# Exam 061682RR – COSTS AND DECISION MAKING

Exam: 061682RR – COSTS AND DECISION
MAKING
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Questions 1 to 20:Select the best answer to each question.
Note that a question and its answers may be split across a page break, so be
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1. Viren Corporation has provided the
following data from its activity-based costing system:

Activity Cost Pool

Total Cost

Total Activity

Assembly

\$387,000

25,000 machine-hours

Processing orders

\$68,510

1,700 orders

Inspection

\$129,117

1,930 inspection-hours

The company makes 240 units of product
T91H a year, requiring a total of 550 machine hours, 90 orders, and 40
inspection hours per year. The product’s direct materials cost is \$16.98 per
unit, and its direct labor cost is \$12.09 per unit. According to the
activity-based costing system, the average cost of product T91H is closestto_______per
unit.
A. \$79.66
B. \$29.07
C. \$90.81
D. \$75.70

2. A disadvantage of the high-low method
of cost analysis is that
A. it relies totally on the judgment of
the person performing the cost analysis.
B. it uses two extreme data points, which
may not be representative of normal conditions.
C. it’s too time-consuming to apply.
D. it can’t be used when there are a very
large number of observations.

3.
Use the following information to answer this question.
Callaham Corporation is a wholesaler that
sells a single product. Management has provided the following cost data for two
levels of monthly sales volume. The company sells the product for \$115.80 per
unit.

Sales volume (units)

4,000 5,000

Cost of sales

\$338,000

\$422,500

\$89,600

\$106,000

The bestestimate of the total
contribution margin when 4,300 units are sold is

A. \$38,270.
B. \$43,430.
C\$134,590.
D.
\$64,070.

4.
A cost driveris
A. the largest single category of cost in
a company.
B. an indirect cost that’s essential to
C. a factor that causes variations in a
cost.
D. a fixed cost that can’t be avoided.

5. At a break-even point of 400 units
sold, variable expenses were \$4,000, and fixed expenses were \$2,000. What will
the 401st unit sold contribute to profit?
A. \$0
B. \$5
C\$15
D. \$10

6. Use the following information to answer
this question.
Harris Company produces a single product.
Last year, Harris manufactured 17,000 units and sold 13,000 units. Production
costs for the year were as follows:

Production Cost Data

Direct materials

\$153,000

Direct labor

\$110,500

\$204,000

\$255,000

Sales were \$780,000 for the year, variable
selling and administrative expenses were \$88,400, and fixed selling and
administrative expenses were \$170,000. There was no beginning inventory. Assume
that direct labor is a variable cost.
Under variable costing, the company’s net
operating income for the year would be_______than under absorption costing.

A. \$60,000 higher
B. \$60,000 lower
C \$108,000 lower
D. \$60,000 higher

7. Use the following information to answer
this question.
Lifsey
Wedding Fantasy Company makes very elaborate wedding cakes to order. The owner
of the company has provided the following data concerning the activity rates in
its activity-based costing system:

Activity Cost Pools Activity Rate

Size-related

\$0.94 per guest

Complexity-related

\$31.62 per tier

Order-related

\$55.79 per order

â¢ The measure of activity for the size-related
activity cost pool is the number of planned guests at the wedding reception.
The greater the number of guests, the larger the cake.
â¢ The measure of complexity is the number of
tiers in the cake.
â¢ The activity measure for the order-related
cost pool is the number of orders. (Each wedding involves one order.)
â¢ The activity rates include the costs of raw
ingredients, such as flour, sugar, eggs, and shortening. The activity rates
don’t include the costs of purchased decorations, such as miniature statues and
wedding bells, which are accounted for separately.
Data concerning two recent orders are
listed here:

Pyburn Smith Wedding Wedding

Number of reception guests

72

189

Number of tiers on the cake

4

5

Cost of purchased decorations for cake

\$29.92

\$68.75

Assuming that all of the costs listed
above are avoidable costs in the event that an order is turned down, which
amount would the company have to charge for the Pyburn wedding cake to just
break even?
A. \$279.87
B. \$338.64
C. \$29.92
D. \$55.79

8. Last year, Gransky Corporation’s
variable costing net operating income was \$52,100, and its ending inventory
increased by 400 units. Fixed manufacturing overhead cost was \$7 per unit. What
was the absorption costing net operating income last year?
A. \$54,900
B. \$49,300
C. \$2,800
D. \$52,100

9. Mardist Corporation has sales of
\$100,000, variable expenses of \$75,000, fixed expenses of \$30,000, and a net
loss of \$5,000. How much would Mardist have to sell to achieve a profit of 10%
of sales?
A. \$225,500
B. \$180,000
C \$187,500
D. \$200,000

10. An increase in the activity level
within the relevant range results in a/an
A. proportionate increase in total fixed
costs.
B. unchanged fixed cost per unit.
C. increase in fixed cost per unit.
D. decrease in fixed cost per unit.

11.
Slosh Cleaning Corporation services both residential and commercial
customers. Slosh expects the following operating results next year for each
type of customer:

Operating Results

Residential Commercial

Sales

\$60,000

\$140,000

Contribution margin ratio

50%

30%

Slosh expects to have \$18,000 in fixed
expenses next year. What would Slosh’s total dollar sales have to be next year
to generate a profit of \$90,000?
A. \$216,000
B. \$270,000
C. \$300,000
D. \$250,000

12. Use the following information to

Gargymal Company would like to estimate
the variable and fixed components of its electrical costs and has compiled the
following data for the past five months of operations.

