Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA PassMaster Questions–Business 5
Export Date: 10/30/08
1
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Cost Measurement and Cost Measurement Concepts
CPA-03465
Type1 M/C
1. CPA-03465 D94 - 1.03
A-D
Corr Ans: C
PM#1
B 5-01
Page 7
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.
Raw materials
Machining @ $12/hr.
Assembly @ $10/hr.
Variable overhead @ $8/hr.
Fixed overhead @ $4/hr.
Total cost
Suggested selling price
Actual research and development costs
Proposed advertising and promotion costs
Tape Duplicator
$ 44.00
18.00
30.00
36.00
18.00
$146.00
Cleaning Unit
$36.00
15.00
10.00
18.00
9.00
$88.00
$ 169.95
$240,000
$500,000
$ 99.98
$175,000
$350,000
The total overhead cost of $27.00 for Huron's laser disc cleaning unit is a:
a.
b.
c.
d.
Carrying cost.
Sunk cost.
Mixed cost.
Committed cost.
CPA-03465
Explanation
Choice "c" is correct. The total overhead cost of $27.00 is a mixed cost because it includes both fixed
and variable components.
Choice "a" is incorrect. Carrying costs are the costs of carrying inventory.
Choice "b" is incorrect. Sunk costs are in the past and unavoidable.
Choice "d" is incorrect. Committed costs are in the future, but unavoidable.
CPA-03484
Type1 M/C
2. CPA-03484 D96 - 1.30
A-D
Corr Ans: B
PM#3
B 5-01
Page 16
Lankip Company produces two main products and a byproduct out of a joint process. The ratio of output
quantities to input quantities of direct material used in the joint process remains consistent from month to
month. Lankip has employed the physical-volume method to allocate joint production costs to the two
main products. The net realizable value of the byproduct is used to reduce the joint production costs
before the joint costs are allocated to the main products. Data regarding Lankip's operations for the
current month are presented in the chart below. During the month, Lankip incurred joint production costs
of $2,520,000. The main products are not marketable at the split-off point and, thus, have to be
processed further.
Monthly output in pounds
Selling price per pound
Process costs
First Main
Product
90,000
$
30
$ 540,000
Second Main
Product
150,000
$
14
$660,000
Byproduct
60,000
$
2
2
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
The amount of joint production cost that Lankip would allocate to the Second Main Product by using the
physical-volume method to allocate joint production costs would be:
a.
b.
c.
d.
$1,260,000
$1,500,000
$1,575,000
$1,650,000
CPA-03484
Explanation
Choice "b" is correct. $1,500,000 joint cost is allocated to the second main product by using the physicalvolume method.
Joint costs
Less net realizable value of byproduct (60,000 × $2)
Net joint costs to be allocated
$2,520,000
(120,000)
$2,400,000
150,000 pounds of second main product
× $2,400,000 = $1,500,000
240,000 pounds of total (first + second) main products
Choices "a", "c", and "d" are incorrect based on the above explanation.
CPA-03498
Type1 M/C
A-D
3. CPA-03498 ARE Nov 95 #48
Corr Ans: C
PM#4
B 5-01
Page 16
For purposes of allocating joint costs to joint products, the sales price at point of sale, reduced by cost to
complete after split-off, is assumed to be equal to the:
a.
b.
c.
d.
Joint costs.
Total costs.
Net sales value at split-off.
Sales price less a normal profit margin at point of sale.
CPA-03498
Explanation
Choice "c" is correct. Sales price less the cost to complete is defined as the net sales value at split-off. In
other words, this is the additional contribution to income generated by completing the product.
Choice "a" is incorrect. Sales price at point of sale reduced by cost to complete is the additional
contribution to income generated by completing the product. It is not equal to joint costs. (If it were, this
would be a zero profit situation.)
Choice "b" is incorrect. Sales price at point of sale reduced by cost to complete is the additional
contribution to income generated by completing the product. It is not equal to total costs.
Choice "d" is incorrect. Selling price less a normal profit margin is generally a cost figure. It is not equal
to sales price less the cost to complete, which is the additional contribution to income generated by
completing the product. (If it were, this would be a zero profit situation.)
CPA-03503
Type1 M/C
A-D
4. CPA-03503 ARE May 95 #43
Corr Ans: B
PM#5
B 5-01
Page 16
Kode Co. manufactures a major product that gives rise to a by-product called May. May's only separable
cost is a $1 selling cost when a unit is sold for $4. Kode accounts for May's sales by deducting the $3 net
amount from the cost of goods sold of the major product. There are no inventories. If Kode were to
change its method of accounting for May from a by-product to a joint product, what would be the effect on
Kode's overall gross margin?
a. No effect.
b. Gross margin increases by $1 for each unit of May sold.
c. Gross margin increases by $3 for each unit of May sold.
3
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
d. Gross margin increases by $4 for each unit of May sold.
CPA-03503
Explanation
Choice "b" is correct. Changing the accounting from by-product to joint product changes the computation
of gross margin because the $1 selling cost is treated differently under each method. Using the byproduct method, the $1 selling expense is netted against the $4 selling price to arrive at a $3 deduction
from cost of goods sold. Since gross margin is calculated as sales less cost of goods sold, the $1 does
flow into the gross margin amount using this method. Using the joint product method, the $1 cost would
be a selling expense, which is not included in the calculation of gross margin. Instead, selling expenses
are deducted from gross margin (after it is computed) to arrive at net income. Although the total net
ncome is the same under both methods, the joint product method results in an increased gross margin of
$1 per unit of May sold.
Choice "a" is incorrect. The $1 selling expense would be deducted from gross margin using the joint
product method.
Choice "c" is incorrect. The $4 sales price is included in the calculation of gross margin under both
methods.
Choice "d" is incorrect. The $4 sales price is included in calculation of gross margin under both methods.
CPA-03506
Type1 M/C
A-D
Corr Ans: D
PM#6
B 5-01
5. CPA-03506 Th May 93 #42 Page 16
For purposes of allocating joint costs to joint products, the sales price at point of sale, reduced by cost to
complete after split-off, is assumed to be equal to the:
a.
b.
c.
d.
Total costs.
Joint costs.
Sales price less a normal profit margin at point of sale.
Relative sales value at split-off.
CPA-03506
Explanation
Choice "d" is correct. Sales price less the cost to complete is defined as the relative sales value at splitoff. In other words, this is the additional contribution to income generated by completing the product.
Choice "a" is incorrect. Sales price at point of sale reduced by cost to complete is the additional
contribution to income generated by completing the product. It is not equal to total costs.
Choice "b" is incorrect. Sales price at point of sale reduced by cost to complete is the additional
contribution to income generated by completing the product. It is not equal to joint costs. (If it were, this
would be a zero profit situation.)
Choice "c" is incorrect. Selling price less a normal profit margin is generally a cost figure. It is not equal
to sales price less the cost to complete, which is the additional contribution to income generated by
completing the product. (If it were, this would be a zero profit situation.)
CPA-03510
Type1 M/C
A-D
Corr Ans: D
PM#7
B 5-01
6. CPA-03510 PII May 92 #42 Page 6
Fab Co. manufactures textiles. Among Fab's 1991 manufacturing costs were the following salaries and
wages:
Loom operators
Factory foremen
Machine mechanics
$120,000
45,000
30,000
What was the amount of Fab's 1991 direct labor?
a. $195,000
4
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
b. $165,000
c. $150,000
d. $120,000
CPA-03510
Explanation
Choice "d" is correct. Direct labor represents the cost of labor directly associated with the manufacturing
of the finished product. The loom operators would qualify as direct labor, while the factory foremen and
the machine mechanics would qualify as indirect labor, or overhead. Total direct labor is $120,000.
Choices "a", "b", and "c" are incorrect based on the above explanation.
CPA-03513
Type1 M/C
7. CPA-03513 J90 - 1.06
A-D
Corr Ans: B
PM#8
B 5-01
Page 14
Sonimad Sawmill manufactures two lumber products from a joint milling process. The two products
developed are mine support braces (MSB) and unseasoned commercial building lumber (CBL). A
standard production run incurs joint costs of $300,000 and results in 60,000 units of MSB and 90,000
units of CBL. Each MSB sells for $2 per unit, each CBL sells for $4 per unit.
Assuming no further processing work is done after the split-off point, the amount of joint cost allocated to
commercial building lumber (CBL) on a physical quantity allocation basis would be:
a.
b.
c.
d.
$75,000
$180,000
$225,000
$120,000
CPA-03513
Explanation
Choice "b" is correct. $180,000. The question requires allocation based on physical quantity, as follows:
Total Units
MSB
CBL
Total units
60,000 units (60/150 = 40%)
90,000 units (90/150 = 60%)
150,000 units (100%)
Allocation of Joint Costs
MSB 40% × $300,000 = $120,000
CBL 60% × $300,000 = $180,000
$300,000
Choices "a", "c", and "d" are incorrect, per the above calculation.
CPA-03541
Type1 M/C
8. CPA-03541 J90 - 1.07
A-D
Corr Ans: A
PM#9
B 5-01
Page 14
Sonimad Sawmill manufactures two lumber products from a joint milling process. The two products
developed are mine support braces (MSB) and unseasoned commercial building lumber (CBL). A
standard production run incurs joint costs of $300,000 and results in 60,000 units of MSB and 90,000
units of CBL. Each MSB sells for $2 per unit, each CBL sells for $4 per unit.
If there are no further processing costs incurred after the split-off point, the amount of joint cost allocated
to the mine support braces (MSB) on a relative sales value basis would be:
a.
b.
c.
d.
$75,000
$180,000
$225,000
$120,000
5
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-03541
Explanation
Choice "a" is correct. $75,000. The question requires allocation based on relative sales value, as follows:
Relative Sales Value
MSB
60,000 units x $2/unit = $120,000 (120/480 = 25%)
CBL
90,000 units x $4/unit = $360,000 (360/480 = 75%)
Total sales value
$480,000 units (100%)
Allocation of Joint Costs
MSB 25% × $300,000 = $ 75,000
CBL 75% × $300,000 = $225,000
$300,000
Choices "b", "c", and "d" are incorrect based on the above explanation.
CPA-03549
Type1 M/C
9. CPA-03549 J90 - 1.08
A-D
Corr Ans: B
PM#10
B 5-01
Page 16
Sonimad Sawmill manufactures two lumber products from a joint milling process. The two products
developed are mine support braces (MSB) and unseasoned commercial building lumber (CBL). A
standard production run incurs joint costs of $300,000 and results in 60,000 units of MSB and 90,000
units of CBL. Each MSB sells for $2 per unit, each CBL sells for $4 per unit.
Continuing with the previous data, assume the commercial building lumber is not marketable at split-off
but must be further planed and sized at a cost of $200,000 per production run. During this process,
10,000 units are unavoidably lost; these spoiled units have no discernable value. The remaining units of
commercial building lumber are saleable at $10.00 per unit. The mine support braces, although saleable
immediately at the split-off point, are coated with a tar-like preservative that costs $100,000 per
production run. The braces are then sold for $5 each.
Using the net realizable value (NRV) basis, the completed cost assigned to each unit of commercial
building lumber would be:
a.
b.
c.
d.
$2.92
$5.625
$5.3125
Some amount other than those given above.
CPA-03549
Explanation
Choice "b" is correct. $5.625.
RULE: If net realizable value cannot be deteriend at split-off, then additional costs added after the splitoff point (separable costs) must be subtracted from the final selling price to arrive at net realizable value.
[Note: In this question, this applies to CBL only, as MSB is saleable at $2 each at split-off.]
CBL sales value at split off
Units of CBL produced 90,000
Less: Spoilage
(10,000)
Units available for sale 80,000
Sales price at point of sale: 80,000 units x $10/unit = $ 800,000
Less: Processing cost to complete
(200,000)
Sales value at split off
$ 600,000
MSB sales value at split off
60,000 units produced x $2 per unit sales price = $120,000
6
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
(Note that the additional processing costs incurred to generate a higher selling price of $5 per unit are not
relevant to the sales value at split off.)
Allocation of joint costs to CBL:
CBL sales value at split off
MSB sales value at split off
Total sales value at split off
$600,000
120,000
$720,000
(600/720 = approx. 83.3%)
(120/720 = approx. 16.7%)
(100%)
$300,000 joint costs x 600/720 = $250,000
(Note that the percentages did not come out "even" - in such cases, it is important to use the exact
computations on your calculator.)
Cost per unit of CBL:
Allocation of joint cost
Additional processing costs
Total costs
Divided by saleable units
Cost per unit
$250,000
200,000
$450,000
÷ 80,000
$ 5.625
Choices "a", "c", and "d" are incorrect based on the above explanation.
CPA-03557
Type1 M/C
10. CPA-03557 J90 - 1.09
A-D
Corr Ans: D
PM#11
B 5-01
Page 16
Sonimad Sawmill manufactures two lumber products from a joint milling process. The two products
developed are mine support braces (MSB) and unseasoned commercial building lumber (CBL). A
standard production run incurs joint costs of $300,000 and results in 60,000 units of MSB and 90,000
units of CBL. Each MSB sells for $2 per unit, each CBL sells for $4 per unit.
Continuing with the previous data, assume the commercial building lumber is not marketable at split-off
but must be further planed and sized at a cost of $200,000 per production run. During this process,
10,000 units are unavoidably lost; these spoiled units have no discernable value. The remaining units of
commercial building lumber are saleable at $10.00 per unit. The mine support braces, although saleable
immediately at the split-off point, are coated with a tar-like preservative that costs $100,000 per
production run. The braces are then sold for $5 each.
If Sonimad Sawmill chose not to process the mine support braces beyond the split-off point, the
contribution from the joint milling process would be:
a.
b.
c.
d.
$50,000 higher.
$180,000 lower.
$100,000 higher.
$80,000 lower.
CPA-03557
Explanation
Choice "d" is correct. $80,000 lower.
Sales price with coating
Sales price without coating
Additional revenue from coating
Units of MSB
Additonal revenue from coating
Less cost of applying coating
Contribution margin foregone
$5 per unit
(2) per unit
$3 per unit
× 60,000 units
$180,000
(100,000)
$80,000
Choices "a", "b", and "c" are incorrect based on the above explanation.
7
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-03561
Type1 M/C
A-D
Corr Ans: A
11. CPA-03561 ARE May 95 #42
PM#13
B 5-01
Page 12
Companies in what type of industry may use a standard cost system for cost control?
a.
b.
c.
d.
Mass production
industry
Yes
Yes
No
No
Service
industry
Yes
No
No
Yes
CPA-03561
Explanation
Choice "a" is correct. Manufacturing industries such as mass production are typical areas where
standard cost systems are used. However, service industries may also use a standard cost system.
Choices "b", "c", and "d" are incorrect based on the above explanation.
CPA-04794
Type1 M/C
A-D
Corr Ans: B
PM#14
B 5-01
12. CPA-04794 2005 Released Page 17
In the past, four direct labor hours were required to produce each unit of product Y. Material costs were
$200 per unit, the direct labor rate was $20 per hour, and factory overhead was three times direct labor
cost. In budgeting for next year, management is planning to outsource some manufacturing activities and
to further automate others. Management estimates these plans will reduce labor hours by 25%, increase
the factory overhead rate to 3.6 times direct labor costs, and increase material costs by $30 per unit.
Management plans to manufacture 10,000 units. What amount should management budget for cost of
goods manufactured?
a.
b.
c.
d.
$4,820,000
$5,060,000
$5,200,000
$6,500,000
CPA-04794
Explanation
Choice "b" is correct.
Old Costs
Cost per
Input unit
Revised Costs
Units
Input per
Unit
Prime Costs
Direct Labor
10,000
4
$
20
800,000
-25%
(200,000)
Direct Materials
10,000
1
$
200
2,000,000
30.00
300,000
2,400,000
Rate Per
DL Costs
3.60
Overhead
Overhead
Rate Per
DL Costs
3
$800,000
Old
Costs
Adjustment
Factor
Adjustment
5,200,000
Total
600,000
2,300,000
2,160,000
5,060,000
The labor and material costs computed in accordance with old standards are adjusted by the amounts
given in the fact pattern. Labor decreases by 25%, and direct materials increase by $30 per unit. The
overhead application rate increases from 3 times direct labor costs to 3.6 times revised direct labor costs.
Total Revised Costs are computed as shown above.
Choice "a" is incorrect per the above computation.
Choice "c" is incorrect. The $5.2 million in total costs represents the old cost structure.
Choice "d" is incorrect per the above computation.
8
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-04795
Type1 M/C
A-D
Corr Ans: D
PM#15
B 5-01
13. CPA-04795 Released 2005 Page 13
Mighty, Inc. processes chickens for distribution to major grocery chains. The two major products resulting
from the production process are white breast meat and legs. Joint costs of $600,000 are incurred during
standard production runs each month, which produce a total of 100,000 pounds of white breast meat and
50,000 pounds of legs. Each pound of white breast meat sells for $2 and each pound of legs sells for $1.
