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									BA 213 Principles of Accounting III                Instructor: Usha Ramanujam
Dear Students,
      Here are the Test#2 review questions. Answers are highlighted. If you wish
      to work the questions first, I suggest highlighting the entire review so you
      don’t know which is the answer!! See you in class!
Usha

Test 2 – Review questions.

1. Discretionary fixed costs:
        A) cannot be changed since they are fixed.
        B) have a long-term planning horizon, generally encompassing many years.
        C) are made up of facilities, equipment, and basic organization.
        D) responses b and c are both correct.
        E) none of these.

2.Which of the following would usually be considered a committed fixed cost for a retail
      sales corporation?
      A) lease payments made on its store buildings
      B) the cost of the Caribbean trip given to the employee of the year
      C) the cost of running an annual leadership seminar for managers
      D) both a and c above

3.The high-low method is used with which of the following types of costs?
       A) Variable.
       B) Mixed.
       C) Fixed.
       D) Step-variable.

4.Iaci 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 $133.60 per unit.

            Sales volume (units)..............................................            4,000    5,000
            Cost of sales ..........................................................   $383,600 $479,500
            Selling, general, and administrative costs .............                   $124,400 $136,000

       The best estimate of the total contribution margin when 4,300 units are sold is:
       A) $112,230
       B) $162,110
       C) $28,380
       D) $45,150




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5.Davis Corporation has provided the following production and total cost data for two
       levels of monthly production volume. The company produces a single product.

          Production volume ..............................          1,000 units 2,000 units
          Direct materials ...................................         $44,200     $88,400
          Direct labor ..........................................      $37,300     $74,600
          Manufacturing overhead .....................                 $48,500     $62,200

       The best estimate of the total monthly fixed manufacturing cost is:
       A) $130,000
       B) $177,600
       C) $34,800
       D) $225,200

6.Eddy Corporation has provided the following production and total cost data for two
       levels of monthly production volume. The company produces a single product.

          Production volume ................................ 6,000 units 7,000 units
          Direct materials .....................................    $582,600 $679,700
          Direct labor ............................................ $136,200 $158,900
          Manufacturing overhead .......................            $691,800 $714,700

       The best estimate of the total variable manufacturing cost per unit is:
       A) $22.90
       B) $119.80
       C) $142.70
       D) $97.10


7.Farmington Corporation has provided the following production and total cost data for
       two levels of monthly production volume. The company produces a single
       product.

          Production volume ................................... 6,000 units 7,000 units
          Direct materials ........................................    $195,000 $227,500
          Direct labor ............................................... $113,400 $132,300
          Manufacturing overhead ..........................            $913,200 $931,700

       The best estimate of the total cost to manufacture 6,300 units is closest to:
       A) $1,162,350
       B) $1,242,570
       C) $1,222,515
       D) $1,282,680




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Use the following to answer questions:
Donner Company would like to estimate the variable and fixed components of its
maintenance costs and has compiled the following data for the last five months of
operations.

           Labor Maintenance
           Hours    Cost
  January   160     $617
  February 130      $553
  March     180     $596
  April     190     $623
  May       110     $532

   8. Using the high-low method of analysis, the estimated variable cost per labor hour
      for maintenance is closest to:
      A) $0.83
      B) $1.84
      C) $1.30
      D) $1.14

   9. Using the high-low method of analysis, the estimated total fixed cost per month
      for maintenance is closest to:
      A) $440
      B) $407
      C) $470
      D) $0


10.In the middle of the year, the price of Lake Corporation's major raw material increased
        by 8%. How would this increase affect the company's break-even point and
        margin of safety?

