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Achievement Test 6: Chapters 11-12 Name ___________________________

Managerial Accounting, 5e Instructor ________________________


Section # _________ Date __________

Part I II III IV Total

Points 30 20 30 20 100

Score

PART I — MULTIPLE CHOICE (30 points)

Instructions: Designate the best answer for each of the following questions.

____ 1. The annual rate of return method of capital budgeting ignores the
a. time value of money.
b. timing of the cash flows.
c. length of time over which the cash flows will be received.
d. all of the above.

____ 2. When using discounted cash flow techniques,


a. a project with an internal rate of return that is zero or positive is acceptable.
b. a project with a net present value that is zero or positive is acceptable.
c. potential salvage value should be ignored as a noncash flow item.
d. the internal rate of return method, but not the net present value method, is usable
with unequal annual cash inflows.

____ 3. The cash payback period is expressed


a. as a percentage.
b. as a dollar amount.
c. in months.
d. in years.

____ 4. The standard rate of pay is $15 per direct labor hour. If the actual direct labor payroll
was $58,800 for 4,000 direct labor hours worked, the direct labor price (rate) variance
is
a. $2,400 unfavorable.
b. $1,200 favorable.
c. $3,000 unfavorable.
d. $3,000 favorable.
AT6- 2 Test Bank for Managerial Accounting, Fifth Edition

____ 5. The standard number of hours that should have been worked for the output attained is
8,000 direct labor hours and the actual number of direct labor hours worked was
8,400. If the direct labor price variance was $8,400 unfavorable, and the standard rate
of pay was $12 per direct labor hour, what was the actual rate of pay for direct labor?
a. $11.00 per direct labor hour.
b. $10.00 per direct labor hour.
c. $13.00 per direct labor hour.
d. $12.00 per direct labor hour.

____ 6. All of the capital budgeting methods use cash flow numbers except the
a. cash payback technique.
b. annual rate of return method.
c. internal rate of return method.
d. net present value method.

____ 7. The time value of money is considered by each of the following except the
a. profitability index.
b. net present value method.
c. internal rate of return method.
d. cash payback technique.

____ 8. A company uses 3,150 pounds of materials and exceeds the standard by 150 pounds.
The quantity variance is $900 unfavorable. What is the standard price?
a. $2.00
b. $3.50
c. $4.00
d. $6.00

____ 9. A company purchases 15,000 pounds of materials. The materials price variance is
$9,000 favorable. What is the difference between the standard and actual price paid
for the materials?
a. $3.00
b. $.60
c. $3.75
d. $15.00

____ 10. A company uses 40,000 pounds of materials for which they paid $9.00 a pound. The
materials price variance was $80,000 favorable. What is the standard price per
pound?
a. $2.00
b. $7.00
c. $10.00
d. $11.00

____ 11. An unfavorable materials quantity variance would occur if


a. more materials are purchased than are used.
b. actual pounds of materials used were less than the standard labor hours.
c. actual labor hours were greater than the standard labor hours allowed.
d. actual pounds of materials used were greater than the standard pounds allowed.
Achievement Test 6 AT6- 3

____ *12. The overhead volume variance relates only to


a. variable overhead costs.
b. fixed overhead costs.
c. both variable and fixed overhead costs.
d. all manufacturing costs.

PART II — TRUE/FALSE (20 points)

Instructions: Designate whether each of the following statements is true or false by circling the T
or F.

T F 1. If actual costs are less than standard costs, the variance is favorable.

T F 2. A materials quantity variance is calculated as the difference between the standard


direct materials price and the actual direct materials price multiplied by the actual
quantity of direct materials used.

T F 3. An unfavorable labor quantity variance indicates the actual number of direct labor
hours worked was greater than the number of direct labor hours that should have
been worked for the output attained.

T F 4. Both the book value and the disposal value of an existing asset is relevant in a retain
or replace equipment decision.

T F 5. A direct labor price standard is frequently called the direct labor efficiency standard.

T F 6. The cash payback technique identifies the time period required to recover the cost of
the capital investment from the annual cash inflow produced by the investment.

T F 7. The primary capital budgeting method that uses discounted cash flow techniques is
the cash payback method.

T F 8. Intangible benefits in capital budgeting include increased quality or safety or


employee loyalty.

T F 9. The profitability index is calculated by dividing the initial investment by the present
value of cash flows.