If there are no further processing costs incurred after the split-off point, what amount of the joint costs
would be allocated to the white breast meat on a relative sales value basis?
a.
b.
c.
d.
$120,000
$200,000
$400,000
$480,000
CPA-04795
Explanation
Choice "d" is correct.
Joint costs allocated based upon relative sales value at split off are allocated based upon the ratio of
individual sales values to sales value at split off. The ratio is computed at 80% and 20% and applied to
the $600,000 in joint cost to arrive at the joint cost allocation below. Be careful of the question. This
question asks for the amount of allocated joint costs, but others may ask for total costs. In those
instances, you would add the allocated costs to the direct costs that can be traced to the product prior to
split off.
White breast meat
Legs
Pounds
100,000
50,000
Price/
Pound
$ 2.00
$ 1.00
Total
Sales Value
Split off
$200,000
50,000
Relative
Value
80%
20%
$250,000
100%
Joint
Costs
$600,000
$600,000
Joint Cost
Allocation
$480,000
120,000
$600,000
Choice "a" is incorrect. This selection represents the allocation to legs.
Choice "b" is incorrect. This selection represents the relative sales value of white breast meat at split off.
Choice "c" is incorrect, per the above computation.
CPA-04824
Type1 M/C
A-D
Corr Ans: A
PM#16
B 5-01
14. CPA-04824 Released 2005 Page 6
Which of the following types of costs are prime costs?
a.
b.
c.
d.
Direct materials and direct labor.
Direct materials and overhead.
Direct labor and overhead.
Direct materials, direct labor, and overhead.
CPA-04824
Explanation
Choice "a" is correct. Prime costs are normally defined as direct materials and direct labor.
Choice "b" is incorrect. Direct materials and overhead do not represent prime costs. Prime costs are
direct material and direct labor.
Choice "c" is incorrect. Direct labor and overhead are normally referred to as conversion costs, not prime
costs.
Choice "d" is incorrect. Direct materials, direct labor, and overhead comprise total costs, not simply prime
costs.
9
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-05250
Type1 M/C
A-D
Corr Ans: A
PM#26
B 5-01
15. CPA-05250 Released 2006 Page 90
Which of the following would be most impacted by the use of the percentage of sales forecasting method
for budgeting purposes?
a.
b.
c.
d.
Accounts payable.
Mortgages payable.
Bonds payable.
Common stock.
CPA-05250
Explanation
Note: This question is answered in the Required Homework Reading regarding Annual Profit Plans in
Chapter B5.
Choice "a" is correct. Of the items listed, accounts payable would be the most impacted by the use of the
percentage of sales forecasting method for budgeting purposes. If sales increased or decreased,
purchases would presumably increase or decrease, by whatever percentage was being used in the
budgeting process. If purchases increased or decreased, accounts payable would presumably increase
or decrease by approximately the same percentage. The other items listed have no relationship at all to
sales and would thus not be affected by the method used to forecast sales.
Choice "b" is incorrect. Mortgages have no relationship to sales and mortgages payable would not be
affected by the method used to forecast sales.
Choice "c" is incorrect. Bonds have no relationship to sales and bonds payable would not be affected by
the method used to forecast sales. Mortgages and bonds are just alternate forms of debt.
Choice "d" is incorrect. Common stock has no relationship to sales and would not be affected by the
method used to forecast sales.
CPA-05248
Type1 M/C
A-D
Corr Ans: C
PM#26
B 5-01
16. CPA-05248 Released 2006 Page 3
Rodder, Inc. manufactures a component in a router assembly. The selling price and unit cost data for the
component are as follows:
Selling price
Direct materials cost
Direct labor cost
Variable overhead cost
Fixed manufacturing overhead cost
Fixed selling and administration cost
$15
3
3
3
2
1
The company received a special one-time order for 1,000 components. Rodder has an alternative use of
production capacity for the 1,000 components that would produce a contribution margin of $5,000. What
amount is the lowest unit price Rodder should accept for the component?
a.
b.
c.
d.
$9
$12
$14
$24
CPA-05248
Explanation
Note: This question is answered in the Required Homework Reading relating to Relevant Costs in
Chapter B5.
Choice "c" is correct. The lowest unit price that Rodder should accept is the variable cost of producing
the router ($3 + $3 + $3 = $9) plus the $5,000 contribution margin on a unit basis ($5,000 / 1,000 = $5) of
10
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
the alternative use for the production capacity. The total of these amounts is $14 [$3 + $3 + $3 + $5 =
$14].
Choice "a" is incorrect. The lowest unit price that Rodder should accept is the variable cost of producing
the router ($3 + $3 + $3 = $9) plus the $5,000 contribution margin on a unit basis ($5,000 / 1,000 = $5) of
the alternative use for the production capacity, not just the variable cost ($9) of producing the router.
Choice "b" is incorrect. The lowest unit price that Rodder should accept is the variable cost of producing
the router ($3 + $3 + $3 = $9) plus the $5,000 contribution margin on a unit basis ($5,000 / 1,000 = $5) of
the alternative use for the production capacity, not the variable and fixed cost ($9 + $2 + $1 = $12) of
producing the router.
Choice "d" is incorrect. The lowest unit price that Rodder should accept is the variable cost of producing
the router ($3 + $3 + $3 = $9) plus the $5,000 contribution margin on a unit basis ($5,000 / 1,000 = $5) of
the alternative use for the production capacity, not the variable cost and selling price ($9 + $15 = $24) of
producing the router.
CPA-05322
Type1 M/C
A-D
Corr Ans: D
PM#29
B 5-01
17. CPA-05322 Released 2006 Page 13
A company manufactures two products, X and Y, through a joint process. The joint (common) costs
incurred are $500,000 for a standard production run that generates 240,000 gallons of X and 160,000
gallons of Y. X sells for $4.00 per gallon, while Y sells for $6.50 per gallon. If there are no additional
processing costs incurred after the split-off point, what is the amount of joint cost for each production run
allocated to X on a physical-quantity basis?
a.
b.
c.
d.
$200,000
$240,000
$260,000
$300,000
CPA-05322
Explanation
Choice "d" is correct. Using a physical quantity basis with no additional processing costs after the split-off
point, product X is 240,000 gallons and product Y is 160,000 gallons, for a total of 400,000 gallons. That
means that product X is allocated 60% (240,000 / 400,000) of the joint costs and product Y is allocated
40% (160,000 / 400,000) of the joint costs. Product X is thus allocated 60% of the $500,000 joint costs,
or $300,000. The data about selling costs is a distracter because the joint costs are allocated on a
physical quantity basis.
Choice "a" is incorrect. $200,000 is the amount of the joint cost that is allocated to product Y, not product
X.
Choice "b" is incorrect, per the above calculation. [$240,000 is $1 for each gallon of product X. However,
it is difficult to determine where the $1 comes from.]
Choice "c" is incorrect, per the above calculation. [$260,000 is a nice round number, and $260,000 plus
the $240,000 adds to the $500,000 joint cost. However, that is about all it is worth.]
CPA-05312
Type1 M/C
A-D
Corr Ans: D
PM#29
B 5-01
18. CPA-05312 Released 2006 Page 5
Which of the following is assigned to goods that were either purchased or manufactured for resale?
a.
b.
c.
d.
Relevant cost.
Period cost.
Opportunity cost.
Product cost.
CPA-05312
Explanation
11
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "d" is correct. Product cost is assigned to goods (products) that were either purchased or
manufactured for resale.
Choice "a" is incorrect. Relevant costs are costs that are relevant to a particular decision.
Choice "b" is incorrect. Period costs are costs that are expensed during a period. They are not charged
to a product (capitalized), which is why they are expensed.
Choice "c" is incorrect. Opportunity costs are costs that would have been saved or profits that would
have been earned if another decision alternative had been selected.
Accumulating and Assigning Costs
CPA-03562
Type1 M/C
19. CPA-03562 ARE R98 #7
A-D
Corr Ans: A
PM#1
B 5-02
Page 116
In its first year of operation, Magna Manufacturers had the following costs when it produced 100,000 and
sold 80,000 units of its only product:
Manufacturing costs-Fixed
Variable
$180,000
160,000
Selling and admin costs-Fixed
Variable
90,000
40,000
How much lower would Magna's net income be if it used variable costing instead of full absorption
costing?
a.
b.
c.
d.
$36,000
$54,000
$68,000
$94,000
CPA-03562
Explanation
Choice "a" is correct. The difference between variable costing and full absorption costing lies in the
treatment of fixed manufacturing costs. Full absorption costing treats fixed manufacturing costs as
product costs, while variable costing expenses these as period costs.
Using full absorption costing:
$180,000 / 100,000 units = $1.80 per unit produced
$1.80 x 80,000 units sold = $144,000 fixed manufacturing costs expensed (through cost of goods sold)
under full absorption costing. The remaining fixed manufacturing costs of $36,000 (= $180,000 $144,000) remain in inventory as product costs.
Variable costing treats all fixed costs as period costs, expensing the costs regardless of sales. Thus, the
difference in net income would be the amount of fixed manufacturing costs inventoried under absorption
costing: $180,000 − $144,000 = $36,000.
Choice "b" is incorrect. Under full absorption costing, all manufacturing costs are product costs. Selling
costs, regardless if fixed or variable, are all considered period costs.
Choice "c" is incorrect. Under full absorption costing, all manufacturing costs are product costs. Selling
costs, regardless if fixed or variable, are all considered period costs. Under variable costing, all fixed
costs, including fixed manufacturing costs, are period costs.
Choice "d" is incorrect. Under full absorption costing, all manufacturing costs are product costs. Selling
costs, regardless if fixed or variable, are all considered period costs. Under variable costing, all fixed
costs, including fixed manufacturing costs, are period costs.
12
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Lecture: Business 5
CPA-03573
Type1 M/C
A-D
Corr Ans: C
PM#2
B 5-02
20. CPA-03573 Th Nov 93 #47 Page 116
In an income statement prepared as an internal report using the direct (variable) costing method, fixed
selling and administrative expenses would:
a.
b.
c.
d.
Not be used.
Be treated the same as variable selling and administrative expenses.
Be used in the computation of operating income but not in the computation of the contribution margin.
Be used in the computation of the contribution margin.
CPA-03573
Explanation
Choice "c" is correct. Contribution margin is defined as net sales revenue less variable costs. Operating
income equals contribution margin less fixed costs.
Choice "a" is incorrect. All expenses are reported, including fixed selling and administrative expenses.
Choice "b" is incorrect. The direct (variable) costing income statement reports expenses under the
categories of variable and fixed. Fixed selling and administrative expenses would not be treated in the
same manner as variable selling and administrative expenses.
Choice "d" is incorrect. Contribution margin is defined as net sales revenue less variable costs.
CPA-03576
Type1 M/C
21. CPA-03576 ARE R01 #19
A-D
Corr Ans: C
PM#3
B 5-02
Page 14
One hundred pounds of raw material W is processed into 60 pounds of X and 40 pounds of Y. Joint costs
are $135. X is sold for $2.50 per pound and Y can be sold for $3.00 per pound or processed further into
30 pounds of Z (10 pounds are lost in the second process) at an additional cost of $60. Each pound of Z
can then be sold for $6. What is the effect on profits of processing product Y further into product Z?
a.
b.
c.
d.
$60 increase.
$30 increase.
No change.
$60 decrease.
CPA-03576
Explanation
Choice "c" is correct.
Note that the joint costs of $135 will not change under either option and therefore are not used to answer
this question.
Choices "a", "b", and "d" are incorrect based on the above explanation.
CPA-03586
Type1 M/C
A-D
22. CPA-03586 ARE May 94 #42
Corr Ans: B
PM#5
B 5-02
Page 17
13
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Under Pick Co.'s job order costing system manufacturing overhead is applied to work in process using a
predetermined annual overhead rate. During January 1994, Pick's transactions included the following:
Direct materials issued to production
Indirect materials issued to production
Manufacturing overhead incurred
Manufacturing overhead applied
Direct labor costs
$ 90,000
8,000
125,000
113,000
107,000
Pick had neither beginning nor ending work-in-process inventory. What was the cost of jobs completed in
January 1994?
a.
b.
c.
d.
$302,000
$310,000
$322,000
$330,000
CPA-03586
Explanation
Choice "b" is correct. Cost of jobs completed (or cost of goods manufactured) equals direct materials
used + direct labor + overhead applied + beginning WIP - ending WIP. In this case, the calculation is:
COGM = $90,000 + $107,000 + $113,000 + $0 − $0
= $310,000
Indirect materials ($8,000) are included in the actual overhead incurred. COGM uses applied overhead,
not actual overhead. The underapplied overhead of $12,000 ($125,000 − $113,000) would normally be
closed out to cost of goods sold unless considered material and then it would be allocated pro rata to the
ending balances of WIP, finished goods inventory, and cost of goods sold.
Choice "a" is incorrect. Cost of jobs completed (or cost of goods manufactured) equals direct materials
used + direct labor + overhead applied + beginning WIP − ending WIP.
Choice "c" is incorrect. Cost of jobs completed (or cost of goods manufactured) equals direct materials
used + direct labor + overhead applied + beginning WIP − ending WIP.
Choice "d" is incorrect. Cost of jobs completed (or cost of goods manufactured) equals direct materials
used + direct labor + overhead applied + beginning WIP − ending WIP.
CPA-03590
Type1 M/C
23. CPA-03590 ARE R03 #21
A-D
Corr Ans: C
PM#6
B 5-02
Page 20
Kerner Manufacturing uses a process cost system to manufacture laptop computers. The following
information summarizes operations relating to laptop computer model #KJK20 during the quarter ending
March 31:
Work-in-process inventory, January 1
Started during the quarter
Completed during the quarter
Work-in-process inventory, March 31
Costs added during the quarter
Direct
Labor
$ 50,000
Units
100
500
400
200
$ 720,000
Beginning work-in-process inventory was 50% complete for direct labor costs. Ending work-in-process
inventory was 75% complete for direct labor costs. What is the total value of direct labor costs in ending
work-in-process inventory using the weighted-average unit cost inventory valuation method?
a. $183,000
b. $194,000
14
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
c. $210,000
d. $216,000
CPA-03590
Explanation
Choice "c" is correct. Computation of total value of direct labor costs in ending inventory using the
weighted average method applied to process costing involves three steps:
1. Compute equivalent units of production
2. Compute the unit cost of production
3. Apply unit costs to the equivalent units in ending inventory
Compute equivalent units of production
Total units to account for:
Units accounted for as follows:
Beginning WIP
100
Units completed
400
Units started
500
Ending WIP (75% complete)
200
Total
600
Total
600
Equivalent units of production for the quarter are 550 computed as follows:
Units completed + completed portion of WIP
(400 + (200 × 75%)) = 550
Compute the unit cost of production
Total costs are computed as follows:
Prior month cost
50,000
Current month cost
720,000
Total
770,000
Cost per unit is computed as follows:
$770,000 ÷ 550 units = $1,400 per unit
Apply unit costs to the equivalent units in ending inventory
Total units in ending inventory
200
Percent complete
× 75%
Equivalent units
150
Equivalent units x cost per unit equals value of direct labor costs in ending inventory
150 units × $1,400 = $210,000
Proof:
B
Beginning inventory
$ 50,000
A
Add: Costs added during quarter
S
Subtract: Costs of goods completed (400 × $1,400)
E
Ending Inventory
720,000
(560,000)
$ 210,000
Choices "a", "b", and "d" are incorrect, per computation above.
CPA-03594
Type1 M/C
24. CPA-03594 ARE R03 #22
A-D
Corr Ans: C
PM#7
B 5-02
Page 20
Kerner Manufacturing uses a process cost system to manufacture laptop computers. The following
information summarizes operations relating to laptop computer model #KJK20 during the quarter ending
March 31:
Work-in-process inventory, January 1
Started during the quarter
Direct
Materials
$ 50,000
Units
100
500
15
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Completed during the quarter
Work-in-process inventory, March 31
Costs added during the quarter
400
200
$720,000
Beginning work-in-process inventory was 50% complete for direct materials. Ending work-in-process
inventory was 75% complete for direct materials. What is the total value of material costs in ending workin-process inventory using the weighted-average unit cost inventory valuation method?
a.
b.
c.
d.
$183,000
$194,000
$210,000
$216,000
CPA-03594
Explanation
Choice "c" is correct, $210,000. Computation of total value of direct material costs in ending inventory
using the weighted average method applied to process costing involves three steps:
1. Compute equivalent units of production
2. Compute the unit cost of production
3. Apply unit costs to the equivalent units in ending inventory
Compute equivalent units of production
Total units to account for:
Units accounted for as follows:
Beginning WIP
100
Units completed
400
Units started
500
Ending WIP (75% complete)
200
Total
600
Total
600
Equivalent units of production for the quarter are 550 computed as follows:
Units completed + completed portion of WIP
(400 + (200 x 75%)) = 550
Compute the unit cost of production
Total costs are computed as follows:
Prior month cost
50,000
Current month cost
720,000
Total
770,000
Cost per unit is computed as follows: $770,000 ÷ 550 units = $1,400 per unit
Apply unit costs to the equivalent units in ending inventory
Total units in ending inventory
200
Percent complete
x
75%
Equivalent units
150
Equivalent units x cost per unit equals value of direct material costs in ending inventory
150 units x $1,400 = $210,000
Proof:
B
Beginning inventory
A
Add: Costs added during quarter
S
Subtract: Costs of goods completed
(400 x $1,400)
E
$ 50,000
720,000
(560,000)
Ending Inventory
$ 210,000
Choices "a", "b", and "d" are incorrect per computation above.
