Cost Management


Part 1

Section C

Cost Management

Topic 1 – Measurement concepts
Topic 2 – Costing systems
Topic 3 – Overhead costs
Topic 4 – Operational efficiency
Topic 5 – Business process performance

Q1:

Baldwin Printing Company uses a job order costing system and applies overhead based on machine hours. A total of 150,000 machine hours have been budgeted for the year. During the year, an order for 1,000 units was completed and incurred the following.

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The accountant calculated the inventory cost of this order to be $4.30 per unit. The annual budgeted overhead in dollars was:

 

$577,500.

 

$600,000.

 

$660,000.

 

$645,000.

The correct answer is: $600,000.

The total inventory cost, or total manufacturing cost, per unit of $4.30 is made up of direct materials cost, direct labor cost and manufacturing overhead cost.

Total manufacturing cost = direct materials cost + direct labor cost + manufacturing overhead cost

The direct materials cost per unit = $1,000 / 1,000 units = $1.00 per unit
The direct labor cost per unit = $1,500 / 1,000 units = $1.50 per unit
Therefore,
$4.30 = $1.00 + $1.50 + manufacturing overhead cost
Manufacturing overhead cost = $1.80 per unit
Use the following formula to calculate the overhead rate, which you will then use to calculate the budgeted overhead cost:
Manufacturing overhead cost per unit = (Machine hours)(overhead rate) / (# units)
$1.80 = (450 machine hours)(overhead rate) / (1,000 units)
($1.80)(1,000 units) = (450 machine hours)(overhead rate)
1,800 = (450 machine hours)(overhead rate)
Overhead rate = 1,800 / 450 = $4
Now, calculate the budgeted overhead cost:
Overhead rate = (budgeted overhead cost) / (total budgeted machine hours)
$4 = (budgeted overhead cost) / (150,000 machine hours)
Budgeted overhead cost = $4 * 150,000 = $600,000 

Q2:

A company desires to prepare two sets of financial statements. Conventional financial statements would be prepared along with a set that is totally consistent with value-chain analysis. How would customer service costs be treated in the two statements?
* Source: Retired ICMA CMA Exam Questions

 

Conventional Financial Statements:  Noninventoriable cost;  Value-chain Financial Statements:  Product cost.

 

Conventional Financial Statements:  Inventoriable cost;  Value-chain Financial Statements:  Non-product cost.

 

Conventional Financial Statements:  Inventoriable cost;  Value-chain Financial Statements:  Product cost.

 

Conventional Financial Statements:  Noninventoriable cost;  Value-chain Financial Statements:  Non-product cost.

Conventional Financial Statements, Noninventoriable costs; Value-chain Financial Statements, Product cost. In conventional financial statements, customer service costs would be an noninventoriable cost due to the expense incurred from this activity. Since customer service is a link in the value chain, it is considered a product cost, and though the value-chain financial statements becomes part of the product cost.

Q3:

In practice, items such as wood screws and glue used in the production of school desks and chairs would most likely be classified as
* Source: Retired ICMA CMA Exam Questions

 

factory overhead.

 

direct labor.

 

direct materials.

 

period costs.

Factory overhead. Factory overhead includes those items which cannot be directly traced to any one particular product. In this case, the wood screws and glue used in the production of school desks and chairs would most likely be classified as factory overhead.

Q4:

In a production process where joint products are produced, the primary factor that will distinguish a joint product from a by-product is the
* Source: Retired ICMA CMA Exam Questions

 

relative total sales value of the products.

 

accounting method used to allocate joint costs.

 

relative ease of selling the products.

 

relative total volume of the products.

Relative total sales value of the products. The primary factor that will distinguish a joint product from a by-product in a production process where joint products are product is the relative total sales value of the products.

Q5:

What is the primary benefit of just-in-time (JIT) systems compared with traditional materials requirement planning (MRP) systems?

 

Increased safety stocks at all levels in a system

 

Maximization of production runs to accommodate complete product lines

 

Reduced inventory through a system

 

Replacement of a “demand-pull” manufacturing strategy with “push-through”

The correct answer is: Reduced inventory through a system
Reduced delays in product flow through a system is the primary benefit of JIT. Production organized into manufacturing cells improves communications and immediate feedback.

Q6:

Lar Company has found that its total electricity cost has both a fixed component and a variable component within the relevant range. The variable component seems to vary directly with the number of units produced. Which one of the following statements concerning Lar’s electricity cost is incorrect?
* Source: Retired ICMA CMA Exam Questions

 

The variable electricity cost per unit of production will remain constant as production volume increases.

 

The fixed electricity cost per unit of production will decline as production volume increases.

 

The total electricity cost will increase as production volume increases.

 

The total electricity cost per unit of production will increase as production volume increases.

The total electricity cost per unit of production will increase as production volume increases. When we are measuring a semivariable cost, such as electricity, given its fixed and variable cost components, the total electricity cost per unit of production will actually decrease as production volume decreases.

Q7:

“Value-added activity” refers to: 

Any activity within an organization.

An activity that can be eliminated with no deterioration in product or service functionality.

An activity that converts resources into products and services consistent with external customer requirements.

 

I only

 

III only

 

I, II, and III

 

II only

The correct answer is: III only.
A value-added activity adds customer value to a product by increasing its quality or decreasing its cost. Customer value is the ratio of quality (as perceived by the customer) to cost. 

Q8:

During December, Krause Chemical Company had the following selected data concerning the manufacture of Xyzine, an industrial cleaner.

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All material is added at the beginning of processing in this department, and conversion costs are added uniformly during the process. The beginning work-in-process inventory had $120 of raw material and $180 of conversion costs incurred. Material added during December was $540 and conversion costs of $1,484 were incurred. Krause uses the weighted-average process-costing method. The total raw material costs in the ending work-in-process inventory for December is:

 

$36.

 

$72.

 

$120.

 

$60.

The correct answer is: $60.

The total raw material cost in the ending inventory is calculated by taking the equivalent units of raw material in the ending inventory and multiplying it by the raw material costs per equivalent unit.

Total raw material cost, ending inventory = (equivalent units, raw material ending inventory)(raw material costs per equivalent unit)

The weighted-average method assumes that all units and costs are current (i.e., there is no beginning inventory). Therefore, 110 equivalent units of raw material are required to yield a transfer-out of 100 units and 10 units in the ending inventory.

Raw material cost per equivalent unit = (total material cost) / (equivalent units)
Raw material cost per equivalent unit = ($120 + $540) / (110 equivalent units)
Raw material cost per equivalent unit = $660 / 110 units = $6 per unit

Therefore, the total raw material cost, ending inventory = (10 equivalent units)($6 per unit) = $60. 

Q9:

Southwood Industries uses a process costing system and inspects its goods at the end of manufacturing. The inspection as of June 30 revealed the following information for the month of June.

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Unit costs were: materials, $3.50; and conversion costs, $6.00. The number of units that Southwood would transfer to its finished goods inventory and the related cost of these units are

 

Units Transferred = 16,000, Cost = $154,850.

 

Units Transferred = 16,300, Cost = $154,850.

 

Units Transferred = 16,000, Cost = $152,000.

 

Units Transferred = 16,000, Cost = $155,800.

The correct answer is: Units Transferred = 16,000, Cost = $154,850.

Using process costing, normal spoilage costs are “spread” over the cost of the 16,000 good units. Abnormal spoilage costs are charged to a loss account. 16,000 good units were produced and transferred.

The cost of these units is calculated as follows:

Per unit cost, units transferred to finished goods inventory = (materials cost per unit) + (conversion cost per unit)
Per unit cost, units transferred to finished goods inventory = ($3.50) + ($6.00) = $9.50.

Total cost of units transferred to finished goods inventory = (16,300 units)($9.50) = $154,850. 

Q10:

In life-cycle costing, which of the following is the primary method of lowering downstream costs?

 

Improving the upstream and manufacturing cost phases

 

Proactive management during the downstream phase such as streamlining manufacturing costs

 

Improving supplier relationships

 

Improving product designs in the downstream phase

The correct answer is: Improving the upstream and manufacturing cost phases
By the time a product reaches the downstream phase, it is too late to be proactive about changes unless the product has been correctly and efficiently designed during the upstream and manufacturing cost phases.

Q11:

A term to describe continuous improvement at all levels in an organization is

 

value-adding.

 

kaizen.

 

trending.

 

benchmarking.

The correct answer is: kaizen.
Kaizen is the Japanese term for incorporating continuous improvement into all levels of an organization. 

Q12:

A manufacturing company has a tennis ball manufacturing machine that had maintenance costs, direct labor costs, and depreciation costs during a period. Which of the following is true for this situation?

 

Depreciation is a period cost, while maintenance and direct labor are product costs.

 

Maintenance and direct labor are period costs, while depreciation is a product cost.

 

Maintenance, direct labor, and depreciation are all product costs.

 

Maintenance and depreciation are period costs, while direct labor is a product cost.

The correct answer is: Maintenance, direct labor, and depreciation are all product costs.
All costs listed are product costs because they relate to the manufacturing process. Depreciation and maintenance of equipment are indirect costs, labor is a direct cost.

Q13:

Antlers, Inc. produces a single product that sells for $150 per unit. The product is processed through the Cutting and Finishing departments. Additional data for these departments are as follows.
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The current production rate is the budgeted rate for the entire year. Direct labor employees earn $20 per hour and the company has a “no layoff” policy in effect. What is the amount of the throughput contribution per unit as computed using the theory of constraints?

 

$26.67.

 

$46.67.

 

$90.00.

 

$76.67.

The correct answer is: $90.00.
Throughput contribution is defined as sales revenue less the cost of direct materials. Sales revenue less direct materials for Cutting and Finishing departments:
$150 – ($45 + $15) = $90

Q14:

During December, Krause Chemical Company had the following selected data concerning the manufacture of Xyzine, an industrial cleaner.

clip_image005

All material is added at the beginning of processing in this department, and conversion costs are added uniformly during the process. The beginning work-in-process inventory had $120 of raw material and $180 of conversion costs incurred. Material added during December was $540 and conversion costs of $1,484 were incurred. Krause uses the first-in, first-out (FIFO) process-costing method. The equivalent units of production used to calculate conversion costs for December was

 

104 units.

 

100 units

 

110 units.

 

92 units.

The correct answer is: 92 units.

FIFO follows the actual flow of the units through the process. Therefore, the equivalent units of production used to calculate conversion costs for December can be calculated as follows:

Equivalent units, conversion costs = (units in beginning inventory)(1 – the completion rate at the beginning of the period) + (units started and finished) + (units in ending inventory)(completion %)

Equivalent units, conversion costs = (20 units)(1 – 0.6) + (80 units) + (10 units)(0.4)
Equivalent units, conversion costs = 8 units + 80 units + 4 units = 92 units 

Q15:

A company makes two joint products from recycled plastic: artificial joists for construction and plastic designer chairs. The total joint costs are $140,000, and the process produces 3,000 joists and 2,000 chairs. Joists sell for $20 and chairs for $50. The average cost per unit is determined to be $28, resulting in a gross margin of -$24,000 for joists and $44,000 for chairs. Which of the following joint cost allocation methods was used for these calculations?

 

Sales value at split-off method

 

Physical measure method

 

Gross profit method

 

Net realizable value method

The correct answer is: Physical measure method
The example calculates the price per unit by dividing the total cost by the total number of units, a physical measure. The resulting skewed gross margins that make the joists seem very unprofitable are the primary problem with using the physical measure method.

Q16:

The benefits of materials requirement planning (MRP) systems include all of the following except,

 

reduced retooling and machine setup time.

 

reduced coordination between functional areas.

 

increased bulk purchasing and price breaks.

 

reduced inventory.

The correct answer is: reduced inventory.
In materials requirement planning systems, a master production schedule indicates the quantities and timing of each part to be produced. Once the scheduled production run begins, departments push output through a system. In contrast to a JIT system, MRP requires more inventory on hand.

Q17:

Life-cycle costing

 

includes only manufacturing cost, selling expense, and distribution expense.

 

is sometimes used as a basis for cost planning and product pricing.

 

is often used in financial and income tax reporting.

 

includes only manufacturing costs incurred over the life of the product.

The correct answer is: is sometimes used as a basis for cost planning and product pricing.
Life cycle costing is used for cost planning and pricing over the life of a product, from its inception through its ultimate demise. 

Q18:

If a firm was more concerned with reliability of data than with the speed at which the data is available, which of the following costing methods would be the best fit?

 

Variable (direct) costing

 

Standard costing

 

Normal costing

 

Actual costing

The correct answer is: Actual costing
An actual costing system uses actual costs, which are very reliable because they rely on actual invoices, but results are delayed due to the wait for invoices and other evidence.

Q19:

Clipper Industries manufactures two types of scissors: a basic model, and a more durable fabric model. During the current year, Clipper accumulated the following summary information about its two products:

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Using the high-low method, estimate the variable production costs of both the basic model and the fabric model.

 

$9.12 variable cost rate for basic model, $9.78 variable cost rate for fabric model

 

$9.78 variable cost rate for basic model, $9.21 variable cost rate for fabric model

 

$9.21 variable cost rate for basic model, $9.78 variable cost rate for fabric model

 

$9.12 variable cost rate for basic model, $9.78 variable cost rate for fabric model

The correct answer is $9.21 variable cost rate for basic model, $9.78 variable cost rate for fabric model.

In this case, the variable costs at the high and low levels of production are as follows:

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Now that we know the differences of the two models, the change in units (production) is divided into the change in costs to determine the variable cost rate.

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Q20:

The cost of scrap, rework, and spoilage in a product quality cost system is categorized as a(n)

 

prevention cost.

 

external failure cost.

 

appraisal cost.

 

internal failure cost.

The correct answer is: internal failure cost.
Internal failure costs are the costs of defective production found prior to customer delivery. Internal failure costs include the costs of scrap, rework, spoilage, and waste.

Q21:

Young Company is beginning operations, and is considering three alternative ways in which to allocate manufacturing overhead to individual units produced. Young can use a plantwide rate, departmental rates, or activity based costing. Young will produce many types of products in its single plant, and not all products will be processed through all departments. In which one of the following independent situations would reported net income for the first year be the same regardless of which overhead allocation method had been selected?
* Source: Retired ICMA CMA Exam Questions

 

The sales mix does not vary from the mix that was budgeted.

 

All ending inventory balances are zero.

 

All production costs approach those costs that were budgeted.

 

All manufacturing overhead is a fixed cost.

That’s incorrect. If a period begins with no inventory balances, reported net income for the first year would be the same regardless of which overhead allocation method has been selected.

Q22:

The value chain is the sequence of business functions in which

 

value is proportionately added to the products or services of an organization.

 

products and services are evaluated with respect to their value to the supply chain.

 

value is deducted from the products or services of an organization.

 

value is added to the products or services of an organization.

The correct answer is: value is added to the products or services of an organization.
The value chain is the sequence of customer value-added activities. The sequence is as follows:
(1) Research and Development;
(2) Product Design;
(3) Procurement;
(4) Production;
(5) Marketing;
(6) Distribution; and,
(7) Customer Service. 

Q23:

A company uses job-order costing and begins the period with no finished goods inventory, but with a beginning WIP of the following jobs:

Job #15 = $42,000
Job #16 = $33,000
Job #17 = $12,000
Total WIP = $87,000

During the period, a new job is started (Job #18) and the following costs are incurred:

Direct materials: $100,000 (20% each for Jobs #15, #16, #17 and 40% for Job #18)

Direct labor: 5,000 hours at $15 per hour (hours for Jobs #15, #16, #17, and #18 are 1,500, 1,500, 1,200, and 800, respectively)

Factory overhead (using a predetermined rate where total overhead for the year is estimated to be $200,000 and total direct labor (cost driver) is 50,000 hours).

Jobs #15 and #16 are completed and sold during the period. What is ending WIP inventory?

 

$98,000

 

$112,000

 

$110,000

 

$90,000

The correct answer is: $110,000
The cost of the jobs not completed can be broken down as follows: (note the predetermined overhead rate is $200,000/50,000 or $4/direct labor hour).

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Q24:

What purpose does an internal differentiation analysis serve a firm conducting a value-chain analysis that assesses competitive advantage?

 

Diagnoses the cost drivers for each value-creating process

 

Determines sources of profitability and the relative cost of internal processes

 

Identifies the customer’s value perceptions of the firm’s products and services

 

Evaluates opportunities for achieving relative cost advantages

The correct answer is: Identifies the customer’s value perceptions of the firm’s products and services
An internal differentiation analysis examines sources for creating and sustaining superior differentiation. The primary focus is the customer’s value perceptions of the firm’s products and services.

Q25:

A manager is charting out the costs for a production process and finds that if she calculates costs at various expected production levels, the change in costs is constant. Above a very high level of sales, the rate is no longer constant. The latter portion is

 

no longer a fixed cost.

 

outside the relevant range.

 

outside the cost-benefit constraint.

 

no longer a variable cost.

The correct answer is: outside the relevant range.
The relevant range is the expected range for a cost driver such as a quantity or amount. Amounts outside the relevant range do not change in a linear fashion.

Q26:

A manufacturing company instituted a Total Quality Management (TQM) program producing the report shown below.
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On the basis of this report, which one of the following statements is most likely correct?

 

Quality costs such as scrap and rework decreased by 48 percent.

 

Quality costs such as returns and repairs under warranty decreased by 40 percent.

 

An increase in conformance costs resulted in a higher quality product and therefore resulted in a decrease in non-conformance costs.

 

An increase in inspection costs was solely responsible for the decrease in quality costs.

The correct answer is: An increase in conformance costs resulted in a higher quality product and therefore resulted in a decrease in non-conformance costs.
Conformance costs consist of prevention and appraisal costs. Non-conformance costs are the costs of internal and external failures. Conformance costs are incurred to reduce the costs of non-conformance by reducing problems and detecting them before customer delivery. Total quality costs are minimized (optimal) when conformance costs is equal to non-conformance costs. An increase in conformance costs could result in a higher quality product, which would in turn result in a decrease in non-conformance costs. 

Q27:

Conformance quality measures which of the following?

 

How well the product meets the customers’ needs

 

How closely the product has met the guidelines of regulatory bodies

 

How well the design features meet the customers’ needs

 

How close the manufactured product is to the design specifications

The correct answer is: How close the manufactured product is to the design specifications
The correct answer defines conformance quality.

Q28:

Ardmore Enterprises uses a standard cost system in its small appliance division. The standard cost of manufacturing one unit of Zeb is as follows.
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The budgeted variable factory overhead rate is $3 per labor hour, and the budgeted fixed factory overhead is $27,000 per month. During May, Ardmore produced 1,650 units of Zeb compared to a normal capacity of 1,800 units. The actual cost per unit was as follows.
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The flexible budget overhead variance for May is

 

$2,415 favorable.

 

$1,920 unfavorable.

 

$1,920 favorable.

 

$330 unfavorable.

The correct answer is: $1,920 favorable.
The flexible budget overhead variance is calculated as follows:
Flexible budget overhead variance = (the actual overhead – the budgeted overhead for the actual output)
The actual overhead is $39,930.
The budgeted overhead for the actual output = Fixed overhead + Variable overhead
= $27,000 + ($3/direct labor hour)(3 direct labor hours per unit)(1,650 units)
= $27,000 + $14,850 = $41,850
Flexible budget overhead variance = $39,930 – $41,850 = -$1,920 or $1,920 favorable.
It is favorable because the actual overhead is less than the flexible budget (less was spent than was budgeted, so that makes it a favorable variance). 

Q29:

Consider the following situation for Weisman Corporation for the prior year. 

The company produced 1,000 units and sold 900 units, both as budgeted.

There were no beginning or ending work-in-process inventories and no beginning finished goods inventory.

Budgeted and actual fixed costs were equal, all variable manufacturing costs are affected by volume of production only, and all variable selling costs are affected by sales volume only.

Budgeted per unit revenues and costs were as follows.

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The operating income for Weisman for the prior year using absorption costing was

 

$14,200.

 

$15,840.

 

$13,600.

 

$15,300.

The correct answer is: $15,300.
The full absorption cost operating income is calculated as follows:
Full absorption cost operating income = (sales) – (cost of sales) – (variable selling costs) – (fixed selling costs) – (fixed administrative costs)
Sales = (900 units)($100 each) = $90,000
Cost of sales = (number of units)(direct materials cost per unit + direct labor cost per unit + variable manufacturing overhead cost per unit + fixed manufacturing overhead cost per unit)
Cost of sales = (900 units)($30 + $20 + $10 + $5) = $58,500
Variable selling costs = (900 units)($12 each) = $10,800
Fixed selling costs = $3,600
Fixed administrative costs = $1,800
Full absorption cost operating income = $90,000 – $58,500 – $10,800 – $3,600 – $1,800
Full absorption cost operating income = $15,300
There is no volume variance since actual production is equal to budgeted production. 

Q30:

According to the theory of constraints, all of the following activities help to relieve the problem of a bottleneck in operations except
* Source: Retired ICMA CMA Exam Questions

 

shifting products that do not have to be made on bottleneck machines to non-bottleneck machines.

 

reducing setup time at the bottleneck operation.

 

increasing the efficiency of operations at non-bottleneck machines.

 

eliminating idle time at the bottleneck operation.

That’s incorrect. Eliminating idle time and reducing setup time at the bottleneck operations, in addition to shifting products that do not have to be made on bottleneck machines to non-bottleneck machines are all activities to help to relieve the problem of a bottleneck according to the Theory of Constraints.

Q31:

Just-in-time production is also called

 

lean manufacturing.

 

activity-based management.

 

kaizen.

 

backflush costing.

The correct answer is: lean manufacturing.
Lean manufacturing is another term for just-in-time production system.

Q32:

If a firm has a significant overapplied overhead at the end of the period, then which of the following statements is true?

 

The accountant should debit overhead and credit a combination of cost of goods sold, WIP inventory, and finished goods inventory for the overapplied amount.

 

The accountant should credit overhead and debit cost of goods sold for the overapplied amount.

 

The accountant should debit overhead and credit cost of goods sold for the overapplied amount.

 

The accountant should credit overhead and debit a combination of cost of goods sold, WIP inventory, and finished goods inventory for the overapplied amount.

The correct answer is: The accountant should debit overhead and credit a combination of cost of goods sold, WIP inventory, and finished goods inventory for the overapplied amount.
Overapplied overhead implies a credit balance in the overhead account (debit overhead for actual costs and credit overhead for applied). To eliminate this balance a debit to overhead is required. Since the overapplied amount is considered significant, the amount must be distributed between accounts that hold some part of the actual factory overhead, i.e., cost of goods sold (COGS), WIP inventory and finished goods inventory.

Q33:

Logo Inc. has two data services departments (the Systems Department and the Facilities Department) that provide support to the company’s three production departments (Machining Department, Assembly Department, and Finishing Department). The overhead costs of the Systems Department are allocated to other departments on the basis of computer usage hours. The overhead costs of the Facilities Department are allocated based on square feet occupied (in thousands). Other information pertaining to Logo is as follows.

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Logo employs the step-down method of allocating service department costs and begins with the Systems Department. Which one of the following correctly denotes the amount of the Systems Department’s overhead that would be allocated to the Facilities Department and the Facilities Department’s overhead charges that would be allocated to the Machining Department?

 

Systems to Facilities = $20,000, Facilities to Machining = $20,000

 

Systems to Facilities = $19,355, Facilities to Machining = $20,578

 

Systems to Facilities = $20,000, Facilities to Machining = $24,000

 

Systems to Facilities = $0, Facilities to Machining = $20,000

The correct answer is: $20,000 and $24,000.

The amount of the Systems Department’s overhead that would be allocated to the Facilities Department is calculated as follows:

Systems Dept overhead allocated to Facilities Dept = [(number of Facilities computer usage hours)(Systems Dept overhead cost)] / (number of computer usage hours used by all departments except System)

System’s Dept overhead allocated to Facilities Dept = [(900 hours)($200,000)] / (9,000 hours) = $20,000

The Facilities Department now has $120,000 to allocate to the three production departments.

The Facilities Department’s overhead charges that would be allocated to the Machining Department are as follows:

Facilities Dept overhead to be allocated to Machining Dept = ($120,000)(2,000 square feet occupied by machining) / (10,000 square feet occupied by the three production departments)

Facilities Dept overhead to be allocated to Machining Dept = $24,000 

Q34:

Which of the following uses the correct stages and correctly orders activity-based costing two-stage allocation?

 

Resource cost assignment of overhead costs to activity cost pools; activity cost assignment of activity costs to cost objects.

 

Volume cost assignment of volume-based cost drivers to volume cost pools; activity cost assignment of activity costs to cost objects.

 

Resource cost assignment of activity costs to activity cost pools; volume cost assignment of volume costs to cost objects.

 

Activity cost assignment of activity costs to cost objects; resource cost assignment of overhead costs to activity cost pools.

The correct answer is: Resource cost assignment of overhead costs to activity cost pools; activity cost assignment of activity costs to cost objects.
Resource costs or overhead is assigned to cost pools using resource cost assignment and then, based on how a cost object uses resources, transfers costs from cost pools to cost objects such as products, services, or customers.

Q35:

Which of the following is a limitation of a materials requirement planning (MRP) system?

 

Minimizes machine setup time

 

Potential inventory accumulation

 

Relies on demand forecasts

 

Additional inventory on hand to cover orders should product be damaged or lost

The correct answer is: Potential inventory accumulation.
Since MRP is used to plan production and inventory levels based upon sales forecasts, and forecasts are subject to variability, there is always the possibility that the system will lead to over-production of products and/or to purchasing too much raw materials and too many purchased parts. 

