Managerial Accounting Chapter 9 Study Guide

1. Davie Corporation is preparing its Manufacturing Overhead Budget for the fourth quarter of the year. The budgeted variable factory overhead rate is $6.00 per direct labor-hour; the budgeted fixed factory overhead is $92,000 per month, of which $16,000 is factory depreciation If the budgeted direct labor time for November is 9,000 hours, then the total budgeted cash disbursements for November must be: $130,000

2. Davie Corporation is preparing its Manufacturing Overhead Budget for the fourth quarter of the year. The budgeted variable factory overhead rate is $6.00 per direct labor-hour; the budgeted fixed factory overhead is $92,000 per month, of which $16,000 is factory depreciation.

If the budgeted direct labor time for December is 4,000 hours, then the predetermined factory overhead per direct labor-hour for December would be: $29

3. Detmer Enterprises has budgeted sales for the next five months as follows:

Past experience has shown that the ending inventory for each month should be equal to 10% of the next month's sales in units. The inventory on December 31 contained 400 units, which was in excess of the desired level of inventory. The company needs to prepare a Production Budget for the first quarter of the year. The desired ending inventory for April is: 460

Desired ending inventory for April = 10% of May sales = 10% x 4,600 = 460 units

4. Thiel Inc. is working on its cash budget for October. The budgeted beginning cash balance is $35,000. Budgeted cash receipts total $166,000 and budgeted cash disbursements total $162,000. The desired ending cash balance is $50,000. The excess (deficiency) of cash available over disbursements for October will be: $39,000

Excess cash available over disbursements = Beginning cash balance + Budgeted cash receipts Budgeted cash disbursements = $35,000 + $166,000 - $162,000 = $39,000

5. Sarrazin Corporation is in the process of preparing its annual budget. The following beginning and ending inventory levels are planned for the year.

Each unit of finished goods requires 8 grams of raw material. If the company plans to sell 640,000 units during the year, the number of units it would have to manufacture during the year would be: 590,000

6. Mouw Inc. bases its manufacturing overhead budget on budgeted direct labor-hours. The direct labor budget indicates that 5,400 direct labor-hours will be required in January. The variable overhead rate is $4.40 per direct labor-hour. The company's budgeted fixed manufacturing overhead is $77,220 per month, which includes depreciation of $9,720. All other fixed manufacturing overhead costs represent current cash flows. The January cash disbursements for manufacturing overhead on the manufacturing overhead budget should be: $91,260

Variable overhead = 5,400 direct labor-hours x $4.40 = $23,760 Cash portion of fixed manufacturing overhead = $77,220 - $9,720 = $67,500 Total cash disbursement for overhead in January = $23,760 + $67,500 = $91,260

7. Hardin, Inc, has budgeted sales in units for the next five months as follows:

Past experience has shown that the ending inventory for each month should be equal to 15% of the next month's sales in units. The inventory on May 31 contained 1,020 units. The company needs to prepare a production budget for the next five months. The total number of units produced in July should be: 5,660 Units produced = Ending inventory + Units sold - Beginning inventory= (6,000 x 15%) + 5,600 - (5,600 x 15%) = 5,660

8. The cash budget must be prepared before you can complete the: budgeted balance sheet 9. A self-imposed budget can be a very effective control device in an organization. True

10. Dano Inc. bases its manufacturing overhead budget on budgeted direct labor-hours. The variable overhead rate is $1.50 per direct labor-hour. The company's budgeted fixed manufacturing overhead is $110,200 per month, which includes depreciation of $28,880. All other fixed manufacturing overhead costs represent current cash flows. The direct labor budget indicates that 7,600 direct labor-hours will be required in December. The company recomputes its predetermined overhead rate every month. The predetermined overhead rate for December should be: $16.00

1. A general rule in relevant cost analysis is: A. variable costs are always relevant. B. fixed costs are always irrelevant. C. differential future costs and revenues are always relevant. D. depreciation is always irrelevant.

2. The opportunity cost of making a component part in a factory with no excess capacity is the: A. variable manufacturing cost of the component. B. fixed manufacturing cost of the component. C. total manufacturing cost of the component. D. net benefit foregone from the best alternative use of the capacity required.

3. Freestone Company is considering renting Machine Y to replace Machine X. It is expected that Y will waste less direct materials than does X. If Y is rented, X will be sold on the open market. For this decision, which of the following factors is (are) relevant? I. Cost of direct materials used II. Resale value of Machine X A. Only I B. Only II C. Both I and II

D. Neither I nor II

4. When there is a production constraint, a company should emphasize the products with: A. the highest unit contribution margins. B. the highest contribution margin ratios. C. the highest contribution margin per unit of the constrained resource. D. the highest contribution margins and contribution margin ratios.