CPA-03598
Type1 M/C
A-D
Corr Ans: D
PM#8
B 5-02
16
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
25. CPA-03598 ARE R02 #21
Page 27
Which of the following is true about activity-based costing?
a.
b.
c.
d.
It should not be used with process or job costing.
It can be used only with process costing.
It can be used only with job costing.
It can be used with either process or job costing.
CPA-03598
Explanation
Choice "d" is correct. Activity-based costing (ABC) assumes that the resource-consuming activities of an
enterprise that generate costs are activities and not outputs. ABC is appropriate for all types of cost
accumulation systems, including both job order and process costing.
Choices "a", "b", and "c" are incorrect. Activity-based costing (ABC) assumes that the resource
consuming activities of an enterprise that generate costs are activities and not outputs. ABC is
appropriate for all types of cost accumulation systems, including both job order and process costing. It is
inappropriate to state that it should not be used with either system.
CPA-03606
Type1 M/C
26. CPA-03606 ARE R02 #25
A-D
Corr Ans: D
PM#10
B 5-02
Page 25
Kerner Manufacturing uses a process cost system to manufacture laptop computers. The following
information summarizes operations relating to laptop computer model #KJK20 during the quarter ending
March 31:
Work-in-process inventory, January 1
Started during the quarter
Completed during the quarter
Work-in-process inventory, March 31
Costs added during the quarter
Direct
Materials
$ 50,000
Units
100
500
400
200
$720,000
Beginning work-in-process inventory was 50% complete for direct materials.
Ending work-in-process inventory was 75% complete for direct materials. What is the total value of
material costs in ending work-in-process inventory using the FIFO unit cost, inventory valuation method?
a.
b.
c.
d.
$183,000
$194,000
$210,000
$216,000
CPA-03606
Explanation
Choice "d" is correct. Under the FIFO method, ending inventory is priced at the cost of manufacturing
during the period. Equivalent units are composed of three parts: the completion of units on hand at the
beginning of the period, units started and completed during the period, and units partially completed at
the end of the period. Applying these principles to the given fact pattern, the total equivalent units of
production for the quarter is detemined as follows:
Equivalent units for the first quarter:
Work in process, beginning
(100 units × 50% to complete)
Units started and completed:
Units completed and transferred out
Units in beginning inventory
50
400
(100)
300
17
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Work in process, ending
(200 units × 75% complete)
150
Equivalent units of production
500
Costs associated with first quarter production
January 1 Work-in-process
First quarter costs added
Total costs
Cost per unit ($720,000/500)
Ending inventory (150 × $1,440)
−
720,000
720,000
1,440
216,000
Choices "a", "b", and "c" are incorrect based on the above explanation.
CPA-03608
Type1 M/C
27. CPA-03608 ARE R01 #13
A-D
Corr Ans: B
PM#11
B 5-02
Page 26
A basic assumption of activity-based costing (ABC) is that:
a.
b.
c.
d.
All manufacturing costs vary directly with units of production.
Products or services require the performance of activities, and activities consume resources.
Only costs that respond to unit-level drivers are product costs.
Only variable costs are included in activity-cost pools.
CPA-03608
Explanation
Choice "b" is correct. Activity-based costing divides the production process into activities where costs are
accumulated. The production process assumes activities consume resources (direct materials, direct
labor, and manufacturing overhead), and that the outcome of the production process requires
performance of the activities.
Choice "a" is incorrect. All manufacturing costs do not vary directly with units of production. Fixed
manufacturing costs are an element in the production process.
Choice "c" is incorrect. Product costs include all manufacturing costs, regardless of whether the costs
respond to unit-level drivers.
Choice "d" is incorrect. Activity-based costing divides the production process into activities where costs
are accumulated. The production process assumes activities consume resources (direct materials, direct
labor, and manufacturing overhead). Both variable and fixed manufacturing costs are accumulated in the
activity-cost pools.
CPA-03611
Type1 M/C
28. CPA-03611 D95 - 1.19
A-D
Corr Ans: A
PM#12
B 5-02
Page 20
Madtack Company's beginning and ending inventories for the month of November 1995 are:
Direct materials
Work-in-process
Finished goods
November 1
$ 67,000
145,000
85,000
November 30
$ 62,000
171,000
78,000
Production data for the month of November follows.
Direct labor
Actual factory overhead
Direct materials purchased
Transportation in
$200,000
132,000
163,000
4,000
18
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Purchase returns and allowances
2,000
Madtack uses one factory overhead control account and charges factory overhead to production at 70
percent of direct labor cost. The company does not formally recognize over/underapplied overhead until
year-end.
Madtack Company's prime cost for November is:
a.
b.
c.
d.
$370,000
$363,000
$170,000
$368,000
CPA-03611
Explanation
Choice "a" is correct. Prime costs are the sum of direct materials and direct labor. Direct material is
found by squeezing out the cost of goods in the account analysis format
Beginning balance direct materials
Plus purchases
Plus transportation in
Less purchase returns and allowances
Materials available
Less cost of materials used
Ending balance direct materials
Direct materials
Direct labor (given)
Prime cost
$ 67,000
163,000
4,000
2,000
232,000
170,000 ← SQUEEZE
$ 62,000
$ 170,000
200,000
$ 370,000
Choices "b", "c", and "d" are incorrect based on the above explanation.
CPA-03616
Type1 M/C
29. CPA-03616 D95 - 1.20
A-D
Corr Ans: D
PM#13
B 5-02
Page 20
Madtack Company's beginning and ending inventories for the month of November 1995 are:
Direct materials
Work-in-process
Finished goods
November 1
$ 67,000
145,000
85,000
November 30
$ 62,000
171,000
78,000
Production data for the month of November follows.
Direct labor
Actual factory overhead
Direct materials purchased
Transportation in
Purchase returns and allowances
$200,000
132,000
163,000
4,000
2,000
Madtack uses one factory overhead control account and charges factory overhead to production at 70
percent of direct labor cost. The company does not formally recognize over/underapplied overhead until
year-end.
Madtack Company's total manufacturing cost for November is:
a.
b.
c.
d.
$502,000
$503,000
$495,000
$510,000
19
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-03616
Explanation
Choice "d" is correct. Total manufacturing cost is the sum of direct material, direct labor, and overhead
applied.
Direct material
Direct labor
Overhead (70% of DL)
Total manufacturing cost
$170,000 [Note A]
200,000
140,000
$510,000
Note A:
Beginning balance direct materials
Plus purchases
Plus transportation in
Less purchase returns and allowances
Materials available
Less cost of materials used
Ending balance direct materials
$ 67,000
163,000
4,000
2,000
232,000
(170,000) ← SQUEEZE
$ 62,000
Choice "a" is incorrect. $502,000 is found by adding actual overhead to direct material and direct labor,
but overhead applied should be used.
Choices "b" and "c" are incorrect, per above.
CPA-03618
Type1 M/C
30. CPA-03618 D95 - 1.21
A-D
Corr Ans: C
PM#14
B 5-02
Page 20
Madtack Company's beginning and ending inventories for the month of November 1995 are:
Direct materials
Work-in-process
Finished goods
November 1
$ 67,000
145,000
85,000
November 30
$ 62,000
171,000
78,000
Production data for the month of November follows.
Direct labor
Actual factory overhead
Direct materials purchased
Transportation in
Purchase returns and allowances
$200,000
132,000
163,000
4,000
2,000
Madtack uses one factory overhead control account and charges factory overhead to production at 70
percent of direct labor cost. The company does not formally recognize over/underapplied overhead until
year-end.
Madtack Company's cost of goods transferred to finished goods inventory for November is:
a.
b.
c.
d.
$469,000
$495,000
$484,000
$476,000
CPA-03618
Explanation
Choice "c" is correct. The cost of goods transferred to finished goods is the total manufacturing cost
adjusted for the changes in the WIP account.
20
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Using the account analysis format.
Beginning balance of WIP
Plus total manufacturing cost
Goods available to transfer
Goods transferred to finished goods
Ending balance of WIP
$145,000
510,000 [Note A]
655,000
484,000 ← SQUEEZE
$171,000
Note A:
Direct material
Direct labor
Overhead (70% of DL)
Total manufacturing cost
$170,000 [Note B]
200,000
140,000
$510,000
Note B:
Beginning balance direct materials
Plus purchases
Plus transportation in
Less purchase returns and allowances
Materials available
Less cost of materials used
Ending balance direct materials
$ 67,000
163,000
4,000
2,000
232,000
(170,000) ← SQUEEZE
$ 62,000
Choices "a", "b", and "d" are incorrect, per above.
CPA-03621
Type1 M/C
31. CPA-03621 D95 - 1.22
A-D
Corr Ans: B
PM#15
B 5-02
Page 20
Madtack Company's beginning and ending inventories for the month of November 1995 are:
November 1
$ 67,000
145,000
85,000
Direct materials
Work-in-process
Finished goods
November 30
$ 62,000
171,000
78,000
Production data for the month of November follows.
Direct labor
Actual factory overhead
Direct materials purchased
Transportation in
Purchase returns and allowances
$200,000
132,000
163,000
4,000
2,000
Madtack uses one factory overhead control account and charges factory overhead to production at 70
percent of direct labor cost. The company does not formally recognize over/underapplied overhead until
year-end.
Madtack Company's cost of goods sold for November is:
a.
b.
c.
d.
$484,000
$491,000
$502,000
$476,000
CPA-03621
Explanation
21
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "b" is correct. Cost of goods sold is found by taking the cost of goods transferred to finished
goods and adjusting for the changes in the finished goods account.
Using the account analysis format.
Beginning balance of finished goods
Plus goods transferred to finished goods
$ 85,000
484,000 [Note A]
569,000
491,000 ← SQUEEZE
$ 78,000
Finished goods available
Cost of goods sold
Ending balance of finished goods
Note A:
Using the account analysis format.
Beginning balance of WIP
Plus total manufacturing cost
Goods available to transfer
Goods transferred to finished goods
Ending balance of WIP
$145,000
510,000 [Note B]
655,000
484,000 ← SQUEEZE
$171,000
Note B:
Direct material
Direct labor
Overhead (70% of DL)
Total manufacturing cost
$170,000 [Note C]
200,000
140,000
$510,000
Note C:
Beginning balance direct materials
Plus purchases
Plus transportation in
Less purchase returns and allowances
Materials available
Less cost of materials used
Ending balance direct materials
$ 67,000
163,000
4,000
2,000
232,000
(170,000) ← SQUEEZE
$ 62,000
Choices "a", "c", and "d" are incorrect, per above.
CPA-03623
Type1 M/C
32. CPA-03623 D95 - 1.23
A-D
Corr Ans: C
PM#16
B 5-02
Page 19
Madtack Company's beginning and ending inventories for the month of November 1995 are:
Direct materials
Work-in-process
Finished goods
November 1
$ 67,000
145,000
85,000
November 30
$ 62,000
171,000
78,000
Production data for the month of November follows.
Direct labor
Actual factory overhead
Direct materials purchased
Transportation in
$200,000
132,000
163,000
4,000
22
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Purchase returns and allowances
2,000
Madtack uses one factory overhead control account and charges factory overhead to production at 70
percent of direct labor cost. The company does not formally recognize over/underapplied overhead until
year-end.
Madtack Company's net charge to factory overhead control for the month of November is:
a.
b.
c.
d.
$8,000 debit, overapplied.
$8,000 debit, underapplied.
$8,000 credit, overapplied.
$8,000 credit, underapplied.
CPA-03623
Explanation
Choice "c" is correct. The net charge to factory overhead is the difference between actual factory
overhead and the amount of overhead applied. Overapplied inventory occurs when more inventory was
applied than actually occurred and underapplied inventory occurs when less inventory was applied than
was actually incurred.
Factory overhead applied (70% of direct labor) $140,000
Actual overhead incurred
132,000
Amount of factory overhead overapplied
$ 8,000
Because overhead was overapplied, there was a larger amount of cost that went to WIP. To correct this,
overapplied overhead is credited to reduce cost.
Choices "a", "b", and "d" are incorrect, per above.
CPA-03625
Type1 M/C
A-D
33. CPA-03625 ARE Nov 95 #45
Corr Ans: A
PM#17
B 5-02
Page 27
Gram Co. develops computer programs to meet customers' special requirements. How should Gram
categorize payments to employees who develop these programs?
a.
b.
c.
d.
Direct
costs
Yes
Yes
No
No
Value-adding
costs
Yes
No
No
Yes
CPA-03625
Explanation
Choice "a" is correct. Direct costs are easily traceable to a product. Payments to employees who
develop computer programs are considered part of direct labor. Value-added costs increase the worth of
the product or service to customers. Employees who develop these programs are adding value to the
computer programs.
Choices "b", "c", and "d" are incorrect based on the above explanation.
CPA-03630
Type1 M/C
A-D
34. CPA-03630 ARE May 95 #41
Corr Ans: D
PM#19
B 5-02
Page 22
In its April 1995 production, Hern Corp., which does not use a standard cost system, incurred total
production costs of $900,000, of which Hern attributed $60,000 to normal spoilage and $30,000 to
abnormal spoilage. Hern should account for this spoilage as:
a. Period cost of $90,000.
b. Inventoriable cost of $90,000.
c. Period cost of $60,000 and inventoriable cost of $30,000.
23
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
d. Inventoriable cost of $60,000 and period cost of $30,000.
CPA-03630
Explanation
Choice "d" is correct. Normal spoilage is considered a necessary cost of production and is a product
(inventoriable) cost. Abnormal spoilage is considered unnecessary and is a period cost.
Choice "a" is incorrect. Normal spoilage is considered a necessary cost of production and is a product
(inventoriable) cost.
Choice "b" is incorrect. Abnormal spoilage is considered unnecessary and is a period cost.
Choice "c" is incorrect. Normal spoilage is a normal product (inventory) cost. Abnormal spoilage is
considered unnecessary to production and is expensed (period cost).
CPA-03632
Type1 M/C
A-D
35. CPA-03632 ARE May 95 #44
Corr Ans: B
PM#20
B 5-02
Page 27
In an activity-based costing system, what should be used to assign a department's manufacturing
overhead costs to products produced in varying lot sizes?
a.
b.
c.
d.
A single cause and effect relationship.
Multiple cause and effect relationships.
Relative net sales values of the products.
A product's ability to bear cost allocations.
CPA-03632
Explanation
Choice "b" is correct. Activity-based costing assigns costs to activities or transactions and allocates them
to products according to their use of each activity. This method means multiple cause and effect
relationships may exist.
Choice "a" is incorrect. Activity-based costing assigns costs to activities or transactions and allocates
them to products according to their use of each activity.
Choice "c" is incorrect. The essence of activity-based costing is determining the activities that are
involved in producing a product. Relative sales value is not based on this approach.
Choice "d" is incorrect. Assigning costs to departments should not be based on ability to bear costs. It
should be based on each department's appropriate share of these costs, based on cause and effect.
CPA-03634
Type1 M/C
36. CPA-03634 J95 - 1.01
A-D
Corr Ans: A
PM#21
B 5-02
Page 24
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 1995.
Units
16,000
100,000
92,000
24,000
Beginning work-in-process inventory, May 1
Started in production during May
Completed production during May
Ending work-in-process inventory, May 31
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.
24
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
•
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:
a.
b.
c.
d.
104,000 units.
107,200 units.
108,000 units.
113,600 units.
CPA-03634
Explanation
Under the FIFO method, the equivalent units of production is comprised of three parts: the completion of
units on hand at the beginning of the period, the units started and completed during the period, and the
units partially completed at the end of the period. Applying these principles to the given fact pattern, the
total equivalent units of production for materials is detemined as follows:
Equivalent units for the first quarter:
Work in process, beginning
(16,000 units × 40% to complete)
6,400
Units started and completed:
Units completed and transferred out
Units in beginning inventory
92,000
(16,000)
76,000
Work in process, ending
(24,000 units × 90% complete)
21,600
Equivalent units of production
104,000
Choice "a" is correct. 104,000 equivalent units for materials using FIFO (or 113,600 using weighted
average).
Choices "b", "c", and "d" are incorrect based on the above explanation.
CPA-03637
Type1 M/C
37. CPA-03637 J95 - 1.02
A-D
Corr Ans: C
PM#22
B 5-02
Page 24
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 1995.