            Break-even point Margin of safety
       A)       Increase        Increase
       B)      Increase        Decrease
       C)      Decrease        Decrease
       D)      Decrease         Increase




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11.The following information relates to the break-even point at Pezzo Corporation:

           Sales dollars ..................... $120,000
           Total fixed expenses ......... $30,000

       If Pezzo wants to generate net operating income of $12,000, what will its sales
       dollars have to be?
       A) $132,000
       B) $136,000
       C) $168,000
       D) $176,000

12.Black Company's sales are $600,000, its fixed expenses are $150,000, and its variable
       expenses are 60% of sales. Based on this information, the margin of safety is:
       A) $90,000
       B) $190,000
       C) $225,000
       D) $240,000

13.During last year, Thor Lab supplied hospitals with a comprehensive diagnostic kit for
       $120. At a volume of 80,000 kits, Thor had fixed expenses of $1,000,000 and net
       operating income of $200,000. Because of an adverse legal decision, Thor's
       liability insurance expenses this year will be $1,200,000 more than they were last
       year. Assuming that the volume and other costs are unchanged, what should be
       the sales price this year if Thor is to make the same $200,000 net operating
       income?
       A) $120
       B) $135
       C) $150
       D) $240


14.Mason Company's selling price was $20.00 per unit. Fixed expenses totaled $54,000,
      variable expenses were $14.00 per unit, and the company reported a profit of
      $9,000 for the year. The break-even point for Mason Company is:
      A) 10,500 units
      B) 4,500 units
      C) 8,500 units
      D) 9,000 units




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15.Garcia Veterinary Clinic expects the following operating results next year:

              Sales (total)....................................    $600,000
              Variable expenses (total) ...............            $120,000
              Fixed expenses (total) ...................           $300,000

         What is Garcia's break-even point next year in sales dollars?
         A) $240,000
         B) $375,000
         C) $400,000
         D) $420,000

16.Gamma Company has sales of $120,000, a contribution margin of $48,000, and a net
      operating income of $12,000. The company's degree of operating leverage is:
      A) 2.5
      B) 4.0
      C) 10.0
      D) 4.8


Use the following to answer questions:
A manufacturer of premium wire strippers has supplied the following data:

  Units produced and sold ..................................................            560,000
  Sales revenue ..................................................................   $4,704,000
  Variable manufacturing expense.....................................                 2,436,000
  Fixed manufacturing expense .........................................               1,200,000
  Variable selling and administrative expense...................                        616,000
  Fixed selling and administrative expense .......................                      272,000
  Net operating income ......................................................          $180,000

  17. The company's margin of safety in units is closest to:
      A) 384,762
      B) 263,704
      C) 61,017
      D) 522,740


  18. The company's unit contribution margin is closest to:
      A) $2.95
      B) $5.45
      C) $7.30
      D) $4.05




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  19. The company's degree of operating leverage is closest to:
      A) 9.18
      B) 3.11
      C) 2.07
      D) 26.13

20.All other things equal, which of the following would increase a division's residual
       income?
       A) Increase in expenses.
       B) Decrease in average operating assets.
       C) Increase in minimum required return.
       D) Decrease in net operating income.

  21. Controllable revenue would be included in a performance report for a:

             Profit center Cost center
        A)        No          No
        B)        No          Yes
        C)       Yes          Yes
        D)       Yes          No

22.Channing Company has two divisions, S and T. The company's overall contribution
      margin ratio is 30% when sales in the two divisions total $750,000. If variable
      expenses are $450,000 in Division S, and if Division S's contribution margin ratio
      is 25%, then sales in Division T must be:
      A) $75,000
      B) $150,000
      C) $225,000
      D) $300,000

23.Sorto Corporation has two divisions: the East Division and the West Division. The
       corporation's net operating income is $93,200. The East Division's divisional
       segment margin is $223,200 and the West Division's divisional segment margin is
       $15,900. What is the amount of the common fixed expense not traceable to the
       individual divisions?
       A) $316,400
       B) $145,900
       C) $109,100
       D) $239,100




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24.Gunderman Corporation has two divisions: the Alpha Division and the Charlie
      Division. The Alpha Division has sales of $230,000, variable expenses of
      $131,100, and traceable fixed expenses of $63,300. The Charlie Division has
      sales of $540,000, variable expenses of $307,800, and traceable fixed expenses of
      $120,700. The total amount of common fixed expenses not traceable to the
      individual divisions is $119,200. What is the company's net operating income?
      A) $147,100
      B) $331,100
      C) $27,900
      D) $211,900

25.The following information pertains to Quest Company's Gold Division for last year:

          Sales ..............................................     $311,000
          Variable expenses..........................              $250,000
          Traceable fixed expenses ..............                   $50,000
          Average operating assets ...............                  $40,000