Q36:

Nash Glassworks Company has budgeted fixed manufacturing overhead of $100,000 per month. The company uses absorption costing for both external and internal financial reporting purposes. Budgeted manufacturing overhead rates for cost allocations for the month of April using alternative unit output denominator levels are shown below.
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Actual output for the month of April was 800,000 units of glassware.
When Nash Glassworks Company allocates fixed costs, management will select a capacity level to use as the denominator or volume. All of the following would be appropriate as the capacity level that approximates actual volume levels except

 

normal capacity.

 

theoretical capacity.

 

expected annual capacity.

 

master-budget capacity.

The correct answer is: theoretical capacity.
Theoretical capacity volume would exceed actual volume in all cases. Theoretical capacity assumes 24/7/365 day operation. In addition, it ignores any problems such as downtime, scrap, rework, spoilage, and material shortages. In addition, it does not allow for worker breaks. Therefore, theoretical capacity is unrealistic and would not be an appropriate capacity level to approximate actual volume levels. 

Q37:

A company’s maintenance department painted its tennis ball department, the racquet ball department, and its own department. The maintenance department uses square feet as its cost driver. The departments respectively have 80,000, 20,000, and 1,000 square feet of space. The total maintenance department costs before allocation are $60,000. Using the direct method of allocating service department costs, how much cost is allocated to each department?

 

Maintenance department: $594; tennis balls: $47,525; racquet balls: $11,881

 

Maintenance department: $0; tennis balls: $36,000; racquet balls: $24,000

 

Maintenance department: $0; tennis balls: $48,000; racquet balls: $12,000

 

Maintenance department: $594; tennis balls: $35,644; racquet balls: $23,762

The correct answer is: Maintenance department: $0; tennis balls: $48,000; racquet balls: $12,000
The direct method does not take into account any amount allocated to another service department, even itself, so nothing is allocated to the maintenance department and the square feet for this department are ignored. Therefore, the proportion of maintenance costs to the tennis ball department is calculated as 80,000/(80,000 + 20,000) = 0.8. This proportion times the total service department costs of $60,000 equals $48,000. Similarly, the racquet ball department is allocated $12,000.

Q38:

A sporting goods manufacturer buys wood as a direct material for baseball bats. The Forming Department processes the baseball bats, and the bats are then transferred to the Finishing Department where a sealant is applied. The Forming Department began manufacturing 10,000 “Casey Sluggers” during the month of May. There was no beginning inventory. Costs for the Forming Department for the month of May were as follows.
clip_image017
A total of 8,000 bats were completed and transferred to the Finishing Department; the remaining 2,000 bats were still in the forming process at the end of the month. All of the Forming Department’s direct materials were placed in process but, on average, only 25 percent of the conversion cost was applied to the ending work-in-process inventory.
The cost of the units transferred to the Finishing Department is

 

$42,400.

 

$40,000.

 

$50,000.

 

$30,000.

The correct answer is: $42,400.
In a process costing system, costs may be added to a product at different points in the manufacturing process. In this scenario, all of the direct material costs have been placed in process for the 10,000 units transferred to the Finishing Department, but only 25% of the conversion costs (conversion costs = direct labor + manufacturing overhead) have been applied to the units which were transferred to the Finishing Department.
The cost of the units transferred to the Finishing Department is calculated by taking the number of units that were transferred out and multiplying that number by the total manufacturing cost per unit.
Cost of units transferred out = (units transferred out)(manufacturing cost per unit)
Number of units transferred to Finishing Department = 8,000 units
Manufacturing cost per unit = direct material cost applied per unit + conversion cost applied per unit
Direct material costs applied per unit = $33,000 / 10,000 units = $3.30 per unit
(Note that direct material costs are related to all 10,000 units, so that number must be used as the denominator)
Conversion costs applied during the period totaled $17,000 and they were applied in full to the 8,000 units that were transferred out, as well as 25% applied to the units remaining in process (2000 units x 0.25 = 500 equivalent units).
Conversion costs per unit = ($17,000) / (8,000 units + 500 units) = $17,000 / 8,500 units = $2.00 per unit
Cost of units transferred out = (units transferred out)(manufacturing cost per unit)
Cost of units transferred out = (8,000)($3.30 + $2.00) = (8,000)($5.30) = $42,400 

Q39:

According to capacity management principles, which of the following actions would generally be the least viable solution for a firm faced with increasing the capacity of a manufacturing process to address long-term demand forecasts?

 

Hiring additional staff

 

Building another factory

 

Seeking new channels of distribution

 

Leasing additional space

The correct answer is: Seeking new channels of distribution
Capacity management typically involves strategic aspects (e.g., building another factory), tactical aspects (e.g., leasing additional space), and operational aspects (e.g., additional staff). Automation and robots generally are applied to the performance of a variety of repetitive tasks but may not necessarily result in long-term capacity gains.

Q40:

A company desiring to achieve dramatic improvements in customer relationship management would most likely undertake

 

kaizen.

 

business process reengineering.

 

benchmarking.

 

total quality management.

The correct answer is: business process reengineering.
By definition, business process reengineering (BPR) is the fundamental analysis and radical redesign of business processes within and between enterprises to achieve dramatic improvements in performance measures. BPR promotes the idea that sometimes wiping the slate clean and radically redesigning and reorganizing an enterprise is necessary to lower costs and increase the quality of a product or service.

Q41:

A service firm decides to contract with another company for billing because those tasks are considered peripheral to its core competencies. This best describes an example of

 

process analysis and improvement.

 

flexible staffing.

 

outsourcing.

 

business process reengineering.

The correct answer is: outsourcing.
Outsourcing is the practice of hiring a third party to perform a function or set of functions that the company might otherwise have employed its own staff to perform (such as software development). Outsourcing typically supports an organization’s business requirements and allows the firm to concentrate on its core competencies. From the perspective of the management

Q42:

accountant, which one of the following represents a major disadvantage of business process reengineering?
* Source: Retired ICMA CMA Exam Questions

 

It results in heavier maintenance for legacy systems.

 

It often results in a decreased use of centralized data bases.

 

The focus is, to a large extent, on short-term results.

 

Internal control mechanisms are often disassembled.

Internal control mechanisms are often disassembled. Business process reengineering includes a focus on short-term results, a decreased use of centralized data bases, and results in a heavier maintenance of legacy systems

Q43:

Patterson Corporation expects to incur $70,000 of factory overhead and $60,000 of general and administrative costs next year. Direct labor costs at $5 per hour are expected to total $50,000. If factory overhead is to be applied per direct labor hour, how much overhead will be applied to a job incurring 20 hours of direct labor?

 

$140

 

$28

 

$260

 

$120

The correct answer is: $140.

The overhead applied to a job incurring 20 direct labor hours would be calculated as follows:

Overhead applied = (overhead rate per direct labor hour)(20 direct labor hours)

The number of direct labor hours to be used to calculate the overhead rate is 10,000 ($50,000 / $5 per hour = 10,000 hours).

The overhead rate = ($70,000) / 10,000 direct labor hours = $7 per direct labor hour.

Therefore, the overhead applied to a job incurring 20 direct labor hours = $7(20 direct labor hours) = $140. 

Q44:

A company wants to perform an in-depth analysis of its best and worst practices, compare these results to other companies, and form a long-term plan for strategic quality improvement. What sort of analysis is this company performing?

 

Benchmarking analysis

 

Quality audit

 

Gap analysis

 

Cause-and-effect diagrams

The correct answer is: Quality audit
A quality audit involves all of the elements mentioned in the question.

Q45:

Henry Manufacturing, which uses direct labor hours to apply overhead to its product line, undertook an extensive renovation and modernization program two years ago. Manufacturing processes were reengineered, considerable automated equipment was acquired, and 60% of the company’s nonunion factory workers were terminated.
Which of the following statements would apply to the situation at Henry?
I. The company’s factory overhead rate has likely increased.
II. The use of direct labor hours seems to be appropriate.
III. Henry will lack the ability to properly determine labor variances.
IV. Henry has likely reduced its ability to quickly cut costs in order to respond to economic downturns.
* Source: Retired ICMA CMA Exam Questions

 

I, II, III, and IV.

 

I and IV only.

 

II and IV only.

 

I and III only.

I and IV only. In this situation, Henry’s manufacturing process was reengineered and it can be assumed that overhead costs were likely increased. And due to the new automated equipment that was acquired, Henry terminated 60% of nonunion factory workers, lowering those overhead costs. Henry has likely reduced its ability to quickly cut costs in order to respond to economic downturns.

Q46:

Petro-Chem Inc. is a small company that acquires high-grade crude oil from low-volume production wells owned by individuals and small partnerships. The crude oil is processed in a single refinery into Two Oil, Six Oil, and impure distillates. Petro-Chem does not have the technology or capacity to process these products further and sells most of its output each month to major refineries. There were no beginning inventories of finished goods or work-in-process on November 1. The production costs and output of Petro-Chem for November are as follows.
clip_image018
Production and sales:

Two Oil, 300,000 barrels produced; 80,000 barrels sold at $20 each.

Six Oil, 240,000 barrels produced; 120,000 barrels sold at $30 each.

Distillates, 120,000 barrels produced and sold at $15 per barrel.

The portion of the joint production costs assigned to Six Oil based upon physical output would be

 

$1,818,181.

 

$3,750,000.

 

$3,636,363.

 

$4,800,000.

The correct answer is: $3,636,363.
Out of a total of 660,000 barrels (240,000 Six Oil + 300,000 Two Oil + 120,000 impure distillates), 240,000 barrels of Six Oil were produced.
The total joint costs to be allocated to the products are $10,000,000 ($5,000,000 crude oil acquired and placed in production + $2,000,000 direct labor and related costs + $3,000,000 factory overhead).
Therefore, the joint costs allocated to Six Oil using physical units is calculated as follows:
Joint costs allocated to Six Oil = (240,000 barrels/660,000 barrels)($10,000,000) = $3,636,363 

Q47:

Roberta Johnson is the manager of SleepWell Inn, one of a chain of motels located throughout the United States. An example of an operating cost at SleepWell that is semivariable is
* Source: Retired ICMA CMA Exam Questions

 

postage for reservation confirmations.

 

the security guard’s salary.

 

electricity.

 

local yellow pages advertising.

Electricity. Semivariable costs are costs that are composed of both fixed and variable components. Electricity is considered a semivariable cost as there is a fixed base charge, and as electricity usage increases, the cost of electricity increases.

Q48:

Kimbeth Manufacturing uses a process cost system to manufacture dust density sensors for the mining industry. The following information pertains to operations for the month of May.
clip_image019
The beginning inventory was 60 percent complete for materials and 20 percent complete for conversion costs. The ending inventory was 90 percent complete for materials and 40 percent complete for conversion costs.
Costs pertaining to the month of May are as follows:

Beginning inventory costs are: materials, $54,560; direct labor, $20,320; and factory overhead, $15,240.

Costs incurred during May are: materials used, $468,000; direct labor, $182,880; and factory overhead, $391,160.

Using the FIFO method, the equivalent unit conversion cost for May is

 

$5.83.

 

$6.00.

 

$5.65.

 

$6.20.

The correct answer is: $5.83.
The FIFO approach follows the production flow and assumes that units will be sold in the order in which they were placed in inventory.
In order to compute the cost per equivalent unit for conversion costs, it is first necessary to calculate the number of equivalent units with respect to conversion costs.
To calculate the equivalent units of production for conversion costs using FIFO, calculate the equivalent units for:
1) units in beginning inventory,
2) products started into production during the month, and,
3) units in ending inventory.
First, the 16,000 units in the beginning inventory would be completed, requiring the addition of 12,800 [(16,000)(1 – 0.2)] equivalent units for conversion costs.
Next, of the 100,000 units started during the month, 76,000 would be completed, requiring 76,000 equivalent units for conversion costs. (92,000 units completed during month – 16,000 units from beginning inventory = 76,000 units)
Lastly, of the 100,000 units started, 24,000 would be in the ending inventory, 40% complete with respect to conversion costs, requiring 9,600 [(0.40)(24,000)] equivalent units for conversion costs.
The total equivalent units for conversion costs would be 12,800 + 76,000 + 9,600 = 98,400.
Conversion costs consist of direct labor and factory overhead.
Conversion costs = $182,880 (direct labor) + $391,160 (factory overhead)
Conversion costs = $574,040
Therefore, the equivalent unit cost for conversion = ($574,040 conversion costs) / (98,400 equivalent units for conversion costs) = $5.83 per unit. 

Q49:

A sporting goods manufacturer buys wood as a direct material for baseball bats. The Forming Department processes the baseball bats, and the bats are then transferred to the Finishing Department where a sealant is applied. The Forming Department began manufacturing 10,000 “Casey Sluggers” during the month of May. There was no beginning inventory. Costs for the Forming Department for the month of May were as follows.
clip_image017[1]
A total of 8,000 bats were completed and transferred to the Finishing Department; the remaining 2,000 bats were still in the forming process at the end of the month. All of the Forming Department’s direct materials were placed in process but, on average, only 25 percent of the conversion cost was applied to the ending work-in-process inventory.
The cost of the work-in-process inventory in the Forming Department at the end of May is

 

$7,600.

 

$10,600.

 

$10,000.

 

$6,850.

The correct answer is: $7,600.
In a process costing system, costs may be added to a product at different points in the manufacturing process.
As far as the units in work-in-process inventory at the end of the month are concerned, all of the direct materials costs have been applied to them, but only 25% of the conversion costs have been applied.
Manufacturing cost per unit = direct material cost applied per unit + conversion cost applied per unit
Direct material costs applied per unit = $33,000 / 10,000 units = $3.30 per unit
(Note that direct material costs are related to all 10,000 units, so that number must be used as the denominator)
Conversion costs applied during the period totaled $17,000 and they were applied in full to the 8,000 units that were transferred out, as well as 25% applied to the units remaining in process. There are 2,000 units remaining in process, which are 25% complete. (2,000 units x 0.25 = 500 equivalent units for conversion costs).
Conversion costs per unit = ($17,000) / (8,000 units + 500 units) = $17,000 / 8,500 units = $2.00 per unit
Cost of units in ending inventory = (unit direct material cost)(equivalent units for direct materials) + (unit conversion cost)(equivalent units for conversion costs)
Cost of units in ending inventory = ($3.30)(2,000 units) + ($2.00)(500 equivalent units) = $6,600 + $1,000 = $7,600 

Q50:

When comparing absorption costing with variable costing, the difference in operating income can be explained by the difference between the
* Source: Retired ICMA CMA Exam Questions

 

units sold and the units produced, multiplied by the unit sales price.

 

ending inventory in units and the beginning inventory in units, multiplied by the unit sales price.

 

units sold and the units produced, multiplied by the budgeted variable manufacturing cost per unit.

 

ending inventory in units and the beginning inventory in units, multiplied by the budgeted fixed manufacturing cost per unit.

Ending inventory in units and the beginning inventory in units, multiplied by the budgeted fixed manufacturing cost per unit. The difference in operating income when comparing absorption costing with variable costing can be explained by taking the ending inventory in units and the beginning inventory in units, multiplied by the budgeted fixed manufacturing cost per unit.

Q51:

A pull system that manufactures finished goods for inventory on the basis of demand forecasts is referred to as

 

materials requirements planning.

 

relevant total cots.

 

economic order quantity.

 

just-in-time purchasing.

The correct answer is: materials requirements planning.
MRP is an integrated production and control system that has three objectives:
(1) Ensuring materials are available for production and products are available for customers at the proper time and in the right quantities;
(2) Maintaining the lowest possible levels of inventory; and,
(3) planning manufacturing activities, delivery schedules, and purchasing activities. 

Q52:

How is stock viewed in a just-in-time (JIT) system?

 

Stock promotes stronger supplier relationships.

 

Stock reduces manufacturing setup times.

 

Stock requires more coordination between functional areas.

 

Stock is a waste of resources.

The correct answer is: Stock is a waste of resources.
Stock is considered a waste of resources that should be eliminated. Stock is generally indicative of other problems that should be tackled and solved.

Q53:

Logo Inc. has two data services departments (the Systems Department and the Facilities Department) that provide support to the company’s three production departments (Machining Department, Assembly Department, and Finishing Department). The overhead costs of the Systems Department are allocated to other departments on the basis of computer usage hours. The overhead costs of the Facilities Department are allocated based on square feet occupied (in thousands). Other information pertaining to Logo is as follows.

clip_image020

If Logo employs the direct method of allocating service department costs, the overhead of the Systems Department would be allocated by dividing the overhead amount by

 

1,200 hours.

 

8,100 hours.

 

9,000 hours.

 

9,300 hours.

The correct answer is: 8,100 hours.

The direct method of cost allocation assumes service departments serve production only. There are no inter-service department services. Therefore, the relevant denominator for the allocation of the Systems Department costs would be the computer hours used by production only. In this case, the number of hours total 8,100, which is the sum of the Machining, Assembly and Finishing departments’ computer usage hours.

3,600 + 1,800 + 2,700 = 8,100 hours 

Q54:

Based on discussions with former customers, a company determines that sales have been lost due to the lengthy turnaround time and inflexible pricing in their proposal and bid process. Which of the following internal activities could not be used to improve the closing ratio?

 

Benchmarking best practices

 

Activity-based management(ABM)

 

Process reengineering

 

Activity-based costing (ABC)

The correct answer is: Activity-based costing (ABC)
Activity-based costing is a methodology that recognizes causal relationships of cost drivers to activities. All the others attempt to improve processes that are deemed important from the customer’s perspective (such as turnaround time and special pricing options).

Q55:

Clipper Industries manufactures two types of scissors: a basic model, and a more durable fabric model. During the current year, Clipper accumulated the following summary information about its two products:

clip_image006[1]

clip_image007[1]

Using the high-low method, estimate the fixed production costs of both the basic model and the fabric model.

 

$6,200 variable costs for fabric model, $3,800 fixed costs for basic model.

 

$6,200 variable costs for fabric model, $3,080 fixed costs for basic model.

 

$6,200 fixed costs for basic model, $3,080 fixed costs for fabric model.

 

$6,200 fixed costs basic model, $3,800 fixed costs for fabric model.

Clipper Industries manufactures two types of scissors: a basic model, and a more durable fabric model. During the current year, Clipper accumulated the following summary information about its two products:

clip_image006[2]

clip_image007[2]

Using the high-low method, estimate the fixed production costs of both the basic model and the fabric model.

 

$6,200 variable costs for fabric model, $3,800 fixed costs for basic model.

 

$6,200 variable costs for fabric model, $3,080 fixed costs for basic model.

 

$6,200 fixed costs for basic model, $3,080 fixed costs for fabric model.

 

$6,200 fixed costs basic model, $3,800 fixed costs for fabric model.

Q56:

Bluebird Enterprises has two production departments (P1 and P2) and two service departments (S1 and S2). A breakdown of current period costs and service usage for each department is as follows:

clip_image021

If Bluebird uses the step method for allocating service costs, allocating service department S1 first, what are the total service costs allocated to the two production departments (P1 and P2)?

 

$19,800 to P1 and $24,200 to P2

 

$24,400 to P1 and $19,600 to P2

 

$20,800 to P1 and $23,200 to P2

 

$25,000 to P1 and $19,000 to P2

The correct answer is: $24,400 to P1 and $19,600 to P2
The step-down method allocates some of the service performed for other service departments. In this case, S1 services are allocated to S2, P1 and P2, and then S2 costs ($20,000 + amount allocated from S1) are allocated to P1 and P2 evenly instead of including S1 because the step-down method does not allocate costs to departments that already allocated their own costs. Calculation is as follows:

clip_image022

Q57:

The primary purpose for allocating common costs to joint products is to determine
* Source: Retired ICMA CMA Exam Questions

 

the inventory cost of joint products for financial reporting.

 

whether or not one of the joint products should be discontinued.

 

the variance between budgeted and actual common costs.

 

the selling price of a by-product.

The inventory cost of joint products for financial reporting. The primary purpose for allocating common costs to joint products is to determine the inventory cost of joint products for financial reporting.

Q58:

A firm wants to study how changing the steps for an operation can lower the overall cost of the operation. Which of the following will help the firm achieve its goals?

 

Volume analysis for volume-based cost drivers

 

Activity analysis for activity-based cost drivers

 

Relevant range analysis

 

Variable costing

The correct answer is: Activity analysis for activity-based cost drivers
Firms use an activity analysis to determine a detailed description of each type of activity. Each step becomes a different cost driver. The intent is to determine how changing the steps will change the overall cost of the operation.

Q59:

Darden Manufacturing, a calendar-year corporation, had $17,000 of spoilage during April that production management characterized as abnormal. The spoilage was incurred on Job No. 532, that was sold three months later for $459,000. Which of the following correctly describes the impact of the spoilage on Darden’s unit manufacturing cost for Job No. 532 and on the year’s operating income?
* Source: Retired ICMA CMA Exam Questions

 

Effect on unit manufacturing cost:  No effect;  Effect on the operating income:  Not enough information to judge

 

Effect on unit manufacturing cost:  No effect;  Effect on the operating income: Decrease

 

Effect on unit manufacturing cost:  Increase;  Effect on the operating income:  Decrease

 

Effect on unit manufacturing cost:  Increase;  Effect on the operating income:  No Effect

Unit Manufacturing Costs, No effect; Operating Income, Decrease. The impact of the spoilage in this problem will have no effect on the unit manufacturing costs, but will decrease operating income as this is considered an additional expense.

Q60:

An organization will directly gain all of the following benefits from the theory of constraints (TOC) methodology except

 

increased profitability.

 

assessment of long-term product profitability.

 

improved quality of products and services.

 

reduced bottlenecks.

The correct answer is: assessment of long-term product profitability.
The TOC attempts to improve throughput in an organization’s processes. TOC considers how to improve short-term profitability by focusing on production constraints and plausible short-term product-mix adjustments. TOC, with its short-term orientation, does not focus on long-term costing and profitability.

Q61:

Which one of the following lists of functions is in proper value chain order?
* Source: Retired ICMA CMA Exam Questions

 

Research and development, marketing, and customer service.

 

Research and development, customer service, and distribution.

 

Production, marketing, and production design.

 

Production design, distribution, and marketing.

Research and development, marketing, and customer services. In a value-chain, the functions should be in the order of the development, getting the product to market, and the servicing of the product after it enters the market. In this case, research and development, marketing, and customer services is the correct order.

Q62:

A demand-pull system in which each component in a production line is produced immediately as needed by the next step in the production line is referred to as

 

economic order quantity.

 

just-in-time.

 

relevant total costs.

 

materials requirements planning.

The correct answer is: just-in-time.
Just-in-time (JIT) production is a demand-pull system in which each component in a production line is produced immediately as needed by the next step in the production line. Its objectives are the minimization of raw material and finished goods inventories and the maximization of throughput through work in process.

Q63:

Which of the following statements best characterizes value-chain analysis?

 

It promotes formulating a generic strategy.

 

It emphasizes a firm’s functions.

 

It adopts a process perspective.

 

It examines a firm’s hierarchal structure.

The correct answer is: It adopts a process perspective.
Value chain analysis (VCA) adopts a process perspective. Because a value chain desegregates the firm into distinct strategic activities, organizations are able to use value chain analysis to determine where in the operations, from design to distribution and customer service, customer value can be enhanced and costs lowered. In this way, VCA helps to identify sources of profitability and to understand the costs of the related activities and processes. VCA looks at activities differently than do the formal hierarchy of existing functions. Also, it should support implementing the firm’s generic strategy, not formulating it.

Q64:

A potential advantage of a firm outsourcing its logistics, warehousing, and shipping is

 

greater protection of proprietary information.

 

improved employee morale.

 

increased quality control.

 

reduced investments.

The correct answer is: reduced investments.
Outsourcing saves money in many cases because a firm does not have to pay for salaries, benefits, office space, computers, telephones, and so on. When outsourcing a one-time project, the outsourcing partner will be contractually bound to perform to agreed-upon standards and can usually be more easily replaced than an employee if the terms of the contract are not met.

Q65:

Valyn Corporation employs an absorption costing system for internal reporting purposes; however, the company is considering using variable costing. Data regarding Valyn’s planned and actual operations for the calendar year are presented below.
clip_image023
The planned per unit cost figures shown in the above schedule were based on Valyn producing and selling 140,000 units. Valyn uses a predetermined manufacturing overhead rate for applying manufacturing overhead to its product; thus, a combined manufacturing overhead rate of $9.00 per unit was employed for absorption costing purposes. Any over- or underapplied manufacturing overhead is closed to the Cost of Goods Sold account at the end of the reporting year.
The beginning finished goods inventory for absorption costing purposes was valued at the previous year’s planned unit manufacturing cost which was the same as the current year’s planned unit manufacturing cost. There are no work-in-process inventories at either the beginning or the end of the year. The planned and actual unit selling price was $70.00 per unit.
Valyn Corporation’s total fixed costs charged to cost of goods sold and income under the absorption costing basis were

 

$2,095,000.

 

$2,030,000.

 

$2,055,000.

 

$2,120,000.