Units
16,000
100,000
92,000
24,000
Beginning work-in-process inventory, May 1
Started in production during May
Completed production during May
Ending work-in-process inventory, May 31
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:
a. 88,800 units.
b. 95,200 units.
25
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
c. 98,400 units.
d. 101,600 units.
CPA-03637
Explanation
Under the FIFO method, the equivalent units of production is comprised of three parts: the completion of
units on hand at the beginning of the period, the units started and completed during the period, and the
units partially completed at the end of the period. Applying these principles to the given fact pattern, the
total equivalent units of production for conversion costs is detemined as follows:
Equivalent units for the first quarter:
Work in process, beginning
(16,000 units × 80% to complete)
12,800
Units started and completed:
Units completed and transferred out
Units in beginning inventory
92,000
(16,000)
76,000
Work in process, ending
(24,000 units × 40% complete)
9,600
Equivalent units of production
98,400
Choice "c" is correct. 98,400 equivalent units for conversion costs using FIFO (or 101,600 using weighted
average).
Choices "a", "b", and "d" are incorrect based on the above explanation.
CPA-03640
Type1 M/C
38. CPA-03640 J95 - 1.03
A-D
Corr Ans: A
PM#23
B 5-02
Page 24
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 1995.
Units
16,000
100,000
92,000
24,000
Beginning work-in-process inventory, May 1
Started in production during May
Completed production during May
Ending work-in-process inventory, May 31
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:
a.
b.
c.
d.
$4.50
$4.60
$4.80
$5.46
CPA-03640
Explanation
Choice "a" is correct. $4.50 equivalent unit cost of materials using the FIFO method.
26
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Cost of materials used
Equivalent units
Equivalent unit cost of materials
$468,000
÷ 104,000 [Note A]
$4.50
Note A:
Under the FIFO method, the equivalent units of production is comprised of three parts: the completion of
units on hand at the beginning of the period, the units started and completed during the period, and the
units partially completed at the end of the period. Applying these principles to the given fact pattern, the
total equivalent units of production for materials is detemined as follows:
Equivalent units for the first quarter:
Work in process, beginning
(16,000 units × 40% to complete)
6,400
Units started and completed:
Units completed and transferred out
Units in beginning inventory
92,000
(16,000)
76,000
Work in process, ending
(24,000 units × 90% complete)
21,600
Equivalent units of production
104,000
Choices "b", "c", and "d" are incorrect based on the above explanation.
CPA-03641
Type1 M/C
39. CPA-03641 J95 - 1.04
A-D
Corr Ans: B
PM#24
B 5-02
Page 24
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 1995.
Units
16,000
100,000
92,000
24,000
Beginning work-in-process inventory, May 1
Started in production during May
Completed production during May
Ending work-in-process inventory, May 31
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:
a.
b.
c.
d.
$5.65
$5.83
$6.00
$6.20
CPA-03641
Explanation
Choice "b" is correct. $5.83 equivalent unit conversion cost using the FIFO method.
27
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Direct labor costs incurred
$ 182,880
Factory overhead incureed
391,160
Conversion costs incurred
$ 574,040
Equivalent units
÷ 98,400 [Note A]
Equivalent unit cost of materials $
5.83
Note A:
Under the FIFO method, the equivalent units of production is comprised of three parts: the completion of
units on hand at the beginning of the period, the units started and completed during the period, and the
units partially completed at the end of the period. Applying these principles to the given fact pattern, the
total equivalent units of production for conversion costs is detemined as follows:
Equivalent units for the first quarter:
Work in process, beginning
(16,000 units × 80% to complete)
12,800
Units started and completed:
Units completed and transferred out
Units in beginning inventory
92,000
(16,000)
76,000
Work in process, ending
(24,000 units × 40% complete)
9,600
Equivalent units of production
98,400
Choices "a", "c", and "d" are incorrect based on the above explanation.
CPA-03642
Type1 M/C
40. CPA-03642 J95 - 1.05
A-D
Corr Ans: A
PM#25
B 5-02
Page 25
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 1995.
Units
16,000
100,000
92,000
24,000
Beginning work-in-process inventory, May 1
Started in production during May
Completed production during May
Ending work-in-process inventory, May 31
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, 1995,
is:
a.
b.
c.
d.
$153,168
$154,800
$155,328
$156,960
28
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-03642
Explanation
Choice "a" is correct. $153,168 total cost of units in ending work-in-process inventory using the FIFO
method.
Ending Work-In-Process Inventory - FIFO
Actual
%
Equiv
Unit
Total
Units x Compl = Units x Cost = Cost
Materials
24,000
90%
21,600
4.50 $97,200
Conversion Costs
24,000
40%
9,600
5.83 $55,968
Ending Inventory
24,000
$153,168
Note that the unit costs for materials ($4.50) and conversion costs ($5.83) are calculated below in Notes
A and B.
Note A:
Cost of materials used
Equivalent units
Equivalent unit cost of materials
$ 468,000
÷ 104,000 [Note 1]
$4.50
Note 1:
Under the FIFO method, the equivalent units of production is comprised of three parts: the
completion of units on hand at the beginning of the period, the units started and completed during
the period, and the units partially completed at the end of the period. Applying these principles to
the given fact pattern, the total equivalent units of production for materials is detemined as
follows:
Equivalent units for the first quarter:
Work in process, beginning
(16,000 units × 40% to complete)
6,400
Units started and completed:
Units completed and transferred out
Units in beginning inventory
(16,000)
Work in process, ending
(24,000 units × 90% complete)
92,000
76,000
21,600
Equivalent units of production
104,000
Note B:
Direct labor costs incurred
Factory overhead incureed
Conversion costs incurred
Equivalent units
Equivalent unit cost of materials
$ 182,880
391,160
$ 574,040
÷ 98,400 [Note 2]
$5.83
Note 2:
Under the FIFO method, the equivalent units of production is comprised of three parts: the
completion of units on hand at the beginning of the period, the units started and completed during
the period, and the units partially completed at the end of the period. Applying these principles to
the given fact pattern, the total equivalent units of production for conversion costs is detemined as
follows:
Equivalent units for the first quarter:
Work in process, beginning
29
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
(16,000 units × 80% to complete)
12,800
Units started and completed:
Units completed and transferred out
Units in beginning inventory
(16,000)
Work in process, ending
(24,000 units × 40% complete)
92,000
76,000
9,600
Equivalent units of production
98,400
Choices "b", "c", and "d" are incorrect based on the above explanation.
CPA-03644
Type1 M/C
41. CPA-03644 J95 - 1.06
A-D
Corr Ans: B
PM#26
B 5-02
Page 21
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 1995.
Units
16,000
100,000
92,000
24,000
Beginning work-in-process inventory, May 1
Started in production during May
Completed production during May
Ending work-in-process inventory, May 31
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 cost of materials for May is:
a.
b.
c.
d.
$4.50
$4.60
$5.03
$5.46
CPA-03644
Explanation
Beginning Inventory
Add: Started
Total Available
Less: Completed
Ending Inventory
Actual
Units
16,000
100,000
116,000
(92,000)
24,000
Materials
%
Equiv.
Compl.
Units
60%
9,600
SQZ 104,000
113,600
100%
(92,000)
90%
21,600
Total
Cost
$54,560
468,000
522,560
Unit
Cost
$4.50 FIFO
$4.60 wtd-avg
$97,200
$4.50 FIFO
Choice "b" is correct. $4.60 equivalent unit cost of materials using the weighted-average method
($54,560 beg inv + $468,000 additions = $522,560 ÷ 113,600 total avail equivalent units).
Choices "a", "c", and "d" are incorrect based on the above explanation.
30
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-03645
Type1 M/C
42. CPA-03645 J95 - 1.07
A-D
Corr Ans: C
PM#27
B 5-02
Page 25
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 1995.
Beginning work-in-process inventory, May 1
Started in production during May
Completed production during May
Ending work-in-process inventory, May 31
Units
16,000
100,000
92,000
24,000
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:
a.
b.
c.
d.
$5.65
$5.83
$6.00
$6.41
CPA-03645
Explanation
Actual
Units
Beginning Inventory 16,000
Add: Started
100,000
Total Available
116,000
Less: Completed
(92,000)
Ending Inventory
24,000
Conversion Costs
%
Equiv.
Total
Compl.
Units
Cost
20%
3,200 $35,560
SQZ
98,400 574,040
101,600 609,600
100%
(92,000)
40%
9,600 $55,968
Unit
Cost
$5.83 FIFO
$6.00 wtd-avg
$5.83 FIFO
Choice "c" is correct. $6.00 equivalent unit conversion cost using the weighted-average method ($35,560
beg inv + $574,040 additions = $609,600 ÷ 101,600 total avail equivalent units).
Choices "a", "b", and "d" are incorrect based on the above explanation.
CPA-03648
Type1 M/C
43. CPA-03648 J95 - 1.08
A-D
Corr Ans: D
PM#28
B 5-02
Page 20
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 1995.
Beginning work-in-process inventory, May 1
Started in production during May
Completed production during May
Ending work-in-process inventory, May 31
Units
16,000
100,000
92,000
24,000
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.
31
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
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, 1995, is:
a.
b.
c.
d.
$153,960
$154,800
$155,328
$156,960
CPA-03648
Explanation
Ending Work-In-Process Inventory - Wtd. Avg.
Actual
%
Equiv.
Total
Unit
Units
Compl.
Units
Cost
Cost
Materials
24,000
90%
21,600 $ 99,360
$4.60 wtd-avg.
Conversion Costs
24,000
40%
9,600
57,600
$6.00 wtd-avg.
24,000
$156,960
Choice "d" is correct. $156,960 total cost of units in ending work-in-process inventory using the weightedaverage method.
Choices "a", "b", and "c" are incorrect based on the above explanation.
CPA-03650
Type1 M/C
A-D
44. CPA-03650 ARE May 94 #40
Corr Ans: D
PM#29
B 5-02
Page 23
The following information pertains to Lap Co.'s Palo Division for the month of April:
Number
of units
15,000
40,000
42,500
12,500
Beginning work-in-process
Started in April
Units completed
Ending work-in-process
Cost of
materials
$ 5,500
18,000
All materials are added at the beginning of the process. Using the weighted-average method, the cost
per equivalent unit for materials is:
a.
b.
c.
d.
$0.59
$0.55
$0.45
$0.43
CPA-03650
Explanation
Choice "d" is correct. Using the weighted average method, the cost per equivalent unit for materials is
calculated as follows:
Beg inv.
Started
Available
Units
15,000
40,000
55,000
Cost
$ 5,500
18,000
$23,500
Cost per equivalent unit is simply $23,500/55,000, or $0.43. Note that in the question, all materials are
added at the beginning of the process, which is why beginning inventory, plus "started", equals
"available." Note that units completed (42,500) plus ending WIP (12,500) also equals the 55,000
available.
32
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "a" is incorrect. Calculate equivalent units by adding the beginning inventory (100% complete as
to materials) and the started units (100% complete as to materials).
Choice "b" is incorrect. Calculate equivalent units by adding the beginning inventory (100% complete as
to materials) and the started units (100% complete as to materials).
Choice "c" is incorrect. Calculate equivalent units by adding the beginning inventory (100% complete as
to materials) and the started units (100% complete as to materials).
CPA-03656
Type1 M/C
A-D
Corr Ans: C
PM#31
B 5-02
45. CPA-03656 Th Nov 93 #45 Page 27
In an activity-based costing system, cost reduction is accomplished by identifying and eliminating:
a.
b.
c.
d.
All cost drivers
No
Yes
No
Yes
Nonvalue-adding
activities
No
Yes
Yes
No
CPA-03656
Explanation
Choice "c" is correct. Eliminating all cost drivers would eliminate all activity. Eliminating nonvalue-adding
activities would reduce costs, which is one of the objectives of activity-based costing systems.
Choice "a" is incorrect. Eliminating all cost drivers would eliminate all activity. Eliminating nonvalueadding activities would reduce costs.
Choice "b" is incorrect. Eliminating all cost drivers would eliminate all activity. Eliminating nonvalueadding activities would reduce costs.
Choice "d" is incorrect. Eliminating all cost drivers would eliminate all activity. Eliminating nonvalueadding activities would reduce costs.
CPA-03659
Type1 M/C
A-D
Corr Ans: C
PM#32
B 5-02
46. CPA-03659 Th May 93 #41 Page 19
In a traditional job order cost system, the issue of indirect materials to a production department increases:
a.
b.
c.
d.
Stores control.
Work in process control.
Factory overhead control.
Factory overhead applied.
CPA-03659
Explanation
Choice "c" is correct. Indirect materials are included in factory overhead costs as they are used in the
production process. Therefore, the issue of indirect materials would decrease stores control and increase
factory overhead control.
Choice "a" is incorrect. Indirect materials are a component of stores prior to being issued to the
production department. When issued, the amount would decrease stores control.
Choice "b" is incorrect. Indirect costs are recorded in factory overhead control when they are incurred,
but these costs do not increase work-in-process until the overhead is applied.
Choice "d" is incorrect. Factory overhead applied is the allocated amount of factory overhead that is
applied to work-in-process based on estimates of production and costs.
CPA-03660
Type1 M/C
A-D
Corr Ans: D
PM#33
B 5-02
33
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
47. CPA-03660 J90 - 1.05
Page 19
Alex Company had the following inventories at the beginning and end of the month of January.
January 1
$ 125,000
235,000
134,000
Finished Goods
Work-in-process
Direct materials
January 31
$117,000
251,000
124,000
The following additional manufacturing data was available for the month of January.
Direct materials purchased
Purchase returns and allowances
Transportation in
Direct labor
Actual factory overhead
$189,000
1,000
3,000
300,000
175,000
Alex Company applies factory overhead at a rate of 60 percent of direct labor cost, and any overapplied
or underapplied factory overhead is deferred until the end of the year, December 31.
Alex Company's balance in factory overhead control for January was:
a.
b.
c.
d.
$5,000 debit-overapplied.
$5,000 credit-underapplied.
$5,000 debit-underapplied.
$5,000 credit-overapplied.
CPA-03660
Explanation
Choice "d" is correct. $5,000 overapplied.
Actual factory overhead
Applied (300,000 x .6)
Overapplied
175,000
(180,000)
(5,000)
Choice "a" is incorrect. When actual overhead expenses are incurred, the factory overhead control
account is debited. As overhead is applied, the account is credited. In this case, the applied overhead
exceeded the actual overhead by $5,000, resulting in a credit balance in the account.
Choices "b" and "c" are incorrect. Because applied overhead exceeded the actual overhead expenses
incurred, overhead has been overapplied.
CPA-04796
Type1 M/C
A-D
Corr Ans: C
PM#34
B 5-02
48. CPA-04796 2005 Released Page 21
Black, Inc. employs a weighted average method in its process costing system. Black's work in process
inventory on June 30 consists of 40,000 units. These units are 100% complete with respect to materials
and 60% complete with respect to conversion costs. The equivalent unit costs are $5.00 for materials
and $7.00 for conversion costs. What is the total cost of the June 30 work in process inventory?
a.
b.
c.
d.
$200,000
$288,000
$368,000
$480,000
CPA-04796
Explanation
Choice "c" is correct and is computed in the following computation. The information provided by this
question purely requires you to convert total production to equivalent units and multiply those units by the
equivalent unit costs.
Materials
Conversion
34
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Total
Becker CPA Review, PassMaster Questions
Lecture: Business 5
June 30
Percent Complete
Equivalent Units
Equivalent Unit Costs
Total
X
X
40,000
100%
40,000
$
5.00
$200,000
40,000
60%
24,000
$
7.00
$ 168,000
X
X
$368,000
Choice "a" is incorrect. The value of equivalent units of materials is not the value of WIP inventory.
Choice "b" is incorrect. This selection anticipates a uniform percentage of completion at 60%.
Choice "d" is incorrect. This selection fails to consider the percentage of completion of conversion costs
less than 100%.
CPA-05316
Type1 M/C
A-D
Corr Ans: B
PM#35
B 5-02
49. CPA-05316 Released 2006 Page 18
What is the required unit production level given the following factors?
Projected sales
Beginning inventory
Desired ending inventory
Prior-year beginning inventory
a.
b.
c.
d.
Units
1,000
85
100
200
915
1,015
1,100
1,215
CPA-05316
Explanation
Choice "b" is correct. Required production can be calculated from a normal Account Analysis Format,
where production takes the place of purchases, sales takes the place of cost of goods sold, and
everything is expressed in units (not dollars). Beginning and ending inventory are given in the question.
The calculation is as follows:
Beginning inventory
85
Add: Production
"plug"
Subtract: Sales
(1,000)
Ending inventory
100
The plug for production is thus 1,015 units.
Choice "a" is incorrect. This answer appears to use the prior-year beginning inventory (200 units) in place
of, and instead of, the ending inventory (100 units). The "plug" will then be 100 units less.
Choice "c" is incorrect. This answer appears to add the sales (1,000 units) and the ending inventory (100
units) and to ignore the beginning inventory.
