFO.
a. 32,000
b. 36,800
c. 37,125
d. 39,000
ANS: A
Materials are added at the beginning of the process. 32,000 units were started in the current period;
therefore there are 32,000 equivalent units for materials.
68. Refer to Ryan Company. Calculate equivalent units of production for conversion using FIFO.
a. 30,125
b. 34,325
c. 37,125
d. 39,000
ANS: B
Equivalent Units
Beginning Inventory (7,000 * 60%) 4,200
Started and Completed (29,500) 29,500
Ending Inventory (2,500 * 25%) 625
34,325 equivalent units
69. Refer to Ryan Company. Calculate equivalent units of production for material using weighted average.
a. 32,000
b. 34,325
c. 37,125
d. 39,000
ANS: D
Equivalent Units
Beginning Inventory (7,000 units) 7,000
Started this Period (32,000) 32,000
39,000 equivalent units
70. Refer to Ryan Company. Calculate equivalent units of production for conversion using weighted average.
a. 34,325
b. 37,125
c. 38,375
d. 39,925
ANS: B
Equivalent Units
Beginning Inventory (7,000 * 100%) 7,000
Started and Completed (29,500) 29,500
Ending Inventory (2,500 * 25%) 625
37,125 equivalent units
Maxwell Company
Maxwell Company adds material at the start of production. The following production information is
available for June:
72. Refer to Maxwell Company. What is the total cost to account for?
a. $ 93,405
b. $205,653
c. $274,558
d. $299,058
ANS: D
73. Refer to Maxwell Company. How many units were started and completed in the period?
a. 111,800
b. 120,000
c. 121,800
d. 130,000
ANS: A
Equivalent Units
Beginning Inventory (10,000 * 100%) 10,000
Started and Completed (111,800) 111,800
Ending Inventory (8,200 * 25%) 8,200
130,000 equivalent units
75. Refer to Maxwell Company. What are the equivalent units for material using the FIFO method?
a. 111,800
b. 120,000
c. 125,500
d. 130,000
ANS: B
Equivalent Units
Beginning Inventory (Ignored for FIFO) 0
Started and Completed (111,800) 111,800
Ending Inventory (8,200 * 25%) 8,200
120,000 equivalent units
76. Refer to Maxwell Company. What are the equivalent units for conversion using the weighted average
method?
a. 120,000
b. 123,440
c. 128,360
d. 130,000
ANS: C
78. Refer to Maxwell Company. What is the material cost per equivalent unit using the weighted average
method?
a. $.58
b. $.62
c. $.77
d. $.82
ANS: C
Material Costs:
Beginning $ 24,500
Current Period 75,600
100,100 130,000 = $ 0.77
units per unit
79. Refer to Maxwell Company. What is the conversion cost per equivalent unit using the weighted average
method?
a. $1.01
b. $1.05
c. $1.55
d. $1.61
ANS: B
Conversion Costs:
Beginning $ 68,905
Current Period 130,053
198,958 128,360 = $ 1.55
units per unit
81. Refer to Maxwell Company. What is the conversion cost per equivalent unit using the FIFO method?
a. $1.05
b. $.95
c. $1.61
d. $1.55
ANS: A
Conversion Costs:
Beginning (Ignored)
Current Period 130,053
130,053 123,860 = $ 1.05
units per unit
82. Refer to Maxwell Company. What is the cost of all units transferred out using the FIFO method?
a. $204,624
b. $191,289
c. $287,004
d. $298,029
ANS: C
Material A is added at the start of production, while Material B is added uniformly throughout the
process.
83. Refer to Cherub Company. Assuming a weighted average method of process costing, compute EUP units
for Materials A and B.
a. 2,700 and 2,280, respectively
b. 2,700 and 2,450, respectively
c. 2,000 and 2,240, respectively
d. 2,240 and 2,700, respectively
ANS: B
84. Refer to Cherub Company Assuming a FIFO method of process costing, compute EUP units for Materials
A and B.
a. 2,700 and 2,280, respectively
b. 2,700 and 2,450, respectively
c. 2,000 and 2,240, respectively
d. 2,450 and 2,880, respectively
ANS: C
85. Refer to Cherub Company Assuming a weighted average method of process costing, compute EUP for
conversion.