The correct answer is: $2,095,000.
The total fixed costs of $2,095,000 charged to cost of goods sold and income under the absorption costing basis consist of all of the selling and administrative expenses, plus the fixed overhead in cost of goods sold.
Total fixed costs charged to cost of goods sold and income = fixed selling expenses + fixed administrative expenses + fixed overhead in cost of goods sold
Total fixed costs charged to cost of goods sold and income = $980,000 + $425,000 + $690,000 = $2,095,000
The fixed selling and fixed administrative expenses are the actual expenses given in the problem. The $690,000 of fixed expenses in cost of goods sold is made up of the fixed portion of applied overhead in cost of goods sold and the unfavorable fixed overhead budget variance.
Fixed expenses in cost of goods sold = fixed portion of applied overhead in cost of goods sold + fixed overhead budget variance
To calculate the amount of the fixed portion of overhead applied, it is first necessary to compute the predetermined overhead rate for the fixed portion of manufacturing overhead charges.
Predetermined overhead rate for fixed portion of manufacturing overhead = total budgeted fixed overhead / total number of budgeted units
Predetermined overhead rate for fixed portion of manufacturing overhead = $700,000 / 140,000 units = $5 per unit (this is also given in the schedule for Valyn)
The amount of fixed overhead applied is calculated by taking the predetermined overhead rate for fixed manufacturing overhead and multiplying it by the number of units produced.
Applied overhead (fixed portion) = (predetermined overhead rate for fixed overhead)(number of units produced)
Applied overhead (fixed portion) based on number of units produced = $5(130,000) = $650,000
Since only 125,000 units were sold, the fixed portion of applied overhead in cost of goods sold is calculated by taking the 125,000 units sold and multiplying that number by $5, to arrive at $625,000 as the amount of fixed overhead applied, which was charged to cost of goods sold.
Finally, the fixed overhead budget variance must be calculated. This is done by comparing the actual overhead to the total fixed overhead that was applied.
Fixed overhead budget variance = total actual fixed overhead – total fixed overhead applied
Fixed overhead budget variance = $715,000 – $650,000 = $65,000 fixed overhead budget variance (unfavorable, since actual fixed overhead was greater than the amount that was applied).
The total fixed overhead in cost of goods sold is $690,000 and is made up of the applied overhead of $625,000 in cost of goods sold and the $65,000 unfavorable fixed overhead budget variance.
Total fixed costs charged to cost of goods sold and income = fixed selling expenses + fixed administrative expenses + fixed overhead in cost of goods sold
Total fixed costs charged to cost of goods sold and income = $980,000 + $425,000 + $690,000 = $2,095,000 

Q66:

Select between job order and process costing for what is best suited to each of the following products:

I. Skyscraper
II. Magazine
III. Check processing
IV. Advertising campaign
V. Car repair

 

Job order costing for II and III; process costing for I, IV, and V.

 

Job order costing for I, IV, and V; process costing for II and III.

 

Job order costing for I, II and IV; process costing for III and V.

 

Job order costing for III and IV; process costing for I, II and V.

The correct answer is: Job order costing for I, IV, and V; process costing for II and III.
Job order costing is best for specific custom jobs, including capital asset construction (the skyscraper) in the manufacturing sector and advertising campaigns and repair jobs in the service sector. Process costing is best for large numbers of nearly identical products or services such as magazines in the manufacturing sector and check processing in the service sector.

Q67:

Which of the following would be the best choice for Timely, Inc., a producer of surface-mount chips (SMC), when it wants to benchmark average call waiting time in its customer service?

 

The average call waiting time of a competing manufacturer that is a customer service leader

 

Internal benchmarks created by reducing current average call waiting time at Timely, Inc.

 

A minimum call waiting time set by a consultant that tracked “best” call waiting times at Timely, Inc.

 

The average call waiting time for the SMC industry overall

The correct answer is: The average call waiting time of a competing manufacturer that is a customer service leader
Benchmarks should be for related industries (manufacturers) but should also focus on the best levels for the item being benchmarked instead of simply on a competitor or historical company results.

Q68:

Colt Company uses a weighted-average process cost system to account for the cost of producing a chemical compound. As part of production, Material B is added when the goods are 80% complete. Beginning work-in-process inventory for the current month was 20,000 units, 90% complete. During the month, 70,000 units were started in process, and 65,000 of these units were completed. There were no lost or spoiled units. If the ending inventory was 60% complete, the total equivalent units for Material B for the month was

 

90,000 units.

 

65,000 units.

 

70,000 units.

 

85,000 units.

The correct answer is: 65,000 units.

The weighted-average method assumes that all units and costs are current (i.e., there is no beginning inventory). Therefore, the 65,000 units completed are assumed to have been started and finished during the month, requiring 65,000 equivalent units of Material B. The ending inventory is 60% complete, and, therefore, has no Material B (Material B is added at the 80% point). 

Q69:

A technique for improving performance of activities and processes that searches for best practices is called

 

trend reporting.

 

Kaizen costing.

 

benchmarking.

 

value-added reporting.

The correct answer is: benchmarking.
Benchmarking involves comparing or contrasting your organization’s processes with the best practices for those processes. Best practice is either “best in class” or “best in industry.” Benchmarking can be used in conjunction with process reengineering or with Total Quality Management (TQM) and continuous improvement. 

Q70:

A company using just-in-time (JIT) production omits the journal entry for work-in-process inventory because little or no inventory remains in this stage. Which of the following costing systems does this company use?

 

Activity-based costing

 

Operation costing

 

Sequential tracking

 

Backflush costing

The correct answer is: Backflush costing
Backflush costing is a costing system tailored for JIT production systems that allows manufacturers to omit some or all of the journal entries for the production cycle.

Q71:

A promotional department for a retailer uses job order costing. At the beginning of the period Job #154 had a WIP inventory balance of $5,000. During the current period, Job #154 required $4,000 in direct materials and $6,000 in direct labor. The department has an overhead cost pool of $80,000 for all jobs. (The pool uses labor-hours as a cost-allocation base.) All jobs in the department consumed 10,000 labor-hours. If Job #154 used 1,000 labor-hours and sold for $34,000, what is its gross profit margin?

 

$18,000

 

$12,000

 

$11,000

 

$6,000

The correct answer is: $11,000
To calculate the gross profit margin, first calculate the indirect cost rate by dividing the overhead cost by the total cost allocation base ($80,000/10,000 = $8/labor-hour).
Then multiply the indirect cost rate by the actual units of the allocation base for the job ($8/labor-hour x 1,000 labor-hours = $8,000).
This amount plus the beginning work in process and current period direct materials and direct labor costs equals the total costs ($8,000 + $5,000 + $4,000 + $6,000 = $23,000).
The gross profit margin is the profit less the total costs ($34,000 – $23,000 = $11,000).

Q72:

In a standard cost system, the investigation of an unfavorable material usage variance should begin with the

 

production manager and/or the purchasing manager.

 

production manager only.

 

plant controller only.

 

purchasing manager only.

The correct answer is: production manager and/or the purchasing manager.
Assuming the material usage standard is realistic, the material usage variance would be caused by either production problems or inferior materials having been purchased and used in production. The former is a production issue, while the latter is a purchasing issue. 

Q73:

Manchester Airlines is in the process of preparing a contribution margin income statement that will allow a detailed look at its variable costs and profitability of operations. Which one of the following cost combinations should be used to evaluate the variable cost per flight of the company’s Boston-Las Vegas flights?
* Source: Retired ICMA CMA Exam Questions

 

Airplane depreciation, baggage handling, and airline marketing.

 

Communication system operation, food service, and ramp personnel.

 

Fuel, food service, and airport landing fees.

 

Flight crew salary, fuel, and engine maintenance.

That’s incorrect. Variable costs are those costs that fluctuate based on activity-levels. In this problem, fuel, food service, and airport landing fees are industry specific variable costs.

Q74:

Ace Inc. estimates its total materials handling costs at two production levels as follows.
clip_image024
What is the estimated total cost for handling 75,000 gallons?

 

$165,000.

 

$146,000.

 

$150,000.

 

$153,000.

The correct answer is: $153,000.
Variable cost per gallon = ($160,000 – $132,000) / (80,000 – 60,000) = $1.40 per gallon.
For the activity level of 60,000 gallons:
Variable costs = $1.40 x 60,000 = $84,000.
Fixed costs = Total costs – Variable costs = $132,000 – $84,000 = $48,000.
For the activity level of 75,000 gallons:
Total costs = $1.40 x 75,000 + $48,000 = $153,000. 

Q75:

Multiple or departmental overhead rates are considered preferable to a single or plant-wide overhead rate when

 

the single or plant-wide rate is related to several identified cost drivers.

 

individual cost drivers cannot accurately be determined with respect to cause-and-effect relationships.

 

various products are manufactured that do not pass through the same departments or use the same manufacturing techniques.

 

manufacturing is limited to a single product flowing through identical departments in a fixed sequence.

The correct answer is: various products are manufactured that do not pass through the same departments or use the same manufacturing techniques.
Individual departmental rates rather than a plant-wide rate for applying overhead would be used if the departments have different cost drivers and various products are manufactured that do not pass through the same departments or use the same manufacturing techniques. For example, one department may be labor-intensive, while another may be machine-intensive, or use highly automated processes. 

Q76:

If a company has cost of goods sold of $180,000, selling and administrative expenses of $40,000, cost of goods manufactured of $220,000 and sales of $450,000, what is its operating income?

 

$20,000

 

$190,000

 

$10,000

 

$230,000

The correct answer is: $230,000
Sales less cost of goods sold less selling and administrative expenses equals operating income ($450,000 – $180,000 – $40,000 = $230,000)

Q77:

M&P Tool has three service departments that support the production area. Outlined below is the estimated overhead by department for the upcoming year.
clip_image025
The Repair Department supports the greatest number of departments, followed by the Tool Department. Overhead cost is allocated to departments based upon the number of employees.
Using the direct method of allocation, how much of the Repair Department’s overhead will be allocated to the Tool Department?

 

$875

 

$11,667

 

$7,000

 

$0

The correct answer is: $0.
The direct method of service department cost allocation does not recognize the servicing of service departments. All services are assumed to go to production departments only. Therefore, no Repair Department costs would be allocated to either the Tool Department or the Receiving Department. 

Q78:

Which one of the following items would not be considered a manufacturing cost?
* Source: Retired ICMA CMA Exam Questions

 

Cream for an ice cream maker.

 

Sales commissions for a car manufacturer.

 

Tires for an automobile manufacturer.

 

Plant property taxes for an ice cream maker.

That’s incorrect. Manufacturing costs are those costs directly related to the production of the good. The answers include all costs associated with the production of a good, except for the sales commissions for a car manufacturer.

Q79:

The key philosophy for total quality management (TQM) includes which of the following?

 

Continuous improvement

 

Statistical process control

 

Gap analysis

 

Absolute quality conformance

The correct answer is: Continuous improvement
Continuous improvement (kaizen) is an integral philosophy for TQM. TQM is treated as a way of life rather than as a one-time process.

Q80:

Oster Manufacturing uses a weighted-average process costing system and has the following costs and activity during October.

clip_image026

All materials are introduced at the start of the manufacturing process, and conversion cost is incurred uniformly throughout production. Conversations with plant personnel reveal that, on average, month-end in-process inventory is 25% complete. Assuming no spoilage, how should Oster’s October manufacturing cost be assigned?

 

Production Completed = $1,155,000, Work-in-Process = $235,000

 

Production Completed = $1,283,077, Work-in-Process = $106,923

 

Production Completed = $1,095,000, Work-in-Process = $222,500

 

Production Completed = $1,042,500, Work-in-Process = $347,500

The correct answer is: $1,155,000 and $235,000.

The cost of the units completed is calculated as follows:

Cost of units completed = (number of units)(total cost per equivalent unit)
Cost of units completed = (60,000 units)(total cost per equivalent unit)

Because all materials are introduced at the start of the manufacturing process, the equivalent units of material for October consists of the completed units and the work-in-process units.
The equivalent units of material for October = (Completed production units) + (Work-in-process units) = 60,000 + 20,000 = 80,000.

The equivalent units for conversion are calculated by adding together the units that were started and finished to the equivalent units that were in work-in-process inventory.

Equivalent units for conversion = (units started and finished) + (% complete for conversion) (ending work-in-process inventory)
Equivalent units for conversion = (60,000) + (0.25)(20,000) = 65,000 equivalent units for conversion.

Cost per equivalent unit for materials = ($40,000 + $700,000) / 80,000 equivalent units
Cost per equivalent unit for materials = $740,000 / 80,000 equivalent units = $9.25

Cost per equivalent unit for conversion = ($32,500 + $617,500) / 65,000 equivalent units
Cost per equivalent unit for conversion = $650,000 / 65,000 equivalent units = $10

Total cost per equivalent unit = ($9.25 + $10) = $19.25

The cost of the 60,000 units completed would be calculated as follows:

Cost of units completed = (60,000 units)($19.25) = $1,155,000

Cost of the ending inventory = (equivalent units for materials)(materials cost per equivalent unit) + (equivalent units for conversion costs)(conversion cost per equivalent unit)

Cost of the ending inventory = (20,000 equivalent units for materials)($9.25 per unit) + (5,000 equivalent units for conversion)($10 per unit) = $235,000

Q81:

Loyal Co. produces three types of men’s undershirts: T-shirts, V-neck shirts, and athletic shirts. In the Folding and Packaging Department, operations costing is used to apply costs to individual units, based on the standard time allowed to fold and package each type of undershirt. The standard time to fold and package each type of undershirt is as follows.

clip_image027

During the month of April, Loyal produced and sold 50,000 T-shirts, 30,000 V-neck shirts, and 20,000 athletic shirts. If costs in the Folding and Packaging Department were $78,200 during April, how much folding and packaging cost should be applied to each T-shirt?

 

$0.6256

 

$0.8689

 

$0.5213

 

$0.7820

The correct answer is: $0.8689.

The folding and packaging cost applied to each T-shirt can be calculated as follows:

Folding and packaging cost applied = (40 seconds)(cost rate per second)

The cost rate per second = ($78,200) / (total seconds)

Cost rate per second = ($78,200) / [(50,000 T-shirts)(40 seconds per shirt) + (30,000 V-neck shirts)(40 seconds per shirt) + (20,000 athletic shirts)(20 seconds per shirt)]

Cost rate per second = ($78,200)/(2,000,000 seconds +1,200,000 seconds + 400,000 seconds)
Cost rate per second = $78,200 / 3,600,000 seconds
Cost rate per second = $0.0217222 per second

Cost applied to each T-shirt = (40 seconds)(0.0217222 per second) = $0.8689

Q82:

All of the following are examples of items to be found in a just-in-time (JIT) production system except

 

strong supplier relationships requiring careful screening.

 

specialized workers stressing work-force expertise.

 

use of manufacturing cells that group similar processes and minimize handling costs.

 

reduced manufacturing lead time and setup time to run smaller batches.

The correct answer is: specialized workers stressing work-force expertise.
JIT production systems stress multiskilled workers who are cross-trained using job sharing and other means to keep the work force flexible.

Q83:

Claremont Company has been asked to evaluate the profitability of a product that it manufactured and sold from 1997 through 2000. The product had a one-year warranty from date of sale. The following information appears in the financial records.
clip_image028
The life-cycle cost for this product is

 

$10,000,000.

 

$12,300,000.

 

$12,200,000.

 

$12,000,000.

The correct answer is: $12,300,000.
The life cycle cost for the product = Manufacturing and distribution costs + R&D and design costs + Total warranty costs = $7,000,000 + $5,000,000 + $200,000 + $100,000 = $12,300,000.

Q84:

Throughput contribution is defined as sales revenue minus

 

direct materials costs minus operating costs.

 

direct materials, direct labor, and variable manufacturing costs.

 

direct materials costs.

 

operating expenses.

The correct answer is: direct materials costs.
Throughput contribution is defined as sales revenue minus direct material costs. Throughput contribution recognizes that the major manufacturing variable cost is direct material. Direct material usually represents over 50% of product costs in most manufacturing operations. While direct labor is defined as the labor that is expended on producing the product, it is often viewed as a fixed cost, since it does not always respond to changes in production volume, and is therefore excluded from the throughput contribution calculation. 

Q85:

Appraisal costs include all of the following except

 

process inspection.

 

inspection.

 

spoilage.

 

product testing.

The correct answer is: spoilage.
Spoilage is part of internal failure costs.

Q86:

Jones Corporation uses a first-in, first-out (FIFO) process costing system. Jones has the following unit information for the month of August.

clip_image029

The number of equivalent units of production for conversion costs for the month of August is

 

92,700.

 

92,300.

 

87,300.

 

88,000.

The correct answer is: 87,300.

FIFO follows the actual flow of the units through the process. Therefore, the equivalent units of production used to calculate conversion costs for December can be calculated as follows:

Equivalent units, conversion costs = (units in beginning inventory)(1-the completion rate at the beginning of the period) + (units started and finished) + (units in ending inventory)(completion %)

Equivalent units, conversion costs = (10,000 units)(1 – 0.75) + (80,000 units) + (8,000 units)(0.6)
Equivalent units, conversion costs = 2,500 + 80,000 + 4,800 = 87,300 

Q87:

The most accurate method of allocating service department costs is the

 

step method.

 

reciprocal method.

 

direct method.

 

composite method.

The correct answer is: reciprocal method.
The reciprocal or cross-allocation method of allocating service department costs to production recognizes all of the inter-service department service linkages. Therefore, it is more accurate than either the direct method, which ignores all inter-service department services, or the sequential (step-down) method, which only recognizes some of the inter-service department services. 

Q88:

Valyn Corporation employs an absorption costing system for internal reporting purposes; however, the company is considering using variable costing. Data regarding Valyn’s planned and actual operations for the calendar year are presented below.
clip_image023[1]
The planned per unit cost figures shown in the above schedule were based on Valyn producing and selling 140,000 units. Valyn uses a predetermined manufacturing overhead rate for applying manufacturing overhead to its product; thus, a combined manufacturing overhead rate of $9.00 per unit was employed for absorption costing purposes. Any over- or underapplied manufacturing overhead is closed to the Cost of Goods Sold account at the end of the reporting year.
The beginning finished goods inventory for absorption costing purposes was valued at the previous year’s planned unit manufacturing cost which was the same as the current year’s planned unit manufacturing cost. There are no work-in-process inventories at either the beginning or the end of the year. The planned and actual unit selling price was $70.00 per unit.
Valyn Corporation’s actual manufacturing contribution margin for the year calculated under the variable costing basis was

 

$4,375,000.

 

$5,500,000.

 

$5,625,000.

 

$4,200,000.

The correct answer is: $5,625,000.
Manufacturing contribution margin is calculated as follows:
Manufacturing contribution margin = sales – variable cost of goods sold
Sales revenue is calculated by multiplying the $70 price per unit by the number of units sold, which is 125,000. So, total sales revenue = $70(125,000) = $8,750,000.
Product costs using variable costing consist of direct material, direct labor, and variable indirect manufacturing costs (variable overhead).
Therefore, Valyn’s product cost per unit using variable costing is calculated as follows:
Unit product cost (variable costing) = direct materials cost per unit + direct labor cost per unit + variable manufacturing overhead cost per unit
Unit product cost (variable costing) = $12 + $9 + $4 = $25 per unit
Variable cost of goods sold = (cost of goods sold per unit)(number of units sold)
Variable cost of goods sold = $25(125,000) = $3,125,000
Manufacturing contribution margin = $8,750,000 – $3,125,000 = $5,625,000

Q89:

A firm has three processes in its manufacturing plant: processes 1, 2, and 3. Assume you are computing equivalent units for process 2 and find the following data:

Beginning WIP: 5,000 units (30% complete for CC)

Units started during period: 93,000 units

Ending WIP: 8,000 units (20% complete for CC)

All direct materials (DM) are added at the beginning of the process and conversion costs (CC) are added evenly throughout production. The firm uses the FIFO method for its inventory. What are the equivalent units for this period (broken down into categories of transferred-in, direct-material and conversion costs, respectively)?

 

93,000; 91,600; 90,100

 

93,000; 93,000; 90,100

 

93,000; 91,600; 89,900

 

93,000; 85,000; 89,900

The correct answer is: 93,000; 93,000; 90,100
Given the information, one can find the number of units started and completed as 93,000 – 8,000 = 85,000 units. Since DM is added at the beginning of the process, all units that enter the process are 100% complete in direct-material costs (and transferred-in costs): [(0% x 5,000 beginning WIP) + 85,000 started and completed + (100% x 8,000 ending WIP)] = 93,000 units. To find conversion cost EU: (5,000 x 70%) + 85,000 + (8,000 x 20%) = 90,100 units.

Q90:

Companies that adopt just-in-time purchasing systems often experience

 

an increase in carrying costs.

 

a reduction in the number of suppliers.

 

less need for linkage with a vendor’s computerized order entry system.

 

fewer deliveries from suppliers.

The correct answer is: a reduction in the number of suppliers.
The goals of a just-in-time (JIT) purchasing system are the minimization of raw material and finished goods inventories, and the maximization of throughput through work in process inventory. The minimization of raw material inventories requires close interactions with a limited number of well-qualified suppliers. 

Q91:

Fitzpatrick Corporation uses a joint manufacturing process in the production of two products, Gummo and Xylo. Each batch in the joint manufacturing process yields 5,000 pounds of an intermediate material, Valdene, at a cost of $20,000.

Each batch of Gummo uses 60% of the Valdene and incurs $10,000 of separate costs. The resulting 3,000 pounds of Gummo sells for $10 per pound.

The remaining Valdene is used in the production of Xylo which incurs $12,000 of separable costs per batch. Each batch of Xylo yields 2,000 pounds and sells for $12 per pound.

Fitzpatrick uses the net realizable value method to allocate the joint material costs. The company is debating whether or not to process Xylo further into a new product, Zinten, which would incur an additional $4,000 in costs and sell for $15 per pound. If Zinten is produced, income would increase by:

 

$26,000.

 

$5,760.

 

$14,000.

 

$2,000.

The correct answer is: $2,000.

The increase in income from producing Zinten is calculated by taking the $30,000 market value of Zinten (2,000 pounds at $15 per pound) and subtracting both the $24,000 market value of Xylo (2,000 pounds at $12 per pound) and the $4,000 in additional processing costs.

Increase in income = $30,000 – $24,000 – $4,000 = $2,000

The joint costs and their allocation are sunk and are therefore, irrelevant. 

Q92:

Absorption costing and variable costing are two different methods of assigning costs to units produced. Of the five cost items listed below, identify the one that is not correctly accounted for as a product cost.

 

direct labor cost-part of product cost under absorption cost: yes; part of product cost under variable cost: yes

 

packaging and shipping costs-part of product cost under absorption cost: yes; part of product cost under variable cost: yes

 

insurance on factory-part of product cost under absorption cost: yes; part of product cost under variable cost: no

 

manufacturing supplies-part of product cost under absorption cost: yes; part of product cost under variable cost: yes

The correct answer is: packaging and shipping costs-part of product cost under absorption cost: yes; part of product cost under variable cost: yes.
Under absorption costing, product costs consist of direct material, direct labor, and indirect manufacturing costs (both variable and fixed overhead).
Under variable costing, product costs consist of direct material, direct labor, and variable indirect manufacturing costs (variable overhead).
Packaging costs, if the packaging is an integral part of the product, are considered to be direct material costs under both absorption and variable costing.
However, shipping costs are not classified as product costs under either costing system. They are a part of marketing and selling costs under both absorption costing and variable costing, and they are expensed in the period during which they are incurred. 

Q93:

All of the following are methods of allocating joint costs to joint products except
* Source: Retired ICMA CMA Exam Questions

 

net realizable value method.

 

physical quantities method.

 

gross market value method.

 

separable production cost method.

Seperable production cost method. The methods of allocating joint costs to joint products includes the physical quantities method, the net realizable value method, and gross market value method.

Q94:

Cotton Company has two service departments and three operating departments. In allocating service department costs to the operating departments, which of the following three methods (direct, step-down, reciprocal) will result in the same amount of service department costs being allocated to each operating department, regardless of the order in which the service department costs are allocated?
* Source: Retired ICMA CMA Exam Questions

 

Direct and step-down methods only.

 

Direct and reciprocal methods only.

 

Direct method only.

 

Step-down and reciprocal methods only.

Direct and reciprocal methods only. Direct and reciprocal methods of cost allocating will result in the same amount of service department costs being allocated to each operating department, regardless of the order in which the service department costs are allocated.

Q95:

Product-quality-related costs are part of a total quality control program. A product-quality-related cost incurred in detecting individual products that do not conform to specifications is an example of a(n)

 

internal failure cost.

 

external failure cost.

 

appraisal cost.

 

prevention cost.

The correct answer is: appraisal cost.
Appraisal (detection) costs are incurred to detect problems in time to make needed corrections. Appraisal costs include the costs of incoming, in-process, and final inspections, testing, and quality audits. 

Q96:

“Committed costs” are costs that

 

result from a clear measurable relationship between inputs and outputs.

 

are responsive to management’s attention.

 

management decides to incur in the current period that do not have a clear cause and effect relationship between inputs and outputs.

 

establish the present level of operating capacity and cannot be altered in the short run.

The correct answer is: establish the present level of operating capacity and cannot be altered in the short run.
Facility costs are committed costs resulting from past decisions related to establishing the firm’s capacity level. A common definition of the short-run is the time period over which capacity is fixed. Once capacity is altered, the firm is in the long-run. 

Q97:

Wilcox Industrial has two support departments, the Information Systems Department and the Personnel Department, and two manufacturing departments, the Machining Department and the Assembly Department. The support departments service each other as well as the two production departments. Company studies have shown that the Personnel Department provides support to a greater number of departments than does the Information Systems Department. If Wilcox uses the direct method of departmental allocation, which one of the following cost allocations would occur? Some of the costs of the
* Source: Retired ICMA CMA Exam Questions

 

Personnel Department would be allocated to the Information Systems Department.

 

Information Systems Department would be allocated to the Assembly Department.

 

Assembly Department would be allocated to the Machining Department.

