Achievement Test 13: Chapters 25 and 26 Accounting Principles, 9e Weygandt, Kieso, & Kimmel
Part Points
Name __________________________ Instructor _______________________ Section # _______ Date _________
I
II
III
IV
Total
26
26
28
20
100
Score
PART I — MULTIPLE CHOICE (26 points) Instructions: Designate the best answer for each of the following questions. ____
1. The annual rate of return technique 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.
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2. When using discounted cash flow techniques, a. a project with a net present value that is zero or positive is acceptable. b. a project with an internal rate of return 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.
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3. If an actual cost exceeds the standard cost, the result is a. an unfavorable variance. b. credited to a variance account. c. carried as a liability on the balance sheet. d. carried as an asset on the balance sheet.
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4. If the purchasing agent buys materials at a price significantly below the standard price, but in doing so acquires materials that are significantly below grade in terms of quality, what direct materials price and quantity variances are likely? a. b. c. d.
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Quantity favorable unfavorable favorable unfavorable
Price favorable favorable unfavorable unfavorable
5. The potential benefit that may be obtained by following an alternative course of action is termed a(n) a. sunk cost. b. avoidable cost. c. opportunity cost. d. incremental cost.
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Test Bank for Accounting Principles, Ninth Edition
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6. Standard costs are a. useful for cost control purposes. b. useful in evaluating management performance. c. useful in setting selling prices of finished goods. d. all of the above.
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7. One of the distinctions between standards and budgets is that a. a standard is generally not journalized; budgets may be incorporated into the cost accounting system. b. a standard is a predetermined amount; a budget is not. c. a standard is a unit amount, whereas a budget is a total amount. d. inventories may be recorded at budget, but not standard, in external financial statements.
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8. Standard costs may be used with a. process, but not job order, costing. b. job order, but not process, costing. c. neither job order nor process costing. d. both job order and process costing.
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9. When setting a standard cost for direct materials, a. the price standard should not include amounts for related costs such as receiving, storing, and handling. b. the engineering department is the main source of information for the standard price. c. potential waste or spoilage should not be allowed to become part of the standard. d. none of the above.
____ 10. When standard costs are in use, a. standards should not be changed once they are set. b. a variance is conceptually the difference between a standard amount and the amount budgeted. c. all variances, however insignificant, should be reported and investigated on a timely basis. d. an evaluation of the resulting variances is often the most difficult, but the most useful aspect of the process. ____ 11. Collins Company purchased raw materials for $120,000. If this represents a $2,000 unfavorable price variance, what is the amount debited to Raw Materials Inventory in the entry that records this acquisition? a. $118,000. b. $120,000. c. $122,000. d. Either (a) or (b). ____ 12. An order at a special price that is accepted will increase income if the revenue received exceeds the a. variable manufacturing, selling, and administrative costs associated with the order. b. variable manufacturing costs associated with the order. c. fixed and variable costs associated with the order. d. incremental costs associated with the order.
Achievement Test 13
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____ 13. Edmond, Inc. makes custom office desks. It can sell semi-finished desks for $750. Costs incurred to this point total $425. It can finish the desks at an additional cost of $175 and increase the selling price to $975. Edmond, Inc. should a. finish the desks since it will increase profits $475 per desk. b. finish the desks since it will increase profits $225 per desk. c. finish the desks since it will increase profits $50 per desk. d. sell the desks unfinished since finishing the desks will reduce profits. PART II — VARIANCE ANALYSIS (26 points) Dryer Corporation manufactures fertilizer. The standard cost for one bag is as follows: Cost Element Direct Materials Direct Labor Overhead
Quantity 50 lbs. .5 hrs. .5 hrs.
Price $ .10 10.00 6.00
Cost $ 5.00 5.00 3.00 $13.00
During the month, the following transactions occurred in manufacturing 150,000 bags: (1) (2) (3) (4)
Purchased and used 7,560,000 pounds at $.09 per pound. 72,000 direct labor hours were worked at a total cost of $712,800. Variable manufacturing overhead incurred was $318,000 and fixed overhead was $168,000. The manufacturing overhead rate of $6.00 is based on a normal capacity of 81,000 direct labor hours. The total budget at this capacity is $324,000 variable and $162,000 fixed.
