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Test 3. Accounting 2122, Summer 2006. Name: ____________________________
Chapters 8, 9, 10 and 11.                          Class Time (circle) 9:45 or 11:30__ Row in Class ____
Multiple Choice Questions count 4 points each for a total of 100 Points.
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Chapter 8. Flexible Budgets and Variance Analysis

1. Raleigh Corporation has developed the following flexible-budget formulas for annual indirect-labor cost:
Total annual indirect labor cost = \$4,800 + \$0.50 per machine hour
Operating budgets for the current month are based upon 19,200 hours of planned machine time.
Indirect-labor costs included in this monthly planning budget are:
a. \$14,800            b. \$10,000             c. \$14,400             d. \$10,400

2. When using a flexible budget, what will occur to variable costs (on a per unit basis) as production
increases within the relevant range?
a. Variable costs per unit will decrease. c. Variable costs per unit will remain unchanged.
b. Variable costs per unit will increase. d. Variable costs are not considered in flexible budgeting.

3. The standard direct material cost to produce a unit of Lem is 4 meters of material at \$2.50 per meter.
During May, 4,200 meters of material costing \$10,080 were purchased and used to produce 1,000 units of
Lem. What was the material price variance for May?
a. \$400 favorable                         c. \$80 unfavorable
b. \$420 favorable                         d. \$480 unfavorable

4. A company manufactures sofa's with vinyl covering. The standard material cost for the vinyl for one sofa
is \$27.00 based on twelve square feet of vinyl at a cost of \$2.25 per square foot. A production run of 1,000
sofas resulted in usage of 12,600 square feet of vinyl at a cost of \$2.50 per square foot, a total cost of
\$31,500. The price variance resulting from the above production run was:
a. \$1,200 unfavorable                   c. \$1,800 favorable
b. \$3,150 unfavorable                   d. \$3,150 favorable

5. Tyro Co. uses a standard cost system. The following information pertains to direct labor for product B for
the month of May:
Actual rate paid                                        \$8.40 per hour
Standard rate                                           \$8.00 per hour
Standard hours allowed for actual production               2,000 hours
Labor efficiency variance                            \$800 unfavorable
What were the actual hours worked?
a. 1,900          b. 1,905            c. 2,095          d. 2,100

6. The difference between the standard labor rate multiplied by the actual labor hours worked and the
standard labor rate multiplied by the standard labor hours is the
a. Total labor variance. b. Labor rate variance. c. Labor efficiency variance. d. None of these

7. Which of the following variances is subject to the least control by the production supervisor?
a. Overhead efficiency variance      b. Labor efficiency variance
c. Material usage variance           d. Material price variance
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H & R Block will operate a separate division for those with simple returns
Budget Information
Amount charged per tax return                            \$100
Total number of tax returns completed                   1,000
Variable cost per return for workers, etc.                \$40
Rent and other fixed costs                             \$4,000
Actual Results
Total number of tax returns completed                   1,200
Total revenue                                       \$108,000
Total variable costs                                  \$47,500
Rent and other fixed costs                             \$5,000

Actual                          Flexible
Results                         Budget
at Actual       Flexible        for Actual         Sales
Activity       Budget           Activity         Activity   Master
Level        Variances          Level          Variances   Budget
Returns prepared             1,200                            1,200                     1,000
Sales
Variable costs
Contribution margin
Fixed costs
Operating income

8. What was the Sales Activity Variance for H&R Block?
a. \$12,500 favorable            b. \$12,000 favorable
c. \$12,500 unfavorable          d. \$12,000 unfavorable      e.   Other

9. What was the Flexible Budget Variance for H&R Block?
a. \$12,500 favorable           b. \$12,000 favorable
c. \$12,500 unfavorable         d. \$12,000 unfavorable       e.   Other
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Chapter 9. Management Control Systems and Responsibility Accounting

10. A company plans to implement a bonus plan based on segment performance. In addition, the company
plans to convert to a responsibility accounting system for segment reporting. The following costs have been
included in the segment performance reports prepared under the current system. What is the only item that
could logically be reported under the planned system?
a Corporate administrative costs allocated on the basis of net segment sales.
b Personnel department costs assigned on the basis of the number of employees in each segment.
c Fixed computer facility costs divided equally among each segment.
d Variable computer operational costs charged to each segment based on actual hours used times a
predetermined standard rate; any variable cost efficiency or inefficiency remains in the computer
department.