a. 2,600
b. 2,180
c. 2,000
d. 2,700
ANS: A
Weighted Average
Beginning Work in Process 700
Units Started and Completed 1500
Ending Work in Process 400
2600
86. Refer to Cherub Company Assuming a FIFO method of process costing, compute EUP for conversion.
a. 2,240
b. 2,180
c. 2,280
d. 2,700
ANS: B
FIFO
Beginning Work in Process (700 * 40%) 280
Units Started and Completed 1500
Ending Work in Process (500 * 80%) 400
2180
87. Refer to Cherub Company Assuming a weighted average method of process costing, compute the average
cost per unit for Material A.
a. $20.10
b. $20.00
c. $31.25
d. $31.00
ANS: A
89. Refer to Cherub Company Assuming a FIFO method of process costing, compute the average cost per
EUP for Material B.
a. $20.10
b. $31.25
c. $20.00
d. $31.00
ANS: B
90. Refer to Cherub Company Assuming a weighted average method of process costing, compute the average
cost per EUP for Material B.
a. $20.00
b. $31.25
c. $20.10
d. $31.00
ANS: D
92. Refer to Cherub Company Assuming a weighted average method of process costing, compute the average
cost per EUP for conversion.
a. $39.90
b. $45.00
c. $43.03
d. $47.59
ANS: A
Conversion Costs Equivalent Average Cost
(Beginning WIP and Units per EUP
Current Period)
$98,100 + $5,640 2,600 $39.90
Talmidge Company
The following information is available for Talmidge Company for the current year:
94. Refer to Talmidge Company. Using weighted average, what are equivalent units for conversion costs?
a. 80,600
b. 78,100
c. 83,100
d. 75,600
ANS: B
95. Refer to Talmidge Company. What is the cost per equivalent unit for material using weighted average?
a. $1.72
b. $1.62
c. $1.77
d. $2.07
ANS: A
97. Refer to Talmidge Company. What is the cost assigned to normal spoilage using weighted average?
a. $31,000
b. $15,500
c. $30,850
d. None of the responses are correct
ANS: D
No costs are assigned to normal, continuous spoilage. Higher costs are assigned to good units
produced.
98. Refer to Talmidge Company. Assume that the cost per EUP for material and conversion are $1.75 and
$4.55, respectively. What is the cost assigned to ending Work in Process?
a. $100,800
b. $87,430
c. $103,180
d. $71,680
ANS: D
Materials: FIFO
Beginning Work in Process - 0% -
+ Units Started and Completed 51,500 100% 51,500
+ Ending Work in Process 16,000 100% 16,000
+ Abnormal Spoilage 2,500 100% 2,500
Equivalent Units of Production 70,000
100. Refer to Talmidge Company. Using FIFO, what are equivalent units for conversion costs?
a. 72,225
b. 67,225
c. 69,725
d. 78,100
ANS: B
Conversion: FIFO
Beginning Work in Process 14,500 25% 3,625
+ Units Started and Completed 51,500 100% 51,500
+ Ending Work in Process 16,000 60% 9,600
+ Abnormal Spoilage 2,500 100% 2,500
Equivalent Units of Production 67,225
101. Refer to Talmidge Company. Using FIFO, what is the cost per equivalent unit for material?
a. $1.42
b. $1.66
c. $1.71
d. $1.60
ANS: C
FIFO: Materials
FIFO: Conversion
103. Refer to Talmidge Company. Assume that the FIFO EUP cost for material and conversion are $1.50 and
$4.75, respectively. Using FIFO what is the total cost assigned to the units transferred out?
a. $414,194
b. $339,094
c. $445,444
d. $396,975
ANS: A
Bowman Company
All materials are added at the start of the production process. Bowman Company inspects goods at 75
percent completion as to conversion.
104. Refer to Bowman Company. What are equivalent units of production for material, assuming FIFO?
a. 100,000
b. 96,500
c. 95,000
d. 120,000
ANS: A
Materials: FIFO
Beginning Work in Process - 0% -
+ Units Started and Completed 77,000 100% 77,000
+ Normal Spoilage--Discrete 3,500 100% 3,500
+ Abnormal Spoilage 5,000 100% 5,000
+ Ending Work in Process 14,500 100% 14,500
Equivalent Units of Production 100,000
105. Refer to Bowman Company. What are equivalent units of production for conversion costs, assuming
FIFO?