Choice "d" is incorrect. This answer appears to add the prior-year beginning inventory (200 units) to the
ending inventory (100 units). The "plug" will then be 200 units more.
CPA-05321
Type1 M/C
A-D
Corr Ans: C
PM#36
B 5-02
50. CPA-05321 Released 2006 Page 18
Jonathon Mfg. adopted a job-costing system. For the current year, budgeted cost driver activity levels for
direct labor hours and direct labor costs were 20,000 and $100,000, respectively. In addition, budgeted
35
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
variable and fixed factory overhead were $50,000 and $25,000, respectively. Actual costs and hours for
the year were as follows:
Direct labor hours
Direct labor costs
Machine hours
21,000
$110,000
35,000
For a particular job, 1,500 direct-labor hours were used. Using direct-labor hours as the cost driver, what
amount of overhead should be applied to this job?
a.
b.
c.
d.
$3,214
$5,357
$5,625
$7,500
CPA-05321
Explanation
Choice "c" is correct. Using direct labor hours, the overhead applied consists of both variable overhead
and fixed overhead. The calculation is as follows:
Variable overhead rate = $50,000 / 20,000 hours = $2.50 per direct labor hour
Fixed overhead rate = $25,000 / 20,000 hours = $1.25 per direct labor hour
Total overhead rate = $2.50 + $1.25 = $3.75
Overhead applied to the job = $3.75 x 1,500 = $5,625
Choices "a" and "b" are incorrect, per the above calculation.
Choice "d" is incorrect. This answer appears to use $5.00 as the overhead application rate. Possibly the
variable overhead rate was used twice, instead of the variable and the fixed overhead rates being used
once each.
CPA-05562
Type1 M/C
A-D
Corr Ans: D
PM#37
B 5-02
51. CPA-05562 Released 2007 Page 17
Card Bicycle Co. has prepared production and raw materials budgets for next year. At the end of this
year, the finished product inventory is expected to include 2,000 bicycles, and raw material inventory is
expected to include 3,000 bicycle tires. Each finished bicycle requires two tires. The marketing
department provided the following data from the sales budget for the first quarter:
Expected bicycle sales (units)
January
12,000
February March
16,000 18,000
The company inventory policy is to have finished product inventory equal to 20% of the following month's
sales requirements, and raw material equal to 10% of the following month's production requirements. In
the January budget for raw materials, how many tires are expected to be purchased?
a.
b.
c.
d.
24,200
26,120
26,600
26,680
CPA-05562
Explanation
Choice "d" is correct. January tire requirements are 26,680 tires. NOTE that this question is very detailed
and quite confusing in parts. We suspect that it will be rare for something of this nature to appear
frequently ob the CPA exam (which is likely a reason they released the question).
There are multiple steps in computing the raw materials requirements.
1.
Determine the amount of raw materials transferred out by computing the amount of finished
goods transferred in:
36
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
2.
3.
a. Compute the ending balance of January Finished Product at 3,200 (February sales x
20%) per company policy.
b. Use the beginning balance (given) and January sales (given) to squeeze out 13,200
bicycles transferred in.
c. Multiply 13,200 by 2 tires per bicycle to arrive at the number of tires transferred out of
Work in Process in January.
Use January ending finished product data and March sales data to arrive at February
production requirements and, by extension, the required ending balance for January's raw
materials inventory:
a. January finished goods ending balance is February finished goods beginning balance.
b. Compute the ending balance of February Finished Product at 3,600 (March sales x 20%)
per company policy.
c. Use the beginning balance (computed) and February sales (given) to squeeze out 16,400
bicycles transferred in (production requirements).
d. Multiply 16,400 by 2 tires per bicycle to arrive at the number of tires needed for
production requirements in February and multiply by 10% to compute the raw materials
ending balance for January at 3,280 in accordance with company policy.
Compute tire requirements (purchases) for January based on computed ending balance and
computed transfers to finished goods in January and beginning inventory (given):
a. Ending balance, 3,280 + Raw materials transferred to finished goods, 26,400 - beginning
inventory, 3,000 = 26,680 tires purchased.
Choice "a" is incorrect. The proposed solution anticipates purchases will be equal to the amount of sale
in January (x 2) plus the change in inventory if we incorrectly assume production requirements for
February are also equal to sales.
Choice "b" is incorrect, per the above computations.
Choice "c" is incorrect. The proposed solution bases raw materials ending inventory upon January rather
than February production requirements.
CPA-05574
Type1 M/C
A-D
Corr Ans: B
PM#38
B 5-02
52. CPA-05574 Released 2007 Page 17
What is the cost of ending inventory given the following factors?
Beginning inventory
Total production costs
Cost of goods sold
Direct labor
$5,000
60,000
55,000
40,000
37
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
a.
b.
c.
d.
$5,000
$10,000
$45,000
$50,000
CPA-05574
Explanation
Choice "b" is correct. The ending inventory in a manufacturing environment is computed as follows (using
the data from the fact pattern provided):
Beginning inventory
Add: Production costs*
Total Manufacturing costs available
Subtract: Cost of good sold
Ending inventory
$ 5,000
60,000
65,000
(55,000)
$10,000
* Total production costs include direct labor, direct material and applied overhead. The information
provided regarding direct labor for $40,000 is a distracter.
Choice "a" is incorrect. The proposed solution appears to suggest that the value of inventory does not
change.
Choice "c" is incorrect. The proposed solution appears to suggest that the value of inventory is the sum
of direct labor charges and beginning inventory.
Choice "d" is incorrect. The proposed solution double counts direct labor and combines it with the total
production costs figure in deriving ending inventory.
CPA-05578
Type1 M/C
A-D
Corr Ans: C
PM#39
B 5-02
53. CPA-05578 Released 2007 Page 17
Crisper, Inc. plans to sell 80,000 bags of potato chips in June, and each of these bags requires five
potatoes. Pertinent data includes:
Actual June 1 inventory
Desired June 30 inventory
Bags of potato chips
15,000 bags
18,000 bags
Potatoes
27,000 potatoes
23,000 potatoes
What number of units of raw material should Crisper plan to purchase?
a.
b.
c.
d.
381,000
389,000
411,000
419,000
CPA-05578
Explanation
Choice "c" is correct. The fact pattern provides beginning and ending finished goods and raw material
data as well as finished goods sales data.
Begin by computing the amount of finished product (chips) completed during the period by squeezing
$83,000 in additions from the beginning and ending inventory and sales of chips data.
Assume that the additions to finished goods were transferred out of raw materials (potatoes) at the rate
defined in the fact pattern, 5 potatoes per bag of chips (5 potatoes x 83,000 = 415,000).
Squeeze the 411,000 planned potatoes purchases of raw materials from the beginning and ending raw
materials inventory provided and the 415,000 potatoes transfer amount derived from finished good data
as follows:
38
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choices "a", "b", and "d" are incorrect, per the above calculation.
CPA-05579
Type1 M/C
A-D
Corr Ans: D
PM#40
B 5-02
54. CPA-05579 Released 2007 Page 17
The following is selected information from the records of Ray, Inc.:
Purchases of raw materials
Raw materials, beginning
Raw materials, ending
Work-in-process, beginning
Work-in-process, ending
Cost of goods sold
Finished goods, beginning
Finished goods, ending
$ 6,000
500
800
0
0
12,000
1,200
1,400
What is the total amount of conversion costs?
a.
b.
c.
d.
$5,500
$5,900
$6,100
$6,500
CPA-05579
Explanation
Choice "d" is correct. Conversion costs (labor and overhead) are equal to $6,500 and are derived from
the relationship between the finished goods and work in process inventory.
1. Beginning ($1,200) and ending ($1,400) finished goods inventory and cost of goods sold
($12,000) are used to squeeze costs of goods manufactured of $12,200
2. Cost of goods manufactured ($12,200) is then used in combination with beginning and ending
WIP inventories of $0 to derive total costs incurred ($12,200) and then, in combination with
materials ($5,700) the conversion costs of $6,500 as follows:
39
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choices "a", "b", and "c" are incorrect, per the above calculation.
CPA-05581
Type1 M/C
A-D
Corr Ans: C
PM#41
B 5-02
55. CPA-05581 Released 2007 Page 27
Which of the following nonvalue-added costs associated with manufactured work in process inventory is
most significant?
a.
b.
c.
d.
The cost of materials that cannot be traced to any individual product.
The cost of labor that cannot be traced to any individual product.
The cost of moving, handling, and storing any individual product.
The cost of additional resources consumed to produce any individual product.
CPA-05581
Explanation
Choice "c" is correct. Value added costs are those resource uses that provide value to the consumer.
The cost of inventorying products, generally moving, handling and storing them, does not add value to the
product and is generally considered one of the most significant non-value activities/costs that a
manufacturer should reduce because it can be controlled.
Choice "a" is incorrect. Costs of materials that cannot be traced to an individual product are often not
controllable and are thus less manageable than inventory costs.
Choice "b" is incorrect. Costs of labor that cannot be traced to an individual product are often not
controllable and are thus less manageable than inventory costs.
Choice "d" is incorrect. The incremental costs of producing an individual product is a variable cost that
remains fixed per unit over the relevant range. This incremental cost can not be controlled and is less
significant that inventory costs.
Factors Affecting Production Costs
CPA-03664
Type1 M/C
56. CPA-03664 D96 - 1.04
A-D
Corr Ans: D
PM#1
B 5-03
Page 32
In the long run, a firm may experience increasing returns due to:
a. The principle of substitution.
b. Law of diminishing returns.
40
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
c. Comparative advantage.
d. Economies of scale.
CPA-03664
Explanation
Choice "d" is correct. In the long run, a firm may experience increasing returns due to economies of scale
which come into full play only if a large enough number of units is being produced to make it worth while
to set up a fairly elaborate productive organization.
Choice "a" is incorrect. The principle of substitution states that people tend to shift their buying from
relatively expensive to relatively cheap goods. Thus, if the price of a product falls, people tend to buy
more of it and less of other (relatively) more expensive products.
Choice "b" is incorrect. The law of diminishing returns states that an increase in labor or capital beyond a
certain point causes a less-than-proportionate increase in production.
Choice "c" is incorrect. The principle of comparative advantage states that even if one of two regions is
absolutely more efficient in the production of every good than is the other, if each region specalizes in the
products in which it has a comparative advantage (greatest relative efficiency), trade will be mutually
profitable to both regions. Real wages of productive factors will rise in both places. This principle is the
basis for international trade.
CPA-03666
Type1 M/C
57. CPA-03666 D92 - 1.15
A-D
Corr Ans: D
PM#2
B 5-03
Page 32
In microeconomics, the distinguishing characteristic of the long run on the supply side is that:
a.
b.
c.
d.
Only supply factors determine price and output.
Only demand factors determine price and output.
Firms are not allowed to enter or exit the industry.
All inputs are variable.
CPA-03666
Explanation
Choice "d" is correct. In microeconomic analysis, in the long run all supply side inputs are variable. In
accounting terms, this means that in the long run all costs are variable. (e.g., the fixed cost of
depreciation of a factory building becomes a variable cost when a second factory building is added.)
Choices "a" and "b" are incorrect. Output and price are ultimately determined by market factors (supply
and demand) and the power a firm has in the market.
Choice "c" is incorrect. In competitive markets (including monopolistic competition), firms rather easily
enter and exit the market.
CPA-03669
Type1 M/C
58. CPA-03669 D90 - 1.09
A-D
Corr Ans: D
PM#3
B 5-03
Page 32
Which one of the following is not a factor contributing to economies of scale?
a.
b.
c.
d.
Labor specialization.
Utilization of by-products.
Efficient utilization of capital equipment.
Diminishing returns.
CPA-03669
Explanation
Choice "d" is correct. The theory of economies of scale states that, as a production process gets larger,
the process becomes more efficient and productivity increases. The theory of diminishing returns is the
opposite of economies of scale in that it holds that, as more product is produced, the factory gets less
productivity out of its workforce and machinery. Factors contributing to economies of scale include:
Labor specialization
Managerial specialization
41
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Utilization of by products (or joint products)
Efficient use of capital equipment
Volume discount purchasing
Choices "a", "b", and "c" are incorrect, per explanation for "d" above.
CPA-03671
Type1 M/C
59. CPA-03671 D94 - 1.04
A-D
Corr Ans: A
PM#4
B 5-03
Page 33
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.
Raw materials
Machining @ $12/hr.
Assembly @ $10/hr.
Variable overhead @ $8/hr.
Fixed overhead @ $4/hr.
Total cost
Suggested selling price
Actual research and development costs
Proposed advertising and promotion costs
Tape Duplicator
$44.00
18.00
30.00
36.00
18.00
$146.00
Cleaning Unit
$36.00
15.00
10.00
18.00
9.00
$88.00
$ 169.95
$240,000
$500,000
$ 99.98
$175,000
$350,000
Research and development costs for Huron's two new products are:
a.
b.
c.
d.
Sunk costs.
Relevant costs.
Opportunity costs.
Avoidable costs.
CPA-03671
Explanation
Choice "a" is correct. Research and development costs are considered sunk costs because they are in
the past, unavoidable, and will not change with different alternatives.
Choice "b" is incorrect. Relevant costs are those that vary with the action taken.
Choice "c" is incorrect. Opportunity cost is the maximum benefit foregone by using a scarce resource.
Choice "d" is incorrect. Avoidable costs can be avoided at management's discretion.
CPA-05255
Type1 M/C
A-D
Corr Ans: A
PM#5
B 5-03
60. CPA-05255 Released 2006 Page 31
The CPA reviewed the minutes of a board of director's meeting of LQR Corp., an audit client. An order for
widget handles was outsourced to SDT Corp. because LQR couldn't fill the order. By having SDT
produce the order, LQR was able to realize $100,000 in sales profits that otherwise would have been lost.
The outsourcing added a cost of $10,000, but LQR was ahead by $90,000 when the order was
completed. Which of the following statements is correct regarding LQR's action?
a.
b.
c.
d.
The use of resource markets outside of LQR involves opportunity cost.
Accounting profit is total revenue minus explicit costs and implicit costs.
Implicit costs are not opportunity costs because they are internal costs.
Explicit costs are opportunity costs from purchasing widget handles from resource market.
42
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-05255
Explanation
Choice "a" is correct. The use of resource markets outside of LQR involves opportunity cost. Opportunity
costs are costs that would have been saved or the profit that would have been earned if another decision
alternative had been selected. Financial accounting records do not record opportunity costs.
Choice "b" is incorrect. Accounting profit is total revenue minus total explicit costs, not total explicit and
implicit costs. Implicit costs are opportunity costs and are ignored in financial accounting.
Choice "c" is incorrect. Implicit costs are opportunity costs.
Choice "d" is incorrect. Explicit costs are not opportunity costs. Explicit costs are documented out-ofpocket costs.
Financial Models Used for Operating Decisions
CPA-03673
Type1 M/C
61. CPA-03673 ARE R03 #25
A-D
Corr Ans: C
PM#1
B 5-04
Page 112
Comel, Inc. has two major product lines: stoves and dryers. Comel's management wants to evaluate
whether discontinuing dryers will increase profits. Which of the following is best for evaluating the
discontinuance of the dryer product line?
a.
b.
c.
d.
Absorption cost.
Variable cost.
Relevant cost.
Throughput cost.
CPA-03673
Explanation
Choice "c" is correct. When considering alternatives, such as discontinuation of a product line,
management should consider relevant costs. Relevant costs are those costs that will change under
different alternatives.
Choice "a" is incorrect. Absorption costs represent an accounting for resources used that are usually
consistent with generally accepted accounting principles and include fixed costs that frequently do not
change with the selection of different alternatives
Choice "b" is incorrect. Variable costs are those costs that increase or decrease with changes in
production. Variable costs do not embrace all costs that will change in the event of different alternatives,
only changes in production.
Choice "d" is incorrect. Throughput costs represent the costs associated with conversion of resources
into a finished product and do not represent costs that will change in the event of selecting between
different alternatives associated with abandoning a segment.
CPA-03688
Type1 M/C
62. CPA-03688 ARE R98 #8
A-D
Corr Ans: A
PM#3
B 5-04
Page 42
The following information is taken from Wampler Co.'s 1997 contribution income statement:
Sales
Contribution margin
Fixed costs
Income taxes
$200,000
120,000
90,000
12,000
What was Wampler's margin of safety?
a. $50,000
b. $150,000
c. $168,000
43
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
d. $182,000
CPA-03688
Explanation
Choice "a" is correct. The margin of safety is the difference between current sales and breakeven sales.
Breakeven sales is calculated by dividing fixed costs by the contribution margin ratio:
Breakeven sales = $90,000 / ($120,000 ÷ $200,000)
= $90,000 / 0.60 = $150,000
Margin of safety = $200,000 − $150,000 = $50,000
Choice "b" is incorrect. The margin of safety is the difference between current sales and breakeven
sales. Breakeven sales are $150,000.