       The Gold Division's return on investment is:
       A) 10.00%
       B) 13.33%
       C) 27.50%
       D) 30.00%


26.The following information is available on Company X:

          Sales ..........................................................   $90,000
          Net operating income ................................               $3,600
          Average operating assets ...........................               $30,000
          Stockholders’ equity..................................             $25,000
          Minimum required rate of return ...............                       10%

       Company X's residual income would be:
       A) $1,100
       B) $5,400
       C) $360
       D) $600

27.Which of the following represents the normal sequence in which the below budgets
      are prepared?
      A) Sales, Balance Sheet, Income Statement
      B) Balance Sheet, Sales, Income Statement
      C) Sales, Income Statement, Balance Sheet
      D) Income Statement, Sales, Balance Sheet




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28.When preparing a production budget, the required production equals:
      A) budgeted sales + beginning inventory + desired ending inventory.
      B) budgeted sales - beginning inventory + desired ending inventory.
      C) budgeted sales - beginning inventory - desired ending inventory.
      D) budgeted sales + beginning inventory - desired ending inventory.

29.The direct labor budget is based on:
       A) the desired ending inventory of finished goods.
       B) the beginning inventory of finished goods.
       C) the required production for the period.
       D) the required materials purchases for the period.

  30. Douglas Company plans to sell 24,000 units of Product A during July and 30,000
      units during August. Sales of Product A during June were 25,000 units. Past
      experience has shown that end-of-month inventory should equal 3,000 units plus
      30% of the next month's sales. On June 30 this requirement was met. Based on
      these data, how many units of Product A must be produced during the month of
      July?
      A) 28,800
      B) 22,200
      C) 24,000
      D) 25,800


                                                 January February March
          Sales in units .....................    15,000   20,000 18,000
          Production in units ............        18,000   19,000 16,000

       One pound of material is required for each finished unit. The inventory of
       materials at the end of each month should equal 20% of the following month's
       production needs. Purchases of raw materials for February should be:
       A) 19,600 pounds
       B) 20,400 pounds
       C) 18,400 pounds
       D) 18,600 pounds

  31. Sparks Company has a cash balance of $7,500 on April 1. The company must
      maintain a minimum cash balance of $6,000. During April, cash receipts of
      $48,000 are planned. Cash disbursements during the month are expected to total
      $52,000. Ignoring interest payments, during April the company will need to
      borrow:
      A) $3,500
      B) $2,500
      C) $6,000
      D) $4,000




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Use the following to answer questions:

Roberts Company manufactures home cleaning products. One of the products,
Quickclean, requires 2 pounds of Material A and 5 pounds of Material B per unit
manufactured. Material A can be purchased from the supplier for $0.30 per pound and
Material B can be purchased for $0.50 per pound. The finished goods inventory on hand
at the end of each month must be equal to 4,000 units plus 25% of the next month's sales.
The raw materials inventory on hand at the end of each month (for either Material A or
Material B) must be equal to 80% of the following month's production needs.

  32. Assume that on January 1 the inventory of Quickclean was 8,000 units. Expected
      sales in January are 14,000 units and expected sales in February are 18,000 units.
      The number of units needed to be manufactured in January would be:
      A) 10,500
      B) 14,000
      C) 14,500
      D) 15,000


  33. Assume that the production budget calls for 26,000 units of Quickclean to be
      manufactured in June and 32,000 units of Quickclean to be manufactured in July.
      On May 31 there will be 41,600 pounds of Material A in inventory. The number
      of pounds of Material A needed for production during June would be:
      A) 61,600
      B) 51,200
      C) 35,600
      D) 52,000

  34. Assume that the production budget calls for 26,000 units of Quickclean to be
      manufactured in June and 32,000 units to be manufactured in July. On May 31
      there will be 104,000 pounds of Material B in inventory. The number of pounds
      of Material B to be purchased during June would be:
      A) 128,000
      B) 130,000
      C) 154,000
      D) 160,000

Use the following to answer questions:

The following are budgeted data for the Bingham Company, a merchandising company:

                                  Budgeted Sales (at retail)
  January ...................            $300,000
  February .................             $340,000
  March .....................            $400,000
  April .......................          $350,000



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Cost of goods sold as a percentage of sales is 60%. The desired ending inventory is 75%
of next month's sales.