 

Machining Department would be allocated to the Information Systems Department.

Information Systems Department would be allocated to the Assembly Department. The direct method of department allocation, no-consideration is given to services performed by one service department for another. Therefore, the Information Systems Department would be allocated to the Assembly Department.

Q98:

Fashion Inc. manufactures women’s dresses using cotton and polyester. Since the same style dresses are made out of both fabrics, Fashions uses operation costing. During June, 1,000 cotton dresses were completely produced. Also during June, 1,500 polyester dresses were started by adding all materials at the beginning of the process. Of these 1,500 dresses, 700 were completely finished and the remainder were 25 percent complete by the end of the month. There was no work-in-process inventory at the beginning of June. Costs incurred during June were as follows.

clip_image030

The cost per unit to manufacture one polyester dress during June was

 

$18.32.

 

$22.00.

 

$32.00

 

$20.32.

The correct answer is: $22.00.

The cost to manufacture one polyester dress in June is calculated as follows:

Cost to manufacture, one dress = (raw material cost per dress) + (conversion cost per dress)

Raw material cost per dress = ($22,500/1,500 dresses) = $15

Conversion cost per dress = ($13,300) / (equivalent unit of conversion incurred in June)

Equivalent units of conversion in June = (1,700 dresses started and finished) + (800 started multiplied by a 25% completion rate)

Equivalent units of conversion in June = (1,700) + (200) = 1,900 dresses

Therefore, the conversion cost per polyester dress = ($13,300) / 1,900 dresses = $7 per dress.

Cost to manufacture, one dress = ($15 + $7) = $22 

Q99:

Cynthia Rogers, the cost accountant for Sanford Manufacturing, is preparing a management report which must include an allocation of overhead. The budgeted overhead for each department and the data for one job are shown below.

clip_image031

Using the departmental overhead application rates, and allocating overhead on the basis of direct labor hours, overhead applied to Job #231 in the Tooling Department would be

 

$501.00.

 

$197.50.

 

$241.50.

 

$44.00.

The correct answer is: $197.50.

The overhead applied to Job #231 in the Tooling Department is calculated as follows:

Tooling overhead applied, Job #231 = (tooling overhead rate)(number of direct labor hours used by Job #231)

Tooling overhead rate = (total tooling overhead costs) / (total direct labor hours used in tooling dept)
Tooling overhead rate = ($8,690) / (440 direct labor hours) = $19.75 per direct labor hour
Tooling overhead applied, Job #231 = ($19.75)(10 direct labor hours) = $197.50 

Q100:

Lee Manufacturing uses a standard cost system with overhead applied based upon direct labor hours. The manufacturing budget for the production of 5,000 units for the month of May included the following information.
clip_image032
During May, 6,000 units were produced and the fixed overhead budget variance was $2,000 favorable. Fixed overhead during May was

 

overapplied by $16,000.

 

overapplied by $18,000.

 

underapplied by $2,000.

 

underapplied by $16,000.

The correct answer is: overapplied by $18,000.
Applied fixed overhead is calculated by taking the predetermined overhead rate for fixed overhead and multiplying it by the standard number of hours.
In this case, the predetermined fixed overhead rate would be $8 per hour ($80,000/10,000 hours = $8 per hour) and the standard number of hours used to apply fixed overhead would be 12,000 hours (6,000 units x 2 direct labor hours per unit = 12,000 direct labor hours)
Multiply the predetermined fixed overhead rate by the standard number of direct labor hours as follows: ($8/hour x 12,000 direct labor hours = $96,000 applied fixed overhead.
Since the fixed overhead budget variance was $2,000 favorable, or less than budgeted, then the actual fixed overhead was $78,000 ($80,000 – $2,000). The fixed overhead budget variance is calculated by taking the difference between the applied fixed overhead and the actual fixed overhead. So, if applied fixed overhead was $96,000 and actual fixed overhead was $78,000, then fixed overhead was overapplied by $18,000. 

Q101:

Normal costing systems are said to offer a user several distinct benefits when compared with actual costing systems. Which one of the following is not a benefit associated with normal costing systems?
* Source: Retired ICMA CMA Exam Questions

 

A smoothing of product costs throughout the period.

 

More timely costing of jobs and products.

 

A more economical way of attaching overhead to a job or product.

 

Improved accuracy of job and product costing.

Improved accuracy of job and product costing. Normal costing systems offer the benefits of more timely costing of jobs and products, a smoothing of product costs throughout the period, and a more economical way of attaching overhead to a job or product.

Q102:

A vacuum cleaner production line has a 2-stage manufacturing process consisting of an assembly department and a packaging department. During the current period, the packaging department has no beginning WIP inventory and receives 200 units from the assembly department with a total cost of $8,000. Direct materials are added at the beginning of the process in the packaging department while conversion costs are added evenly. During the period, $2,000 of direct materials and $3,760 of conversion costs are used in packaging. Ending WIP inventory is 20 units, which are 40% complete. What is the ending balance in the WIP inventory account for the packaging department?

 

$360

 

$160

 

$13,760

 

$1,160

The correct answer is: $1,160
Note that if there is no beginning WIP inventory, the inventory valuation method (FIFO or Weighted Average) will result in the same equivalent units and inventory values. Given the information, one can compute that the number of units started and completed during the period were 180 (200 started – 20 in ending WIP). The 20 units in ending WIP are 100% complete as far as transfer costs and direct materials costs are concerned, so we have the following:

clip_image033

Therefore, ending WIP inventory is (20 x $40) + (20 x $10) + (8 x $20) = $1,160.

Q103:

Clarendon, Inc. has two production departments, machining and assembly. James Irving, the manager of the assembly department, has noted a concern about the indirect costs allocated to his department, which, based on direct labor hours, seem excessive. He argues that his department is only half the size (in square footage used) of the machining department and uses a small portion of the engineering services and yet he is allocated nearly half of the indirect costs provided by engineering services and occupancy costs. Mr. Irving argues that adopting activity-based costing (ABC) , and using multiple cost drivers, would more fairly divide the costs. Assume the following data is collected by Mr. Irving:

clip_image034

If Clarendon changes to the ABC system recommended, how much would indirect costs change in Mr. Irving’s department?

 

$82,500 reduction

 

$103,000 reduction

 

$73,000 reduction

 

$92,000 reduction

The correct answer is: $73,000 reduction
Currently the assembly department is allocated 5,500/11,200 x ($186,000 + $150,000) = $165,000. If the change occurred, assembly would be charged $62,000 of the occupancy costs [$186,000 x (20,000/60,000)] and $30,000 of the engineering costs [$150,000 x (1,000/5,000)], declining in total to $92,000. The reduction in cost is $165,000 – $92,000 = $73,000.

Q104:

Kimbeth Manufacturing uses a process cost system to manufacture dust density sensors for the mining industry. The following information pertains to operations for the month of May.
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The beginning inventory was 60 percent complete for materials and 20 percent complete for conversion costs. The ending inventory was 90 percent complete for materials and 40 percent complete for conversion costs.
Costs pertaining to the month of May are as follows:

Beginning inventory costs are: materials, $54,560; direct labor, $20,320; and factory overhead, $15,240.

Costs incurred during May are: materials used, $468,000; direct labor, $182,880; and factory overhead, $391,160.

Using the first-in, first-out (FIFO) method, the equivalent units of production for materials are

 

104,000 units.

 

106,000 units.

 

97,600 units.

 

113,600 units.

The correct answer is: 104,000 units.
The FIFO approach follows the production flow and assumes that units will be sold in the order in which they were placed in inventory.
To calculate the equivalent units of production for materials using FIFO, calculate the equivalent units for materials for:
1) units in beginning inventory,
2) products started into production during the month, and,
3) units in ending inventory.
First, the 16,000 units in the beginning inventory would be completed, requiring the addition of 6,400 [(16,000)(1 – 0.6)] equivalent units for materials.
Next, of the 100,000 units started during the month, 76,000 would be completed, requiring 76,000 equivalent units for materials.
(92,000 units completed during month – 16,000 units from beginning inventory = 76,000 units)
Lastly, of the 100,000 units started, 24,000 would be in the ending inventory, 90% complete with respect to materials, requiring 21,600 [(0.90)(24,000)] equivalent units for materials.
Therefore, the total equivalent units for materials would be 6,400 + 76,000 + 21,600 = 104,000. 

Q105:

External failure costs include all of the following costs except those related to
* Source: Retired ICMA CMA Exam Questions

 

product liability suits.

 

product field testing.

 

warranty obligations.

 

lost sales and lost customers.

Product field testing. External failure costs are those costs that are beyond the company’s control. In this case, lost sales and lost customers, warranty obligations, and product liability suits are all external failure costs.

Q106:

Which of the following methods is generally considered the most acceptable method of allocating service department costs?

 

Step-down method

 

Activity-based method

 

Reciprocal method

 

Direct method

The correct answer is: Reciprocal method
The reciprocal method fully recognizes all interdepartmental service costs, allocating all costs to other affected departments using complex algorithms.

Q107:

A production process has laborers who work for two hours, must wait for a half hour while a machine is set up, and then work for another two hours before taking a half-hour unpaid lunch. On this day, a breakdown occurs after lunch, and the laborers lose one hour of productive time before putting in a final three hours for the day. How many direct labor (DL) hours and indirect labor (IL) hours per person were spent?

 

Seven hours DL; two hours IL

 

Seven-and-a-half hours DL; one hour IL

 

Eight-and-a-half hours DL

 

Seven hours DL; one-and-a-half hours IL

The correct answer is: Seven hours DL; one-and-a-half hours IL
The seven hours of productive time are counted as direct labor. The half-hour of wait time and the one hour of downtime are both counted as indirect labor, since the workers were idle during that time. The lunch period is unpaid, so it is not counted at all.

Q108:

Tucariz Company processes Duo into two joint products, Big and Mini. Duo is purchased in 1,000 gallon drums for $2,000. Processing costs are $3,000 to process the 1,000 gallons of Duo into 800 gallons of Big and 200 gallons of Mini. The selling price is $9 per gallon for Big and $4 per gallon for Mini.

If the sales value at split-off method is used to allocate joint costs to the final products, the per gallon cost (rounded to the nearest cent) of producing Big is:

 

$3.38 per gallon.

 

$5.00 per gallon.

 

$5.63 per gallon.

 

$4.50 per gallon.

The correct answer is: $5.63 per gallon.

The per gallon cost of Big, using the relative sales value at split-off method is calculated by finding Big’s share of the joint costs and dividing it by the 800 gallons produced.

Sales value of Big at split-off = (800 gallons)($9) = $7,200

Sales value of Mini at split-off = (200 gallons)($4) = $800

Total sales value (Big + Mini) at split-off = $7,200 + $800 = $8,000

Big’s share of the joint costs = ($7,200/$8,000)($5,000) = $4,500

Big’s cost per gallon = $4,500 / 800 gallons = $5.625, or $5.63 rounded 

Q109:

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Using information from Exhibit B, what are conversion costs per unit?

 

$113

 

$108

 

$58

 

$18

The correct answer is: $58
Conversion costs per unit are defined as direct labor per unit plus overhead per unit. In this case, $40 + $10 + $8 = $58.

Q110:

SANSCOM Corporation utilizes an activity-based costing system for applying costs to its two products, P and Q. In the assembly department, material handling costs vary directly with the number of parts inserted into the product. Machinery is recalibrated and oiled each weekend regardless of the number of parts inserted during the previous week. Both material handling and machinery maintenance costs are charged to the product on the basis of the number of parts inserted. Due to reengineering of the production process for Product P, the number of insertion parts per finished unit has been reduced. How will the redesign of the production process for Product P affect the activity-based cost of Product Q?

 

Material handling cost per Q unit will remain unchanged, and machinery maintenance cost per Q unit will increase.

 

Material handling cost per Q unit will remain unchanged, and machinery maintenance cost per Q unit will remain unchanged.

 

Material handling cost per Q unit will increase, and machinery maintenance cost per Q unit will increase.

 

Material handling cost per Q unit will increase, and machinery maintenance cost per Q unit will remain unchanged.

The correct answer is: Material handling cost per Q unit will remain unchanged, and machinery maintenance cost per Q unit will increase.
Material handling costs are variable and machinery maintenance costs are fixed. Because the variable costs are being assigned by the cost driver, material handling cost per Q unit will remain unchanged. The fixed cost per unit will increase, as that cost will now be spread over a smaller number of cost driver units.

Q111:

Mill Corporation had the following unit costs for the recently concluded calendar year.

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Inventory for Mill’s sole product totaled 6,000 units on January 1 and 5,200 units on December 31. When compared to variable costing income, Mill’s absorption costing income is

 

$6,800 higher.

 

$2,400 higher.

 

$6,800 lower.

 

$2,400 lower.

The correct answer is: $2,400 lower.

The income under these two methods can be compared by taking the fixed manufacturing cost per unit and multiplying it by the change in inventory.

Fixed manufacturing cost per unit = $3.00
Change in inventory = (5,200 – 6,000) = -800 units

Difference in absorption costing income = ($3)(-800 units) = -$2,400

Therefore, the full absorption operating income is $2,400 lower than the variable cost operating income. 

Q112:

In a decision analysis situation, which one of the following costs is not likely to contain a variable cost component?

 

selling

 

labor

 

depreciation

 

overhead

The correct answer is: depreciation.
Variable costs are those that respond automatically to change in an activity level (cost driver). Depreciation is usually determined by a time-based method rather than an activity-based method. Therefore, depreciation has no variable component and is a fixed cost. 

Q113:

Internal failure costs include

 

returns.

 

warranty expense.

 

rework.

 

field repairs.

The correct answer is: rework.
All other choices are components of external failure costs.

Q114:

A large semiconductor manufacturer plans to apply the theory of constraints (TOC) methodology to increase production capacity. How could a management accountant best support the initiative?

 

Provide net profit, ROI, and cash flow data.

 

Determine outsourcing costs to off-load long-term critical constraints.

 

Design buffer management worksheets to facilitate quantitative analysis.

 

Supply activity-based cost data.

The correct answer is: Supply activity-based cost data.
Organizations that implement the TOC often use activity-based costing (ABC). The short-term aspects of TOC and long-range focus of ABC make them complementary profitability analysis methods.

Q115:

Valyn Corporation employs an absorption costing system for internal reporting purposes; however, the company is considering using variable costing. Data regarding Valyn’s planned and actual operations for the calendar year are presented below.
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The planned per unit cost figures shown in the above schedule were based on Valyn producing and selling 140,000 units. Valyn uses a predetermined manufacturing overhead rate for applying manufacturing overhead to its product; thus, a combined manufacturing overhead rate of $9.00 per unit was employed for absorption costing purposes. Any over- or underapplied manufacturing overhead is closed to the Cost of Goods Sold account at the end of the reporting year.
The beginning finished goods inventory for absorption costing purposes was valued at the previous year’s planned unit manufacturing cost which was the same as the current year’s planned unit manufacturing cost. There are no work-in-process inventories at either the beginning or the end of the year. The planned and actual unit selling price was $70.00 per unit.
Valyn Corporation’s absorption costing operating income was

 

higher than variable costing operating income because actual sales exceeded actual production.

 

lower than variable costing operating income because actual production exceeded actual sales.

 

higher than variable costing operating income because actual production exceeded actual sales.

 

lower than variable costing operating income because actual sales exceeded actual production.

The correct answer is: higher than variable costing operating income because actual production exceeded actual sales.
Using an absorption costing system, product costs consist of direct material, direct labor, and indirect manufacturing costs (both variable and fixed overhead). Using a variable costing system, product costs consist of direct material, direct labor, and variable indirect manufacturing costs (variable overhead only; fixed overhead is not included in product costs using variable costing).
Fixed manufacturing overhead is not included in product costs in a variable costing system. Instead, a variable costing system treats fixed overhead as a period cost. Therefore, the profit under absorption costing is calculated by taking the profit under variable costing and adding the change in the fixed overhead in the absorption cost inventory. When production exceeds sales, the change is positive. If sales exceed production, then the change is negative. 

Q116:

Which of the following is a benefit of a materials requirement planning (MRP) system?

 

More coordination required between functional areas, which will increase interaction and communication

 

Potential inventory accumulations

 

Possibility that manufacturing cells may receive parts they are not ready to process

 

Predictable raw materials needs and the ability to take advantage of bulk purchasing and other price breaks

The correct answer is: Predictable raw materials needs and the ability to take advantage of bulk purchasing and other price breaks.
MRP is used to set production and purchasing schedules. It facilitates the coordination of purchasing activities to take advantage of bulk purchasing and quantity discounts.

Q117:

During December, Krause Chemical Company had the following selected data concerning the manufacture of Xyzine, an industrial cleaner.

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All material is added at the beginning of processing in this department, and conversion costs are added uniformly during the process. The beginning work-in-process inventory had $120 of raw material and $180 of conversion costs incurred. Material added during December was $540 and conversion costs of $1,484 were incurred. Krause uses the weighted-average process-costing method. The total conversion cost assigned to units transferred to the next department in December was

 

$1,513.

 

$1,600.

 

$1,484.

 

$1,664.

The correct answer is: $1,600.

The total conversion cost assigned to the units transferred to the next department can be calculated as follows:

Total conversion cost assigned to units transferred to next dept = (number of units transferred)(conversion cost per equivalent unit)

Number of units transferred = 100

The weighted-average method assumes that all units and costs are current (i.e., there is no beginning inventory).

Therefore, the equivalent units for conversion cost = (units completed) + (units in ending inventory)(% complete)

Equivalent units for conversion cost = (100) + (10)(40%) = 104

Conversion cost per equivalent unit = ($180 + $1,484) / 104 equivalent units

Conversion cost per equivalent unit = $1,664 / 104 = $16 per equivalent unit

Total conversion cost assigned to the units transferred to the next department = (100 units) ($16) = $1,600 

Q118:

The following information was gathered for the current period of manufacturing production for a firm:

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There were 100 units in beginning WIP, which were 30% complete in direct materials (DM) and 40% complete in conversion costs (CC). During the period 2,000 units were started in production and 1,900 were completed. Ending WIP inventory was 70% complete in DM and 60% complete in CC. If the firm uses the weighted average inventory method, what are equivalent units for the period?

 

DM: 2,040 units; CC: 2,020 units

 

DM: 2,000 units; CC: 1,980 units

 

DM: 1,900 units; CC: 1,900 units

 

DM: 2,020 units; CC: 1,990 units

The correct answer is: DM: 2,040 units; CC: 2,020 units
First compute the number of units in ending inventory = 100 + 2,000 – 1,900 = 200 units. Weighted average EU = number of units completed plus the EU in ending WIP inventory. For DM: 1,900 + (200 x 0.7) = 2,040; For CC: 1,900 + (200 x 0.6) = 2,020.

Q119:

All of the following are examples of benchmarking standards except
* Source: Retired ICMA CMA Exam Questions

 

the performance of the unit during the previous year.

 

the best performance of a competitor with a similar operation.

 

the best performance of the unit in comparable past periods.

 

a comparison with a similar unit within the same company.

The performance of the unit during the previous year. Benchmarking standards include the best performance of the unit in comparable past periods, a comparison with a similar unit within the same company, and the best performance of a competitor with a similar operation.

Q120:

Logical actions to determine best-in-class performance during a benchmarking study include

 

review of core competencies and identification of desired workflow process changes.

 

identification of desired workflow process changes and collection of industry data.

 

determination of the desired state and identification of benchmarking partners.

 

agreement on a data-gathering method, identification of organizations to benchmark, and collection of data.

The correct answer is: agreement on a data-gathering method, identification of organizations to benchmark, and collection of data.
Through benchmarking, a firm identifies best levels and conducts a benchmarking study to help define how those levels can be adopted to create improved performance. Agreement on a data-gathering method, identification of organizations to benchmark, and collection of data are the logical activities when attempting to identify best-in-class performance.

Q121:

Which of the following is often changed on a day-to-day basis?

 

Fixed overhead costs

 

Plant-wide overhead rate

 

Departmental overhead rate

 

Variable overhead costs

The correct answer is: Variable overhead costs
Variable overhead costs can be influenced on an ongoing basis, unlike fixed overhead costs, which cannot be influenced by daily attention.

Q122:

A plant using plant-wide overhead and machine-hours for the overhead application rate is considering switching to an activity-based costing (ABC) overhead costing method. Total overhead was $620,000 for a period that contained two jobs. Job 1 used 8,000 machine-hours; job 2 used 12,000 machine-hours. New data groups overhead costs into three pools for job 1: utilities measured by machine-hours at a predetermined driver rate of $10/machine-hour, materials handling of 60,000 pounds at a rate of $3/pound, and 200 setups at a rate of $300/setup. For job 1, what amount is allocated using the plant-wide and ABC methods?

 

Plant-wide: $248,000; ABC overhead costing: $320,000

 

Plant-wide: $310,000; ABC overhead costing: $372,000

 

Plant-wide: $310,000; ABC overhead costing: $320,000

 

Plant-wide: $248,000; ABC overhead costing: $372,000

The correct answer is: Plant-wide: $248,000; ABC overhead costing: $320,000
The plant-wide rate is calculated by dividing the total cost by the machine-hours for the entire plant: $620,000/20,000 machine-hours = $31/machine-hour. This rate times 8,000 machine-hours equals $248,000 allocated to job 1. The ABC overhead costing method allocates costs as follows ($10/machine-hour x 8,000 machine-hours) + (60,000 pounds x $3/pound) + (200 setups x $300/setup) = $80,000 + $180,000 + $60,000 = $320,000

Q123:

Valyn Corporation employs an absorption costing system for internal reporting purposes; however, the company is considering using variable costing. Data regarding Valyn’s planned and actual operations for the calendar year are presented below.
clip_image023[3]
The planned per unit cost figures shown in the above schedule were based on Valyn producing and selling 140,000 units. Valyn uses a predetermined manufacturing overhead rate for applying manufacturing overhead to its product; thus, a combined manufacturing overhead rate of $9.00 per unit was employed for absorption costing purposes. Any over- or underapplied manufacturing overhead is closed to the Cost of Goods Sold account at the end of the reporting year.
The beginning finished goods inventory for absorption costing purposes was valued at the previous year’s planned unit manufacturing cost which was the same as the current year’s planned unit manufacturing cost. There are no work-in-process inventories at either the beginning or the end of the year. The planned and actual unit selling price was $70.00 per unit.
The value of Valyn Corporation’s actual year end finished goods inventory under the variable costing basis was

 

$1,000,000.

 

$750,000.

 

$1,050,000.

 

$1,400,000.

The correct answer is: $1,000,000.
Variable costing product costs consist of direct material, direct labor, and variable indirect manufacturing costs (variable overhead).
The unit product cost using variable costing is calculated as follows:
Unit product cost (variable costing) = direct materials cost per unit + direct labor cost per unit + variable manufacturing overhead cost per unit
Unit product cost (variable costing) = $12 + $9 + $4 = $25 per unit
Valyn’s ending finished goods inventory is 40,000 units (35,000 units in beginning inventory + 130,000 units produced – 125,000 units sold).
Thus, the year-end finished goods inventory under variable costing is $25(40,000 units) = $1,000,000. 

Q124:

Which one of the following statements best describes material requirements planning (MRP)? MRP is

 

a planning system that is used to determine the amount and timing of inventories that are dependent on the demand for finished goods.

 

a software tool that is used to forecast the ordering quantities of inventories that tend to be subject to a variable and continual demand.

 

a software tool that is used to forecast the schedule of material purchases that tend to be subject to a variable and continual demand.

 

a planning system that is used to determine the amount and timing of the optimal inventory level.

The correct answer is: a planning system that is used to determine the amount and timing of inventories that are dependent on the demand for finished goods.
An MRP system is an integrated production and inventory control system used to determine:
(1) what to make, when to make it , and how much to make; and,
(2) what to purchase, when to purchase it, and how much to purchase.
Therefore, it helps determine optimal inventory levels. 

Q125:

Kepler Optics makes lenses for telescopes. Because Kepler will only sell lenses of the highest quality, the normal spoilage during a reporting period is 1,000 units. At the beginning of the current reporting period, Kepler had 2,200 units in inventory, and during the period, production was started and completed on 4,000 units. Units in inventory at the end of the current reporting period were 1,500, and the units transferred out were 3,000. During this period, the abnormal spoilage for Kepler’s lense production was

 

700 units

 

1,000 units.

 

1,700 units.

 

3,200 units.

The correct answer is: 700 units.
Total spoilage = beginning units + units started and completed – units transferred out – ending units = 2,200 + 4,000 – 3,000 – 1,500 = 1,700
Abnormal spoilage = Total spoilage – Normal spoilage = 1,700 – 1,000 = 700

Q126:

A firm uses direct labor hours as its plant-wide cost driver for overhead. Managers estimate total overhead during the year to be $108,000 and direct labor hours to be 15,000. Assume that during the current period, 1,500 direct labor hours were recorded and actual overhead for the period was $9,350. Which of the following statements is true?

 

Overhead is underapplied by $1,450.

 

Overhead is overapplied by $350.

 

Overhead is underapplied by $350.

 

Overhead is overapplied by $1,450.

The correct answer is: Overhead is overapplied by $1,450.
The predetermined overhead rate is $108,000/15,000 or $7.20 per hour. During the period, 1,500 hours were recorded so overhead applied would be 1,500 x $7.20 = $10,800. Since actual overhead was $9,350, overhead is overapplied by the difference of $1,450.

Q127:

Bluebird Enterprises has two production departments (P1 and P2) and two service departments (S1 and S2). A breakdown of current period costs and service usage for each department is as follows:

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If Bluebird uses the direct method for allocation of service costs, what are the total service costs allocated to the two production departments (P1 and P2)?