Choice "c" is incorrect. The margin of safety is the difference between current sales and breakeven
sales. Income taxes are not relevant in determining the margin of safety.
Choice "d" is incorrect. The margin of safety is the difference between current sales and breakeven
sales.
CPA-03695
Type1 M/C
63. CPA-03695 D96 - 1.03
A-D
Corr Ans: C
PM#4
B 5-04
Page 35
Kator Co. is a manufacturer of industrial components. One of their products that is used as a subcomponent in auto manufacturing is KB-96. This product has the following financial structure per unit.
Selling Price
$150
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Shipping and handling
Fixed selling and administrative
Total costs
$20
15
12
30
3
10
$90
During the next year, KB-96 sales are expected to be 10,000 units. All of the costs will remain the same
except for fixed manufacturing overhead, which will increase by 20 percent and material, which will
increase by 10 percent. The selling price per unit for next year will be $160. Based on these data, the
contribution margin from KB-96 for next year will be:
a. $620,000
b. $750,000
c. $1,080,000
d. $1,100,000
CPA-03695
Explanation
Selling price
This
Year
$150
Direct materials
Direct labor
Variable mfg oh
Fixed mfg oh
Variable selling
Fixed sga
Total costs
Margin
20
15
12
30
3
10
90
$ 60
Change
+
$10
=
×
1.1
=
×
1.2
=
Next
Year
$160
Contribution
Margin
$160
22
15
12
36
3
10
98
$ 62
22
15
12
−
3
−
52
$108
Choice "c" is correct. $1,080,000 contribution margin for next year ($108 × 10,000 units).
44
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choices "a", "b", and "d" are incorrect based on the above explanation.
CPA-03702
Type1 M/C
A-D
64. CPA-03702 ARE Nov 95 #39
Corr Ans: C
PM#5
B 5-04
Page 43
Sender, Inc. estimates parcel mailing costs using data shown on the chart below.
What is Sender's estimated cost for mailing 12,000 parcels?
a.
b.
c.
d.
$36,000
$45,000
$51,000
$60,000
CPA-03702
Explanation
Choice "c" is correct. The estimated cost for mailing 12,000 parcels consists of both fixed and variable
costs. The fixed cost equals the point at which the cost line intercepts the Y axis, since this is the cost
incurred even when no parcels are mailed. Fixed costs are therefore $15,000. Variable costs can be
determined by evaluating any other point on the cost line. For example, the chart indicates that the total
cost to mail 20,000 parcels is $75,000. Since fixed costs are known to be $15,000, this leaves $60,000
(=$75,000 - $15,000) of variable costs. Variable costs per parcel are therefore $60,000 / 20,000 parcels,
or $3 per parcel. (Note that the variable cost can also be determined as the slope of the cost line:
($75,000 − $15,000)/(20,000 − 0) = $3 per parcel.)
Fixed cost
Variable cost (12,000 parcels × $3)
Total estimated costs
$15,000
36,000
$51,000
Choice "a" is incorrect. $36,000 is the variable cost. Fixed cost must also be considered.
Choice "b" is incorrect. Fixed and variable costs must both be considered. $15,000 is the fixed cost;
variable costs must be added to this amount.
Choice "d" is incorrect. $60,000 is the variable cost component to mail 20,000 parcels. The question was
asking for the total cost to mail 12,000 parcels.
CPA-03707
Type1 M/C
A-D
65. CPA-03707 ARE Nov 95 #43
Corr Ans: B
PM#6
B 5-04
Page 42
Product Cott has sales of $200,000, a contribution margin of 20%, and a margin of safety of $80,000.
What is Cott's fixed cost?
a.
b.
c.
d.
$16,000
$24,000
$80,000
$96,000
45
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-03707
Explanation
Choice "b" is correct. Margin of safety equals actual (or budgeted) sales less breakeven sales. Since the
margin of safety is $80,000 and sales are $200,000, breakeven sales must be $120,000 ($200,000 −
$80,000).
Breakeven sales
Contribution margin rate
Contribution margin
$120,000
20%
$ 24,000
At breakeven, fixed cost equals contribution margin, or $24,000.
Choice "a" is incorrect. Margin of safety equals actual sales less breakeven sales. $16,000 is the profit
when sales are $200,000. The question asks for fixed cost.
Choice "c" is incorrect. Contribution margin is $40,000 at a sales level of $200,000, but with breakeven
sales of $120,000, the contribution margin changes. Breakeven sales are actual sales less margin of
safety.
Choice "d" is incorrect. With a contribution margin of $40,000 ($200,000 × 20%) at a sales level of
$200,000, the fixed cost must be less than $96,000 since the margin of safety ($80,000) equals actual
sales less breakeven sales.
CPA-03711
Type1 M/C
A-D
66. CPA-03711 ARE Nov 95 #55
Corr Ans: A
PM#8
B 5-04
Page 41
Based on potential sales of 500 units per year, a new product has estimated traceable costs of $990,000.
What is the target price to obtain a 15% profit margin on sales?
a.
b.
c.
d.
$2,329
$2,277
$1,980
$1,935
CPA-03711
Explanation
Choice "a" is correct. Since a 15% profit is desired, the cost of $990,000 would be 85% of sales.
(Remember that profit + cost = sales.) Thus, sales are $1,164,700 ($990,000 ÷ 85%). $1,164,700 ÷ 500
units equals $2,329 per unit.
Choice "b" is incorrect. The 15% margin should be based on sales, not on costs.
Choice "c" is incorrect. $1,980 is the cost per unit, not the selling price per unit. In order to earn the
desired 15% profit, the selling price would have to exceed this amount.
Choice "d" is incorrect. If a profit margin of 15% is to be achieved, the target price cannot be less than
the cost per unit of $1,980.
CPA-03712
Type1 M/C
A-D
67. CPA-03712 ARE Nov 95 #56
Corr Ans: D
PM#9
B 5-04
Page 117
Lynn Manufacturing Co. prepares income statements using both standard absorption and standard
variable costing methods. For 1994, unit standard costs were unchanged from 1993. In 1994, the only
beginning and ending inventories were finished goods of 5,000 units. How would Lynn's ratios using
absorption costing compare with those using variable costing?
a.
b.
c.
Current
ratio
Same
Same
Greater
Return on
stockholders'
equity
Same
Smaller
Same
46
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
d.
Greater
Smaller
CPA-03712
Explanation
Choice "d" is correct. Under variable (direct) costing, fixed manufacturing overhead is treated as a period
cost and expensed, while under absorption costing this expense is treated as a product cost and is
inventoried. The two different methods will therefore result in different year-end inventory amounts, with
inventory under the absorption method being higher. Since the current ratio includes inventory in current
assets, the current ratio under absorption costing will be higher.
Since inventory balances did not change, both methods will result in the same net income for the current
year. However, this would not have been the case in every prior year. The first year that had an ending
inventory would have resulted in a difference in income between the two methods, with absorption costing
generating a higher income than variable costing. Since the previous year had an amount in ending
inventory, this timing difference has not entirely reversed, and therefore stockholders' equity will be larger
under absorption costing than under variable costing. A higher stockholders' equity with a constant net
income results in a lower value for return on equity.
Choices "a", "b", and "c" are incorrect based on the above explanation.
CPA-03716
Type1 M/C
A-D
68. CPA-03716 ARE May 95 #40
Corr Ans: D
PM#10
B 5-04
Page 36
Using the variable costing method, which of the following costs are assigned to inventory?
a.
b.
c.
d.
Variable selling and
administrative costs
Yes
Yes
No
No
Variable factory
overhead costs
Yes
No
No
Yes
CPA-03716
Explanation
Choice "d" is correct. Under variable costing, only the variable manufacturing costs (direct material, direct
labor, variable overhead) are assigned to inventory.
Choices "a", "b", and "c" are incorrect based on the above explanation.
CPA-03717
Type1 M/C
A-D
69. CPA-03717 ARE May 95 #49
Corr Ans: D
PM#11
B 5-04
Page 35
Jago Co. has 2 products that use the same manufacturing facilities and cannot be subcontracted. Each
product has sufficient orders to utilize the entire manufacturing capacity. For short-run profit
maximization, Jago should manufacture the product with the:
a.
b.
c.
d.
Lower total manufacturing costs for the manufacturing capacity.
Lower total variable manufacturing costs for the manufacturing capacity.
Greater gross profit per hour of manufacturing capacity.
Greater contribution margin per hour of manufacturing capacity.
CPA-03717
Explanation
Choice "d" is correct. To maximize profit at full capacity, contribution margin per hour should be
maximized.
Choice "a" is incorrect. To maximize profit, the sales price of the products must also be considered.
Choice "b" is incorrect. To maximize profit, the sales price of the products must also be considered.
47
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "c" is incorrect. Contribution margin is a better measure of profit maximization than gross profit
because it includes all variable costs. Gross margin includes consideration of cost of goods sold, but may
exclude other variable costs, such as selling, general, and administrative costs.
CPA-03719
Type1 M/C
70. CPA-03719 D94 - 1.05
A-D
Corr Ans: C
PM#12
B 5-04
Page 41
Austin Manufacturing, which is subject to an effective income tax rate of 40 percent, had the following
operating data for the accounting period just ended.
Selling price per unit
Variable cost per unit
Fixed-costs
$60
22
504,000
Management plans to improve the quality of its sole product by:
•
•
Replacing a component that costs $3.50 with a higher grade unit that costs $5.50, and
Acquiring a $180,000 packing machine.
Austin will depreciate the machine over an estimated 10-year life by using the straight-line method. If the
company desires to earn after-tax income of $172,800 in the upcoming period, it must sell:
a.
b.
c.
d.
19,300 units.
21,316 units.
22,500 units.
23,800 units.
CPA-03719
Explanation
Choice "c" is correct. 22,500 units will equal $172,800 in after-tax income.
Amount
$60
%
100%
Variable cost per unit
Adjustment to VC for upgrade ($5.50 − $3.50)
(22)
(2)
40%
Contribution margin per unit
$36
60%
Sales price per unit
Fixed-costs
Per last period
Depr on packing equipment ($180,000 ÷ 10 years)
Total fixed costs
$504,000
18,000
$522,000
Add: Desired pretax profit ($172,800 ÷ 60%)
Total fixed costs plus target profit
288,000
$810,000
Breakeven formula:
(fixed costs + target profit) ÷ contribution margin = required units
$810,000 ÷ $36 = 22,500 units.
CPA-03721
Type1 M/C
A-D
71. CPA-03721 ARE May 94 #49
Corr Ans: B
PM#13
B 5-04
Page 108
Clay Co. has considerable excess manufacturing capacity. A special job order's cost sheet includes the
following applied manufacturing overhead costs:
Fixed costs
Variable costs
$21,000
33,000
48
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
The fixed costs include a normal $3,700 allocation for in-house design costs, although no in-house design
will be done. Instead the job will require the use of external designers costing $7,750. What is the total
amount to be included in the calculation to determine the minimum acceptable price for the job?
a.
b.
c.
d.
$36,700
$40,750
$54,000
$58,050
CPA-03721
Explanation
Choice "b" is correct. The minimum acceptable selling price should include only the incremental costs
associated with the order: $33,000 variable costs + $7,750 external designers costs = $40,750. Note that
this is a special order (won't affect regular sales) and there is idle capacity.
Choice "a" is incorrect. The $3,700 allocation of in-house design costs should not be included as it is not
an incremental cost for this special order.
Choice "c" is incorrect. The $21,000 fixed costs should not be included as they are not incremental costs
for this special order.
Choice "d" is incorrect. No part of the $21,000 fixed costs should be included as they are not incremental
costs for this special order.
CPA-03724
Type1 M/C
72. CPA-03724 J94 - 1.25
A-D
Corr Ans: A
PM#14
B 5-04
Page 113
Condensed monthly operating income data for Korbin, Inc. for May 31, 1994, is presented below.
Korbin, Inc.
Combined Income Statement
May 31, 1994
Sales
Variable costs
Contribution margin
Direct fixed-costs
Store segment margin
Common fixed-cost
Operating income
Urban
Store
$80,000
32,000
48,000
Suburban
Store
$120,000
84,000
36,000
Total
$200,000
116,000
84,000
20,000
28,000
40,000
(4,000)
60,000
24,000
4,000
$24,000
6,000
$ (10,000)
10,000
$ 14,000
Additional information regarding Korbin's operations follows.
•
•
•
•
One-fourth of each store's direct fixed-costs would continue if either store is closed.
Korbin allocates common fixed-costs to each store on the basis of sales dollars.
Management estimates that closing the Suburban Store would result in a ten percent decrease in the
Urban Store's sales, while closing the Urban Store would not affect the Suburban Store's sales.
The operating results for May 1994 are representative of all months.
A decision by Korbin to close the Suburban Store would result in a monthly increase (decrease) in
Korbin's operating income of:
a.
b.
c.
d.
$(10,800)
$(1,200)
$4,000
$10,000
CPA-03724
Explanation
49
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "a" is correct. $(10,800).
Fixed costs are not eliminated when the Suburban Store closes. In fact, after closing the Suburban Store,
there will be a larger loss than there was when it was open:
Contribution margin from Suburban Store
Direct fixed costs:
$40,000 × 1/4
Common fixed costs:
Loss from Suburban Store after closing
$
0
(10,000)
6,000)
(16,000)
This loss exceeds the original $10,000 loss by $6,000.
In addition, the Urban Store's contribution margin will also decrease by $4,800 ($48,000 x 10%) as a
result of the closing of the Suburban Store.
The net result will be a decrease in operating income of $10,800 (= $6,000 + $4,800).
Choices "b", "c", and "d" are incorrect based on the above explanation.
CPA-03727
Type1 M/C
73. CPA-03727 J94 - 1.26
A-D
Corr Ans: B
PM#15
B 5-04
Page 35
Condensed monthly operating income data for Korbin, Inc. for May 31, 1994, is presented below.
Korbin, Inc.
Combined Income Statement
May 31, 1994
Sales
Variable costs
Contribution margin
Direct fixed-costs
Store segment margin
Common fixed-cost
Operating income
Urban
Store
$80,000
32,000
48,000
Suburban
Store
$120,000
84,000
36,000
Total
$200,000
116,000
84,000
20,000
28,000
40,000
(4,000)
60,000
24,000
4,000
$24,000
6,000
$ (10,000)
10,000
$ 14,000
Additional information regarding Korbin's operations follows.
•
•
•
•
One-fourth of each store's direct fixed-costs would continue if either store is closed.
Korbin allocates common fixed-costs to each store on the basis of sales dollars.
Management estimates that closing the Suburban Store would result in a ten percent decrease in the
Urban Store's sales, while closing the Urban Store would not affect the Suburban Store's sales.
The operating results for May 1994 are representative of all months.
Korbin is considering a promotional campaign at the Suburban Store that would not affect the Urban
Store. Increasing annual promotional expense at the Suburban Store by $60,000 in order to increase this
store's sales by ten percent would result in a monthly increase (decrease) in Korbin's operating income
during 1995 (rounded) of:
a.
b.
c.
d.
$(5,000)
$(1,400)
$7,000
$12,000
CPA-03727
Explanation
Choice "b" is correct. $(1,400).
50
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
10% increase in contribution margin:
$36,000 × 10%
Promotional expense for one month:
$60,000 annual expense × 1/12
Decrease in operating income
$ 3,600
(5,000)
$(1,400)
Choices "a", "c", and "d" are incorrect based on the above explanation.
CPA-03730
Type1 M/C
74. CPA-03730 J94 - 1.27
A-D
Corr Ans: B
PM#16
B 5-04
Page 35
Condensed monthly operating income data for Korbin, Inc. for May 31, 1994, is presented below.
Korbin, Inc.
Combined Income Statement
May 31, 1994
Sales
Variable costs
Contribution margin
Direct fixed-costs
Store segment margin
Common fixed-cost
Operating income
Urban
Store
$80,000
32,000
48,000
Suburban
Store
$120,000
84,000
36,000
Total
$200,000
116,000
84,000
20,000
28,000
40,000
(4,000)
60,000
24,000
4,000
$24,000
6,000
$ (10,000)
10,000
$ 14,000
Additional information regarding Korbin's operations follows.
•
•
•
•
One-fourth of each store's direct fixed-costs would continue if either store is closed.
Korbin allocates common fixed-costs to each store on the basis of sales dollars.
Management estimates that closing the Suburban Store would result in a ten percent decrease in the
Urban Store's sales, while closing the Urban Store would not affect the Suburban Store's sales.
The operating results for May 1994 are representative of all months.
One-half of the Suburban Store's dollar sales are from items sold at variable cost to attract customers to
the store. Korbin is considering the deletion of these items, a move that would reduce the Suburban
Store's direct fixed expenses by 15 percent and result in a 20 percent loss of Suburban Store's remaining
sales volume. This change would not affect the Urban Store. A decision by Korbin to eliminate the items
sold at cost would result in a monthly increase (decrease) in Korbin's operating income during 1995 of:
a.
b.
c.
d.
