# The cost of goods manufactured line on the income statement of a ... - DOC

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Practice Test No. 2. Accounting 2122, Summer 2009.                 Name: ____________________________
Class Time: 9:45 or 11:30 (Circle one)      Row in Class _____
Multiple Choice- 26 questions count 4 points each for a total of 104 Points.
Blacken the area in the circle containing the appropriate letter for each entry. Use a soft-lead pencil. Enter last
name first in the area for “NAME.” Enter student ID number in the area for “IDENTIFICATION NUMBER.”
1. A retail ice cream company normally sells 12,000 gallons of ice cream each month. Selling price is \$5.00
per gallon. Wholesale cost is \$3.00 per gallon. Company is considering reducing its retail price to \$4.50 per
gallon, in order to increase its sales. How many gallons will need to be sold at \$4.50 per gallon in order to
increase its gross profit from its current level?
a. More than 12,000 gallons, but not more than 16,000 gallons
b. More than 16,000 gallons, but not more than 20,000 gallons
c. More than 20,000 gallons

2. Washington Company, a glove manufacturer, has enough idle capacity available to accept a special order or
20,000 pairs of gloves at \$12.00 a pair. The normal selling price is \$20.00 a pair. Variable manufacturing
costs are \$9.00 a pair, and fixed manufacturing costs are \$3.00 a pair. Washington will not incur any selling
expenses as a result of the special order, except for a shipping charge of \$1 per pair. What would be the effect
on operating income if the special order could be accepted without affecting normal sales?
a. \$40,000 increase b. \$60,000 increase c. \$180,000 increase d. \$240,000 increase

3. Local Co. plans to discontinue a department with a \$50,000 contribution to overhead, and allocated
overhead of \$100,000, of which \$40,000 cannot be eliminated. What would be the effect of this
discontinuance on Local's pretax profit?
a. Increase of \$8,000.              b.   Decrease of \$50,000.
c. Decrease of \$60,000              d.   Decrease of \$10,000
e. Increase of \$10,000

4. Charlotte Company's regular selling price for its product is \$10 per unit. Variable costs are \$6 per unit.
Fixed costs total \$1 per unit based on 100,000 units, and remain unchanged within the relevant range of 50,000
units to total capacity of 200,000 units. After sales of 80,000 units were projected for 2007, a special order
was received for an additional 10,000 units. To increase its operating income by \$20,000, what price per unit
should Charlotte charge for this special order?
a. \$7 b. \$8 c. \$10 d. \$11

5. A part for a radio being produced by Car Audio Systems is being purchased at present for \$85 per 100 parts.
Management is studying the possibility of manufacturing these parts. Cost and production data would be as
follows: Annual production (usage) is 50,000 units. Fixed costs would remain unchanged whether
the part is purchased or manufactured.
Fixed Costs           \$18,000           \$.36 per unit
Variable costs:       Materials         \$.25 per unit
Labor             \$.22 per unit
Should the company purchase or make the part?
a. Purchase the part b. Make the part

6. In a process that produces two products, which of the following costs is relevant in determining whether a
product should be sold at the point of split-off of processed further?
a. Joint Costs b. Costs to be incurred after split-off c. Both
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7. The manufacturing capacity of Concord Company's facilities is 30,000 units a year. Operating results for the
year is budgeted as follows (before considering an offer for a special order):
Sales (18,000 units @ \$100)             \$1,800,000
Variable mfg. and selling costs            990,000
Contribution margin                        810,000
Fixed costs                                495,000
Operating income                         \$ 315,000
A foreign distributor has offered to buy 15,000 units at \$70 per units during the year. If Concord accepted this
offer and rejected some business from regular customers so as not to exceed capacity, what would be the total
operating income for 2004?
a. \$405,000        b. \$705,000         c. \$840,000       d. \$855,000 e. None of these

8. Gastonia manufactures products X, Y, and Z from a joint process, with joint costs of \$60,000.
Sales Value                   Costs If Processed Further
Product      Units Produced          at split-off        Sales values           Added Costs
X             6,000               \$40,000              \$55,000                \$10,000
Y             4,000                35,000               40,000                 7,000
Z            2,000                25,000               39,000                 5,000

Which products should be sold at split-off?
a. X b. Y c. Z d. none of the products

9. Raleigh manufactures products X, Y, and Z from a joint process, with joint costs of \$60,000.
Sales Value
Units Produced           at split-off
X                6,000                 \$40,000
Y                4,000                  35,000
Z                6,000                  25,000
Assuming that joint production costs are allocated using the relative sales value approach,
what were the total costs allocated to Product Z?
a. \$15,000 b. \$21,000          c. \$25,000 d. \$39,000 e. None of these

10. Repeat the preceding question. Joint production costs are allocated using the physical measures (units
produced) approach. What were the total costs allocated to Product Z?
a. \$15,000 b. \$20,000        c. \$22,500 d. \$30,000 e. None of these

11. In deciding whether to replace or keep existing equipment, which of these items is (are) relevant?:
a       Book value of old equipment              c      Cost of new equipment
b       Original cost of old equipment           d      All of these