5. The Kelsh Company has two divisions--North and South. The divisions have the following revenues and expenses: North South Sales $900,000 $800,000 Variable expenses 450,000 300,000 Traceable fixed expenses 260,000 210,000 Allocated common corporate expenses 240,000 190,000 Net operating income (loss) $(50,000) $100,000 Management at Kelsh is pondering the elimination of North Division. If North Division were eliminated, its traceable fixed expenses could be avoided. The total common corporate expenses would be unaffected. Given these data, the elimination of North Division would result in an overall company net operating income of: A. $100,000. B. $150,000. C. $(140,000). D. $50,000.

6. Manor Company plans to discontinue a department that has a contribution margin of $24,000 and $48,000 in fixed costs. Of the fixed costs, $21,000 cannot be eliminated. The effect of this discontinuance on Manor's net operating income would be a(an): A. decrease of $3,000. B. increase of $3,000. C. decrease of $24,000. D. increase of $24,000.

7. Power Systems Inc. manufactures jet engines for the United States armed forces on a costplus basis. The production cost of a particular jet engine is shown below: Direct materials $200,000 Direct labor 150,000

Manufacturing overhead: Supervisor's salary Fringe benefits on direct labor Depreciation Rent Total cost

20,000 15,000 12,000 11,000 $408,000

If production of this engine was discontinued, the production capacity would be idle, and the supervisor would be laid off. The depreciation referred to above is for special equipment that would have no resale value and that does not wear out through use. When asked to bid on the next contract for this engine, the minimum unit price that Power Systems should bid is: A. $408,000. B. $365,000. C. $397,000. D. $385,000.

8. The O.T. Company makes 35,000 motors to be used in the production of its sewing machines. The cost per motor at this level of activity is: Direct materials $4.50 Direct labor $4.60 Variable manufacturing overhead $3.75 Fixed manufacturing overhead $3.45 An outside supplier has offered to supply all the motors the company needs for $15 each. If O.T. Company decided not to make the motors, there would be no other use for the production facilities and none of the fixed manufacturing overhead cost could be avoided. If O.T. Company decides to continue making the motor, how much higher or lower would net operating income be than if the motors are purchased from the outside supplier? A. $75,250 higher. B. $45,500 lower. C. $311,500 higher. D. $120,750 higher.

9. Wright Company produces products I, J, and K from a single raw material input. Budgeted data for the next month follows: Product I J K Units produced 1,500 2,000 3,000 Per unit sales value at split-off $10 $12 $15 Added processing costs per unit $2 $4 $4

Per unit sales value if processed further

$15

$15

$20

If the cost of the raw material input is $78,000, which of the products should be processed beyond the split-off point? Product I J K A. B. C. D. yes yes no no yes no yes yes no yes no yes

The Tingey Company has 500 obsolete microcomputers that are carried in inventory at a total cost of $720,000. If these microcomputers are upgraded at a total cost of $100,000, they can be sold for a total of $160,000. As an alternative, the microcomputers can be sold in their present condition for $50,000.
Reference: 13-1

10. The sunk cost in this situation is: A. $720,000. B. $160,000. C. $ 50,000. D. $100,000.

The Tingey Company has 500 obsolete microcomputers that are carried in inventory at a total cost of $720,000. If these microcomputers are upgraded at a total cost of $100,000, they can be sold for a total of $160,000. As an alternative, the microcomputers can be sold in their present condition for $50,000.
Reference: 13-1

11. What is the net advantage or disadvantage to the company from upgrading the computers rather than selling them in their present condition? A. $110,000 advantage. B. $660,000 disadvantage. C. $ 10,000 advantage. D. $ 60,000 advantage.

The Tingey Company has 500 obsolete microcomputers that are carried in inventory at a total cost of $720,000. If these microcomputers are upgraded at a total cost of $100,000, they can be sold for a total of $160,000. As an alternative, the microcomputers can be sold in their present condition for $50,000.
Reference: 13-1

12. Suppose the selling price of the upgraded computers has not been set. At what selling price per unit would the company be as well off upgrading the computers as if it just sold the computers in their present condition? A. $100. B. $770. C. $300. D. $210.

13. The following information is available on Product A: Number of units produced and sold each year 10,000 Selling price per unit $80 Unit product cost $50 Investment in Product A $400,000 Required return on investment 15% The company uses the absorption approach to cost-plus pricing. Based on these data, the total selling, general, and administrative expenses each year would be: A. $240,000. B. $300,000. C. $140,000. D. $200,000.

14. Johannsen Corporation makes a product with the following costs: Per unit Per year Direct materials $14.70 Direct labor 14.10 Variable manufacturing overhead 3.70 Fixed manufacturing overhead $305,200 Variable SG&A expenses 3.00 Fixed SG&A expenses 163,800 The company uses the absorption costing approach to cost-plus pricing. The pricing calculations are based on budgeted production and sales of 14,000 units per year. The company has invested $540,000 in this product and expects a return on investment of

10%. The markup on absorption cost would be closest to: A. 27.1%. B. 124.2%. C. 34.2%. D. 10.0%.