$(5,200)
$(1,200)
$2,000
$6,000
CPA-03730
Explanation
Choice "b" is correct. $(1,200).
Note that the items sold at variable cost were not contributing anything to contribution margin. The entire
contribution margin of $36,000 was therefore due to the other half, that was being sold above cost.
Reducing that remaining half by 20% will result in a new contribution revenue of $28,800 (=$36,000 - 20%
of $36,000).
Sales
Variable cost
Sub store
UNADJ
120,000
(84,000)
50% Sold
@ VC
60,000
(60,000)
51
Other
50%
60,000
(24,000)
20% Sales
reduction
48,000
(19,200)
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Contribution margin
36,000
0
36,000
28,800
Direct fixed cost, reduced by 15% (= $40,000 × 85%)
Common fixed cost
Operating loss after deletion of items
Previous operating loss
Increase in operating loss
(34,000)
(6,000)
(11,200)
10,000
(1,200)
Choices "a", "c", and "d" are incorrect based on the above explanation.
CPA-03734
Type1 M/C
75. CPA-03734 D93 - 1.04
A-D
Corr Ans: D
PM#17
B 5-04
Page 35
The following information relates to Clyde Corporation, which produced and sold 50,000 units during a
recent accounting period.
Sales
Manufacturing costs
Fixed
Variable
Selling & administrative costs
Fixed
Variable
Income tax rate
$850,000
210,000
140,000
300,000
45,000
40%
For the next accounting period, if production and sales are expected to be 40,000 units, the company
should anticipate a contribution margin per unit of:
a.
b.
c.
d.
$0.55
$3.10
$9.10
$13.30
CPA-03734
Explanation
Choice "d" is correct. $13.30 contribution margin per unit.
Sales
Variable manufacturing costs
Variable S&A costs
Contribution margin
Units
Contribution margin per unit
$850,000
(140,000)
(45,000)
665,000
÷ 50,000
$ 13.30
Note that contribution margin per unit does not change with volume.
Choices "a", "b", and "c" are incorrect based on the above explanation.
CPA-03739
Type1 M/C
A-D
Corr Ans: B
PM#18
B 5-04
76. CPA-03739 Th May 93 #45 Page 36
A manufacturing company prepares income statements using both absorption and variable costing
methods. At the end of a period actual sales revenues, total gross profit, and total contribution margin
approximated budgeted figures; whereas net income was substantially greater than the budgeted
amount. There were no beginning or ending inventories. The most likely explanation of the net income
increase is that, compared to budget, actual:
a. Manufacturing fixed costs had increased.
b. Selling and administrative fixed expenses had decreased.
c. Sales prices and variable costs had increased proportionately.
52
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
d. Sales prices had declined proportionately less than variable costs.
CPA-03739
Explanation
Choice "b" is correct. Under absorption costing, selling and administrative fixed expenses are not a
component of gross profit, but rather are deducted from gross profit to arrive at net income. Therefore, if
gross profit approximates the budgeted figure and these expenses are less than the budgeted amount,
net income will be greater than the budgeted amount. Similarly, under variable costing, selling and
administrative fixed expenses are not included in contribution margin. Again, if these expenses are less
than the budgeted amount, when they are deducted from a contribution margin that approximates the
budgeted amount, net income will be greater than that budgeted.
Choice "a" is incorrect. If manufacturing fixed costs increased, then gross profit (under absorption
costing) would not approximate the budgeted amount, since cost of goods sold includes an allocation of
manufacturing fixed costs. Under variable costing, the contribution margin would still approximate
budget, since manufacturing fixed costs are not included in this figure; however, an increase in fixed costs
would result in a decrease in net income.
Choice "c" is incorrect. If sales prices and variable costs had increased proportionately, then gross
margin would increase proportionately and would not approximate the budgeted amount.
Choice "d" is incorrect. If sales prices declined proportionately less than variable costs, then the gross
profit would be higher than the budgeted gross profit amount.
CPA-03742
Type1 M/C
77. CPA-03742 D92 - 1.03
A-D
Corr Ans: C
PM#19
B 5-04
Page 109
Richardson Motors uses ten units of Part Number T305 each month in the production of large diesel
engines. The cost to manufacture one unit of T305 is presented below.
Direct materials
$2,000
Material handling
(20% of direct material cost)
Direct labor
Manufacturing overhead
(150% of direct labor)
Total manufacturing cost
400
16,000
24,000
$42,400
Material handling, which is not included in manufacturing overhead, represents the direct variable costs of
the Receiving Department that are applied to direct materials and purchased components on the basis of
their cost. Richardson's annual manufacturing overhead budget is one-third variable and two-thirds fixed.
Simpson Castings, one of Richardson's reliable vendors, has offered to supply T305 at a unit price of
$30,000.
If Richardson Motors purchases the ten T305 units from Simpson Castings, the capacity Richardson used
to manufacture these parts would be idle. Should Richardson decide to purchase the parts from
Simpson, the out-of-pocket cost per unit of T305 would:
a.
b.
c.
d.
Decrease $6,400.
Increase $3,600.
Increase $9,600.
Decrease $4,400.
CPA-03742
Explanation
Choice "c" is correct. Increase $9,600.
Direct materials
Material handling (20% of DM cost)
Direct labor
Manufacturing OH − variable
Build
$ 2,000
400
16,000
8,000
53
Buy
$30,000
6,000
0
0
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
− fixed
16,000
$42,400
Total costs
16,000
$52,000
Choice "a" is incorrect. Fixed costs of $16,000 will still be incurred if the component is purchased.
Choice "b" is incorrect. Material handling costs apply to purchased components based on cost, so an
increase in purchased components will result in a corresponding increase (= $6,000) in material handling
costs.
Choice "d" is incorrect. Fixed costs of $16,000 will still be incurred, and direct materials will increase by
$28,000 (not $30,000), if the component is purchased.
CPA-03751
Type1 M/C
78. CPA-03751 J90 - 1.14
A-D
Corr Ans: B
PM#20
B 5-04
Page 39
Madengrad Company manufactures a single electronic product called Precisionmix. This unit is a batchdensity monitoring device attached to large industrial mixing machines used in flour, rubber, petroleum
and chemical manufacturing. Precisionmix sells for $900 per unit. The following variable costs are
incurred to produce each Precisionmix device.
Direct labor
Direct materials
Factory overhead
Total variable production costs
Marketing costs
Total variable costs
$180
240
105
525
75
$600
Madengrad's income tax rate is 40 percent, and annual fixed-costs are $6,600,000. Except for an
operating loss incurred in the year of incorporation, the firm has been profitable over the last five years.
For Madengrad Company to achieve an after-tax net income of $540,000, annual sales revenue must be:
a.
b.
c.
d.
$23,850,000
$22,500,000
$21,420,000
$7,500,000
CPA-03751
Explanation
Choice "b" is correct.
Step 1 − Calculate before tax income
Net income before tax − tax = Net income after tax
NIBT − .40 NIBT = NIAT
.60 NIBT = 540,000
NIBT = 900,000
Step 2 − Calculate number of units to achieve $900,000 net income before tax
Sales − variable cost - fixed cost = net income before tax = $900,000
($900 x units) - ($600 x units) - 6,600,000 = 900,000
$300 x units = 7,500,000
Number of units = 25,000
Step 3 - Calculate sales revenue based on number of units
25,000 units × $900 per unit = $22,500,000
Choices "a", "c", and "d" are incorrect based on the above explanation.
54
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-03767
Type1 M/C
79. CPA-03767 J94 - 1.26
A-D
Corr Ans: A
PM#23
B 5-04
Page 47
Condensed monthly operating income data for Korbin, Inc. for May 31, 1994, is presented below.
Korbin, Inc.
Combined Income Statement
May 31, 1994
Sales
Variable costs
Contribution margin
Direct fixed-costs
Store segment margin
Common fixed-cost
Operating income
Urban
Store
$80,000
32,000
48,000
Suburban
Store
$120,000
84,000
36,000
Total
$200,000
116,000
84,000
20,000
28,000
40,000
(4,000)
60,000
24,000
4,000
$24,000
6,000
$ (10,000)
10,000
$ 14,000
Additional information regarding Korbin's operations follows.
•
•
•
•
One-fourth of each store's direct fixed costs would continue if either store were closed.
Korbin allocates common fixed costs to each store on the basis of sales dollars.
Management estimates that closing the Suburban Store would result in a ten percent decrease in the
Urban Store's sales, while closing the Urban Store would not affect the Suburban Store's sales.
The operating results for May 1994 are representative of all months.
Korbin is considering a promotional campaign at the Suburban Store that would not affect the Urban
Store. Increasing annual promotional expense at the Suburban Store by $60,000 in order to increase this
store's sales by ten percent would result in a monthly increase (decrease) in Korbin's operating income
during 1995 (rounded) of:
a.
b.
c.
d.
$(1,400)
$487
$7,000
$12,000
CPA-03767
Explanation
Choice "a" is correct. $(1,400).
10% increase in contribution margin:
$36,000 × 10%
Promotional expense for one month:
$60,000 annual expense × 1/12
Decrease in operating income
$ 3,600
(5,000)
$(1,400)
Choices "b", "c", and "d" are incorrect based on the above explanation.
CPA-03774
Type1 M/C
A-D
80. CPA-03774 ARE May 94 #44
Corr Ans: B
PM#25
B 5-04
Page 44
Brent Co. has intracompany service transfers from Division Core, a cost center, to Division Pro, a profit
center. Under stable economic conditions, which of the following transfer prices is likely to be most
conducive to evaluating whether both divisions have met their responsibilities?
a.
b.
c.
d.
Actual cost.
Standard variable cost.
Actual cost plus mark-up.
Negotiated price.
55
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-03774
Explanation
Choice "b" is correct. Since the selling division is a cost center (not a profit center), its transfer price
should be based on standard costs, not actual costs or even actual cost plus mark-up. Using actual costs
will not provide an incentive for control of costs since the costs are simply passed on to the next division.
Negotiated prices are also not relevant when the selling division is a cost center since profit is not a
divisional goal.
Choice "a" is incorrect. Using actual costs will not provide an incentive for cost control since the costs are
simply passed on the next division.
Choice "c" is incorrect. Using actual costs will not provide an incentive for cost control since the costs are
simply passed on the next division.
Choice "d" is incorrect. Negotiated prices are not relevant when dealing with cost centers since profit is
not a divisional goal. Instead, the divisional goal is cost control.
CPA-04798
Type1 M/C
A-D
Corr Ans: B
PM#26
B 5-04
81. CPA-04798 Released 2005 Page 39
Waldo Company, which produces only one product, provides its most current month's data as follows:
Selling price per unit
Variable costs per unit:
Direct materials
Direct labor
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
Manufacturing overhead
Selling and administrative
Units:
Beginning inventory
Month's production
Number sold
Ending inventory
$80
21
10
3
6
$76,000
58,000
0
5,000
4,500
500
Based upon the above information, what is the total contribution margin for the month under the variable
costing approach?
a.
b.
c.
d.
$46,000
$180,000
$207,000
$226,000
CPA-04798
Explanation
Choice "b" correct.
Under variable costing, all fixed factory overhead is treated as a period cost and is expensed in the period
incurred. The cost of inventory includes only variable manufacturing costs, so the cost of goods sold
includes only variable costs. Also, the variable selling, general and administrative expenses are part of
total variable costs.
Sales
Direct Materials
Direct Labor
Unit Price
$80.00
Units
4,500
$21.00
$10.00
4,500
4,500
Total
$360,000
$94,500
45,000
56
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Variable Mfg O/H
Variable S&A
Total Variable Costs
$3.00
$6.00
4,500
4,500
13,500
27,000
180,000
Contribution Margin
180,000
Fixed Mfg O/H
Fixed S&A
Total Fixed Costs
76,000
58,000
134,000
Net Income
$ 46,000
Choice "a" is incorrect. The net income is not the contribution margin.
Choice "c" is incorrect per the above computation.
Choice "d" is incorrect. The contribution margin is not the difference between sales and fixed costs
($360,000 - $134,000 = $226,000).
CPA-04815
Type1 M/C
A-D
Corr Ans: A
PM#27
B 5-04
82. CPA-04815 Released 2005 Page 37
At the end of a company's first year of operations, 2,000 units of inventory are on hand. Variable costs
are $100 per unit, and fixed manufacturing costs are $30 per unit. The use of absorption costing, rather
than variable costing, would result in a higher net income of what amount?
a.
b.
c.
d.
$60,000
$140,000
$200,000
$260,000
CPA-04815
Explanation
Choice "a" is correct. The difference between variable and absorption costing is the manner in which
fixed manufacturing costs are treated. Under variable costing, only variable costs are included in
inventory. Consequently, the difference in net income under variable costing rather than absorption
costing is the amount of fixed manufacturing costs (accounted for in inventory under absorption costing)
multiplied by the change in inventory. An increase in inventory indicates that a portion of the fixed costs
associated with inventory under absorption costing are expensed under variable costing. Absorption
costing, therefore, produces greater income than variable costing as inventory level increase as follows:
Change in inventory (increase)
Fixed manufacturing cost per unit (absorbed into inventory,
excluded from cost of goods sold)
Higher net income under absorption costing
2,000 units
$
30
$60,000
Choice "b" is incorrect. The difference between the fixed costs in inventory and the variable costs in
inventory is not the difference in net income when comparing the two methods.
Choice "c" is incorrect. The change in inventory times the variable cost per unit does not define the
difference in net income per above. Variable costs are included in inventory and, therefore, reduce cost
of goods sold under both methods.
Choice "d" is incorrect. The change in inventory times total cost does not define the difference in net
income. Inventory does receive a value under variable costing, however, it is limited to variable costs.
CPA-05554
Type1 M/C
A-D
Corr Ans: C
PM#27
B 5-04
57
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Lecture: Business 5
83. CPA-05554 Released 2007 Page 38
Pinecrest Co. had variable costs of 25% of sales, and fixed costs of $30,000. Pinecrest's break-even
point in sales dollars was:
a.
b.
c.
d.
$24,000
$30,000
$40,000
$120,000
CPA-05554
Explanation
Choice "c" is correct. Break even analysis can be used to calculate the required sales dollars to produce
breakeven using the following formula:
Sales =
Fixed Cost ÷
Contribution Margin Ratio
(contribution margin expressed as a percentage of revenue)
The fact pattern indicates that variable costs are 25% of sales. By extension, contribution must be 75%
of sales (100%-25%). Break even in sales dollars is computed using the formula above based upon fixed
costs given at $30,000:
Sales =
Sales =
$30,000 ÷ 75%
$40,000
Choice "a" is incorrect, per computation above.
Choice "b" is incorrect. The proposed answer implies that there are no variable costs.
Choice "d" is incorrect. The proposed answer of $120,000 divides fixed costs by variable costs
expressed as a percentage of sales in error.
CPA-04818
Type1 M/C
A-D
Corr Ans: B
PM#28
B 5-04
84. CPA-04818 Released 2005 Page 47
Zig Corp. provides the following information:
Pretax operating profit
Tax rate
Capital used to generate profits 50%, 50% equity
Cost of equity
Cost of debt
$ 300,000,000
40%
$1,200,000,000
15%
5%
What of the following represents Zig's year-end economic value-added amount?
a.
b.
c.
d.
$0
$60,000,000
$120,000,000
$180,000,000
CPA-04818
Explanation
Choice "b" is correct. Economic value added (EVA) is computed as after-tax income in excess of
required return. EVA is applied to the fact pattern as follows:
Pretax operating profit
Less: Taxes
After tax income
40%
Less: Required return
Weight
Cost of equity
50%
Cost of debt
50%
Capital
1,200,000,000
1,200,000,000
Return
15%
5%
90,000,000
30,000,000
58
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
300,000,000
(120,000,000)
180,000,000
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Total required return
120,000,000
Economic value added (EVA)
60,000,000
Earnings after taxes of $180,000,000 net of the required return of 15% on half of the investment funded
by equity and 5% on the other half of the investment funded by debt ($120,000,000) yields an EVA of
$60,000,000.
Choice "a" is incorrect, per the above computation.
Choice "c" is incorrect. The amount of the required return is not the EVA.
Choice "d" is incorrect. The amount of the after-tax income is not the EVA.
CPA-05586
Type1 M/C
A-D
Corr Ans: C
PM#28
B 5-04
85. CPA-05586 Released 2007 Page 26
Which of the following terms represents the residual income that remains after the cost of all capital,
including equity capital, has been deducted?
a.
b.
c.
d.
Free cash flow.
Market value-added.
Economic value-added.
Net operating capital.
CPA-05586
Explanation
Choice "c" is correct. Economic value-added is a residual income technique used for capital budgeting
and performance evaluation. It represents the residual (excess) income of project earnings in excess of
the cost of capital (including cost of equity) associated with invested capital.
Choice "a" is incorrect. Free cash flow is defined as operating cash flows net of dividends paid to
preferred shareholders and capital expenditures-it is not a residual income technique.