11. The AB Company is considering a bonus plan for its department managers. The company provides the
information shown below.
Dept. A         Dept. B         Company
Net sales                                   \$950,000        \$1,950,000     \$ 2,900,000
Variable costs                                750,000           950,000      1,700,000
Contribution margin                           200,000         1,000,000      1,200,000
Costs Controlled by Dept. Manager              75,000            60,000        135,000
Segment margin                                125,000           940,000      1,065,000
Allocated Company Advertising costs            70,000            80,000        150,000
Income                                       \$ 55,000         \$860,000       \$915,000
Unallocated costs                                                            \$300,000
Organization profit                                                          \$615,000
What is the best measure on which to base a bonus for the manager of Department A?
a. \$950,000       b. \$200,000        c. \$125,000        d. \$55,000         e. (\$95,000)
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Chapter 10. Management Control in a Decentralized Organization

12. The following information pertains to Bala Co. for the year ended December 31, 2006:
Sales                                  \$600,000
Net income                              100,000
Capital investment                      400,000
Which of the following equations should be used to compute Bala’s return on investment?
a. (4/6) × (6/1) = ROI           b. (6/4) × (1/6) = ROI
c. (4/6) × (1/6) = ROI           d. (6/4) × (6/1) = ROI

13. James Webb is the manager of the Industrial Division, and his performance is measured using the
residual income method. Webb forecasted the following information for his division for next year:
Category                        Amount
Working capital               \$ 2,800,000
Revenue                        30,000,000
Plant and equipment            17,200,000
If the imputed interest charge is 15% and Webb wants to achieve a residual income target of \$1,850,000,
what will costs have to be in order to achieve the target?
a. \$9,000,000.         b. \$25,000,000        c. \$25,150,000        d. \$25,690,000

14. The following selected data pertain to the Darwin Division of Beagle Co. for 20X1:
Sales                             \$400,000
Operating income                     16,000
Capital turnover                          4
Imputed interest rate                  10%
What was Darwin’s residual income?
a. \$0                            b. \$4,000
c. \$10,000                       d. \$30,000                    e. Other

15. Division A of a company is currently operating at 50% capacity. It produces a single product and sells all
its production to outside customers for \$13 per unit. Variable costs are \$7 per unit, and fixed costs are \$6 per
unit at the current production level. Division B, which currently purchases this product from an outside
supplier for \$12 per unit, would like to purchase the product from Division A. Division A will operate at
80% capacity to meet outside customers’ and Division B’s demand. What is the minimum price that Division
A should charge Division B for this product?
a. \$7.00 per unit. b. \$10.40 per unit c. \$12.00 per unit.             d. \$13.00 per unit.

16. The Alpha Division of a company, which is operating at capacity, produces and sells 1,000 units of a
certain electronic component in a perfectly competitive market. Revenue and cost data are as follows:
Sales                 \$50,000
Variable costs         34,000
Fixed costs            12,000
The minimum transfer price that should be charged to the Beta Division of the same company for each
component is:
a.     \$12         b. \$34             c. \$46            d. \$50
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17. A company has two divisions, A and B, each operated as a profit center. A charges B \$35 per unit for
each unit transferred to B. Other data follow:
A’s variable cost per unit        \$     30
A’s fixed costs                   \$ 10,000
A’s annual sales to B            5,000 units
A’s sales to outsiders           50,000 units
A is planning to raise its transfer price to \$50 per unit. Division B can purchase units at \$40 each from
outsiders, but doing so would idle A’s facilities now committed to producing units for B. Division A cannot
increase its sales to outsiders. From the perspective of the company as a whole, from whom should Division
B acquire the units, assuming A’s market is unaffected?
a. Outside vendors.
b. Division A, but only at the variable cost per unit.
c. Division A, but only until fixed costs are covered, then from outside venders.
d. Division A, despite the increased transfer price.