 

$25,000 to P1 and $19,000 to P2

 

$24,000 to P1 and $20,000 to P2

 

$20,000 to P1 and $15,200 to P2

 

$19,800 to P1 and $15,400 to P2

The correct answer is: $25,000 to P1 and $19,000 to P2
The direct method eliminates the service performed between service departments. The service provided by S1 ($24,000 total) is divided 5/8 to P1 and 3/8 to P2, which is $15,000 and $9,000, respectively. The service provided by S2 ($20,000 total) is divided evenly between the two production departments. So total cost allocated to P1 is $15,000 + $10,000 = $25,000 and total cost allocated to P2 is $9,000 + $10,000 = $19,000.

Q128:

Pelder Products Company manufactures two types of engineering diagnostic equipment used in construction. The two products are based upon different technologies, x-ray and ultra-sound, but are manufactured in the same factory. Pelder has computed the manufacturing cost of the x-ray and ultra-sound products by adding together direct materials, direct labor, and overhead cost applied based on the number of direct labor hours. The factory has three overhead departments that support the single production line that makes both products. Budgeted overhead spending for the departments is as follows.

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Pelder’s budgeted manufacturing activities and costs for the period are as follows.

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The budgeted cost to manufacture one ultra-sound machine using the activity-based costing method is

 

$264.

 

$225.

 

$293.

 

$305.

The correct answer is: $264.

The budgeted cost to manufacture one ultra-sound machine using the activity-based costing method is calculated as follows:

Budgeted cost, one machine, activity-based costing = (direct material cost per machine) + (direct labor cost per machine) + (manufacturing overhead cost per machine)

Budgeted cost, one machine, activity-based costing = ($8,000/100 units) + ($12,000/100 units) + (manufacturing overhead cost per machine)
Budgeted cost, one machine, activity-based costing = $80 + $120 + (manufacturing overhead cost per machine)
The manufacturing overhead costs consist of engineering design, material handling, and set-up costs assigned to ultra-sound machines. To compute the per unit manufacturing overhead cost, divide the total manufacturing overhead costs by 100 units.

Manufacturing overhead costs = (engineering design costs) + (material handling costs) + (set-up costs)
Manufacturing overhead costs = ($6,000)/(2+1) + ((5,000)(600) / (1,000 parts used)) + (($3,000)(7) / (15 set-ups))
Manufacturing overhead costs = $2,000 + $3,000 + $1,400 = $6,400
Manufacturing overhead costs per unit = ($6,400) / 100 units = $64 per unit

Budgeted cost, one machine, activity-based costing = $80 + $120 + $64 = $264 

Q129:

Smile Labs develops 35mm film using a four-step process that moves progressively through four departments. The company specializes in overnight service and has the largest drug store chain as its primary customer. Currently, direct labor, direct materials, and overhead are accumulated by department. The cost accumulation system that best describes the system Smile Labs is using is

 

activity-based costing.

 

process costing.

 

operation costing.

 

job order costing

The correct answer is: process costing.
Process costing accumulates costs by process or department rather than by job. It is used when costing continuous production operations, as opposed to intermittent, or batch, production operations. 

Q130:

Xylon Company uses direct (variable) costing for internal reporting and absorption costing for the external financial statements. A review of the firm’s internal and external disclosures will likely find
* Source: Retired ICMA CMA Exam Questions

 

internal income figures that vary closely with sales and external income figures that are influenced by both units sold and productive output.

 

a difference in the treatment of fixed selling and administrative costs.

 

a contribution margin rather than gross margin in the reports released to shareholders.

 

a higher inventoriable unit cost reported to management than to the shareholders.

Internal income figures that vary closely with sales and external income figures that are influenced by both units sold and productive output. When an organization used a variable costing method for internal reporting and absorption costing for external financial statements, an organization will likely find internal income figures that vary closely with sales and external income figures that are influenced by both units sold and productive output.

Q131:

Although there is no one standard process to conduct value chain analysis, the Statement on Management Accounting recommends: 

internal cost analysis.

internal differentiation analysis.

vertical linkage analysis.

 

III only

 

I, II, and III

 

II only

 

I only

The correct answer is: I, II, and III.
The value chain is the sequence of customer value-added activities, including internal cost analysis, internal differentiation analysis and vertical linkage analysis. The value chain sequence is as follows:
(1) Research and Development;
(2) Product Design;
(3) Procurement;
(4) Production;
(5) Marketing;
(6) Distribution; and,
(7) Customer Service. 

Q132:

A manager who is compensated based on operating income decides to increase operating income by producing extra inventory for items that have high fixed manufacturing costs even though the demand for this inventory does not exist. Which of the following costing methods caused this situation to occur, and which solution would fix the problem?

 

Variable costing; apply a carrying charge for all ending inventory.

 

Variable costing; switch to absorption costing for internal and external reporting.

 

Absorption costing; apply a carrying charge for all ending inventory.

 

Absorption costing; switch to variable costing for internal and external reporting.

The correct answer is: Absorption costing; apply a carrying charge for all ending inventory.
Absorption costing allows managers to manipulate operating income simply by increasing production. The manager may increase inventory or produce items that absorb the highest fixed manufacturing costs even though no additional demand exists. One disincentive to creating excess inventory would be to apply a percentage carrying charge for all ending inventory.

Q133:

Which one of the following statements is correct regarding absorption costing and variable costing?

 

If finished goods inventory increases, absorption costing would result in higher income.

 

Variable manufacturing costs are lower under variable costing.

 

Gross margins are the same under both costing methods.

 

Overhead costs are treated in the same manner under both costing methods.

The correct answer is: If finished goods inventory increases, absorption costing would result in higher income.
Absorption costing considers fixed indirect manufacturing (fixed overhead) to be a product cost chargeable to inventory. Variable costing considers fixed indirect manufacturing (fixed overhead) to be a period cost chargeable to net income. Therefore, the difference between absorption costing income and variable costing income is the change in the amount of fixed overhead in the full absorption cost inventory over the income statement period.
When inventories increase, the amount of the fixed overhead deferred to the balance sheet causes the cost of goods sold in an absorption costing scenario to be lower than the cost of goods sold if variable costing were used. This results in an absorption cost income which is higher than the variable cost income. 

Q134:

Which one of the following refers to a cost that remains the same as the volume of activity decreases within the relevant range?
* Source: Retired ICMA CMA Exam Questions

 

Average cost per unit.

 

Unit fixed cost.

 

Variable cost per unit.

 

Total variable cost.

Variable cost per unit. Variable cost per unit remains the same as the volume of activity decreases within the relevant range.

Q135:

A company using the step-down method of allocating service department costs has two service departments and two production departments. The amount of each department’s costs is used to determine the relative value of each department to the firm for purposes of allocation. HR costs $100,000, and maintenance costs $150,000. These departments respectively use 8,000 and 10,000 labor-hours. Production departments have original department costs and labor-hours of $400,000 (40,000 labor-hours) for tennis balls and $300,000 (30,000 labor-hours) for racquet balls. What is the total cost for the tennis ball department if labor-hours are used as the sole cost driver? (Round all intermediate calculations to three decimal places.)

 

$475,065

 

$542,857

 

$514,286

 

$596,343

The correct answer is: $542,857
The maintenance department’s costs are allocated first to all other departments:
to HR $150,000 x [8,000/(8,000 + 40,000 + 30,000)] = $15,384;
to tennis balls $150,000 x 0.513 = $76,923.
Thus HR’s new costs to allocate are $115,384 ($100,000 + $15,384).
HR’s costs allocated to the tennis ball department are calculated as follows:
$115,384 x [40,000/(40,000 + 30,000)] = $65,934.
Thus the tennis ball department’s total costs are $400,000 + $76,923 + $65,934 = $542,857.

Q136:

When using activity-based costing techniques, which one of the following departmental activities would be expected to use machine hours as a cost driver to allocate overhead costs to production?
* Source: Retired ICMA CMA Exam Questions

 

Robotics painting

 

Material handling.

 

Plant cafeteria.

 

Machine setups.

Robotics painting. Of the list, the only one that requires machinery in its process is that of robotics painting. The others would require other activity cost drivers.

Q137:

The following information was gathered for the current period of manufacturing production for a firm:

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There were 100 units in beginning WIP, which were 20% complete in direct materials (DM) and 30% complete in conversion costs (CC). During the period 2,000 units were started in production and 1,900 were completed. If the firm uses the weighted average inventory method, and equivalent units are calculated as 2,000 for direct materials (DM) and 2,050 for conversion costs (CC), what is the total cost assigned to the units completed?

 

$431,300

 

$447,760

 

$408,600

 

$436,140

The correct answer is: $431,300
First, compute the cost per equivalent unit: DM = $254,000/2,000 = $127; CC = $205,000/2,050 = $100. Then multiply the total cost of $227 by the number of units completed (1,900) to find $431,300.

Q138:

Kimber Company has the following unit cost for the current year.

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Fixed manufacturing cost is based on an annual activity level of 8,000 units. Based on these data, the total manufacturing cost expected to be incurred to manufacture 9,000 units in the current year is

 

$560,000.

 

$575,000.

 

$615,000.

 

$630,000.

The correct answer is: $615,000.
Total manufacturing costs to be incurred for 9,000 units can be calculated as follows:
Total manufacturing costs for 9,000 units = (fixed manufacturing costs) + (variable manufacturing costs per unit)(number of units produced)
Fixed manufacturing costs = (fixed manufacturing overhead per unit)(8,000 units of annual activity used to determine the fixed overhead per unit
Fixed manufacturing costs = $15(8,000) = $120,000
Variable manufacturing costs per unit = (raw materials cost) + (direct labor cost) + (variable manufacturing overhead cost)
Variable manufacturing costs per unit = $20 + $25 + $10 = $55
Total manufacturing costs to be incurred for 9,000 units = $120,000 + $55(9,000 units) = $120,000 + $495,000 = $615,000 

Q139:

A firm wants a simple method to allocate costs from service departments to production departments but never needs to allocate costs from one service department to another. Which of the following methods would satisfy these requirements?

 

Activity-based method

 

Direct method

 

Reciprocal method

 

Step-down method

The correct answer is: Direct method
The direct method is the most direct and simple method of allocating service department costs. This method cannot be used to allocate costs to other service departments.

Q140:

Which of the following activities would not be considered as adding value?

 

Rework of defective product

 

Quality assurance activities

 

Client support services for product fulfillment

 

Redesign of a product

The correct answer is: Rework of defective product
By definition, value-added refers to activities that convert resources into product and services consistent with external customer requirements; non-value-added refers to activities that can be eliminated with no deterioration in product service, functionality, performance, or quality in the eyes of the end user. Rework would be non-value-added because faulty products provide no direct value to a customer.

Q141:

Based on activity-based management (ABM) information, organizations generally can: 

make better decisions.

improve performance.

increase earnings on assets deployed.

 

III only

 

I, II, and III

 

I only

 

II only

The correct answer is: I, II, and III.
ABM is the evaluation of the cause and effect relationships between activity costs and the drivers of the activities and costs. It helps management understand what is really happening in an operation. Therefore, ABM helps make better decisions, improve performance, increase profits, and optimize asset utilization. 

Q142:

Which of the following statements is true concerning fixed costs, variable costs, and total costs? Within the relevant range,

 

total cost per unit decreases as the number of units produced increases.

 

fixed costs per unit increases as the number of units produced increases.

 

variable cost per unit increases as the number of units produced increases.

 

fixed costs per unit does not change as the number of units produced increases.

The correct answer is: total cost per unit decreases as the number of units produced increases.
While fixed costs (in total) stay constant over the relevant range, as output increases, fixed costs per unit declines. Since variable costs per unit is a constant, then total costs per unit must decline as the number of units produced increases.

Q143:

A firm using a plant-wide overhead rate has four departments with the following overhead amounts: $200,000, $300,000, $100,000, and $200,000. The same departments respectively have the following annual labor-hours totals: 30,000, 40,000, 20,000, and 10,000. Assuming labor-hours are used as the allocation base, what overhead rate will the first department use?

 

$2/labor-hour

 

$6.67/labor-hour

 

$10/labor-hour

 

$8/labor-hour

The correct answer is: $8/labor-hour
Since the plant uses a plant-wide overhead rate, the overhead amounts and the labor-hours amounts are totaled and the total plant overhead is divided by the total units of the cost driver: $800,000/100,000 labor-hours = $8/labor-hour.

Q144:

Consider the following manufacturing-related activities.
I. Conducting the final assembly of wooden furniture.
II. Moving completed production to the finished goods warehouse.
III. Painting newly-manufactured automobiles.
IV. Setting up a machine related to a new production run.
V. Reworking defective goods to bring them up to quality standards.
The activities that would be classified as value-added activities are
* Source: Retired ICMA CMA Exam Questions

 

II, III, IV, and V only.

 

I, III, and V only.

 

I, IV and V only.

 

I and III only.

and III only. Value-added activities include those activities which add value to a product throughout its complete production. Of the above items, conducting the final assembly of wooden furniture and painting newly-manufactured automobiles are all value-added activites.

Q145:

Wilcox Industrial has two support departments, the Information Systems Department and the Personnel Department, and two manufacturing departments, the Machining Department and the Assembly Department. The support departments service each other as well as the two production departments. Company studies have shown that the Personnel Department provides support to a greater number of departments than the Information Systems Department. If Wilcox uses the step-down method of departmental allocation, which one of the following cost allocations would not occur? Some of the costs of the
* Source: Retired ICMA CMA Exam Questions

 

Information Systems Department would be allocated to the Personnel Department.

 

Personnel Department would be allocated to the Assembly Department.

 

Personnel Department would be allocated to the Assembly Department and the Machining Department.

 

Personnel Department would be allocated to the Information Systems Department.

Information Systems Department would be allocated to the Personnel Department. If a step-down allocation method is used, the costs associated with the Information Systems Department would be allocated to the Personnel Department. A step-down method is a method for allocating service department costs that recognizes that some service departments support the activities in other service departments as well as those in operating departments.

Q146:

Which of the following statements on the theory of constraints is true? 

It focuses on eliminating constraints and improving/speeding up cycle or delivery time.

It uses a long-term time horizon.

It assumes operating costs are fixed.

 

I, II, and III

 

II only

 

I only

 

III only

The correct answer is: I only.
The theory of constraints focuses on eliminating constraints and improving/speeding up cycle or delivery time by identifying, analyzing, and removing production bottlenecks (e.g., constraints). 

Q147:

Lucy Sportswear manufactures a specialty line of T-shirts using a job order cost system. During March, the following costs were incurred in completing Job ICU2: direct materials $13,700; direct labor $4,800; administrative $1,400; and selling $5,600. Factory overhead was applied at the rate of $25 per machine hour, and Job ICU2 required 800 machine hours. If Job ICU2 resulted in 7,000 good shirts, the cost of goods sold per unit would be

 

$5.70.

 

$6.30.

 

$6.50.

 

$5.50.

The correct answer is: $5.50.
The unit costs for Job ICU2 would consist of direct material, direct labor and applied overhead per unit.
Cost of goods sold per unit = (direct material costs + direct labor costs + applied overhead) / number of units
Applied overhead for Job ICU2 = (overhead rate)(number of machine hours)
Applied overhead for Job ICU2 = ($25)(800 machine hours) = $20,000
Cost of goods sold per unit = ($13,700 + $4,800 + $20,000) / (7,000 units)
Cost of goods sold per unit = ($38,500) / (7,000 units) = $5.50 per unit 

Q148:

A company is using process costing with weighted average inventory valuation and all costs are added evenly throughout the manufacturing process. For a period with 5,000 units in beginning WIP inventory (30% complete), 10,000 units in ending WIP inventory (60% complete), and 25,000 units started in process, how many equivalent units are there for this period?

 

24,500

 

26,000

 

25,000

 

22,500

The correct answer is: 26,000
Using weighted average, equivalent units are the number of units completed plus the equivalent units in ending WIP inventory. Since there were 5,000 units in beginning WIP plus 25,000 started in process, there are 30,000 units to be accounted for. Of those 30,000 units, 10,000 are in ending WIP inventory; therefore, 20,000 units must have been completed during the period. Adjust the 20,000 units with the equivalent units in ending WIP inventory, 60% of 10,000 = 6,000 units. Therefore, equivalent units for this period is 26,000 units.

Q149:

A firm has $100,000 in direct materials costs, $50,000 in direct labor costs, and $80,000 in overhead. Which of the following is true?

 

Prime costs are $130,000; conversion costs are $150,000.

 

Prime costs are $150,000; conversion costs are $180,000.

 

Prime costs are $150,000; conversion costs are $130,000.

 

Prime costs are $180,000; conversion costs are $150,000.

The correct answer is: Prime costs are $150,000; conversion costs are $130,000.
Prime costs are the combination of direct labor and direct materials costs. Conversion costs are the combination of direct labor and overhead costs.

Q150:

Leese Inc. has the following quality financial data for its most recent fiscal year.

clip_image042

The total amount of prevention costs that should be reported in a Cost of Quality report for the year is

 

$390,000.

 

$755,000.

 

$690,000.

 

$515,000

That’s incorrect.  The correct answer is: $515,000.

Prevention costs include all costs incurred to try to prevent production of goods and services that do not conform to quality standards. The prevention costs presented are design engineering, labor training and product testing.

The sum of design engineering ($300,00) + labor training ($150,000) + product testing ($65,000) = $515,000

Q151:

The series of activities in which customer usefulness is added to the product is the definition of

 

activity-based costing.

 

process value analysis.

 

integrated manufacturing.

 

a value chain.

The correct answer is: a value chain.
The value chain is the sequence of activities, each of which is intended to add value to the final product or service. The sequence is as follows:
(1) Research and Development;
(2) Product Design;
(3) Procurement;
(4) Production;
(5) Marketing;
(6) Distribution; and,
(7) Customer Service. 

Q152:

Noncompetitive firms providing information to other companies about the processes they excel in is an example of

 

reengineering.

 

benchmarking.

 

value chain analysis.

 

process analysis.

The correct answer is: benchmarking.
By definition, benchmarking is used to describe the continuous systematic process of measuring products, services, and practices against the best levels of performance. Benchmarking may capture “best-in-class” information or involve comparisons to external benchmarks of industry leaders or measures from other organizations (outside an industry) that have similar processes.

Q153:

Which of the following statements accurately differentiates activity-based costing (ABC) and activity-based management (ABM)?

 

ABC is predominately forward -looking; ABM is primarily historical.

 

ABC seeks to change costs and their drivers; ABM focuses on understanding costs and their drivers.

 

ABC provides information on process, product, and market performance; ABM finds ways to improve them.

 

ABC provides actionable information; ABM is a source of explanatory data.

The correct answer is: ABC provides information on process, product, and market performance; ABM finds ways to improve them.
Activity-based management (ABM) uses activity-based costing (ABC) data on process, product, and market performance and examines how to redirect and improve the use of resources to increase value for customers and other stakeholders. But where ABC is more of a static analysis of “what is” and is focused on controlling existing costs, ABM is forward-looking and change-oriented. ABM seeks ways to avoid unnecessary costs and put existing resources to maximum use.

Q154:

Which one of the following best describes direct labor?

 

a period cost

 

a product cost

 

both a product cost and a prime cost

 

a prime cost

The correct answer is: both a product cost and a prime cost.
Following generally accepted accounting principles (GAAP), product costs consist of direct material, direct labor, and indirect manufacturing costs (overhead). Prime costs are defined as direct material plus direct labor.

Q155:

What is the cost of goods sold for a manufacturing company that has the following data?

Beginning work-in-process inventory of $5,000

Ending work-in-process inventory of $15,000

Total manufacturing costs of $110,000

$20,000 in beginning finished goods inventory

$30,000 in ending finished goods inventory

 

$50,000

 

$100,000

 

$110,000

 

$90,000

The correct answer is: $90,000
First, the cost of goods manufactured (COGM) must be computed. COGM is equal to the beginning work-in-process inventory plus total manufacturing costs minus the ending work-in-process inventory ($5,000 + $110,000 – $15,000 = $100,000). Then cost of goods sold can be computed. The cost of goods sold is equal to the beginning finished goods inventory plus the cost of goods manufactured minus the ending finished goods inventory ($20,000 + $100,000 – $30,000) = $90,000.

Q156:

Which one of the following is the best reason for using variable costing?
* Source: Retired ICMA CMA Exam Questions

 

All costs are variable in the long term.

 

Variable costing usually results in higher operating income than if a company uses absorption costing.

 

Fixed factory overhead is more closely related to the capacity to produce than to the production of specific units.

 

Variable costing is acceptable for income tax reporting purposes.

Fixed factory overhead is more closely related to the capacity to produce than to the production of specific units. A decision to use a variable costing system can best be decided on due to fixed factory overhead being more closely related to the capacity to produce than to the production of specific units.

Q157:

A company is considering the implementation of an activity-based costing and management program. The company
* Source: Retired ICMA CMA Exam Questions

 

should focus on manufacturing activities and avoid implementation with service-type functions.

 

would probably find a lack of software in the marketplace to assist with the related recordkeeping.

 

would normally gain added insights into causes of cost.

 

would likely use fewer cost pools than it did under more traditional accounting methods.

Would normally gain added insights into causes of cost. Any organization that would implement an activity-based costing and management program would normally gain added insights into the causes of costs as an activity-based costing method provides more detailed information over other costing methods.

Q158:

Lucy Sportswear manufactures a specialty line of T-shirts using a job order cost system. During March, the following costs were incurred in completing Job ICU2: direct materials $13,700; direct labor $4,800; administrative $1,400; and selling $5,600. Factory overhead was applied at the rate of $25 per machine hour, and Job ICU2 required 800 machine hours. If Job ICU2 resulted in 7,000 good shirts, the cost of goods sold per unit would be

 

$5.50.

 

$6.50.

 

$6.30.

 

$5.70.

The correct answer is: $5.50.
The unit costs for Job ICU2 would consist of direct material, direct labor and applied overhead per unit.
Cost of goods sold per unit = (direct material costs + direct labor costs + applied overhead) / number of units
Applied overhead for Job ICU2 = (overhead rate)(number of machine hours)
Applied overhead for Job ICU2 = ($25)(800 machine hours) = $20,000
Cost of goods sold per unit = ($13,700 + $4,800 + $20,000) / (7,000 units)
Cost of goods sold per unit = ($38,500) / (7,000 units) = $5.50 per unit 

Q159:

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Using information from Exhibit B, what are prime costs per unit?

 

$90

 

$100

 

$108

 

$113

The correct answer is: $90
Prime costs per unit are defined as direct materials per unit plus direct labor per unit. In this case, $50 + $40 = $90 prime costs.

Q160:

Which one of the following costing methods does not utilize sequential tracking?

 

Process costing.

 

Job costing.

 

Operation costing.

 

Backflush costing.

The correct answer is: Backflush costing.
Backflush costing system omits recording some or all of the sequential journal entries relating to the four trigger points that traditional costing systems use: purchase of materials, production, completion of finished goods, and sale of finished goods.

Q161:

When evaluating the cost of quality in an organization, which one of the following would be considered an internal failure cost?
* Source: Retired ICMA CMA Exam Questions

 

The warranty repair costs.

 

The cost to inspect units produced.

 

The cost to rework defective units.

 

Product testing.

The cost to rework defective units. Internal failure costs are those costs that could be avoided if internal operations were effective. In this case, the cost to rework defective units is an internal failure cost.

Q162:

What is the primary difference between exploiting and elevating a constraint while implementing the theory of constraints?

 

Exploiting the constraint improves long-term profitability; elevating the constraint boosts short-term profitability.

 

Exploiting the constraint typically does not increase capital investments; elevating the constraint does.

 

Exploiting the constraint improves short-term profitability; elevating the constraint looks at long-term profitability.

 

Exploiting the constraint increases capital investments; elevating the constraint does not.

The correct answer is: Exploiting the constraint typically does not increase capital investments; elevating the constraint does.
In the theory of constraints (TOC), exploiting the constraint changes how the organization uses the constraint without spending more money. Elevating the constraint requires investing more money to increase the constrained resource’s capacity.

Q163:

A distinguishing feature of kaizen as a management philosophy is the concept of

 

cycle-time improvements.

 

design simplicity.

 

continuous improvement.

 

lower costs.

The correct answer is: continuous improvement.
The kaizen process is often described as “a staircase of improvement.” Moving from step to step, an organization follows a continuous process of following an improvement, maintaining an improvement, following an improvement, maintaining an improvement, and so on. While the steps may be small, they move the organization upwards toward sustained improvements.

Q164:

A company is using process costing (with FIFO) and all costs are added evenly throughout the manufacturing process. If there are 5,000 units in beginning WIP inventory (30% complete), 10,000 units in ending WIP inventory (60% complete), and 25,000 units started in process this period, how many equivalent units are there for this period?

 

26,000

 

24,500

 

22,500

 

25,000

The correct answer is: 24,500
Using FIFO, we need to consider the number of units started and completed (25,000 – 10,000) and adjust for equivalent units in both beginning and ending WIP inventory. 70% of beginning WIP inventory are completed in the period (5,000 x 0.7 = 3,500) and 60% of ending WIP inventory are completed in the period (10,000 x 0.6 = 6,000). The sum of 24,500 (15,000 + 3,500 + 6,000) represents the equivalent units for the period.