Instructions: Compute and label ("F" for favorable and "U" for unfavorable) the variances listed below. Present supporting calculations. (a) Direct Materials: Price = $___________; Quantity = $____________; Total = $____________.
(b) Direct Labor: Price = $___________; Quantity = $____________; Total = $____________.
(c) Overhead: Controllable = $_________; Volume = $___________; Total = $__________.
AT13- 4
Test Bank for Accounting Principles, Ninth Edition
PART III — INCREMENTAL ANALYSIS (28 points) Instructions: This problem is comprised of four independent parts covering different types of decisions where incremental analysis is appropriate. Show appropriate, labeled calculations in all cases! A. Limited Resources Steele Corp. manufactures two models of a fishing reel: Deluxe and Supreme, selling for $90 and $150, respectively. There are only 30,000 hours of the master craftsmen's time available to manufacture reels. Direct labor and other variable costs come to $50 for the Deluxe model and $60 for the Supreme. Total fixed costs equal $70,000. It takes the craftsmen 2 hours to make the Deluxe model and 4 hours for the Supreme. Demand for these reels is such that it is estimated up to 6,000 of each type of reel can be sold. How many of each reel should Steele make in order to maximize net income?
B. Elimination of a Department Childress Corporation has three departments. Condensed income statement data are as follows: Department A Department B Department C Total Sales $300,000 $280,000 $120,000 $700,000 175,000 105,000 440,000 Variable Expenses 160,000 Contribution Margin 140,000 105,000 15,000 260,000 35,000 40,000 140,000 Fixed Expenses 65,000 Net Income $ 75,000 $ 70,000 $ (25,000) $120,000 If Department C is discontinued, fixed expenses would drop $26,000 since the departmental supervisor would leave; the remaining fixed expenses would continue. Sales in Department A would drop 10%; Department B would be unaffected. Should Department C be discontinued?
C. Make or Buy Bahnson Electric has an offer from a potential supplier to provide 40,000 units at $65 each that Bahnson now manufactures at a total cost of $75 per unit. The manufacturing costs for 40,000 units are: direct materials $900,000; direct labor $450,000; variable overhead $900,000; and fixed overhead $750,000. All costs except $340,000 in fixed overhead will be avoided if the parts are purchased. (1) What should Bahnson do in this situation?
Achievement Test 13
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(2) Would your answer change if Bahnson could use the capacity that would become available to produce additional income of $125,000? Explain.
D. Special Order Kiner Motors diesel engine plant, which is currently operating slightly above breakeven at 30% of its 200,000 unit capacity, wants to take advantage of an opportunity to bid on a special order from a potential customer. Kiner's regular product sells for $400 and has the following costs per unit: variable manufacturing, $100; fixed manufacturing, $180; variable selling and administrative, $35; fixed selling and administrative, $50. The order would be for 40,000 units over each of the next 5 years, with no hope for renewal because of product-line changes, and would require an expenditure of $4,000,000 for special machinery that would have no alternative use. Variable selling costs would be $10 less per unit on the special order, but variable manufacturing would be $10 higher. If Kiner requires a minimum of a $15 per unit contribution towards profits on a special order, what should be its minimum bid?
PART IV — CAPITAL BUDGETING (20 points) Swanger Company is considering a capital investment of $800,000 in new equipment. It is expected to have a useful life of 10 years with no salvage value. Depreciation is by the straightline method. During the life of the investment, annual net income and cash inflows are expected to be $45,000 and $125,000, respectively. Swanger requires either a 12% cost of capital "hurdle" rate, or a payback period of 6 years. Instructions: Compute the (a) annual rate of return, (b) cash payback period, (c) net present value, and (d) internal rate of return. Show all computations. State whether the project should be accepted or rejected for each of the four capital budgeting techniques. Present Value of a Series of Future Payments (n) 5% Periods 10 7.72173
6% 7.36009
8% 6.71008
9% 6.41766
10% 6.14457
(a) Annual Rate of Return = _____________________.