a. 108,900
b. 103,900
c. 108,650
d. 106,525
ANS: D
Conversion: FIFO
Beginning Work in Process 20,000 65% 13,000
+ Units Started and Completed 77,000 100% 77,000
+Normal Spoilage--Discrete 3,500 75% 2,625
+ Abnormal Spoilage 5,000 75% 3,750
+ Ending Work in Process 14,500 70% 10,150
Equivalent Units of Production 106,525
106. Refer to Bowman Company. Assume that the costs per EUP for material and conversion are $1.00 and
$1.50, respectively. What is the amount of the period cost for July using FIFO?
a. $0
b. $9,375
c. $10,625
d. $12,500
ANS: C
107. Refer to Bowman Company. Assume that the costs per EUP for material and conversion are $1.00 and
$1.50, respectively. Using FIFO, what is the total cost assigned to the transferred-out units (rounded to the
nearest dollar)?
a. $245,750
b. $244,438
c. $237,000
d. $224,938
ANS: B
Transferred Out Units: FIFO
Beginning Work in Process 25,000
+ Completion of Beginning Inventory (20,000 * 65%) 13,000 1.50 19,500
+ Units Started and Completed 77,000 2.50 192,500
+Normal Spoilage--Discrete-Materials 3,500 1.00 3,500
+Normal Spoilage--Discrete-Conversion 2,625 1.50 3,938
Equivalent Units of Production 244,438
DIF: Difficult OBJ: 6-2,6-4,6-8
108. Refer to Bowman Company. What are equivalent units of production for material assuming weighted
average is used?
a. 107,000
b. 116,500
c. 120,000
d. 115,000
ANS: C
Materials: Weighted Average
Beginning Work in Process 20,000 100% 20,000
+ Units Started and Completed 77,000 100% 77,000
+ Normal Spoilage--Discrete 3,500 100% 3,500
+ Abnormal Spoilage 5,000 100% 5,000
+ Ending Work in Process 14,500 100% 14,500
Equivalent Units of Production 120,000
109. Refer to Bowman Company. What are equivalent units of production for conversion costs assuming
weighted average is used?
a. 113,525
b. 114,400
c. 114,775
d. 115,650
ANS: A
110. Refer to Bowman Company. Assume that the costs per EUP for material and conversion are $1.00 and
$1.50, respectively. What is the cost assigned to normal spoilage, using weighted average, and where is it
assigned?
Value Assigned To
111. Refer to Bowman Company. Assume that the costs per EUP for material and conversion are $1.00 and
$1.50, respectively. Assuming that weighted average is used, what is the cost assigned to ending
inventory?
a. $29,725.00
b. $37,162.50
c. $38,475.00
d. $36,250.00
ANS: A
All materials are added at the start of production and the inspection point is at the end of the process.
112. Refer to Jones Company. What are equivalent units of production for material using FIFO?
a. 80,000
b. 79,100
c. 78,900
d. 87,500
ANS: A
Materials: FIFO
113. Refer to Jones Company. What are equivalent units of production for conversion costs using FIFO?
a. 79,700
b. 79,500
c. 81,100
d. 80,600
ANS: D
Conversion: FIFO %
Units Complete EUP
7,
Beginning Work in Process 500 60% 4,500
65,
+ Units Started and Completed 000 100% 65,000
13,
+ Ending Work in Process 000 70% 9,100
1,
+ Normal Spoilage (discrete) 100 100% 1,100
114. Refer to Jones Company. What are equivalent units of production for material using weighted average?
a. 86,600
b. 87,500
c. 86,400
d. 85,500
ANS: B
Conversion: FIFO %
Units Complete EUP
7,
Beginning Work in Process 500 100% 7,500
65,
+ Units Started and Completed 000 100% 65,000
13,
+ Ending Work in Process 000 70% 9,100
1,
+ Normal Spoilage (discrete) 100 100% 1,100
116. Refer to Jones Company. What is cost per equivalent unit for material using FIFO?
a. $1.63
b. $1.37
c. $1.50
d. $1.56
ANS: C
FIFO:
Materials
117. Refer to Jones Company. What is cost per equivalent unit for conversion costs using FIFO?
a. $4.00
b. $4.19
c. $4.34
d. $4.38
ANS: C
FIFO: Conversion
118. Refer to Jones Company. What is cost per equivalent unit for material using weighted average?
a. $1.49
b. $1.63
c. $1.56
d. $1.44
ANS: A
Weighted Average:
Materials
Beginning $ 10,400
Current Period 120,000
130,400 87,500 = $ 1.49
units per unit
119. Refer to Jones Company. What is cost per equivalent unit for conversion costs using weighted average?
a. $4.19
b. $4.41
c. $4.55
d. $4.35
ANS: D
Weighted Average:
Conversion
Beginning $ 13,800
Current Period 350,000
363,800 83,600 = $ 4.35
units per unit
120. Refer to Jones Company. What is the cost assigned to ending inventory using FIFO?
a. $75,920
b. $58,994
c. $56,420
d. $53,144
ANS: B
122. Refer to Jones Company. What is the cost assigned to normal spoilage and how is it classified using
weighted average?
a. $6,193 allocated between WIP and Transferred Out
b. $6,424 allocated between WIP and Transferred Out
c. $6,193 assigned to loss account
d. $6,424 assigned to units Transferred Out
ANS: D
123. Refer to Jones Company. What is the total cost assigned to goods transferred out using weighted average?
a. $435,080
b. $429,824
c. $428,656
d. $423,400
ANS: B
Price per
Goods Equivalent
Transferred Out Unit Total
73,600 $5.84 $429,824
10. When JIT is implemented, which of the following changes in the accounting system would not be
expected?
a. fewer cost allocations
b. elimination of standard costs
c. combining labor and overhead into one product cost category
d. combing raw material and materials in work-in-process into one product cost category
ANS: B DIF: Moderate OBJ: 17-6
11. Striving for flexibility in the number of products that can be produced in a short period of time is
characteristic of
a. EOQ systems.
b. push systems in general.
c. JIT.
d. pull systems in general.
ANS: C DIF: Easy OBJ: 17-6
12. Just-in-time (JIT) inventory systems
a. result in a greater number of suppliers for each production process.
b. focus on a "push" type of production system.
c. can only be used with automated production processes.
d. result in inventories being either greatly reduced or eliminated.
ANS: D DIF: Easy OBJ: 17-6
14. In a JIT manufacturing environment, product costing information is least important for use in
a. work in process inventory valuation.
b. pricing decisions.
c. product profitability analysis.
d. make-or-buy decisions.
ANS: A DIF: Moderate OBJ: 17-6
15. With JIT manufacturing, which of the following costs would be considered an indirect product cost?
a. cost of specific-purpose equipment
b. cost of equipment maintenance
c. property taxes on the plant
d. salary of a manufacturing cell worker
ANS: C DIF: Easy OBJ: 17-6
16. With JIT manufacturing, which of the following costs would be considered a direct product cost?
a. insurance on the plant
b. repair parts for machinery
c. janitors' salaries
d. salary of the plant supervisor
ANS: B DIF: Moderate OBJ: 17-6
18. The JIT environment has caused a reassessment of product costing techniques. Which of the following
statements is true with respect to this reassessment?
a. Traditional cost allocations based on direct labor are being questioned and criticized.
b. The federal government, through the SEC, is responsible for the reassessment.
c. The reassessment is caused by the replacement of machine hours with labor hours.
d. None of the above is true.
ANS: A DIF: Moderate OBJ: 17-6
20. Which of the following describes the effect on direct labor when management adopts the JIT philosophy?
a. Each direct labor person performs a single task, thereby allowing that person to reach his
or her theoretical potential.
b. Because each person runs a single machine in a JIT environment, there are more
employees classified as direct labor.
c. The environment becomes more labor-intensive.
d. Machine operators are expected to run several different types of machines, help set up for
production runs, and identify and repair machinery needing maintenance.
ANS: D DIF: Moderate OBJ: 17-6
25. In accounting for JIT operations, the Raw Material Inventory account
a. is closely monitored to ensure that materials are always on hand in time.
b. can be expected to have a larger balance than with traditional manufacturing methods.
c. is combined with the Work In Process Inventory account.
d. is combined with the Finished Goods Inventory account.
ANS: C DIF: Easy OBJ: 17-6
31. For workers in a multiprocess handling situation, which of the following happens?
a. no no
b. no yes
c. yes yes
d. yes no
32. The process of _________ occurs when equipment is programmed to stop when a certain situation arises.
a. throughput
b. automation
c. backflushing
d. information sharing
ANS: B DIF: Easy OBJ: 17-6
33. The connection of two or more flexible manufacturing systems via a host computer and a networking
information system is known as
a. yes yes
b. yes no
c. no no
d. no yes
a. yes no
b. no no
c. yes yes
d. no yes
39. The process that determines an allowable product cost while setting market price and allowing for an
acceptable profit margin is known as
a. target costing.
b. product life cycle costing.
c. activity-based costing.
d. responsibility costing.