12. Spartanburg has 10,000 obsolete desk lamps that are carried in inventory at a manufacturing cost of
\$50,000. If the lamps are reworked for \$20,000, they could be sold for \$35,000. Alternatively, the lamps
could be sold in their present condition for \$25,000 to a jobber located in a distant city. Which action should
be chosen?
a. Sell the lamps to the jobber, without modification
b. Rework the lamps and then sell them.
c. Cannot determine from the information given
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13. Winston began operations on January 1, 2007, and produces a single product that sells for \$11.00 per unit.
Winston uses an actual (historical) cost system. 100,000 units were produced and 90,000 units were sold in
2007. There was no work-in-process inventory at December 31, 2007. Manufacturing costs and selling and
administrative expenses for 2007 were as follows
Fixed costs       Variable costs
Raw materials (all variable)                 No fixed costs     \$3.00 per unit produced
Direct labor (all variable)                  No fixed costs      2.00 per unit produced
Factory overhead (fixed and variable)          \$100,000          Plus 1.00 per unit produced

Selling and admin. (fixed and variable)         \$60,000           Plus \$1.00 per unit sold
What is the operating income for 2007 using the direct costing method?
a. \$200,000 b. \$210,000 c. \$281,000 d. \$361,000
14. Repeat the preceding question. What is the operating income using the absorption costing method?
a. \$200,000 b. \$210,000 c. \$281,000 d. \$361,000

15. Which of the following steps in the preparation of a master budget would logically be performed first?
a   Prepare a cash budget.           c    Prepare a production schedule.
b   Prepare a sales forecast.        d    Prepare a budget of manufacturing costs.

16. UNCC budgeted sales of 100,000 units of product R for September.
Production of one unit of R requires two pounds of material A and three pounds of material B.
Actual inventory units at Sept. 1 and desired units at Sept. 30 are:
Actual inventory         Budgeted inventory
September 1               September 30
Product R                                  20,000 Units             25,000 Units
Material A                                 25,000 Pounds            18,000 Pounds
Material B                                 22,000 Pounds            24,000 Pounds
How many units of R should be produced during September?
a.  105,000            b. 95,000            c. 110,000                  d.     330,000

17. Repeat the preceding question. How many pounds of Material B should be purchased during September?
a.    272,000             b. 298,000         c. 302,000            d.     317,000

18. Assume that the expected cash receipts for the Atlanta Company during the month of April amount to
\$45,000. On April 1 the company has a cash balance of \$9,000 and must have a minimum cash balance of
\$8,000 on the first of every month for operating funds. Anticipated cash disbursements during April will be
\$52,000. During April the company will need to borrow:
a. \$2,000 b. \$4,000 c. \$6,000
d. \$8,000 e. none of these

19. Red Company prepared its cash budget for July based on the following projections:
Sales                                           \$1,500,000
Markup based on cost                                 50%
Decrease in inventories                         \$ 70,000
Increase in accounts payable for inventories    \$ 120,000
For July, what were the estimated cash disbursements for inventories?
a. \$810,000 b. \$1,010,000 c. \$1,055,000 d. \$1,175,000 e. none of these
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20. A company forecasts sales (all on credit) of \$50,000, \$40,000, and \$60,000 for May, June, and July,
respectively. Seventy percent of sales are collected in the month of the sale, 20% in month following the sale,
and 8% in second month following the sale, (2% are uncollectible). What are budgeted cash receipts for July?
a. \$18,800 b. \$24,500 c. \$54,000 d. \$60,000               e. none of these

21. A company has budgeted its activity for October based on the following information:
 Sales are budgeted at \$300,000.
 All sales are credit sales and a provision for bad debts is made monthly at the rate of 2% of sales.
 Merchandise inventory was \$70,000 at September 30, and an increase of \$10,000 is planned for the month.
 All merchandise is marked up to sell at invoice cost plus 25%.
 Cash disbursements for selling and administrative expenses in the month are \$40,000.
 Depreciation for the month is projected at 5,000.
Budgeted operating income for October in the amount of
a. \$6,000 b. \$9,000 c. \$56,000 d. \$66,000 e. None of these

Use the following information for the next 4 questions.
The January 31, balance sheet of UNCC Corporation follows: (Not a Manufacturing Company)
Cash                                                                              \$ 8,000
Accounts receivable (net of allowance for uncollectible accounts of \$2,000)        38,000
Inventory                                                                          90,000
Property and equipment (net of allowance for accum. Deprec. of \$60,000)            40,000
Total                                                                  \$176,000
Accounts payable                                                                 \$ 90,000
Common stock                                                                       50,000
Retained earnings                                                                  36,000
Total                                                                  \$176,000
1 Collections are expected to be 60% in the month of sale, 38% the next month, and 2% uncollectible.
2 Accounts payable for purchases are paid in full the following month.
3 Sales are budgeted as follows: February - \$120,000 March - \$120,000 April - \$140,000
4 Gross margin is 25% of sales.
5 Purchases each month are sufficient to cover the next month's projected sales.
6 Other expenses each month, paid in cash, are expected to be \$16,500.
7. Depreciation each month is \$5,000.

22. What is the projected balance cash at the end of February?
a \$5,000                  b \$11,500          c \$13,000             d    \$22,000          e    \$30,000

23. What is the pro forma income (loss) before income taxes for March?
a. (\$3,700) b. (\$1,500) c. \$3,800         d. \$6,100

24. What is the projected accounts payable balance on March 31?
a. \$82,500 b. \$86,250 c. \$90,000 d. \$105,000

25. The cash disbursements in April for purchases are expected to be:
a. \$82,500 b. \$86,250 c. \$90,000 d. \$105,000
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26.. A company had the following: (in \$thousands)
Accounts receivable on January 1              \$250
Accounts receivable on December 31             200
Net sales in year (all on credit)           \$2,600