11% 5.88923
12% 5.65022
15% 5.01877
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Test Bank for Accounting Principles, Ninth Edition
(b) Payback = _____________________.
(c) Net Present Value = _____________________.
(d) Internal Rate of Return = _______________________. (to the nearest %)
Achievement Test 13
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Solutions — Achievement Test 13: Chapters 25-26 PART I — MULTIPLE CHOICE (26 points) 1. 2. 3. 4. 5.
d a a b c
6. 7. 8. 9. 10.
d c d d d
11. a 12. d 13. c
PART II — VARIANCE ANALYSIS (26 points) (a) Direct materials (total variance: $75,600 F – $6,000 U = $69,600 F) AQ × AP (7,560,000 × $.09) $680,400 AQ × SP (7,560,000 × $.10) 756,000 Price variance $ 75,600 F AQ × SP (7,560,000 × $.10) SQ × SP (7,500,000 × $.10) Quantity variance
$756,000 750,000 $ 6,000 U
(b) Direct labor (total variance: $7,200 F + $30,000 F = $37,200 F) AH × AR (72,000 × $9.90) $712,800 AH × SR (72,000 × $10.00) 720,000 Price variance $ 7,200 F AH × SR (72,000 × $10.00) SH × SR (75,000 × $10.00) Quantity variance
$720,000 750,000 $ 30,000 F
(c) Overhead (total variance: $24,000 U + $12,000 U = $36,000 U) Actual ($318,000 + $168,000) $486,000 Budgeted ($300,000 + $162,000) 462,000 Controllable variance $ 24,000 U Volume variance: (Normal hours – Standard hours) × Fixed overhead rate (81,000 – 75,000) × $2/hr. = $ 12,000 U
PART III — INCREMENTAL ANALYSIS (28 points) A.
Deluxe contribution margin per DL hour [($90 – $50) ÷ 2] .............
$20.00
Supreme contribution margin per DL hour [($150 – $60) ÷ 4]........
$22.50
Steele should produce as many Supreme reels as it can sell: 6,000 reels. Any remaining capacity should be used for Deluxe reels:[30,000 – (6,000 × 4)] ÷ 2 = 3,000 reels.
AT13- 8 B.
Test Bank for Accounting Principles, Ninth Edition
Fixed expenses saved .................................................................. Department C contribution margin lost .......................................... Department A contribution margin lost .......................................... Decrease in income if C is eliminated .......................................
$26,000 (15,000) (14,000) $ (3,000)
Department C should not be discontinued. C.
(1) Direct materials Direct labor Variable overhead Fixed overhead Purchase price
Make $ 900,000 450,000 900,000 750,000 $3,000,000
Buy -0-0-0500,000 2,600,000 $3,100,000
Net Income Increase (Decrease) $ 900,000 450,000 900,000 250,000 (2,600,000) $ (100,000)
Continue to make the units. (2) Costs per (1) above Opportunity cost
Make $3,000,000 125,000 $3,125,000
Buy $3,100,000 $3,100,000
Net Income Increase (Decrease) $(100,000) 125,000 $ 25,000
Bahnson should purchase the units instead of making them. D.
Incremental costs per unit Variable manufacturing ($100 + $10) .................................. Variable selling and administrative ($35 – $10)................... Fixed manufacturing ($4,000,000 ÷ 200,000)...................... Minimum desired profit per unit ........................................... Minimum bid..................................................................................
$110 25 20 15 $170
PART IV — CAPITAL BUDGETING (20 points) (a) Annual rate of return — $45,000 ÷ ($800,000 ÷ 2) = 11.3%. Reject project. (b) Payback — $800,000 ÷ $125,000 = 6.4 years. Reject project. (c) Net present value — ($125,000 × 5.65022) – $800,000 = $(93,723). Reject project. (d) Internal rate of return (to the nearest %) — $800,000 ÷ $125,000 = 6.40, or approximately 9%. Reject project.