ANS: A DIF: Easy OBJ: 17-5
40. The peak level of unit sales will occur in which stage of the product life cycle?
a. growth
b. maturity
c. decline
d. introduction
ANS: B DIF: Easy OBJ: 17-4
41. For product life cycle costing, R&D costs are
a. expensed as incurred.
b. capitalized and allocated over the life cycle.
c. deducted as period costs.
d. charged to specific departments as incurred.
ANS: B DIF: Easy OBJ: 17-4
44. Approximately what percentage of future product costs is determined in the development stage of the
product life cycle?
a. 30%
b. 50%
c. 70%
d. 90%
ANS: D DIF: Easy OBJ: 17-4
45. Which of the following fluctuate over the product life cycle?
a. sales price per unit
b. the types of costs that are incurred
c. product profitability
d. all of the above
ANS: D DIF: Easy OBJ: 17-4
46. In which of the following stages of the product life cycle would operating losses not be expected?
a. growth
b. development
c. introduction
d. decline
ANS: A DIF: Easy OBJ: 17-4
47. During which stage of the product life cycle will a company witness the highest profit?
a. development
b. maturity
c. growth
d. decline
ANS: C DIF: Easy OBJ: 17-4
48. Cost tables are databases that provide information on which of the following?
a. design specifications
b. manufacturing processes
c. impact on product costs when different inputs resources are used
d. all of the above
ANS: D DIF: Easy OBJ: 17-5
49. Ongoing efforts to reduce costs, increase product quality, and/or improve production process once
manufacturing has begun is known as
a. cost management.
b. kaizen costing.
c. target costing.
d. life-cycle costing.
ANS: B DIF: Easy OBJ: 17-5
50. Kaizen costing is used for which of the following types of products?
a. yes yes
b. no yes
c. no no
d. yes no
51. A mandate to reduce costs, increase product quality, and/or improve production processes through
continuous improvement is known as
a. kaizen costing.
b. activity-based costing.
c. the theory of constraints.
d. mass customization.
ANS: A DIF: Easy OBJ: 17-5
52. If life-cycle costs exceed the target cost of a product, managers will strive to reduce
a. the cost of special orders.
b. the level of activities that are non-value-added.
c. product variety.
d. period costs.
ANS: B DIF: Easy OBJ: 17-5
53. The projected sales price for a new product (which is still in the development stage of the product life
cycle) is $50. The company has estimated the life-cycle cost to be $30 and the first-year cost to be $60.
On this type of product, the company requires a $12 per unit profit. What is the target cost of the new
product?
a. $60
b. $30
c. $38
d. $42
ANS: C DIF: Easy OBJ: 17-5
57. The flow of goods through a production process cannot be at a faster rate than the slowest bottleneck is
the definition for
a. mass customization.
b. business process reengineering.
c. the theory of constraints.
d. the Pareto principle.
ANS: C DIF: Easy OBJ: 17-8
a. yes yes
b. yes no
c. no yes
d. no no
61. Which approaches to costing should be associated with each of the following life-cycle stages?
62. In the introduction stage of a product's life-cycle, which of the following type of costs typically may
create losses rather than profits?
a. advertising
b. assembly
c. design
d. overhead
ANS: A DIF: Moderate OBJ: 17-4
63. Most studies have indicated that what percent of a product's total life-cycle costs are determined in the
development/design stage?
a. 60%-70%
b. 70%-80%
c. 80%-90%
d. 90%-95%
ANS: C DIF: Easy OBJ: 17-4
64. Which of the following costing methods is the most effective in controlling a product's total life-cycle
cost?
a. kaizen costing
b. target costing
c. standard costing
d. process costing
ANS: B DIF: Moderate OBJ: 17-5
65. Which of the following formulas is the best representation of the concept of target costing?
a. target cost + profit margin = selling price
b. selling price - target cost = profit margin
c. selling price - profit margin = target cost
d. target cost - standard cost = profit margin
ANS: C DIF: Easy OBJ: 17-5
71. From a cost management view, research and development cost represents
a. a life-cycle investment
b. a period expense.
c. an unearned revenue.
d. a risk reserve.