Q165:

A profitable company with five departments uses plantwide overhead rates for its highly diversified operation. The firm is studying a change to either allocating overhead by using departmental rates or using activity-based costing (ABC). Which one of these two methods will likely result in the use of a greater number of cost allocation bases and more accurate costing results?
* Source: Retired ICMA CMA Exam Questions

 

Greater number of cost allocation bases:  Departmental;  More accurate costing results:  Departmental

 

Greater number of cost allocation bases:  Departmental;  More accurate costing results:  ABC

 

More accurate cost allocation bases:  ABC;  More accurate costing results:  Departmental

 

Greater number of cost allocation bases:  ABC;  More accurate costing results:  ABC

An activity-based costing system provides a greater number of allocation bases and more accurate costing results than other costing systems.

Q166:

Well-implemented just-in-time production and purchasing techniques

 

result in improved quality control and less materials waste.

 

reduce a company’s competitive edge.

 

result in large stockpiles of inventory to keep production running.

 

increase reliance on long-term consumer forecasts.

The correct answer is: result in improved quality control and less materials waste.
Just-in-time (JIT) production improves product quality and minimizes material waste and losses by focusing management and worker attention on value-added activities and the maximization of throughput through work in process. 

Q167:

Which of the following is not a period cost?

 

Drill bits for a drill press

 

Data entry costs

 

Depreciation costs on the VP’s company car

 

Sales commissions

The correct answer is: Drill bits for a drill press
Drill bits for a drill press are product costs because they relate directly to production and provide measurable future benefits. Selling and administrative costs, advertising costs, data processing, and executive costs are all period costs.

Q168:

John Sheng, cost accountant at Starlet Company, is developing departmental factory overhead application rates for the company’s tooling and fabricating departments. The budgeted overhead for each department and the data for one job are shown below.

clip_image043

Using the departmental overhead application rates, total overhead applied to Job #231 in the Tooling and Fabricating Departments will be

 

$225.

 

$671.

 

$537.

 

$303.

The correct answer is: $303.

The total overhead applied to Job #231 in the Tooling and Fabricating Departments can be calculated as follows:

Total overhead applied, Job #231 = (tooling overhead rate per direct labor hour)(number of direct labor hours on Job #231) + (fabricating overhead rate per direct labor hour)(number of direct labor hours on Job #231)

Tooling overhead rate = $8,625 / 460 total direct labor hours = $18.75 per direct labor hour

Fabricating overhead rate = $16,120 / 620 total direct labor hours = $26 per direct labor hour

Total overhead applied, Job #231 = ($18.75)(12 direct labor hours) + ($26)(3 direct labor hours)
Total overhead applied, Job #231 = $225 + $78 = $303 

Q169:

Kimbeth Manufacturing uses a process cost system to manufacture dust density sensors for the mining industry. The following information pertains to operations for the month of May.
clip_image019[2]
The beginning inventory was 60 percent complete for materials and 20 percent complete for conversion costs. The ending inventory was 90 percent complete for materials and 40 percent complete for conversion costs.
Costs pertaining to the month of May are as follows:

Beginning inventory costs are: materials, $54,560; direct labor, $20,320; and factory overhead, $15,240.

Costs incurred during May are: materials used, $468,000; direct labor, $182,880; and factory overhead, $391,160.

Using the FIFO method, the total cost of units in the ending work-in-process inventory at May 31 is

 

$156,960.

 

$154,800.

 

$153,168.

 

$155,328.

The correct answer is: $153,168.
The FIFO approach follows the production flow and assumes that units will be sold in the order in which they were placed in inventory.
In order to compute the total cost of units in the ending work-in-process inventory, it is necessary to calculate the number of equivalent units with respect to materials, as well as the equivalent units with respect to conversion costs.
To calculate the equivalent units of production for both materials and conversion costs using FIFO, calculate the equivalent units for each for:
1) units in beginning inventory,
2) products started into production during the month, and,
3) units in ending inventory.
Equivalent units for materials
First, the 16,000 units in the beginning inventory would be completed, requiring the addition of 6,400 [(16,000)(1 – 0.6)] equivalent units for materials.
Next, of the 100,000 units started during the month, 76,000 would be completed, requiring 76,000 equivalent units for materials. (92,000 units completed during month – 16,000 units from beginning inventory = 76,000 units)
Lastly, of the 100,000 units started, 24,000 would be in the ending inventory, 90% complete with respect to materials, requiring 21,600 [(0.90)(24,000)] equivalent units for materials.
The total equivalent units for materials would be 6,400 + 76,000 + 21,600 = 104,000.
Equivalent units for conversion costs
First, the 16,000 units in the beginning inventory would be completed, requiring the addition of 12,800 [(16,000)(1 – 0.2)] equivalent units for conversion costs.
Next, of the 100,000 units started during the month, 76,000 would be completed, requiring 76,000 equivalent units for conversion costs. (92,000 units completed during month – 16,000 units from beginning inventory = 76,000 units)
Lastly, of the 100,000 units started, 24,000 would be in the ending inventory, 40% complete with respect to conversion costs, requiring 9,600 [(0.40)(24,000)] equivalent units for conversion costs.
The total equivalent units for conversion costs would be 12,800 + 76,000 + 9,600 = 98,400.
Cost per equivalent unit for both materials and conversion costs is calculated by separately taking the materials cost and conversion costs and dividing each by their respective equivalent unit.
Cost per equivalent unit – materials
The cost of materials used is $468,000
Therefore, the equivalent unit cost for materials = ($468,000 material cost) / (104,000 equivalent units for materials) = $4.50 per unit
Cost per equivalent unit – conversion costs
Conversion costs consist of direct labor and factory overhead.
Conversion costs = $182,880 (direct labor) + $391,160 (factory overhead)
Conversion costs = $574,040
Therefore, the equivalent unit cost for conversion = ($574,040 conversion costs) / (98,400 equivalent units for conversion costs) = $5.83 per unit
Cost of ending inventory
Ending inventory, materials = 0.9(24,000 units) = 21,600 equivalent units
Ending inventory, conversion costs = 0.4(24,000 units) = 9,600 equivalent units
Cost of ending inventory = (ending inventory, materials)(materials cost per equivalent unit) + (ending inventory, conversion costs)(conversion cost per equivalent unit)
Cost of ending inventory = (21,600 equivalent units)($4.50 per equivalent unit) + (9,600 equivalent units)($5.83 per equivalent unit)
Cost of ending inventory = $153,168 

Q170:

Jansen Inc. pays bonuses to its managers based on operating income. The company uses absorption costing, and overhead is applied on the basis of direct labor hours. In order to increase bonuses, Jansen’s managers may do all of the following except

 

defer expenses such as maintenance to a future period.

 

decrease production of those items requiring the most direct labor.

 

produce those products requiring the most direct labor.

 

increase production schedules independent of customer demands.

Feedback

The correct answer is: decrease production of those items requiring the most direct labor.
Absorption costing considers fixed overhead to be a product cost. Therefore, absorption costing operating income is a function of production as well as sales. As production increases, operating income increases; as production decreases, operating income decreases. Since overhead is applied based upon direct labor hours, decreasing production of those items requiring the most direct labor would lower operating income and, consequently, bonuses. 

Q171:

The concept of value added is best described as

 

activities that can be eliminated with no deterioration in product service, functionality, performance, or quality in the eyes of the end user.

 

a series of transactions between employees or between internal customers and internal suppliers to deliver an end product.

 

activities that convert resources into products and services consistent with external customer requirements.

 

a series of transactions between employees to deliver an end product to external customers and external suppliers.

The correct answer is: activities that convert resources into products and services consistent with external customer requirements.
By definition, value added refers to activities that convert resources into products and services consistent with external customer requirements. The goal of the customer-supplier value chain is to integrate value into every aspect of a work process.

Q172:

Squeal Tire Company is budgeting their production for next year. They are also planning to expand their production line to produce additional tires. The sales department has informed them that the market demands Squeal produce 30% more of its gross tire-producing capacity in additional tires. Considering no other factors, production department management knows that they are at 68% of gross capacity on their production line and adding this 30% would put them at 98%, therefore production management decides to budget for the additional 30%.

In this case, did Squeal Tire Company’s production management use Theoretical or Practical Capacity in their analysis of their production capacity? And, what is the likely result of using Theoretical or Practical capacity in their analysis?

 

Theoretical capacity. Utilizing full capacity is always good for the organization.

 

Practical capacity. Utilizing full capacity is always good for the organization.

 

Practical capacity. It provides the best possible analysis, allowing for factors outside of the production department’s control.

 

Theoretical capacity. It does not provide for the best possible analysis of capacity, and will result in lower overhead allocation to individual units of product, distorting allocated costs.

The correct answer is: Theoretical capacity. It does not provide for the best possible analysis of capacity, and will result in lower overhead allocation to individual units of product, distorting allocated costs.

Using theoretical capacity when calculating overhead allocations would mean that a large denominator activity level would be used, resulting in a lower overhead allocation to individual units of product, distorting allocated costs and provide management with costs too low. Practical capacity represents the highest level of capacity that can be achieved, while allowing for unavoidable losses of productive time. In this case, Squeal’s management incorrectly used theoretical capacity as they used sales forecasts and did not consider the limiting factors on practical capacity.

Q173:

A visual signal indicating the need for a specified quantity of materials or parts to move from one operation or department to another in a just-in-time (JIT) manufacturing sequence is a

 

drum.

 

buffer.

 

kanban.

 

flexible manufacturing marker.

The correct answer is: kanban.
In JIT environments, workers use a kanban to signal the need for a specified quantity of materials or parts to move from one operation or department to another in sequence. Workers respond only after receiving a kanban. When production is complete, the kanban is attached to the finished order and sent downstream to the next department.

Q174:

Jones, Inc. processes cedar logs, producing lumber of various sizes as well as a by-product of cedar mulch, sold to gardening centers. At the end of the period, Jones’ accountant is attempting to allocate the joint costs of $900,000, after which time each product may or may not require further processing. Data collected follow:

clip_image044

If Jones allocates joint product costs using the sales value at split-off, how much of the joint costs is allocated to the mulch?

 

$60,000

 

$180,000

 

$16,560

 

$34,650

The correct answer is: $16,560
Market values at split-off are $800,000 + $2,400,000 + $60,000 = $3,260,000. The percentage of total costs allocated to the mulch is $60,000/$3,260,000 = 1.84%. 1.84% of $900,000 = $16,560.

Q175:

Render Inc. has four support departments (maintenance, power, human resources, and legal) and three operating departments. The support departments provide services to the operating departments as well as to the other support departments. The method of allocating the costs of the support departments that best recognizes the mutual services rendered by support departments to other support departments is the
* Source: Retired ICMA CMA Exam Questions

 

step-down allocation method.

 

dual-rate allocation method.

 

reciprocal allocation method.

 

direct allocation method.

Reciprocal allocation method. The method of allocating the costs of the support departments that best recognizes the mutual services rendered by support department to other support departments I the reciprocal allocation method.

Q176:

A company uses job-order costing and begins the period with no finished goods inventory, but with a beginning WIP of the following jobs:

Job #15 = $42,000
Job #16 = $33,000
Job #17 = $12,000
Total WIP = $87,000

During the period, a new job is started (Job #18) and the following costs are incurred:

Direct materials: $100,000 (20% each for Jobs #15, #16, #17 and 40% for Job #18)

Direct labor: 5,000 hours at $15 per hour (hours for Jobs #15, #16, #17, and #18 are 1,500, 1,500, 1,200, and 800, respectively)

Factory overhead (using a predetermined rate where total overhead for the year is estimated to be $200,000 and total direct labor (cost driver) is 50,000 hours).

Jobs #15 and #16 are completed and sold during the period. What is cost of goods sold for the period?

 

$97,000

 

$175,000

 

$172,000

 

$160,000

The correct answer is: $172,000
The cost of the jobs completed can be broken down as follows (note the predetermined overhead rate is $200,000/50,000 or $4/direct labor hour):

clip_image045

Q177:

In the traditional cost of quality analysis, which of the following includes the cost of designing a quality system?

 

Appraisal costs

 

External failure costs

 

Prevention costs

 

Internal failure costs

The correct answer is: Prevention costs
Prevention costs are the costs of quality system design, implementation, and maintenance, including audits of the quality system itself.

Q178:

Starr Company uses material requirements planning (MRP) and manufactures a product with the following product structure tree.
clip_image046
Starr has just received an order for 100 units of X, the finished product. The company has 20 units of X, 100 units of B, and 50 units of E in inventory. How many units of E must Starr purchase in order to fill the order?

 

1,000.

 

800.

 

830.

 

550.

The correct answer is: 550.
Product X needed to fill the order: (100 – 20) = 80.
Product B needed to fill the order: 80 x 5 = 400.
Product B to be manufactured: 400 – 100 = 300.
Product E needed to fill the order: 300 x 2 = 600.
Product E to be purchased: 600 – 50 = 550. 

Q179:

Which of the following would a merchandising company use in place of cost of goods manufactured on a statement of cost of goods sold?

 

Prime costs

 

Net purchases

 

Materials inventory

 

Conversion costs

The correct answer is: Net purchases
The income statement for a merchandising company looks similar to that of a manufacturing company, except that it uses net purchases instead of cost of goods manufactured.

Q180:

Bluebird Enterprises has two production departments (P1 and P2) and two service departments (S1 and S2). A breakdown of current period costs and service usage for each department is as follows:

clip_image021[2]

If Bluebird uses the reciprocal method for allocating service costs, what are the total service costs allocated to the two production departments (P1 and P2) (rounding all numbers to the nearest dollar)?

 

$24,917 to P1 and $19,083 to P2

 

$25,000 to P1 and $19,000 to P2

 

$24,400 to P1 and $20,600 to P2

 

$24,667 to P1 and $19,333 to P2

Feedback

The correct answer is: $24,917 to P1 and $19,083 to P2
To find the reciprocal method of allocation, establish 2 cost equations for the service departments: S1 = $24,000 + .2S2 and S2 = $20,000 + .2S1. Solving for the unknowns in these two equations, S1 = $29,167 and S2 = $25,833. An example of how to solve for the unknowns and a table showing how to allocate these numbers follows:

clip_image047

Note that $24,916 + $19,083 = $43,999 rounded to $44,000 (to account for rounding differences) equals the amount necessary to allocate: $20,000 + $24,000.

Q181:

When demand for a product or products exceeds production capacity, which one of the following is the first step that managers should take?
* Source: Retired ICMA CMA Exam Questions

 

Focus their efforts on constraint identification.

 

Change the throughput of operations.

 

Spend money to eliminate the bottleneck.

 

Apply activity-based management to solve the problem.

Focus their efforts on constraint identification. When faced with a product or products exceeding production capacity, managers must consider how to make the production process more efficient to meet the production capacity. Therefore, managers must first focus their efforts on identifying any constraints within a system.

Q182:

Kimbeth Manufacturing uses a process cost system to manufacture dust density sensors for the mining industry. The following information pertains to operations for the month of May.
clip_image019[3]
The beginning inventory was 60 percent complete for materials and 20 percent complete for conversion costs. The ending inventory was 90 percent complete for materials and 40 percent complete for conversion costs.
Costs pertaining to the month of May are as follows:

Beginning inventory costs are: materials, $54,560; direct labor, $20,320; and factory overhead, $15,240.

Costs incurred during May are: materials used, $468,000; direct labor, $182,880; and factory overhead, $391,160.

Using the weighted-average method, the equivalent unit conversion cost for May is

 

$6.00.

 

$5.83.

 

$6.41.

 

$5.65.

The correct answer is: $6.00.
The weighted-average method assumes that there is no beginning inventory. In other words, all units are started in the current period and all costs are incurred in the current period.
Therefore, the assumption is that 116,000 units were added in the period, of which 92,000 were completed and 24,000 are in the ending inventory. The 24,000 units in ending inventory are 40% complete with respect to conversion costs.
The equivalent units for conversion costs = (units completed during the period) + (equivalent units in ending inventory)
Equivalent units for conversion costs = 92,000 + 0.4(24,000) = 101,600
Total conversion costs for the period = $182,880 + $20,320 + $391,160 + $15,240
Total conversion costs for the period = $609,600
Equivalent unit cost for conversion = (total conversion costs for the period) / (total equivalent units for conversion costs)
Equivalent unit cost for conversion = ($609,600) / (101,600) = $6.00

Q183:

The estimated unit costs for a company using absorption (full) costing and planning to produce and sell at a level of 12,000 units per month are as follows.
clip_image048
Estimated total variable costs per unit are

 

$32.

 

$67.

 

$70.

 

$52.

The correct answer is: $70.
Total variable cost per unit = Direct Materials costs + Direct Labor Costs + Variable Manufacturing Overhead Costs + Variable Selling Costs
Total variable cost per unit = $32 + $20 + $15 + $3 = $70 

Q184:

Whitehall Corporation produces chemicals used in the cleaning industry. During the previous month Whitehall incurred $300,000 of joint costs in producing 60,000 units of AM-12 and 40,000 units of BM-36. Whitehall uses the units-of-production method to allocate joint costs. Currently, AM-12 is sold at split-off for $3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the production of AM-12 after further processing. The further processing will cost Whitehall $90,000.
Concerning AM-12, which one of the following alternatives is most advantageous?

 

Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $3.00, which covers the joint costs.

 

Whitehall should continue to sell at split-off unless Flank offers at least $4.50 per unit after further processing, which covers Whitehall’s total costs.

 

Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $5.00.

 

Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $1.50, which covers the incremental costs.

The correct answer is: Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $5.00.
Whitehall should process the AM-12 after split-off as long as the increase in market value (selling price) -at the split-off point is greater than the additional processing costs of $1.50 per unit.
AM-12 can be sold at the split-off point for $3.50 per unit. The increase in selling price after further processing has to be greater than the $1.50 per unit processing costs. Therefore, the final selling price has to exceed $5.00 ($3.50 + $1.50).
The joint costs of $300,000 are irrelevant to the decision, since they are sunk costs. 

Q185:

A review of Plunkett Corporation’s accounting records for last year disclosed the following selected information.

clip_image049

In addition, the company suffered a $27,700 uninsured factory fire loss during the year. What were Plunkett’s product costs and period costs for last year?

 

Product cost: $656,100, Period Cost: $493,000

 

Product cost: $683,800, Period Cost: $465,300

 

Product cost: $497,500, Period Cost: $651,600

 

Product cost: $235,100, Period Cost: $914,000

The correct answer is: Product cost: $656,100, Period Cost: $493,000.
Product costs are calculated as follows:
Product costs = (cost of direct materials used) + (direct labor cost) + (variable manufacturing overhead cost) + (fixed manufacturing overhead cost)
Product costs = $56,000 + $179,100 + $154,000 + $267,000 = $656,100
Period costs, in this problem, are calculated as follows:
Period costs = (variable and fixed selling and administrative costs) + (uninsured factory fire loss)
Period costs = $108,400 + $121,000 + $235,900 + $27,700 = $493,000 

Q186:

Parker Company pays each member of its sales staff a salary as well as a commission on each unit sold. For the coming year, Parker plans to increase all salaries by 5% and to keep unchanged the commission paid on each unit sold. Because of increased demand, Parker expects the volume of sales to increase by 10%. How will the total salaries and commissions change for the coming year?

 

Increase by more than 5% but less than 10%.

 

Increase by more than 10%.

 

Increase by 10%.

 

Increase by 5% or less.

The correct answer is: Increase by more than 5% but less than 10%.
The cost of salaries will increase by exactly 5%. The cost of commissions paid (a variable cost) will increase by the level of activity, which is 10%. Because total compensation is a blend of these two costs, total compensation will increase by some amount between 5% and 10%.

Q187:

Which contemporary productivity approach would a firm most likely use to prevent or overcome mismatches between supply and demand?

 

Concurrent engineering

 

Computer-aided design

 

Capacity planning

 

Flexible manufacturing

The correct answer is: Capacity planning
Capacity planning determines the maximum amount that can be produced in a given period and attempts to match the capacity as closely as possible to projected demand.

Q188:

A company makes two joint products from recycled plastic: artificial joists for construction and plastic designer chairs. The total joint costs are $140,000, and the process produces 3,000 joists and 2,000 chairs. Joists sell for $20 and chairs for $50. The average cost per unit is determined to be $28, resulting in a gross margin of -$24,000 for joists and $44,000 for chairs. Which of the following joint cost allocation methods was used for these calculations?

 

Gross profit method

 

Net realizable value method

 

Sales value at split-off method

 

Physical measure method

The correct answer is: Physical measure method
The example calculates the price per unit by dividing the total cost by the total number of units, a physical measure. The resulting skewed gross margins that make the joists seem very unprofitable are the primary problem with using the physical measure method.

Q189:

The Chocolate Baker specializes in chocolate baked goods. The firm has long assessed the profitability of a product line by comparing revenues to the cost of goods sold. However, Barry White, the firm’s new accountant, wants to use an activity-based costing system that takes into consideration the cost of the delivery person. Listed below are activity and cost information relating to two of Chocolate Baker’s major products.

clip_image050

Using activity-based costing, which one of the following statements is correct?

 

The muffins are $1,925 more profitable.

 

The muffins have a higher profitability as a percentage of sales and, therefore, are more advantageous.

 

The muffins are $2,000 more profitable.

 

The cheesecakes are $75 more profitable.

The correct answer is: The muffins are $1,925 more profitable.

The gross profit for muffins after assigning delivery costs would be calculated as follows:

Gross profit, muffins = revenue – cost of goods sold – assigned delivery costs
Gross profit, muffins = $53,000 – $26,000 – assigned delivery costs
Gross profit, muffins = $27,000 – assigned delivery costs
The assigned delivery costs are calculated as follows:
Assigned delivery costs, muffins = (number of deliveries)(cost per delivery)
Assigned delivery costs, muffins = (150 deliveries)(10 minutes/60 minutes)($20 per hour) = $500
Gross profit for muffins = $27,000 – $500 = $26,500
The gross profit for cheesecake after assigning delivery costs would be calculated as follows:
Gross profit, cheesecake = revenue – cost of goods sold – assigned delivery costs
Gross profit, cheesecake = $46,000 – $21,000 – assigned delivery costs
Gross profit, cheesecake = $25,000 – assigned delivery costs
The assigned delivery costs are calculated as follows:
Assigned delivery costs, cheesecake = (number of deliveries)(cost per delivery)
Assigned delivery costs, cheesecake = (85 deliveries)(15 minutes/60 minutes)($20 per hour) = $425
Gross profit for cheesecake = $25,000 – $425 = $24,575
The gross profit for cheesecake is $1,925 less than the gross profit for muffins.
$26,500 – $24,575 = $1,925

Q190:

When allocating the cost of janitorial services to production departments, which of the following items would most likely be used as an activity base?

 

Units produced

 

Machine-hours

 

Direct labor-hours

 

Square footage occupied

The correct answer is: Square footage occupied
Janitorial services are generally charged based on area that is cleaned. Of the choices, square footage occupied has the closest relationship to services provided.

Q191:

When using normal costing, $1,000,000 of overhead was allocated to the production process but $1,020,000 was actually incurred. Which of the following is true of this situation?

 

If immaterial, the overapplied overhead decreases the cost of goods sold.

 

If material, the underapplied overhead increases the cost of goods sold.

 

If material, the overapplied overhead decreases the cost of goods sold.

 

If immaterial, the underapplied overhead increases the cost of goods sold.

The correct answer is: If immaterial, the underapplied overhead increases the cost of goods sold.
Since the amount of overhead incurred was greater than what was budgeted, the difference is the amount that was underapplied. Only immaterial amounts are allowed to directly adjust the cost of goods sold.

Q192:

Presario Inc. recently installed just-in-time production and purchasing systems. If Presario’s experience is similar to that of other companies, Presario will likely
* Source: Retired ICMA CMA Exam Questions

 

increase the dollar investment in finished goods inventory.

 

be less reliant on sales orders as a “trigger” mechanism for production runs.

 

reduce the number of suppliers with which it does business.

 

increase the size of individual orders of raw materials.

Reduce the number of suppliers with which it does business. In just-in-time production and purchasing systems, the number of suppliers in which it does business will be reduced to more effectively manage the just-in-time production and purchasing systems.

Q193:

The variance in an absorption costing system that measures the departure from the denominator level of activity that was used to set the fixed overhead rate is the

 

production volume variance.

 

efficiency variance.

 

flexible budget variance.

 

sales volume variance.

The correct answer is: production volume variance.
The production volume variance is calculated as follows:
Production volume variance (or fixed overhead volume variance) = (fixed overhead rate)(the denominator level of activity – the standard level of activity for the output achieved)
The denominator level of activity is sometimes referred to as the denominator or normal base. 

Q194:

M&P Tool has three service departments that support the production area. Outlined below is the estimated overhead by department for the upcoming year.
clip_image025[1]
The Repair Department supports the greatest number of departments, followed by the Tool Department. Overhead cost is allocated to departments based upon the number of employees.
Using the step-down method of allocation, the allocation from the Repair Department to the Tool Department would be

 

$0.

 

$11,667.

 

$7,000.

 

$875.

The correct answer is: $875.
The step-down (sequential) method of service department cost allocation recognizes inter-service department services in one direction only. Reciprocal services are ignored.
The Repair Department Costs would be allocated to all of the other departments. The resulting Tool Department costs would be allocated to the Repair Department and the production departments. The resulting Repair Department costs would be allocated to the production departments, only.
Repair Department costs are allocated to other departments based on the number of employees in the other departments. The number of employees in the departments other than the Repair Department totals 40. The Tooling Department has one employee out of the total of forty that are being used as the basis to allocate the Repair Department costs, therefore the Tooling Department receives 1/40th of the Repair Department’s costs.
The allocation of Repair Department costs to the Tool Department based upon the number of employees would be (1/40)($35,000) = $875 

Q195:

Which of the following costing systems would work best for a firm that spent a considerable percentage of its overall costs on research and development?