18. WoodCraft and Recliner are divisions of the Comfort Company. Woodcraft makes high quality chair
frames, which it sells to a variety of manufacturers of recliners, including the Recliner Division of Comfort
Company. WoodCraft budgets it 2006 sales to independent customers at 40,000 frames at a unit selling price
of \$480. Recliner plans to buy 10,000 frames from the WoodCraft Division in 2006 at a transfer price of
\$396 per frame. WoodCraft wants to increase the price of the part it sells to Chair by \$84 to \$480. The
manager of Recliner has stated that it cannot afford a price that high, because that would cause the Recliner's
profit to fall to near zero. Recliner can buy the part from an outside supplier for \$448. The cost data for the
WoodCraft for a frame is:
Direct materials              \$136
Direct labor                    200
WoodCraft will be able to reduce its fixed manufacturing overhead by \$140,000 if it ceases to produce the
parts for Recliner. Woodcraft has excess capacity and there is no alternative use for its facilities. What will
be the impact on net income of Woodcraft is it discontinues selling the 10,000 frames to Recliner?
a. \$60,000 decrease                  b. \$60,000 increase
c. \$340,000 decrease                 d. \$340,000 Increase         e. Other
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Chapter 11. Capital Budgeting
19. Oak Company bought a machine which they will depreciate on the straight-line basis over an estimated
useful life of seven years. The machine has no salvage value. They expect the machine to generate after-tax
net cash inflows from operations of \$110,000 in each of the seven years. Oak’s minimum rate of return is
12%. Information on present value factors is as follows:
-Present value of \$1 at 12% at the end of seven periods                   0.0452
-Present value of an ordinary annuity of \$1 at 12% for seven periods        4.564
Assuming a positive net present value of \$12,000, what was the cost of the machine?
a.     \$480,000 b. \$490,040            c. \$502,040        d. \$514,040

20. Local Corporation plans to replace a delivery truck two years from today. The new truck will cost of
\$40,000. Local has just sold some vacant land and wants to be sure the funds will be available for
replacement of the truck without going into debt. Assume that Local will earn interest at an annual rate of 6%
compounded annually. How much should Local set aside today for truck replacement?
a. \$14,720        b. \$31,577          c. \$35,600         d. \$31,686

21. On January 1, Miami Inc. purchased for \$520,000 a new machine with a useful life of eight years and no
salvage value. The machine will be depreciated using the straight-line method and it is expected to produce
annual cash flow from operations, net of income taxes, of \$120,000. The present value of an ordinary annuity
of \$1 for eight periods at 14% is 4.639. The present value of \$1 for eight periods at 14% is 0.351. Assuming
that Miami uses a time adjusted rate of return of 14% what is the net present value?
a. \$ 36,680        b. \$ 94,668         c. \$154,440       d. \$255,145

Items 22 through 25 are based on the following:
Atlanta Co. is negotiating for the purchase of equipment that would cost \$100,000, with the expectation that
\$20,000 per year could be saved in after-tax cash costs if the equipment were acquired. The equipment's
estimated useful life is 10 years, with no residual value, and would be depreciated by the straight-line
method. Atlanta's predetermined minimum desired rate of return is 12%.
Present value of an annuity of 1 at 12% for 10 periods is         5.65
Present value of 1 due in 10 periods at 12% is                    .322
22. The net present value is
a. \$ 41,250        b. \$ 6,440           c. \$12,200         d. \$13,000

23. The payback period is
a. 4.0 years.    b. 4.4 years.           c. 4.5 years.      d.   5.0 years.

24. The accrual accounting rate of return based on initial investment is
a. 20%            b. 15%               c. 12%               d. 10%

25. In estimating the internal rate of return, the factors in the table of present values of an annuity should be
taken from the columns closest to the following multiple.
a. 0.65           b. 4.00                c. 5.00             d. 5.65

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