15. Which of the following represents the normal sequence in which the indicated budgets are prepared? A. Direct Materials, Cash, Sales B. Production, Cash, Income Statement C. Sales, Balance Sheet, Direct Labor D. Production, Manufacturing Overhead, Sales

16. Which of the following is not a benefit of budgeting? A. It reduces the need for tracking actual cost activity. B. It sets benchmarks for evaluation performance. C. It uncovers potential bottlenecks. D. It formalizes a manager's planning efforts.

17. A continuous (or perpetual) budget: A. is prepared for a range of activity so that the budget can be adjusted for changes in activity. B. is a plan that is updated monthly or quarterly, dropping one period and adding another. C. is a strategic plan that does not change. D. is used in companies that experience no change in sales.

18. Budgeted production needs are determined by: A. adding budgeted sales in units to the desired ending inventory in units and deducting the beginning inventory in units from this total. B. adding budgeted sales in units to the beginning inventory in units and deducting the desired ending inventory in units from this total. C. adding budgeted sales in units to the desired ending inventory in units. D. deducting the beginning inventory in units from budgeted sales in units.

19. Shown below is the sales forecast for Cooper Inc. for the first four months of the coming

year. Cash sales Credit sales Jan Feb Mar Apr $ 15,000 $ 24,000 $ 18,000 $ 14,000 $100,000 $120,000 $ 90,000 $ 70,000

On average, 50% of credit sales are paid for in the month of the sale, 30% in the month following sale, and the remainder is paid two months after the month of the sale. Assuming there are no bad debts, the expected cash inflow in March is: A. $138,000. B. $122,000. C. $119,000. D. $108,000.

20. The following data have been taken from the budget reports of Brandon Company, a merchandising company. Purchases Sales January $160,000 $100,000 February 160,000 200,000 March 160,000 240,000 April 140,000 300,000 May 140,000 260,000 June 120,000 240,000 Forty percent of purchases are paid for in cash at the time of purchase, and 30% are paid for in each of the next two months. Purchases for the previous November and December were $150,000 per month. Employee wages are 10% of sales for the month in which the sales occur. Operating expenses are 20% of the following month's sales. (July sales are budgeted to be $220,000.) Interest payments of $20,000 are paid quarterly in January and April. Brandon's cash disbursements for the month of April would be: A. $140,000. B. $254,000. C. $200,000. D. $248,000.

21. The Jung Corporation's production budget calls for the following number of units to be produced each quarter for next year: Budgeted production Quarter 1 45,000 units Quarter 2 38,000 units Quarter 3 34,000 units

Quarter 4

48,000 units

Each unit of product requires three pounds of direct material. The company's policy is to begin each quarter with an inventory of direct materials equal to 30% of that quarter's direct material requirements. Budgeted direct materials purchases for the third quarter would be: A. 114,600 pounds. B. 89,400 pounds. C. 38,200 pounds. D. 29,800 pounds.

22. The Carlquist Company makes and sells a product called Product K. Each unit of Product K sells for $24 dollars and has a unit variable cost of $18. The company has budgeted the following data for November: * Sales of $1,152,000, all in cash. * A cash balance on November 1 of $48,000. * Cash disbursements (other than interest) during November of $1,160,000. * A minimum cash balance on November 30 of $60,000. If necessary, the company will borrow cash from a bank. The borrowing will be in multiples of $1,000 and will bear interest at 2% per month. All borrowing will take place at the beginning of the month. The November interest will be paid in cash during November. The amount of cash that must be borrowed on November 1 to cover all cash disbursements and to obtain the desired November 30 cash balance is: A. $20,000. B. $21,000. C. $37,000. D. $38,000.

Mitchell Company had the following budgeted sales for the last half of last year: Cash Credit Sales Sales July $50,000 $150,000 August 55,000 170,000 September 45,000 130,000 October 50,000 145,000 November 60,000 200,000 December 80,000 350,000 The company is in the process of preparing a cash budget and must determine the expected cash collections by month. To this end, the following information has been assembled:

Collections on credit sales: 60% in month of sale 30% in month following sale 10% in second month following sale
Reference: 9-3

23. Assume that the accounts receivable balance on July 1 was $75,000. Of this amount, $60,000 represented uncollected June sales and $15,000 represented uncollected May sales. Given these data, the total cash collected during July would be: A. $150,000. B. $235,000. C. $215,000. D. $200,000.

Mitchell Company had the following budgeted sales for the last half of last year: Cash Credit Sales Sales July $50,000 $150,000 August 55,000 170,000 September 45,000 130,000 October 50,000 145,000 November 60,000 200,000 December 80,000 350,000 The company is in the process of preparing a cash budget and must determine the expected cash collections by month. To this end, the following information has been assembled: Collections on credit sales: 60% in month of sale 30% in month following sale 10% in second month following sale
Reference: 9-3

24. What is the budgeted accounts receivable balance on December 1? A. $ 80,000. B. $140,000. C. $ 94,500. D. $131,300.

Answer Key

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24.

C D C C C B D A B A C C A C B A B A C B A B D C