 

Process costing

 

Activity-based costing

 

Job order costing

 

Life-cycle costing

The correct answer is: Life-cycle costing
Life-cycle costing considers the entire life cycle of a product or service in its scope, so operations with a high percentage of R&D costs can benefit from an approach that takes design and R&D costs into account when evaluating the overall profitability of a product.

Q196:

In measuring the cost of quality, which one of the following is considered an appraisal cost?
* Source: Retired ICMA CMA Exam Questions

 

Rework cost.

 

Equipment maintenance cost.

 

Warranty claims cost.

 

Product testing cost.

Product testing cost. An appraisal cost is the cost of inspecting materials and products for quality purposes. In this case, the cost of product testing is considered an appraisal cost.

Q197:

All of the following are likely to be used as a cost allocation base in activity-based costing except the
* Source: Retired ICMA CMA Exam Questions

 

units of materials used to manufacture the product.

 

number of vendors supplying the materials used to manufacture the product.

 

cost of materials used to manufacture the product.

 

number of different materials used to manufacture the product

Cost of materials used to manufacture the product. In an activity-based costing system, cost allocation bases typically include a number of different materials used to manufacture the product, the units of materials used to manufacture the product, and a number of vendors supplying the materials used to manufacture the product.

Q198:

Consider the following situation for Donaldson Company for the prior year.

The company produced 1,000 units and sold 900 units, both as budgeted.

There were no beginning or ending work-in-process inventories and no beginning finished goods inventory.

Budgeted and actual fixed costs were equal, all variable manufacturing costs are affected by volume of production only, and all variable selling costs are affected by sales volume only.

Budgeted per unit revenues and costs were as follows.

clip_image051

Assuming that Donaldson uses variable costing, the operating income for the prior year was

 

$15,300.

 

$14,200.

 

$13,600.

 

$14,800.

The correct answer is: $14,800.

The variable cost operating income is calculated as follows:

Variable cost operating income = (sales) – (all variable costs) – (all fixed costs)

Sales = (900 units)($100 each) = $90,000

Total variable costs = (number of units)(direct materials cost per unit + direct labor cost per unit + variable manufacturing overhead cost per unit + variable selling and administrative cost per unit)
Total variable costs = (900 units)($30 + $20 + $10 + $12) = $64,800

Total fixed costs = (fixed manufacturing costs) + (fixed selling and administrative costs)

Fixed manufacturing costs = (fixed manufacturing overhead cost per unit)(budgeted production level)
Fixed manufacturing costs = ($5)(1,000 units) = $5,000

Fixed selling costs are given at $3,600, and fixed administrative costs are given at $1,800.

Variable cost operating income = $90,000 – $64,800 – $5,000 – $3,600 – $1,800 = $14,800. 

Q199:

The following information was gathered for the current period of manufacturing production for a firm:

clip_image037[1]

There were 100 units in beginning WIP, which were 20% complete in direct materials (DM) and 30% complete in conversion costs (CC). During the period 2,000 units were started in production and 1,900 were completed. Ending WIP inventory was 70% complete in DM and 60% complete in CC. If the firm uses the FIFO inventory method, what are equivalent units for the period?

 

DM: 2,040 units; CC: 2,020 units

 

DM: 2,000 units; CC: 1,980 units

 

DM: 1,900 units; CC: 1,900 units

 

DM: 2,020 units; CC: 1,990 units

The correct answer is: DM: 2,020 units; CC: 1,990 units
Compute the number of units in ending inventory = 100 + 2,000 – 1,900 = 200 units. Compute units to account for = 100 units in beginning WIP + 2,000 units started = 2,100 units. Units started and finished = units to account for – ending WIP – beginning WIP completed first = 2,100 – 200 – 100 = 1,800 units. The EU calculation is as follows:

clip_image052

Q200:

San Jose Inc. uses a weighted-average process costing system. All materials are introduced at the start of manufacturing, and conversion cost is incurred evenly throughout production. The company started 70,000 units during May and had the following work-in-process inventories at the beginning and end of the month.

clip_image053

Assuming no spoilage or defective units, the total equivalent units used to assign costs for May are

 

Materials = 100,000, Conversion Cost = 70,000.

 

Materials = 82,000, Conversion Cost = 82,000.

 

Materials = 100,000, Conversion Cost = 82,000.

 

Materials = 70,000, Conversion Cost = 70,000.

The correct answer is: Materials = 100,000, Conversion Cost = 82,000.

Units completed = Beginning Inventory + Units Added – Ending Inventory
Units completed = 30,000 units + 70,000 units – 24,000 units
Units completed = 76,000

The weighted-average method assumes that all units and costs are current (i.e., there is no beginning inventory). Therefore, the equivalent units of material required would be 100,000 (the 76,000 completed + 24,000 in the ending inventory).

The equivalent units of conversion cost = (76,000 completed) + (24,000 units 25% complete)
Equivalent units of conversion cost = 76,000 + 6,000 = 82,000 

Q201:

Which one of the following categories of cost is most likely not considered a component of fixed factory overhead?

 

property taxes

 

rent

 

supervisory salaries

 

supplies

The correct answer is: supplies.
Supply costs vary automatically in direct proportion to changes in activity level. Supply costs are variable. 

Q202:

Which of the following is true of job order costing?

 

Standard costing can be used with job order costing but not actual or normal costing.

 

Job order costing cannot be used with actual, normal, or standard costing.

 

Actual or normal costing can be used with job order costing but not standard costing.

 

Actual, normal, or standard costing can be used with job order costing.

The correct answer is: Actual, normal, or standard costing can be used with job order costing.
Job order costing allows use of actual, normal, or standard costing.

Q203:

Listed below are selected line items from the Cost of Quality Report for Watson Products for last month.
clip_image054
What is Watson’s total prevention and appraisal cost for last month?

 

$1,154.

 

$786.

 

$2,665.

 

$1,940.

The correct answer is: $1,940.
Prevention costs are incurred to prevent problems before they happen. Examples of prevention costs are systems design, quality planning, training, maintenance, and supplier development costs. Appraisal (detection) costs are incurred to detect problems in time to make needed corrections. Appraisal costs include the costs of incoming, in-process, and final inspections, testing, and quality audits.
Watson’s prevention costs consist of equipment maintenance costs of $1,154. Their appraisal costs are $786, which consists of product testing costs. The total of prevention and appraisal costs for Watson is $1,940. 

Q204:

A firm has three processes in its manufacturing plant: processes 1, 2, and 3. Assume you are computing equivalent units for process 2 and find the following data:

Beginning WIP: 5,000 units

Units started during period: 93,000 units

Ending WIP: 8,000 units

All direct materials (DM) and conversion costs (CC) are added evenly throughout production. Beginning WIP inventory is 80% complete in DM and 60% complete in CC; ending WIP inventory is 40% complete in DM and 10% complete in CC. The firm uses the FIFO method for its inventory. What are the equivalent units for this period (broken down into categories of transferred-in, direct materials and conversion costs, respectively)?

 

93,000; 92,900; 88,800

 

93,000; 89,200; 87,800

 

93,000; 93,200; 90,800

 

85,000; 92,900; 88,800

The correct answer is: 93,000; 89,200; 87,800
First, find the number of units started and completed during the period as 93,000 – 8,000 = 85,000. Then compute the equivalent units as follows:

clip_image055

Q205:

Which of the following best describes business process re-engineering?

 

It puts emphasis on the chain of activities that take input and create output of value to the customer.

 

It reinvents, rather than improving or modifying. It disregards existing processes and invents new ways of doing work.

 

It forces people to look at tacit rules and assumptions underlying the way they currently do business.

 

It is used when “heavy blasting” is required to alleviate a dire situation.

The correct answer is: It reinvents, rather than improving or modifying. It disregards existing processes and invents new ways of doing work.
Business process reengineering is the radical redesign of processes to achieve significant productivity or cost reduction improvements. It is revolutionary, as opposed to evolutionary. 

Q206:

The management of ROX Company wishes to encourage all other departments to use the legal department, as circumstances warrant. To accomplish this, legal department costs should be
* Source: Retired ICMA CMA Exam Questions

 

absorbed as a corporate expense.

 

allocated to users on the basis of standard cost for the type of service provided.

 

allocated to users on the basis of the actual cost of hours used.

 

allocated to users on the basis of the budgeted cost of actual hours used.

Absorbed as a corporate expense. Since the management of ROX Company wishes to encourage all other departments to use the legal department, as circumstances warrant, and the legal department assists the organization as a whole, these legal department costs should be absorbed as a corporate expense and not be allocated to each department based on use.

Q207:

A manufacturing company has begun work on a batch of units at the beginning of the current period with no work in process at that point. The manufacturing process adds direct materials at the beginning of the process and adds direct labor and factory overhead evenly throughout the process. If the units are considered to be 60% complete in conversion costs at the end of the period, in which of the following accounts are the costs held?

 

Direct materials costs are in materials inventory and all conversion costs are in work-in-process inventory.

 

60% of conversion costs are in factory overhead and direct materials costs are in finished goods inventory.

 

All costs are in work-in-process inventory.

 

60% of conversion costs are in work-in-process inventory and direct materials costs are in finished goods inventory.

The correct answer is: All costs are in work-in-process inventory.
The work-in-process inventory account contains the cost of all materials and conversion costs that have begun the production process but are not finished by the end of the reporting period. Even though direct materials are added at the beginning of the process, the units themselves are not complete; the material costs remain with the units.

Q208:

Wagner Corporation applies factory overhead based upon machine hours. At the beginning of the year, Wagner budgeted factory overhead at $250,000 and estimated that 100,000 machine hours would be used to make 50,000 units of product. During the year, the company produced 48,000 units, using 97,000 machine hours. Actual overhead for the year was $252,000. Under a standard cost system, the amount of factory overhead applied during the year was

 

$252,000.

 

$250,000.

 

$242,500.

 

$240,000.

The correct answer is: $240,000.
To calculate the predetermined overhead rate, take the budgeted overhead cost and divide it by the budgeted machine hours as follows: $250,000 overhead/100,000 machine hours = $2.50 per machine hour.
Next, calculate the number of machine hours needed to produce 50,000 units as follows: 100,000 hours/50,000 units = 2 hours per unit
$2.50 x 2 hours x 48,000 units = $240,000 

Q209:

The most important criterion in accurate cost allocations is
* Source: Retired ICMA CMA Exam Questions

 

using homogeneous cost pools.

 

using a simple allocation method.

 

allocating fixed and variable costs by using the same allocation base.

 

using multiple drivers for each cost pool.

Using homogeneous cost pools. The most important criterion in accurate cost allocations is through the use of homogeneous cost pools. Homogeneous cost pools are a group of overhead costs associated with activities that can utilize the same cost driver.

Q210:

Assuming that a management accountant wants to maximize reported net income, which of the following costing methods would show the greatest net income when the company increases its ending inventory?

 

Absorption costing

 

Variable costing

 

Standard costing

 

Normal costing

The correct answer is: Absorption costing
When more units are produced than sold, absorption costing will have higher net income than variable costing, because absorption costing leaves a higher proportion of costs in inventory. Lower costs for the items actually sold equate to a higher net income

Q211:

Kimbeth Manufacturing uses a process cost system to manufacture dust density sensors for the mining industry. The following information pertains to operations for the month of May.
clip_image019[4]
The beginning inventory was 60 percent complete for materials and 20 percent complete for conversion costs. The ending inventory was 90 percent complete for materials and 40 percent complete for conversion costs.
Costs pertaining to the month of May are as follows:

Beginning inventory costs are: materials, $54,560; direct labor, $20,320; and factory overhead, $15,240.

Costs incurred during May are: materials used, $468,000; direct labor, $182,880; and factory overhead, $391,160.

Using the FIFO method, the equivalent units of production for conversion costs are

 

98,400 units.

 

85,600 units.

 

88,800 units.

 

101,600 units.

The correct answer is: 98,400 units.
The FIFO approach follows the production flow and assumes that units will be sold in the order in which they were placed in inventory.
To calculate the equivalent units of production for conversion costs using FIFO, calculate the equivalent units for:
1) units in beginning inventory,
2) products started into production during the month, and,
3) units in ending inventory.
First, the 16,000 units in the beginning inventory would be completed, requiring the addition of 12,800 [(16,000)(1 – 0.2)] equivalent units for conversion costs.
Next, of the 100,000 units started during the month, 76,000 would be completed, requiring 76,000 equivalent units for conversion costs. (92,000 units completed during month – 16,000 units from beginning inventory = 76,000 units)
Lastly, of the 100,000 units started, 24,000 would be in the ending inventory, 40% complete with respect to conversion costs, requiring 9,600 [(0.40)(24,000)] equivalent units for conversion costs.
Therefore, the total equivalent units for conversion costs would be 12,800 + 76,000 + 9,600 = 98,400

Q212:

Which one of the following alternatives correctly classifies the business application to the appropriate costing system?

 

job costing system: print shop; processing costing system: beverage drink manufacturer.

 

job costing system: microcomputer manufacturer; processing costing system: construction company.

 

job costing system: wallpaper manufacturer; processing costing system: oil refinery.

 

job costing system: aircraft assembly; processing costing system: public accounting firm

The correct answer is: job costing system: print shop; processing costing system: beverage drink manufacturer.
Job costing systems are appropriate for intermittent (batch-, unit- or lot-based) production. Process costing is appropriate for continuous processing. Print shops involve lot-oriented, intermittent production. A beverage drink producer would normally use continuous processing. 

Q213:

Three of the basic measurements used by the Theory of Constraints (TOC) are

 

fixed manufacturing overhead per unit, fixed general overhead per unit, and unit gross margin (or gross profit).

 

throughput (or throughput contribution), inventory (or investments), and operational expense.

 

gross margin (or gross profit), return on assets, and total sales.

 

number of constraints (or subordinates), number of non-constraints, and operating leverage.

The correct answer is: throughput (or throughput contribution), inventory (or investments), and operational expense.
The Theory of Constraints uses three measurements: Throughput contribution, investments, and operating costs.

Q214:

Which of the following is not an advantage of using activity-based cost drivers?

 

Implementation is relatively inexpensive compared to other methods.

 

Detailed breakdown of activities helps firms remove non-value-added activities.

 

Costs are more reliably determined.

 

Cost deviations from expectations are highlighted.

The correct answer is: Implementation is relatively inexpensive compared to other methods.
Activity-based cost drivers require a detailed description of each type of activity, so initial implementation can be costly and time-consuming.

Q215:

A primary advantage of a materials requirement planning (MRP) system is

 

a highly skilled and flexible work force and reliable suppliers.

 

increased productivity as workstations receive parts according to schedule.

 

low investments in space for production and inventories.

 

its ability to relate demand for materials directly to a master schedule.

The correct answer is: its ability to relate demand for materials directly to a master schedule.
In materials requirement planning systems, a master production schedule indicates the quantities and timing of each part to be produced. This can result in a number of advantages ranging from reduced costs to better planning.

Q216:

Valyn Corporation employs an absorption costing system for internal reporting purposes; however, the company is considering using variable costing. Data regarding Valyn’s planned and actual operations for the calendar year are presented below.
clip_image023[4]
The planned per unit cost figures shown in the above schedule were based on Valyn producing and selling 140,000 units. Valyn uses a predetermined manufacturing overhead rate for applying manufacturing overhead to its product; thus, a combined manufacturing overhead rate of $9.00 per unit was employed for absorption costing purposes. Any over- or underapplied manufacturing overhead is closed to the Cost of Goods Sold account at the end of the reporting year.
The beginning finished goods inventory for absorption costing purposes was valued at the previous year’s planned unit manufacturing cost which was the same as the current year’s planned unit manufacturing cost. There are no work-in-process inventories at either the beginning or the end of the year. The planned and actual unit selling price was $70.00 per unit.
The total variable cost expensed by Valyn Corporation under the variable costing basis was

 

$3,125,000.

 

$3,250,000.

 

$4,550,000.

 

$4,375,000.

The correct answer is: $4,375,000.
Total variable cost expensed by Valyn is equal to the variable cost per unit multiplied by the number of units sold. Note that this includes all variable costs, not just variable costs related to production.
Variable cost per unit is calculated as follows:
Variable cost per unit = direct materials cost per unit + direct labor cost per unit + variable manufacturing overhead cost per unit + variable selling cost per unit + variable administrative expenses
Variable cost per unit = $12 + $9 + $4 + $8 + $2 = $35 per unit
Sales volume is 125,000 units.
Total variable cost expensed = (variable cost per unit)(number of units sold)
Total variable cost expensed = ($35 per unit)(125,000 units) = $4,375,000 

Q217:

Generally, individual departmental rates rather than a plant-wide rate for applying overhead would be used if

 

the manufactured products differ in the resources consumed from the individual departments in the plant.

 

a company’s manufacturing operations are basically labor based.

 

a company wants to adopt a standard cost system.

 

a company’s manufacturing operations are all highly automated.

The correct answer is: the manufactured products differ in the resources consumed from the individual departments in the plant.
Individual departmental rates rather than a plant-wide rate for applying overhead would be used if the departments have different cost drivers and the manufactured products differ in the resources consumed from the individual departments in the plant. For example, one department may be labor-intensive, while another may be machine-intensive, or use highly automated processes. 

Q218:

Which of the following correctly shows the treatment of (1) factory insurance, (2) direct labor, and (3) finished goods shipping costs under absorption costing and variable costing? 

* Source: Retired ICMA CMA Exam Questions

 

Absorption Costing ->     Product Cost:  1, 2   Period Cost:  3
Variable Costing ->         Product Cost:  2       Period Cost:  1, 3

 

Absorption Costing ->     Product Cost:  2, 1   Period Cost:  3, 1
Variable Costing ->         Product Cost:  2       Period Cost:  3

 

Absorption Costing ->     Product Cost:  1       Period Cost:  2, 3
Variable Costing ->         Product Cost:  1, 2   Period Cost:  3

 

Absorption Costing ->     Product Cost:  1 2    Period Cost:  3
Variable Costing ->         Product Cost:  2,3    Period Cost:  1

Absorption Costing: Product cost, 1, 2; Period cost, 3. Variable costing: Product cost, 2; Period cost, 1,3. Absorption costing involves expensing all costs associated with the manufacturing process using total direct costs and overhead costs associated with the manufacturing of a product as the cost base. Under absorption costing, factory insurance and direct labor are considered product costs, and finished goods shipping costs is considered a period cost. Variable costing involves expensing all variable costs associated with the manufacturing of a product. Under variable costing, direct labor is considered a product cost, and factory insurance and finished goods shipping costs are considered period costs.

Q219:

When measuring the cost of quality, the cost of inspecting incoming raw materials is a(n)
* Source: Retired ICMA CMA Exam Questions

 

external failure cost.

 

internal failure cost.

 

prevention cost.

 

appraisal cost.

Appraisal cost. An appraisal cost is cost of inspecting materials or products for quality purposes.

Q220:

clip_image056

Using the information from Exhibit A, what is cost of goods manufactured (COGM) for the period?

 

$114,000

 

$107,000

 

$128,000

 

$126,000

The correct answer is: $126,000
Net purchases in this problem is $58,000 – $4,000 + $12,000 = $66,000. Direct materials used is $40,000 + $66,000 – $33,000 = $73,000. Adding direct materials used, direct labor and factory overhead, manufacturing costs total $73,000 + $42,000 + $13,000 = $128,000. COGM = beginning WIP inventory + manufacturing costs – ending WIP inventory. In this problem, COGM = $13,000 + $128,000 – $15,000 = $126,000.

Q221:

New-Rage Cosmetics has used a traditional cost accounting system to apply quality control costs uniformly to all products at a rate of 14.5 percent of direct labor cost. Monthly direct labor cost for Satin Sheen makeup is $27,500. In an attempt to more equitably distribute quality control costs, New-Rage is considering activity-based costing. The monthly data shown in the chart below have been gathered for Satin Sheen makeup.
clip_image057
The monthly quality control cost assigned to Satin Sheen makeup using activity-based costing is

 

$525.50 higher than the cost using the traditional system.

 

$525.50 lower than the cost using the traditional system.

 

$8,500.50.

 

$3,987.50.

The correct answer is: $525.50 higher than the cost using the traditional system.
To answer this question, it is necessary to calculate the monthly quality control costs for both a traditional and activity-based costing system.
The quality control cost using a traditional costing system would be calculated by taking the total direct labor cost (overhead is applied based on direct labor cost) and multiplying it by the 14.5% rate.
Traditional costing overhead application = (total direct labor costs)(overhead rate)
Traditional costing overhead application = ($27,500 x 0.145 = $3,987.50)
The activity-based costing system calculates the quality control cost to be assigned by assessing how much of the quality control activities are related to the product.
This is calculated by taking the sum of the rate for each activity, multiplied by the quantity of that activity that is consumed by the Satin Sheen product.
Activity-based costing overhead application = (rate per type for incoming material inspection)(number of types of material for Satin Sheen product) + (rate per unit for in-process inspection)(number of units of Satin Sheen) + (rate per order for product certification)(number of orders for Satin Sheen)
Activity-based costing overhead application = ($11.50)(12 types) + ($0.14)(17,500 units) + ($77)(25 orders) = $138 + $2,450 + $1,925 = $4,513
Activity-based costing quality control cost – traditional costing quality control cost = $4,513 – $3,987.50 = $525.50
The monthly quality control cost assigned to Satin Sheen makeup using activity-based costing is $525.50 higher than the traditional costing system. 

Q222:

In determining next year’s overhead application rates, a company desires to focus on manufacturing capacity rather than output demand for its products. To derive a realisitic application rate, the denominator activity level should be based on

 

practical capacity.

 

maximum capacity.

 

normal capacity.

 

master-budget (expected annual) capacity.

The correct answer is: practical capacity.
Maximum capacity would occur if there were no interruptions, which is virtually impossible. Normal and master-budget capacity focus on output demand. Thus, practical capacity, which is the maximum production output the firm can reach at the usual level of interruptions, will produce the best overhead allocation rate given the circumstances.

Q223:

Huron Industries has recently developed two new products, a cleaning unit for laser discs and a tape duplicator for reproducing home movies taken with a video camera. However, Huron has only enough plant capacity to introduce one of these products during the current year. The company controller has gathered the following data to assist management in deciding which product should be selected for production.
Huron’s fixed overhead includes rent and utilities, equipment depreciation, and supervisory salaries. Selling and administrative expenses are not allocated to products.
clip_image058
The costs included in Huron’s fixed overhead are

 

indirect costs.

 

joint costs.

 

opportunity costs.

 

prime costs.

The correct answer is: indirect costs.
Indirect costs are those that are not economically traceable to a cost object. In product costing, the cost object is the product. Overhead costs, including fixed overhead, are product costs that are not easily traced to the product and are, therefore, indirect costs. 

Q224:

The method of inventory costing in which direct manufacturing costs and manufacturing overhead costs, both variable and fixed, are considered as inventoriable costs is best described as

 

conversion costing.

 

direct costing.

 

variable costing.

 

absorption costing.

The correct answer is: absorption costing.
Absorption costing follows generally accepted accounting principles (GAAP). Under GAAP, product costs consist of direct material, direct labor, and both variable and fixed indirect manufacturing costs (overhead). 

Q225:

An accounting system that collects financial and operating data on the basis of the underlying nature and extent of the cost drivers is

 

activity-based costing.

 

target costing.

 

variable costing.

 

direct costing.

The correct answer is: activity-based costing.
Activity-based costing (ABC) is an accounting technique that allocates production support costs to the activities that drive these costs. The ABC system then reassigns the costs from the activities to the products produced. 

Q226:

Atmel Inc. manufactures and sells two products. Data with regard to these products are given below.

clip_image059

Total budgeted machine hours are 100,000. The budgeted overhead costs are shown below.

clip_image060

Using activity-based costing, the per unit overhead cost allocation of receiving costs for product A is

 

$10.75.

 

$19.50.

 

$28.13.

 

$3.75.

The correct answer is: $3.75.

Using activity-based costing, the per unit overhead cost allocation of receiving costs for product A is calculated as follows:

Overhead cost allocation, receiving costs, product A = [(cost rate for receiving costs)(number of product A receipts)] / (number of units of product A)

Cost rate for receiving costs = $450,000 / 200 total receipts = $2,250
Number of product A receipts = 50
Number of units of product A = 30,000
Overhead cost allocation, receiving costs, product A = [($2,250)(50)] / (30,000) = $3.75 per unit 

Q227:

The following information was gathered for the current period of manufacturing production for a firm:

clip_image061

There were 100 units in beginning WIP inventory, which were 20% complete in direct materials (DM) and 30% complete in conversion costs (CC). During the period 2,000 units were started in production and 1,900 were completed. If the firm uses the FIFO inventory method, and equivalent units are calculated as 2,000 for direct materials (DM) and 1,980 for conversion costs (CC), what is the total cost assigned to the units completed?

 

$436,140

 

$431,300

 

$447,760

 

$408,600

The correct answer is: $447,760
Several steps are required to solve this problem:
(1) Compute the number of units started and completed during the period (units completed less units in beginning WIP completed first): 1,900 – 100 = 1,800.
(2) Compute the current period cost per equivalent unit: DM = $254,000/2,000 = $127; CC = $198,000/1,980 = $100.
(3) The 1,900 units completed are made up of the 100 units in beginning WIP inventory plus 1,800 units started and completed during the period.
(4) Compute the cost of these units as follows:

clip_image062

Q228:

A company has a beginning material inventory of $50,000, makes purchases of $20,000, and has an ending materials inventory of $30,000. If its beginning work-in-process (WIP) inventory is $100,000 and ending WIP inventory is $60,000 and its conversion costs are $80,000, what is its cost of goods manufactured for the period?

