Business / Accounting Review Questions and Exercises

Business    / Accounting  Review Questions and Exercises

Subject: Business    / Accounting
Question

Review Questions and Exercises

Completion Statements

Fill in the blank(s) to complete each statement.

1. In a ___ cost pool, all of the costs in the cost pool have the same or a similar cause-and-effect or benefits-received relationship with the cost-allocation base.

2. The reduction in selling price below list selling price in order to encourage customers to purchase more is called a ______

3. A _____ ________ categorizes costs related to customers into different cost pools on the basis of different types of cost drivers (or cost-allocation bases) or different degrees of difficulty in determining cause and- effect or benefits-received relationships.

4. A __ unit is a hypothetical unit with weights based on the mix of individual units.

5. The sales-volume variance subdivides into which two variances? __ ____ and _

6. (Appendix) The direct materials (DM) efficiency variance subdivides into which two variances? __ and __ __________.

True-False

Indicate whether each statement is true (T) or false (F).

___ 1. One of the four purposes of cost allocation is to measure income and assets for reporting to external parties.

___ 2. The fairness criterion is superior to other criteria used for guiding cost-allocation decisions when the purpose of the allocation is either to provide information for economic decisions or to motivate managers and other employees.

__ 3. When the degree of homogeneity is greater among costs, more cost pools are required to explain accurately the differences in how products use the resources of a company.

___ 4. Customer-profitability analysis often shows that a small percentage of customers accounts for a large percentage of the company’s operating income.

___ 5. In the customer cost hierarchy, delivery cost for a customer order is a customer sustaining cost.

___ 6. An unfavorable sales-mix variance arises for an individual product when its actual sales-mix percentage is less than its budgeted sales-mix percentage.

___ 7. (Appendix) When multiple inputs of direct materials can be combined in varying proportions within specified limits, they are called substitutable inputs.

___ 8. (Appendix) An unfavorable direct materials mix variance for an individual type of direct material arises when its actual mix percentage is less than its budgeted mix percentage.

Multiple Choice

Select the best answer to each question. Space is provided for computations after the quantitative questions.

__ __ 1. (CPA) Of most relevance in deciding how indirect costs should be allocated to products is the degree of:

b. causality.

____ 2. In a customer cost hierarchy, the cost of a sales visit to a customer is:

c. a customer-sustaining cost.

____ 3. The following information is for Eucha Corp. for the first quarter of the current fiscal year:

Actual

Results

Static

Budget

Unit sales:

Product X

15,000

40,000

Product Y

65,000

60,000

Total

80,000

100,000

Contribution margin per unit:

Product X $4 $5

Product Y $3 $2

The sales-mix variance for both products together is:

a. $51,000 unfavorable.

___ 4. Using the information in question 3, the sales-quantity variance for Product Y is:

___ 5. Using the information in question 3, the amount of the budgeted contribution margin per composite unit is:

__ 6. (Appendix) The following information is for Kershaw Company for last month:

Budgeted direct labor mix at budgeted prices for actual output produced

3,825 skilled hours at $16 per hour

1,275 unskilled hours at $12 per hour

5,100 total hours

Actual results

4,000 skilled hours at $19 per hour

1,000 unskilled hours at $9 per hour

5,000 total hours

The direct labor yield variance for both types of labor together is:

____ 7. (Appendix) Using the information in question 6, the mix variance for skilled labor is:

Review Exercises

1. (CMA) Cosmo Inc.’s income statement by segments for November 2011 is as follows:

Total

Mall Store

Town Store

Revenues

$200,000

$80,000

$120,000

Variable costs

116,000

32,000

84,000

Contribution margin

84,000

48,000

36,000

Direct fixed costs

60,000

20,000

40,000

Contribution by store

24,000

28,000

(4,000)

Indirect fixed costs

10,000

4,000

6,000

Operating income

$ 14,000

$24,000

$(10,000)

Additional information regarding Cosmo’s operations is as follows:

?One-fourth of each store’s direct fixed costs will continue through December 31, 2012, even if either

store is closed.

?Cosmo allocates indirect fixed costs to each store on the basis of revenues. These costs are regarded

as unavoidable.

?Management estimates that closing the Town Store would result in a 10% decrease in the Mall

Store’s sales volume, whereas closing the Mall Store would not affect the Town Store’s sales volume.

?The operating results for November 2011 represent the average for all months.

a. Compute the increase/decrease in Cosmo’s monthly operating income for 2012 if the Town Store is

closed.

b. Cosmo is considering a promotion campaign at the Town Store that would not affect the Mall Store.

Compute the increase/decrease in Cosmo’s monthly operating income in 2012, assuming annual promotion

costs at the Town Store are increased by $60,000 and its sales volume increases by 10%.

c. One-half of Town Store’s revenues are from items sold at variable cost in order to attract customers

to the store. Cosmo is considering discontinuing these items, a decision that would reduce the Town

Store’s direct fixed costs by 15% and result in the loss of 20% of its remaining revenues and variable

costs. This change would not affect the Mall Store. Compute the increase/decrease in Cosmo’s

monthly operating income for 2012, assuming the items sold at variable cost are discontinued.

2. (CMA) Given the following information for Xerbert Company (in thousands):

Static Budget for 2008

Actual Results for 2008

Xenox

Xeon

Total

Xenox

Xeon

Total

Units sold

150

100

250

130

130

260

Revenues

$900

$1,000

$1,900

$780

$1,235

$2,015

Variable costs

450

750

1,200

390

975

1,365

Contribution margin

$450

$ 250

$ 700

$390

$ 260

$ 650

Fixed costs:

Manufacturing

200

190

Marketing

153

140

Customer service

95

90

Total fixed costs

448

420

Operating income

$ 252

$ 230

a. Compute the sales-volume variance for both products together.

b. Compute the sales-mix variance for both products together.

c. Compute the sales-quantity variance for both products together