T F 10. The annual rate of return method is based on accounting data and indicates the
profitability of a capital expenditure.
AT6- 4 Test Bank for Managerial Accounting, Fifth Edition

PART III — VARIANCE ANALYSIS (30 points)

Universal Bats, Inc. manufactures aluminum baseball bats that it sells to university athletic
departments. It has developed the following per unit standard costs for 2011 for each baseball
bat:
Direct Materials Direct Labor Manufacturing Overhead
Standard quantity 2 pounds (Aluminum) ½ hour ½ hour
Standard price $4.00 $10.00 $6.00
Unit standard cost $8.00 $5.00 $3.00

In 2011, the company planned to produce 60,000 baseball bats at a level of 30,000 hours of
direct labor. Actual results for 2011 are presented below:

1. Direct materials purchased were 123,000 pounds of aluminum that cost $516,600.
2. Direct materials used were 110,000 pounds of aluminum.
3. Direct labor costs were $278,400 for 29,000 direct labor hours actually worked.
4. Total manufacturing overhead was $175,000.
5. Actual production was 57,000 baseball bats.

Instructions
Compute the following variances:
1. Direct materials price.
2. Direct materials quantity.
3. Direct labor price.
4. Direct labor quantity.
5. Total overhead variance.
Achievement Test 6 AT6- 5

PART IV — CAPITAL BUDGETING (20 points)

Henley Company is considering a capital investment of $1,200,000 in new equipment. It is


expected to have a useful life of 10 years with no salvage value. Depreciation is computed by the
straight-line method. During the life of the investment, annual net income and cash inflows are
expected to be $105,000 and $225,000, respectively. Henley requires either a 12% rate of return,
or a payback period of 5 years.

Instructions: Compute the (a) annual rate of return, (b) cash payback period, (c) net present
value, (d) profitability index, and (e) internal rate of return. Show all computations. State whether
the project should be accepted or rejected for each of the five capital budgeting techniques.

Present Value of a Series of Future Payments


(n)
Periods 8% 9% 10% 11% 12% 15%
10 6.71008 6.41766 6.14457 5.88923 5.65022 5.01877

(a) Annual Rate of Return = _____________________.

(b) Cash Payback Period = _____________________.

(c) Net Present Value = _____________________.

(d) Profitability Index = _____________________.

(e) Internal Rate of Return = _______________________.


AT6- 6 Test Bank for Managerial Accounting, Fifth Edition

Solutions — Achievement Test 6: Chapters 11-12

PART I — MULTIPLE CHOICE (30 points)


1. d 6. b 11. d
2. b 7. d *12. b
3. d 8. d
4. b 9. b
5. c 10. d

PART II — TRUE/FALSE (20 points)


1. T 6. T
2. F 7. F
3. T 8. T
4. F 9. F
5. F 10. T

PART III — VARIANCE ANALYSIS (30 points)


1. Direct materials price variance = $24,600 Unfavorable.
(AQ × AP) – (AQ × SP)
(123,000 × $4.20*) – (123,000 × $4.00) = $516,600 – $492,000 = $24,600
*AP = $516,600 ÷ 123,000 pounds = $4.20

2. Direct materials quantity variance = $16,000 Favorable.


(AQ × SP) – (SQ × SP)
(110,000 × $4.00) – (114,000* × $4.00) = $440,000 – $456,000 = $16,000
*SQ = 57,000 × 2 pounds = 114,000 pounds

3. Direct labor price variance = $11,600 Favorable.


(AH × AR) – (AH × SR)
(29,000 × $9.60*) – (29,000 × $10.00) = $278,400 – $290,000 = $11,600
*AR = $278,400 ÷ 29,000 hours = $9.60 per hour

4. Direct labor quantity variance = $5,000 Unfavorable.


(AH × SR) – (SH × SR)
(29,000 × $10.00) – (28,500* × $10.00) = $290,000 – $285,000 = $5,000
*SH = 57,000 × ½ hour = 28,500 hours

5. Actual overhead – Overhead applied = Total overhead variance.


$175,000 – $171,000* = $4,000 Unfavorable
*SH = 28,500 × $6.00 = $171,000 hours

PART IV — CAPITAL BUDGETING (20 points)


(a) Annual rate of return — $105,000 ÷ ($1,200,000 ÷ 2) = 8.8%. Reject project.
(b) Cash payback period — $1,200,000 ÷ $225,000 = 5.3 years. Reject project.
(c) Net present value — ($225,000 × 5.65022) – $1,200,000 = $(71,300). Accept project.
(d) Profitability index — ($225,000 × 5.65022) ÷ $1,200,000 = 1.06. Accept project.
Achievement Test 6 AT6- 7

(e) Internal rate of return — $1,200,000 ÷ $225,000 = 5.33, or approximately 13.5%. Accept
project.

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