ANS: A DIF: Moderate OBJ: 17-4
72. Life-cycle costing is especially important in which of the following types of companies?
75. The JIT philosophy indicates that inventory, as well as which of the following, should be eliminated?
Business-Value-
Suppliers Storage Employees Added Activities
76. Companies have often produced significant amounts of unwanted inventory because of
a. variable overhead allocation methodologies.
b. fixed overhead allocation methodologies.
c. variable and fixed overhead allocation methodologies.
d. the financial accounting requirement to expense research and development as incurred.
ANS: B DIF: Moderate OBJ: 17-6
77. Goods will flow through a production process at the rate of the
a. slowest part of the process.
b. fastest part of the process.
c. average of all the parts of the process.
d. time standards set using externally calibrated benchmarks.
ANS: A DIF: Moderate OBJ: 17-8
79. In a production process with a machine constraint, if a quality control point is to be established, it should
be set up
a. within the machine's processes.
b. directly after the machine has performed its functions.
c. immediately before the machine.
d. at the end of the production process.
ANS: C DIF: Easy OBJ: 17-8
81. Precious Jewels Corporation produces quality jewelry items for various retailers. For the coming year, it
has estimated it will consume 500 ounces of gold. Its carrying costs for a year are $2 per ounce. No safety
stock is maintained. If the EOQ is 100 ounces, what is the cost per order?
a. $40
b. $20
c. $5
d. $25
ANS: B
EOQ = 100 =
10,000 = 500x
$20 = x
82. Precious Jewels Corporation produces quality jewelry items for various retailers. For the coming year, it
has estimated it will consume 500 ounces of gold. Its carrying costs for a year are $2 per ounce. No safety
stock is maintained. If the EOQ is 100 ounces, what would be the estimate for Precious Jewels total
carrying costs for the coming year?
a. $200
b. $250
c. $100
d. $1,000
ANS: C
500 oz/100 oz = 5 orders per year * $20 per order cost = $100
83. A firm estimates that its annual carrying cost for material X is $.30 per lb. If the firm requires 50,000 lbs.
per year, and ordering costs are $100 per order, what is the EOQ (rounded to the nearest pound)?
a. 5,774 lbs.
b. 4,082 lbs.
c. 1,732 lbs.
d. 1,225 lbs.
ANS: A
EOQ =
EOQ = 5,774 lbs.
Zedlar Corporation
Zedlar Corporation's EOQ for Material A is 500 units. This EOQ is based on:
84. Refer to Zedlar Corporation. What is the annual carrying cost per unit for Material A?
a. $0.50
b. $2.00
c. $2.50
d. $5.00
ANS: A
Clear Day Corporation manufactures various glass products including a car window. The setup cost to
produce the car window is $1,200. The cost to carry a window in inventory is $3 per year. Annual demand
for the car window is 12,000 units.
86. Refer to Clear Day Corporation. What is the most economical production run (rounded to the nearest
unit)?
a. 6,000 units
b. 3,000 units
c. 9,295 units
d. 3,098 units
ANS: D
EOQ =
EOQ = 3,098 units
87. Refer to Clear Day Corporation. If the annual demand for the car window was to increase to 15,000 units,
a. the number of setups would decrease.
b. the total carrying costs would increase.
c. the economic order quantity would decline.
d. all of the above would occur.
ANS: B DIF: Easy OBJ: 17-9
88. A company has estimated its economic order quantity for Part A at 2,400 units for the coming year. If
ordering costs are $200 and carrying costs are $.50 per unit per year, what is the estimated total annual
usage?
a. 6,000 units
b. 28,800 units
c. 7,200 units
d. 2,400 units
ANS: C
89. A company annually consumes 10,000 units of Part C. The carrying cost of this part is $2 per year and the
ordering costs are $100. The company uses an order quantity of 500 units. By how much could the
company reduce its total costs if it purchased the economic order quantity instead of 500 units?
a. $500
b. $2,000
c. $2,500
d. $0
ANS: A
EOQ =
EOQ = 1,000 units
At present, 20 orders are placed for a total annual cost of $2,000. If the EOQ is used, 10
orders will be placed at a cost of $1,000
Because an average of an additional 250 units will be on hand, carrying costs will increase by
$500. The net difference is a savings of $500.