  35. Assuming that the Bingham Company had inventory on hand of $70,000 (at cost)
      on January 1, the purchases for January (at cost) would be:
      A) $180,000
      B) $250,000
      C) $263,000
      D) $110,000

  36. The desired ending inventory (at cost) for the month of February would be:
      A) $180,000
      B) $300,000
      C) $240,000
      D) $160,000

  37. Assume that all purchases are paid for in the month following the month of
      purchase. The cash disbursements for purchases that would appear in the April
      cash budget would be:
      A) $180,000
      B) $157,500
      C) $240,000
      D) $217,500

Use the following to answer questions:

LFM Corporation makes and sells a product called Product WZ. Each unit of Product
WZ requires 3.5 hours of direct labor at the rate of $16.00 per direct labor-hour.
Management would like you to prepare a Direct Labor Budget for June.

  38. The budgeted direct labor cost per unit of Product WZ would be:
      A) $4.57
      B) $19.50
      C) $16.00
      D) $56.00


  39. The company plans to sell 31,000 units of Product WZ in June. The finished
      goods inventories on June 1 and June 30 are budgeted to be 100 and 600 units,
      respectively. Budgeted direct labor costs for June would be:
      A) $1,764,000
      B) $504,000
      C) $1,708,000
      D) $1,736,000




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Use the following to answer questions:

Harris, Inc., has budgeted sales in units for the next five months as follows:

           June .......................    9,400 units
           July ........................   7,800 units
           August ...................      7,300 units
           September ..............        5,400 units
           October ..................      4,100 units

Past experience has shown that the ending inventory for each month should be equal to
20% of the next month's sales in units. The inventory on May 31 contained 1,880 units.
The company needs to prepare a production budget for the next five months.

  40. The beginning inventory for September should be:
      A) 820 units
      B) 1,880 units
      C) 1,460 units
      D) 1,080 units

 41.The total number of units produced in July should be:
      A) 9,260 units
      B) 7,700 units
      C) 7,800 units
      D) 7,900 units




                                                                                         11
Problem:

The Fraley Company, a merchandising firm, has planned the following sales for the next
       four months:

                                                      March   April   May     June
           Total budgeted sales ..........           $50,000 $70,000 $90,000 $60,000

       Sales are made 40% for cash and 60% on account. From experience, the company
       has learned that a month’s sales on account are collected according to the
       following pattern:

           Month of sale.........................................................    70%
           First month following month of sale .....................                 20%
           Second month following month of sale ................                      8%
           Uncollectible .........................................................    2%

       The company requires a minimum cash balance of $4,000 to start a month.

       Required:
       a. Compute the budgeted cash receipts for June.
       b. Assume the following budgeted data for June:

            Purchases ......................................................     $52,000
            Selling and administrative expenses ............                     $10,000
            Depreciation .................................................        $8,000
            Equipment purchases ...................................              $15,000
            Cash balance, beginning of June ..................                    $6,000

       Using this data, along with your answer to part (1) above, prepare a cash budget
       in good form for June. Clearly show any borrowing needed during the month. The
       company can borrow in any dollar amount, but will not pay any interest until the
       following month.




                                                                                           12
Answer:

a.   Cash sales, June: $60,000 × 40% ................ $24,000
     Collections on account:
      June: $60,000 × 60% × 70% .................... 25,200
      May: $90,000 × 60% × 20% .................... 10,800
      April: $70,000 × 60% × 8% .....................              3,360
     Total cash receipts ....................................... $63,360

b.   Cash balance, beginning .............................              $ 6,000
     Add cash receipts from sales ......................                 63,360
     Total cash available ....................................           69,360
     Less disbursements:
       Purchases .................................................       52,000
       Selling and administrative .......................                10,000
       Equipment purchases ..............................                15,000
     Total disbursements....................................             77,000
     Deficiency of cash ......................................           (7,640)
     Financing:
       Borrowing ...............................................         11,640
       Repayments .............................................               0
       Interest .....................................................         0
     Total financing ...........................................         11,640
     Cash balance, ending ..................................            $ 4,000




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