Machine Electrical Hours Cost

August

1,000

\$1,620

September

900

\$1,510

October

1,500

\$1,870

November

2,000

\$1,950

December

1,300

\$1,730

Using the high-low method of analysis, the
estimated fixed cost per month for electricity is closest to which of the
following?
A. \$1,150.00
B. \$1,306.50
C. \$1,290.00
D.
\$870.00

13. Use the following information to
Lifsey Wedding Fantasy Company makes very
elaborate wedding cakes to order. The owner of the company has provided the
following data concerning the activity rates in its activity-based costing
system:

Activity Cost Pools

Activity Rate

Size-related

\$0.94 per guest

Complexity-related

\$31.62 per tier

Order-related

\$55.79 per order

â¢ The measure of activity for the size-related
activity cost pool is the number of planned guests at the wedding reception.
The greater the number of guests, the larger the cake.
â¢ The measure of complexity is the number of
tiers in the cake.
â¢ The activity measure for the order-related
cost pool is the number of orders. (Each wedding involves one order.)
â¢ The activity rates include the costs of raw
ingredients, such as flour, sugar, eggs, and shortening. The activity rates
don’t include the costs of purchased decorations, such as miniature statues and
wedding bells, which are accounted for separately.
Data concerning two recent orders are
listed here:

Pyburn Wedding

Smith Wedding

Number of reception guests

72

189

Number of tiers on the cake

4

5

Cost of purchased decorations for cake

\$29.92

\$68.75

Suppose the company decides that the
present activity-based costing system is too complex and that all costs (except
for the costs of purchased decorations) should be allocated on the basis of the
number of guests. In that event, what would you expect to happen to the costs
of cakes?
A. The costs of all cakes would go down.
B. The cost of cakes for receptions with
more than the average number of guests would go down.
C. The cost of cakes for receptions with
fewer than the average number of guests would go down.
D. The costs of all cakes would go up.

14. Use the following information to
Callaham Corporation is a wholesaler that
sells a single product. Management has provided the following cost data for two
levels of monthly sales volume. The company sells the product for \$115.80 per
unit.

Sales volume (units)

4,000 5,000

Cost of sales

\$338,000

\$422,500

\$89,600

\$106,000

The bestestimate of the total
variable cost per unit is
A. \$106.90.
B. \$100.90.
C. \$84.50.
D. \$105.70.

15. Murdoch Corporation has provided the
following data concerning its only product:

Murdoch Product Data

Selling price

\$230 per unit

Current sales

39,100 units

Break-even sales

29,716 units

What is the margin of safety in dollars?
A. \$5,995,333
B. \$8,993,000
C. \$6,834,680
D. \$2,158,320
16. Daniele Corporation uses an
activity-based costing system with the following three activity cost pools:

Activity Cost Pool

Total Activity

Fabrication

50,000 machine-hours

Order processing

500 orders

Other

not applicable

The Other activity cost pool is used to
accumulate costs of idle capacity and organization-sustaining costs. The
company has provided the following data concerning its costs:

Cost Data

Wages and salaries

\$280,000

Depreciation

\$200,000

Occupancy

\$140,000

Total

\$620,000

The distribution of resource consumption
across activity cost pools is given below:

Activity
Cost Pools

Fabrication

Order Processing

Other

Total

Wages and salaries

60%

30%

10%

100%

Depreciation

20%

35%

45%

100%

Occupancy

10%

50%

40%

100%

The activity rate for the Fabrication
activity cost pool is closestto ___ per machine hour.

A. \$1.24
B. \$7.44
C. \$4.44
D. \$3.72

17. Indiana Corporation produces a single
product that it sells for \$9 per unit. During the first year of operations,
100,000 units were produced, and 90,000 units were sold. Manufacturing costs
and selling and administrative expenses for the year were as follows:

Fixed Costs

Variable Costs

Raw materials

\$1.75 per unit produced

Direct labor

\$1.25 per unit produced

\$100,000

\$0.50 per unit produced

\$70,000

\$0.60 per unit sold

What was Indiana Corporation’s net
operating income for the year using variable costing?
A.
\$181,000
B.
\$271,000
C.
\$281,000
D.
\$371,000

18. Bear Publishing sells a nature guide.
The following information was reported for a typical month (sales volume is constant
each month):

Total

Per Unit

Sales

\$17,600

\$16.00

Variable expenses

\$9,680

\$8.80

Contribution margin

\$7,920

\$7.20

Fixed expenses

\$3,600

Net operating income

\$4,320

Bear is expecting a 20-cent increase in
variable expenses. No other changes are expected or planned. How much
contribution margin should Bear expect after the increase?
A. \$9,900
B. \$4,100
C. Can’t be determined
D. \$7,700
19.
Rank the following methods of assigning overhead costs from leastaccurate
to mostaccurate.
A. Plantwide rate, departmental rates,
activity-based costing
B. Plantwide rate, activity-based costing,
departmental rates
C. Departmental rates, plantwide rate,
activity-based costing
D. Activity-based costing, departmental
rates, plantwide rate

20. Which of the following is trueregarding
the contribution margin ratio of a single-product company?
A. As fixed expenses decrease, the
contribution margin ratio increases.
B. The contribution margin ratio increases
as the number of units sold increases.
C. If sales increase, the dollar increase
in net operating income can be computed by multiplying the contribution margin
ratio by the dollar increase in sales.
D.
The contribution margin ratio multiplied by the variable expense per unit
equals the contribution margin per unit.

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