90. A company annually consumes 10,000 units of Part C. The carrying cost of this part is $2 per year and the
ordering costs are $100. The company uses an order quantity of 500 units. If the company operates 200
days per year, and the lead time for ordering Part C is 5 days, what is the order point?
a. 250 units
b. 1,000 units
c. 500 units
d. 2,000 units
ANS: A
Order point = Daily use * Lead time
= (10,000/200) * 5
= 250 units
94. The size of the safety stock is directly affected by all of the following, except the
a. cost of a stockout.
b. probability of a stockout.
c. carrying cost of stock.
d. economic order quantity.
ANS: D DIF: Easy OBJ: 17-9
97. The optimal size of the safety stock is defined by the point where the
a. costs of carrying the safety stock equal stockout costs.
b. setup costs equal stockout costs.
c. ordering costs equal stockout costs.
d. reorder point equals safety stock.
ANS: A DIF: Moderate OBJ: 17-9
98. If a company carries safety stock and its annual carrying costs per unit are $0.30, what formula yields the
total annual carrying costs?
a. $0.30 x [(EOQ/2) + Safety stock)]
b. $0.30 x (EOQ + Safety stock)
c. $0.30 x [(EOQ x 2) + Safety stock)]
d. $0.30 x (EOQ - Safety stock)
ANS: A DIF: Easy OBJ: 17-9
Douglas Corporation
Douglas Corporation operates its factory 300 days per year. Its annual consumption of Material Y is
1,200,000 gallons. It carries a 10,000 gallon safety stock of Material Y and its lead time is 12 business
days.
99. Refer to Douglas Corporation. What is the order point for Material Y?
a. 10,000 gallons
b. 38,000 gallons
c. 48,000 gallons
d. 58,000 gallons
ANS: D
Order point = (Daily use * Lead time) + Safety Stock
= (4,000 * 12) + 10,000
= 58,000 gallons
100. Refer to Douglas Corporation. If the EOQ for Material Y is 30,000 gallons, and the carrying cost per
gallon per year is $.25, what is the total annual carrying cost for Material Y?
a. $3,750
b. $7,500
c. $6,250
d. $10,000
ANS: C
Annual carrying cost = [(EOQ/2) + Safety stock] * per unit carrying cost
= (15,000 + 10,000) * $0.25
= $6,250
Rawson Corporation
Rawson Corporations order quantity for Material T is 5,000 lbs. If the company maintains a safety stock
of T at 500 lbs., and its order point is 1,500 lbs.
102. Refer to Rawson Corporation. What is the lead time assuming daily usage is 50 lbs.?
a. 30 days
b. 100 days
c. 10 days
d. 20 days
ANS: D
Order point = (Daily use * Lead time) + Safety Stock
1,500 = (50 * LT) + 500
1,000 = (50 * LT)
20 = LT
103. Refer to Rawson Corporation. What would be the total annual carrying costs assuming the carrying cost
per unit is $0.20?
a. $1,000
b. $600
c. $100
d. $1,100
ANS: B
(5,000units/2) + 500 units = 3,000 units *$0.20/unit = $600
105. In an Pareto inventory analysis, the items that are most likely to be controlled with a red-line system are
the
a. A items.
b. B items.
c. C items.
d. items on a perpetual inventory.
ANS: C DIF: Easy OBJ: 17-9
106. Which of the following might be appropriate for items in the "C" category of an Pareto inventory
analysis?
a. a red-line system
b. a two-bin system
c. a periodic inventory system
d. all of the above
ANS: D DIF: Moderate OBJ: 17-9
107. The __________________ would not affect the economic order quantity.
a. company's weighted average cost of capital
b. cost of purchase requisition forms
c. cost of insuring inventory
d. cost of a stockout
ANS: D DIF: Moderate OBJ: 17-9
108. All other factors equal, a decrease in the order quantity will
a. decrease the annual carrying costs.
b. decrease the annual ordering costs.
c. increase the lead time.
d. reduce the safety stock.
ANS: A DIF: Easy OBJ: 17-9
111. The number of orders that will be submitted each year for raw material is given by which formula?
a. Economic order quantity x order point
b. Total annual material needs/economic order quantity
c. Order point/economic order quantity
d. Total annual material needs/safety stock
ANS: B DIF: Easy OBJ: 17-9