 

$220,000

 

$180,000

 

$360,000

 

$160,000

The correct answer is: $160,000
Direct materials (DM) used is equal to the beginning material inventory plus purchases minus ending material inventory ($50,000 + $20,000 – $30,000 = $40,000). Cost of goods manufactured is beginning WIP inventory plus DM, plus conversion costs, minus ending WIP inventory ($100,000 + $40,000 + $80,000 – $60,000 = $160,000).

Q229:

Retail Partners Inc., which operates eight discount store chains, is seeking to reduce the costs of its purchasing activities through reengineering and a heavier use of electronic data interchange (EDI). Which of the following benchmarking techniques would be appropriate in this situation?
I. A comparison of the purchasing costs and practices of each of Retail Partners’ store chains to identify their internal “best in class.”
II. A comparison of the practices of Retail Partners to those of Discount City, another retailer, whose practices are often considered “best in class.”
III. A comparison of the practices of Retail Partners to those of Capital Airways, an international airline, whose practices are often considered “best in class.”
IV. An in-depth review of a retail trade association publication on successful electronic data interchange applications.
* Source: Retired ICMA CMA Exam Questions

 

I and II only.

 

I, II, III, and IV.

 

II and IV only.

 

I and IV only.

I, II, III, and IV. Benchmarking techniques appropriate when reengineering and a heavier use of electronic data interchange takes place would include any comparison that is considered “best in class”. Looking at the above example, the internal processes, external competition, other companies, and other “best” applications, are all good benchmarking techniques.

Q230:

Wilcox Industrial has two support departments, the Information Systems Department and the Personnel Department, and two manufacturing departments, the Machining Department and the Assembly Department. The support departments service each other as well as the two production departments. Company studies have shown that the Personnel Department provides support to a greater number of departments than the Information Systems Department. Which one of the following departmental allocations is present in the reciprocal method of departmental allocation? The costs of the
* Source: Retired ICMA CMA Exam Questions

 

The costs of the Information Systems Department are allocated to the Personnel Department, Machining Department, and Assembly Department.

 

Assembly Department costs are allocated to the Information Systems Department and the Personnel Department.

 

Information Systems Department costs are allocated to the Machining Department and the costs of the Machining Department are allocated to the Assembly Department.

 

Personnel Department costs are allocated solely to the Information Systems Department.

Information Systems Department costs are allocated to the Personnel Department, Machining Department, and Assembly Department.

Departmental cost allocation involves allocating the costs among the departments that the particular service department supports. In this case, the Information System Department costs are allocated to the Personnel Department, Machining Department, and Assembly Department. The reciprocal method includes allocation of services provided to all departments and services consumed by the same department.

Q231:

Kimbeth Manufacturing uses a process cost system to manufacture dust density sensors for the mining industry. The following information pertains to operations for the month of May.
clip_image019[5]
The beginning inventory was 60 percent complete for materials and 20 percent complete for conversion costs. The ending inventory was 90 percent complete for materials and 40 percent complete for conversion costs.
Costs pertaining to the month of May are as follows:

Beginning inventory costs are: materials, $54,560; direct labor, $20,320; and factory overhead, $15,240.

Costs incurred during May are: materials used, $468,000; direct labor, $182,880; and factory overhead, $391,160.

Using the FIFO method, the equivalent unit cost of materials for May is

 

$4.60.

 

$5.03.

 

$4.12.

 

$4.50.

The correct answer is: $4.50.
The FIFO approach follows the production flow and assumes that units will be sold in the order in which they were placed in inventory.
In order to compute the cost per equivalent unit for materials, it is first necessary to calculate the number of equivalent units with respect to materials.
To calculate the equivalent units of production for materials using FIFO, calculate the equivalent units for materials for:
1) units in beginning inventory,
2) products started into production during the month, and,
3) units in ending inventory.
First, the 16,000 units in the beginning inventory would be completed, requiring the addition of 6,400 [(16,000)(1 – 0.6)] equivalent units for materials.
Next, of the 100,000 units started during the month, 76,000 would be completed, requiring 76,000 equivalent units for materials. (92,000 units completed during month – 16,000 units from beginning inventory = 76,000 units)
Lastly, of the 100,000 units started, 24,000 would be in the ending inventory, 90% complete with respect to materials, requiring 21,600 [(0.90)(24,000)] equivalent units for materials.
The total equivalent units for materials would be 6,400 + 76,000 + 21,600 = 104,000.
The cost of materials used is $468,000.
Therefore, the equivalent unit cost for materials = ($468,000 material cost) / (104,000 equivalent units for materials) = $4.50 per unit 

Q232:

A firm believes it needs to grow its product line diversity to take advantage of market opportunities. Which of the following cost drivers is this firm expanding?

 

Supplier relationships executional cost driver

 

Complexity structural cost driver

 

Production process design executional cost driver

 

Scale structural cost driver

The correct answer is: Complexity structural cost driver
With the complexity structural cost driver, the more complex a firm gets (more products, more levels of hierarchy), the more it costs to sustain the complexity, but too low a level of complexity may mean the firm is missing out on market opportunities.

Q333:

Indirect and common costs often make up a significant portion of the cost of a product. All of the following are reasons for indirect cost allocation to cost objects except to
* Source: Retired ICMA CMA Exam Questions

 

provide information for economic decision making.

 

justify costs for reimbursement purposes.

 

measure income and assets for external reporting purposes.

 

reduce total costs identified with products.

Reduce total costs identified with products. Indirect cost allocation to cost objects include the measure of income and assets for external reporting purposes, to justify costs for reimbursement purposes, and to provide information for economic decision making.

Q234:

Jones Tax Company has three divisions – Compliance, Tax Planning, and Financial Consulting. Based on the divisional data presented below, which one of the allocation bases for common company expenses would likely have the least negative behavioral impact on the Financial Consulting Division manager?
clip_image063
* Source: Retired ICMA CMA Exam Questions

 

Revenues.

 

Equal sharing.

 

Contribution margin.

 

Number of employees.

Number of employees. Analyzing the data for the Financial Consulting Division, the number of employees would have the least negative behavioral impact on the division, as the contribution margin per employee is the lower than the other divisions.

Q235:

Adam Corporation manufactures computer tables and has the following budgeted indirect manufacturing cost information for next year.

clip_image064

If Adam uses the step-down method, beginning with the Maintenance Department, to allocate support department costs to production departments, the total overhead (rounded to the nearest dollar) for the Machining Department to allocate to its products would be

 

$415,526.

 

$422,750.

 

$445,000.

 

$442,053.

The correct answer is: $442,053.

Using the step-down method to allocate service costs, the Maintenance costs would be allocated 10% ($36,000) to Systems and 50% ($180,000) to Machining.

The Systems department would then have $131,000 ($95,000 + $36,000) to allocate 45/95th’s ($62,053) to Machining.

Therefore, total overhead for the Machining Department to allocate to its products would equal $200,000 (its own overhead) + $180,000 + $62,053 = $442,053. 

Q236:

A wig company using process costing has a weaving department and a cutting and styling department for the same product. When weaving is complete, all weaving department costs should

 

be transferred to finished goods inventory.

 

remain in the weaving department’s WIP inventory account until all departments finish the wig and then debited to the company’s transferred-in costs account.

 

remain in the company’s WIP inventory account until the good is complete and then be transferred to finished goods inventory.

 

be transferred to the cutting and styling department’s WIP inventory account.

be transferred to the cutting and styling department’s WIP inventory account.
In process costing, each department must have its own WIP inventory account. All costs charged to that account are transferred to the next department’s WIP inventory account by debiting a transferred-in costs account on the next department’s books. When the good is fully complete, all costs are transferred to finished goods inventory.

Q237:

Consider the following situation for Weisman Corporation for the prior year. 

The company produced 1,000 units and sold 900 units, both as budgeted.

There were no beginning or ending work-in-process inventories and no beginning finished goods inventory.

Budgeted and actual fixed costs were equal, all variable manufacturing costs are affected by volume of production only, and all variable selling costs are affected by sales volume only.

Budgeted per unit revenues and costs were as follows.

clip_image014[1]

The operating income for Weisman for the prior year using absorption costing was

 

$15,300.

 

$15,840.

 

$14,200.

 

$13,600.

The correct answer is: $15,300.
The full absorption cost operating income is calculated as follows:
Full absorption cost operating income = (sales) – (cost of sales) – (variable selling costs) – (fixed selling costs) – (fixed administrative costs)
Sales = (900 units)($100 each) = $90,000
Cost of sales = (number of units)(direct materials cost per unit + direct labor cost per unit + variable manufacturing overhead cost per unit + fixed manufacturing overhead cost per unit)
Cost of sales = (900 units)($30 + $20 + $10 + $5) = $58,500
Variable selling costs = (900 units)($12 each) = $10,800
Fixed selling costs = $3,600
Fixed administrative costs = $1,800
Full absorption cost operating income = $90,000 – $58,500 – $10,800 – $3,600 – $1,800
Full absorption cost operating income = $15,300
There is no volume variance since actual production is equal to budgeted production. 

Q238:

Boston Furniture Company manufactures several steel products. It has three production departments, Fabricating, Assembly, and Finishing. The service departments include Maintenance, Material Handling, and Designing. Currently, the company does not allocate service department costs to the production departments. John Baker, who has recently joined the company as the new cost accountant, believes that service department rates should be developed and charged to the production departments for services requested. If the company adopts this new policy, the production department managers would be least likely to
* Source: Retired ICMA CMA Exam Questions

 

refrain from using necessary services.

 

replace outdated and inefficient systems.

 

request an excessive amount of service.

 

be encouraged to control costs.

Request an excessive amount of service. If there is a new corporate policy that would require a department or division to incur additional costs, management of those departments or divisions effected would be least likely to incur those additional costs. In this case, the product department manager would be least likely to request an excessive amount of service.

Q239:

A company that uses a process costing system inspects its goods at the 60% stage of completion. If the firm’s ending work-in-process inventory is 80% complete, how would the firm account for its normal and abnormal spoilage?
* Source: Retired ICMA CMA Exam Questions

 

Normal spoilage costs would be added to the cost of the good units completed during the period; in contrast, abnormal spoilage costs would be written off as a loss.

 

Normal spoilage costs would be allocated between the cost of good units completed during the period and the ending work-in-process inventory. In contrast, abnormal spoilage costs would be written off as a loss.

 

Both normal and abnormal spoilage costs would be written off as an expense of the period.

 

Both normal and abnormal spoilage costs would be added to the cost of the good units completed during the period.

Normal spoilage costs would be allocated between the cost of good units completed during the period and the ending work-in-process inventory. In contrast, abnormal spoilage costs would be written off as a loss. If a firm has normal and abnormal spoilage, the normal spoilage costs would be allocated between the cost of good units completed during the period and the ending work-in-process inventory. In contrast, abnormal spoilage costs would be written off as a loss.

Q240:

Fowler Co. provides the following summary of its total budgeted production costs at three production levels.
clip_image065
The cost behavior of each of the Costs A through D, respectively, is
* Source: Retired ICMA CMA Exam Questions

 

variable, semi-variable, fixed, and semi-variable.

 

variable, fixed, fixed, and variable.

 

semi-variable, variable, fixed, and variable.

 

variable, semi-variable, fixed, and variable.

Variable, semi-variable, fixed, and variable. Costs A and D are considered variable costs as they change in proportion to the level of activity. Cost B is considered a semivariable cost as it is variable in the sense that greater levels of production increase total cost. If no production occurs, then a fixed cost is still incurred. Cost C is a fixed cost, as it remains constant at any level of activity.

Q241:

Bethany Company has just completed the first month of producing a new product, but has not yet shipped any of this product. The product incurred variable manufacturing costs of $5,000,000, fixed manufacturing costs of $2,000,000, variable marketing costs of $1,000,000, and fixed marketing costs of $3,000,000.
If Bethany uses the variable cost method to value inventory, the inventory value of the new product would be

 

$11,000,000.

 

$6,000,000.

 

$8,000,000.

 

$5,000,000.

The correct answer is: $5,000,000.
The variable cost method includes only variable manufacturing costs in the value of the inventory. Therefore, the inventory value would be $5,000,000. 

Q242:

Chassen Company, a cracker and cookie manufacturer, has the following unit costs for the month of June.

clip_image066

A total of 100,000 units were manufactured during June of which 10,000 remain in ending inventory. Chassen uses the first-in, first-out (FIFO) inventory method, and the 10,000 units are the only finished goods inventory at month-end. Using the full absorption costing method, Chassen’s finished goods inventory value would be

 

$70,000.

 

$50,000.

 

$145,000.

 

$85,000.

The correct answer is: $70,000.

The full absorption cost inventory consists of variable and fixed manufacturing costs per unit multiplied by the number of units in the inventory.

Full absorption cost inventory = ($5 + $2)(10,000 units) = $7(10,000 units) = $70,000 

Q243:

Analyzing how an industry partner has been successful with an innovative employee recognition program typifies a step in

 

process reengineering.

 

value chain analysis.

 

kaizen.

 

benchmarking.

The correct answer is: benchmarking.
Identifying innovative ideas and concepts or program characteristics of another business’ efforts typifies benchmarking. Metric for best levels in benchmarking may be financial or nonfinancial measures.

Q244:

A plant meters electricity usage at the department level. The department has several product operations, including tennis ball manufacture. Electricity is considered which of the following for a can of tennis balls?

 

A variable indirect cost

 

A fixed direct cost

 

A variable direct cost

 

A fixed indirect cost

The correct answer is: A variable indirect cost
The electricity is a variable cost, because as the quantity of tennis balls produced is increased, electricity costs also increase. Indirect costs include electricity because it is metered at the department level and cannot be traced to the cost for a can of tennis balls in a cost-effective manner.

Q245:

When identifying fixed and variable costs, which one of the following is a typical assumption concerning cost behavior?
* Source: Retired ICMA CMA Exam Questions

 

General and administrative costs are assumed to be variable costs.

 

The relevant time period is assumed to be five years.

 

Total costs are assumed to be linear when plotted on a graph.

 

Cost behavior is assumed to be realistic for all levels of activity from zero to maximum capacity.

Total costs are assumed to be linear when plotted on a graph. A typical assumption concerning cost behaviors is that total costs are assumed to be linear when plotted on a graph.

Q246:

Which of the following is not a correct comparison of a just-in-time system with a traditional system?

 

Traditional: Inventory is an asset; Just-in-Time: Inventory is a liability.

 

Traditional: Lot size based on immediate need; Just-in-Time: Lot size based on formulas.

 

Traditional: Longer lead times; Just-in-Time: Shorter lead times.

 

Traditional: Some scrap tolerated; Just-in-Time: Zero defects desired.

The correct answer is: Traditional: Lot size based on immediate need; Just-in-Time: Lot size based on formulas.
In a just-in-time system, the goal is to minimize the amount of inventory at the plant. Accordingly, lot size is based on immediate need of the manufacturing units. In contrast, in a traditional system, raw material inventory purchase lot size is often determined on the basis of formulas, such as EOQ.

Q247:

Kimbeth Manufacturing uses a process cost system to manufacture dust density sensors for the mining industry. The following information pertains to operations for the month of May.
clip_image019[6]
The beginning inventory was 60 percent complete for materials and 20 percent complete for conversion costs. The ending inventory was 90 percent complete for materials and 40 percent complete for conversion costs.
Costs pertaining to the month of May are as follows:

Beginning inventory costs are: materials, $54,560; direct labor, $20,320; and factory overhead, $15,240.

Costs incurred during May are: materials used, $468,000; direct labor, $182,880; and factory overhead, $391,160.

Using the weighted-average method, the total cost of the units in the ending work-in-process inventory at May 31 is

 

$154,800.

 

$153,168.

 

$156,960.

 

$155,328.

The correct answer is: $156,960.
The weighted-average method assumes that there is no beginning inventory. In other words, all units are started in the current period and all costs are incurred in the current period.
Therefore, the assumption is that 116,000 units were added in the period, of which 92,000 were completed and 24,000 are in the ending inventory.
In order to calculate the total cost of units in ending work-in-process inventory, it is necessary to calculate the equivalent units for both materials and conversion costs. After that is done, calculate the cost per equivalent unit for both materials and conversion costs.
The 24,000 units in ending inventory are 90% complete with respect to materials and 40% complete with respect to conversion costs.
Equivalent units for materials
The equivalent units for materials = (units completed during the period) + (equivalent units in ending inventory)
Equivalent units for materials = 92,000 + 0.9(24,000) = 113,600
Equivalent units for conversion costs
The equivalent units for conversion costs = (units completed during the period) + (equivalent units in ending inventory)
Equivalent units for conversion costs = 92,000 + 0.4(24,000) = 101,600
Cost per equivalent unit – materials
Total material cost for the period = $54,560 + $468,000 = $522,560
Equivalent unit cost for materials = (total material cost for the period) / (total equivalent units for materials)
Equivalent unit cost for materials = ($522,560) / (113,600) = $4.60
Cost per equivalent unit – conversion costs
Total conversion costs for the period = $182,880 + $20,320 + $391,160 + $15,240
Total conversion costs for the period = $609,600
Equivalent unit cost for conversion = (total conversion costs for the period) / (total equivalent units for conversion costs)
Equivalent unit cost for conversion = ($609,600) / (101,600) = $6.00
Cost of ending inventory
Ending inventory, materials = 0.9(24,000 units) = 21,600 equivalent units
Ending inventory, conversion costs = 0.4(24,000 units) = 9,600 equivalent units
Cost of ending inventory = (ending inventory, materials)(materials cost per equivalent unit) + (ending inventory, conversion costs)(conversion cost per equivalent unit)
Cost of ending inventory = (21,600 equivalent units)($4.60 per equivalent unit) + (9,600 equivalent units)($6.00 per equivalent unit)
Cost of ending inventory = $156,960 

Q248:

Dremmon Corporation uses a standard cost accounting system. Data for the last fiscal year are as follows:

clip_image067

There were no price, efficiency, or spending variances for the year, and actual selling and administrative expenses equaled the budget amount. Any volume variance is written off to cost of goods sold in the year incurred. There are no work-in-process inventories.
Assuming that Dremmon used absorption costing, the amount of operating income earned in the last fiscal year was

 

$30,000.

 

$21,500.

 

$28,000.

 

$27,000.

The correct answer is: $21,500.
The full absorption costing operating income can be calculated as follows:
Full absorption costing operating income = (sales) – (standard cost of sales) – (unfavorable volume variance) – (selling and administrative costs)
Sales = (750 units)($200 each) = $150,000
Standard cost of sales = (number of units)(variable + fixed manufacturing costs)
Standard cost of sales = (750 units)($90 + $20)
Standard cost of sales = (750)($110) = $82,500
Unfavorable volume variance = ($20 fixed overhead per unit)(denominator level of activity – actual activity
Unfavorable volume variance = ($20)(750-700) = $20(50) = $1,000
Selling and administrative costs = $45,000
Full absorption costing operating income = $150,000 – $82,500 – $1,000 – $45,000
Full absorption costing operating income = $21,500 

Q249:

Adam Corporation manufactures computer tables and has the following budgeted indirect manufacturing cost information for next year.

clip_image068

If Adam uses the direct method to allocate support department costs to production departments, the total overhead (rounded to the nearest dollar) for the Machining Department to allocate to its products would be which of the following?

 

$445,000

 

$418,000

 

$422,750

 

$442,053

The correct answer is: $445,000.

The direct method of cost allocation assumes service departments serve production only. There are no inter-service department services. Therefore, the total overhead for the Machining Department to allocate to its products is calculated as follows:

Total overhead, Machining Dept = (Machining Dept overhead) + (Machining Dept share of Maintenance overhead) + (Machining Dept share of Systems’ overhead)

Total overhead, Machining Dept = ($200,000) + [(0.50) / (0.50+0. 40)]($360,000) + [(0.45) / (0.45 + 0.50)]($95,000)
Total overhead, Machining Dept = $200,000 + $200,000 + $45,000 = $445,000 

Q250:

clip_image035[2]

Using information from Exhibit B, what is the gross profit per unit?

 

$97

 

$100

 

$92

 

$110

The correct answer is: $92
Gross profit per unit is sales price per unit less the product costs per unit. In this case $200 – ($50 + $40 + $10 + $8) = $92.

Q251:

If a manufacturing company uses variable costing to cost inventories, which of the following costs are considered inventoriable costs?
* Source: Retired ICMA CMA Exam Questions

 

Only raw material, direct labor, variable manufacturing overhead and variable selling and administrative costs.

 

Only raw material and direct labor costs.

 

Only raw material, direct labor, and variable manufacturing overhead costs.

 

Only raw material, direct labor, variable and fixed manufacturing overhead costs.

Only raw material, direct labor, and variable manufacturing overhead costs. Inventoriable costs under a variable costing system include only raw material, direct labor, and variable manufacturing overhead costs.

Q252:

Activity-based costing (ABC) can eliminate cost distortions because ABC

 

establishes multiple cost pools.

 

eliminates product variations.

 

recognizes interactions between different departments.

 

uses cost drivers that have a cause-and-effect relationship with the activities performed.

The correct answer is: uses cost drivers that have a cause-and-effect relationship with the activities performed.
ABC minimizes cost distortions by recognizing that there are multiple cost drivers and by relating costs, by cause and effect when possible, to the drivers. 

Q253:

Reducing costs by improving relationships with a vendor over the short term is one example of

 

a structural cost driver.

 

a volume-based cost driver.

 

an activity-based cost driver.

 

an executional cost driver.

The correct answer is: an executional cost driver.
Executional cost drivers focus on short-term operations, reducing costs through concern with work-force commitment and involvement, production design, and supplier relationships.

Q254:

Which type of cost driver is primarily intended to reduce short-term operational costs?

 

Volume-based cost drivers

 

Structural cost drivers

 

Executional cost drivers

 

Activity-based cost drivers

The correct answer is: Executional cost drivers
Executional cost drivers are the short-term decisions that can be made to reduce operational costs.

Q255:

clip_image056[1]

Using the information from Exhibit A, compute total manufacturing costs for the period.

 

$126,000

 

$128,000

 

$116,000

 

$109,000

The correct answer is: $128,000
Net purchases in this problem is $58,000 – $4,000 + $12,000 = $66,000. Direct materials used is $40,000 + $66,000 – $33,000 = $73,000. Adding direct materials used, direct labor and factory overhead, manufacturing costs total $73,000 + $42,000 + $13,000 = $128,000.

Q256:

Assuming that a management accountant wants to minimize reported net income, which of the following costing methods would show the lowest net income when the company increases its ending inventory?

 

Variable costing

 

Standard costing

 

Normal costing

 

Absorption costing

The correct answer is: Variable costing
When more units are produced than sold, variable costing will have lower net income than absorption costing, because variable costing leaves more costs in the cost of goods sold than in inventory. Higher costs in the cost of goods sold equate to a lower net income.

Q257:

The distinction between joint products and by-products is largely dependent on
* Source: Retired ICMA CMA Exam Questions

 

historical costs.

 

salvage value.

 

market value.

 

prime costs.

Market value. The distinction between joint products and by-products is largely dependent on market value.

Q258:

clip_image056[2]

Using the information from Exhibit A, assume that the goods sold were sold with a 50% mark-up. What is gross profit this period?

 

$56,000

 

$62,000

 

$44,000

 

$124,000

The correct answer is: $62,000
Net purchases in this problem is $58,000 – $4,000 + $12,000 = $66,000.
Direct materials used is $40,000 + $66,000 – $33,000 = $73,000.
Manufacturing costs are the total of direct materials used, direct labor and factory overhead, so,
manufacturing costs = $73,000 + $42,000 + $13,000 = $128,000.
Cost of goods manufactured (COGM) = beginning WIP inventory + manufacturing costs – ending WIP inventory, so,
COGM = $13,000 + $128,000 – $15,000 = $126,000.
Cost of goods sold (COGS) = beginning finished goods inventory + COGM – ending FG inventory, so,
COGS = $20,000 + $126,000 – $22,000 = $124,000.
If sold at a mark-up of 50%, the sales price is $124,000 x 1.5 = $186,000 and the gross profit is $186,000 – $124,000 = $62,000.

Q259:

Waller Co. uses a weighted-average process-costing system. Material B is added at two different points in the production of shirts, 40% is added when the units are 20% completed, and the remaining 60% of Material B is added when the units are 80% completed. At the end of the quarter, there are 22,000 shirts in process, all of which are 50% completed. With respect to Material B, the ending shirts in process represent how many equivalent units?

 

11,000 units

 

22,000 units

 

8,800 units

 

4,400 units

The correct answer is: 8,800 units.

The ending inventory of 22,000 shirts is only 50% complete. Therefore, the inventory units have only 40% of the Material B.

This equates to 8,800 equivalent units, which is calculated by multiplying the number of units in ending inventory (22,000) by the percent of Material B (40%).

Equivalent units, shirts = (22,000 units)(0.4) = 8,800 units 

Q260:

Property taxes are a

 

committed direct cost.

 

discretionary indirect cost.

 

committed indirect cost.

 

discretionary direct cost.

The correct answer is: committed indirect cost.
Costs can be discretionary or committed. Committed costs are costs that cannot be omitted due to strategic or operational priorities. Property taxes are a committed cost. Indirect costs are costs that cannot be directly traced to a process or product, such as depreciation, taxes, salaries paid to sales people, insurance, and lease costs.

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