Choice "b" is incorrect. Market value added is defined as the difference between the market value of
company's stock and the adjusted book value of the equity and debt invested in the company-it is not a
residual income technique.
Choice "d" is incorrect. Net operating capital is a term generally synonymous with working capital-it is not
a residual income technique.
CPA-05325
Type1 M/C
A-D
Corr Ans: C
PM#29
B 5-04
86. CPA-05325 Released 2006 Page 45
Spring Co. had two divisions, A and B. Division A created Product X, which could be sold on the outside
market for $25 and used variable costs of $15. Division B could take Product X and apply additional
variable costs of $40 to create Product Y, which could be sold for $100. Division B received a special
order for a large amount of Product Y. If Division A were operating at full capacity, which of the following
prices should Division A charge Division B for the Product X needed to fill the special order?
a.
b.
c.
d.
$15
$20
$25
$40
CPA-05325
Explanation
Choice "c" is correct. This question is on transfer pricing. The best transfer pricing model is based on
market price, which, in this question, is $25.
Choice "a" is incorrect. The best transfer pricing model is based on market price ($25), not the variable
costs of $15.
59
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "b" is incorrect. The best transfer pricing model is based on market price ($25). This answer
apparently starts with the selling price ($100) and subtracts the total of the market price ($25), the
variable costs ($15), and additional variable costs ($40), a total subtract of $80.
Choice "d" is incorrect. The best transfer pricing model is based on market price ($25), not the total of the
market price ($25) and the variable cost ($15).
CPA-05580
Type1 M/C
A-D
Corr Ans: B
PM#29
B 5-04
87. CPA-05580 Released 2007 Page 115
Which of the following costing methods provide(s) the added benefit of usefulness for external reporting
purposes?
I. Variable.
II. Absorption.
a.
b.
c.
d.
I only.
II only.
Both I and II.
Neither I nor II.
CPA-05580
Explanation
Choice "b" is correct. Absorption costing methods represent generally accepted accounting principles
generally used for the presentation of external financial statements and are, therefore, for the benefit of
external users.
Choice "a" is incorrect. Variable (sometimes called direct) costing is used for the benefit of internal users.
Variable costs excludes fixed costs from product (inventoried) costs and thereby produces a contribution
margin based income statement highly useful to internal managers in computing break even points and
other analysis of performance.
Choice "c" is incorrect. Although item II, absorption costing, is designed for external reporting, item I,
variable costing, primarily benefits internal managers.
Choice "d" is incorrect. Although item I, variable costing, is not designed to add usefulness to external
users, item II is designed for that purpose.
Forecasting and Projection Techniques
CPA-04226
Type1 M/C
88. CPA-04226 J88 - 1.02
A-D
Corr Ans: D
PM#1
B 5-05
Page 51
Thompson Company is in the process of preparing its budget for the next fiscal year. The company has
had problems controlling costs in prior years and has decided to adopt a flexible budgeting system this
year. Many of its costs contain both fixed and variable cost components. A method that can be used to
separate costs into fixed and variable components is:
a.
b.
c.
d.
Trend analysis.
Monte Carlo simulation.
Dynamic programming.
Regression analysis.
CPA-04226
Explanation
Choice "d" is correct. Regression analysis can be used to separate costs into fixed and variable
components by means of least squares. This method mathematically fits a trend line to minimize the
distance between the trend line and the actual observations.
60
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "a" is incorrect, because trend analysis is used to project costs (expenses) out into the future.
Choice "b" is incorrect, because Monte Carlo simulation is used to generate individual values for a
random variable.
Choice "c" is incorrect, because dynamic programming is used to make a series of interrelated decisions.
CPA-04229
Type1 M/C
89. CPA-04229 D93 - 1.28
A-D
Corr Ans: C
PM#2
B 5-05
Page 51
Regression analysis:
a.
b.
c.
d.
Estimates the independent cost variable.
Uses probability assumptions to determine total project costs.
Estimates the dependent cost variable.
Ignores the coefficient of determination.
CPA-04229
Explanation
Choice "c" is correct. Regression analysis is a statistical model that can estimate the dependent cost
variable based on changes in the independent variable.
Choice "a" is incorrect. An independent variable is assumed (not estimated) in regression analysis and is
based on activity, rather than costs.
Choice "b" is incorrect. No probabilities are used in regression analysis. This is a far-out distractor.
Choice "d" is incorrect. The coefficient of determination is a statistical measure used to evaluate the
results of regression analysis.
CPA-04231
Type1 M/C
90. CPA-04231 J97 - 1.26
A-D
Corr Ans: A
PM#3
B 5-05
Page 51
A regression equation:
a.
b.
c.
d.
Estimates the dependent variables.
Is based on objective and constraint functions.
Estimates the independent variable.
Ignores the coefficient of determination.
CPA-04231
Explanation
Choice "a" is correct. A regression equation is a statistical model that estimates the dependent variables
based on changes in the independent variable.
Choice "b" is incorrect. Objective and constraint functions are used in linear programming, not in
regression analysis.
Choice "c" is incorrect. An independent variable is assumed (not estimated) in regression analysis and is
based on activity, rather than costs.
Choice "d" is incorrect. The coefficient of determination is a statistical measure used to evaluate the
results of regression analysis.
61
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Lecture: Business 5
CPA-04234
Type1 M/C
91. CPA-04234 D94 - 1.28
A-D
Corr Ans: B
PM#4
B 5-05
Page 53
Seacraft Inc. received a request for a competitive bid for the sale of one of its unique boating products
with a desired modification. Seacraft is now in the process of manufacturing this product but with a
slightly different modification for another customer. These unique products are labor intensive and both
will have long production runs. Which one of the following methods should Seacraft use to estimate the
cost of the new competitive bid?
a.
b.
c.
d.
Expected value analysis.
Learning curve analysis.
Regression analysis.
Continuous probability simulation.
CPA-04234
Explanation
Choice "b" is correct. Learning curve analysis is used to determine increases in efficiency or production
as experience is gained. Both products have long production runs, making learning curve analysis the
best method for estimating the cost of the competitive bid.
Choice "a" is incorrect. Expected value analysis represents the long-term average of repeated trials and
is found by multiplying the probability of each outcome by its payoff and then summing the results.
Choice "c" is incorrect. Regression analysis is a statistical model that can estimate the dependent cost
variable based on changes in the independent variable.
Choice "d" is incorrect. Continuous probability simulation is a procedure that studies a problem by
creating a model of the process and then, through trial and error solutions, attempts to improve the
problem solution.
CPA-04236
Type1 M/C
92. CPA-04236 J96 - 1.07
A-D
Corr Ans: C
PM#5
B 5-05
Page 53
It is estimated that a particular manufacturing job is subject to an 80 percent learning curve. The first unit
required fifty labor hours to complete. What is the cumulative average time per unit after completing four
units?
a.
b.
c.
d.
50.0 hours.
40.0 hours.
32.0 hours.
30.0 hours.
CPA-04236
Explanation
Rule: The basic premise of the learning curve is that operating efficiency and/or production increases in
repetitive tasks as experience is gained. The rate of improvement, measured by the learning curve, has a
regular pattern that can be stated as follows:
As cumulative quantities double, average cost per unit decreases by a specified percent of the previous
cost.
Choice "c" is correct. 32.0 hours cumulative average time per unit after completing four units.
Cumulative #
of Units
1
2
4
Average Time
Per Unit
50 Hours
40 Hours (50 × 0.8)
32 Hours (40 × 0.8)
Choices "a", "b", and "d" are incorrect, per the above calculation.
62
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Lecture: Business 5
CPA-04799
Type1 M/C
A-D
Corr Ans: A
PM#6
B 5-05
93. CPA-04799 2005 Released Page 52
A management accountant performs a linear regression of maintenance cost vs. production using a
computer spreadsheet. The regression output shows an "intercept" value of $322,897. How should the
accountant interpret this information?
a.
b.
c.
d.
Y has a value of $322,897 when X equals zero.
X has a value of $322,897 when Y equals zero.
The residual error of the regression is $322,897.
Maintenance cost has an average value of $322,897.
CPA-04799
Explanation
Choice "a" is correct. The intercept value is the point at which the behavior of the independent variable
(production) stated in terms of the dependent variable (cost) intercepts the y axis as follows:
Choice "b" is incorrect. The "x" axis, or independent variable, measures production in units, not dollars
(per above).
Choice "c" is incorrect. The "y" intercept is not the residual error of the regression.
Choice "d" is incorrect. The "y" intercept is not the average cost. It is most likely the amount of fixed
maintenance costs.
CPA-05565
Type1 M/C
A-D
Corr Ans: A
PM#7
B 5-05
94. CPA-05565 Released 2007 Page 50
Which of the following is a disadvantage of participative budgeting?
a.
b.
c.
d.
It is more time consuming.
It decreases motivation.
It decreases acceptance.
It is less accurate.
CPA-05565
Explanation
Choice "a" is correct. Participative budgeting requires input from multiple stakeholders and spreads the
decision-making process over multiple layers of managers and individuals. Implementing this approach
effectively is time consuming. Authoritative (top down) budgeting is faster.
Choice "b" is incorrect. Participative budgeting promotes empowerment of a wide range of individuals in
the organization, and motivation will likely increase, not decrease.
Choice "c" is incorrect. Participative budgeting requires buy-in by a wide range of individuals in the
organization, and acceptance will likely increase, not decrease.
63
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "d" is incorrect. Participative budgeting requires input from the individuals most responsible for
the details of the operation. Thus, it tends to be more accurate.
Planning/Budgeting Overview and Planning/Budgeting Techniques
CPA-03792
Type1 M/C
95. CPA-03792 ARE R02 #30
A-D
Corr Ans: C
PM#1
B 5-06
Page 103
Rolling Wheels purchases bicycle components in the month prior to assembling them into bicycles.
Assembly is scheduled one month prior to budgeted sales. Rolling pays 75% of component costs in the
month of purchase and 25% of the costs in the following month. Component costs included in budgeted
cost of sales are:
April
$5,000
May
$6,000
June
$7,000
July
$8,000
August
$8,000
What is Rolling's budgeted cash payments for components in May?
a
b.
c.
d.
$5,750
$6,750
$7,750
$8,000
CPA-03792
Explanation
Choice "c" is correct, $7,750.
This problem requires the candidate to derive budgeted cash payments for the month of May from a
schedule of budgeted cost of sales. The question indicates that components are purchased one month
prior to assembly and two months prior to sale. The question also indicates that components are paid for
over two months, with 75% being paid in the month of purchase and the remaining 25% paid in the
following month. Therefore, cash payments in May will relate to units to be sold in June and July. The
payments will include the 25% balance of components purchased for June sales, and the 75% payment
for components purchased for July sales. ($8,000 × 75% + $7,000 × 25% = $7,750)
The following computation sheet shows the development of the cash budget for May:
Choice "a" is incorrect, per above.
64
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "b" is incorrect. Computation for April cash budget is computed if the candidate fails to account
for all one-month lags.
Choice "d" is incorrect. Response does not properly compute components of cash payments.
CPA-03794
Type1 M/C
A-D
96. CPA-03794 ARE Nov 95 #40
Corr Ans: C
PM#2
B 5-06
Page 94
Mien Co. is budgeting sales of 53,000 units of product Nous for October 1995. The manufacture of one
unit of Nous requires 4 kilos of chemical Loire. During October 1995, Mien plans to reduce the inventory
of Loire by 50,000 kilos and increase the finished goods inventory of Nous by 6,000 units. There is no
Nous work-in-process inventory. How many kilos of Loire is Mien budgeting to purchase in October
1995?
a.
b.
c.
d.
138,000
162,000
186,000
238,000
CPA-03794
Explanation
Choice "c" is correct.
Mien plans to sell 53,000 units of product Nous, plus increase inventory of Nous by 6,000 units. This
implies that 59,000 units must be manufactured, which will require 236,000 (= 59,000 x 4) kilos of Loire.
Since there is already inventory of 50,000 kilos of Loire, only 186,000 kilos will need to be purchased.
Budgeted sales of Nous
Desired increase in Nous inventory
Units of Nous to be manufactured
Kilos of Loire required for each unit of Nous
Total units of Loire required
Amount of Loire be used from current inventory
53,000 units
6,000 units
59,000 units
x4
236,000 kilos
(50,000) kilos
Amount of Loire to be purchased
186,000 kilos
Choice "a" is incorrect. The 6,000 units of desired finished goods inventory increases the units of Nous to
be manufactured and should be added to the 53,000, not subtracted from it.
Choice "b" is incorrect. The increase in Nous inventory must be included in determining the budgeted
purchases for October.
Choice "d" is incorrect. The 6,000 units of desired finished goods inventory increases the units of Nous to
be manufactured and should be added to the 53,000, not subtracted from it. In addition, the reduction of
Loire inventory reduces the amount to be purchased, so it should be deducted from the purchase amount
rather than added.
CPA-03803
Type1 M/C
A-D
97. CPA-03803 ARE May 95 #37
Corr Ans: C
PM#3
B 5-06
Page 103
A 1995 cash budget is being prepared for the purchase of Toyi, a merchandise item. Budgeted data are:
Cost of goods sold for 1995
Accounts payable 1/1/95
Inventory - 1/1/95
12/31/95
$300,000
20,000
30,000
42,000
Purchases will be made in 12 equal monthly amounts and paid for in the following month. What is the
1995 budgeted cash payment for purchases of Toyi?
65
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
a.
b.
c.
d.
$295,000
$300,000
$306,000
$312,000
CPA-03803
Explanation
Choice "c" is correct. Purchases in 1995 should be budgeted to cover both the planned sales (cost =
$300,000) and the desired increase in inventory ($12,000), for a total of $312,000. Accounts payable at
1/1/95 (relating to December 1994 purchases) will be paid in 1995. Accounts payable at 12/31/95 of
$26,000 (= $312,000 ÷ 12) will not be paid until 1996.
Purchases
A/P paid in 1995
December purchase
Paid in 1996
$312,000
20,000
(26,000)
$306,000
Choice "a" is incorrect. Budgeted purchases must include the desired increase in inventory.
Choice "b" is incorrect. Budgeted purchases must include the desired increase in inventory, and cash
payments must include adjustments for accounts payable (add December 1994 purchases and subtract
December 1995 purchases).
Choice "d" is incorrect. Accounts payable at 1/1/95 will be paid in 1995 and December 1995 purchases
will be paid in 1996.
CPA-03805
Type1 M/C
98. CPA-03805 D96 - 1.04
A-D
Corr Ans: C
PM#4
B 5-06
Page 92
Daffy Tunes manufactures an animated rabbit with moving parts and a built-in voice box. Projected sales
in units for the next five months are as follows.
Month
January
February
March
April
May
Projected
Sales in Units
30,000
36,000
33,000
40,000
29,000
Each rabbit requires basic materials that Daffy purchases from a single supplier at $3.50 per rabbit.
Voice boxes are purchased from another supplier at $1.00 each. Assembly labor cost is $2.00 per rabbit
and variable overhead cost is $.50 per rabbit. Fixed manufacturing overhead applicable to rabbit
production is $12,000 per month. Daffy's policy is to manufacture 1.5 times the coming month's projected
sales every other month starting with January (i.e., odd-numbered months) for February sales, and to
manufacture 0.5 times the coming month's projected sales in alternate months (i.e., even-numbered
months). This allows Daffy to allocate limited manufacturing resources to other products as needed
during the even-numbered months.
The unit production budget for animated rabbits for January is:
a.
b.
c.
d.
45,000 units.
16,500 units.
54,000 units.
14,500 units.
CPA-03805
Explanation
Choice "c" is correct. 54,000 units is the production budget for January:
February sales projection
1.5 × in odd months
36,000
× 1.5
66
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
January production budget
54,000
Choices "a", "b", and "d" are incorrect based on the above explanation.
CPA-03807
Type1 M/C
99. CPA-03807 D96 - 1.05
A-D
Corr Ans: D
PM#5
B 5-06
Page 58
Daffy Tunes manufactures an animated rabbit with moving parts and a built-in voice box. Projected sales
in units for the next five months are as follows.
Month
January
February
March
April
May
Projected
Sales in Units
30,000
36,000
33,000
40,000
29,000
Each rabbit requires basic materials that Daffy purchases from a single supplier at $3.50 per rabbit.
Voice boxes are purchased from another supplier at $1.00 each. Assembly labor cost is $2.00 per rabbit
and variable overhead cost is $.50 per rabbit. Fixed manufacturing overhead applicable to rabbit
production is $12,000 per month. Daffy's policy is to manufacture 1.5 times the coming month's projected
sales every other month starting with January (i.e., odd-numbered months) for February sales, and to
manufacture 0.5 times the coming month's projected sales in alternate months (i.e., even-numbered
months). This allows Daffy to allocate limited manufacturing resources to other products as needed
during the even-numbered months.
The dollar production budget for animated rabbits for February is:
a.
b.
c.
d.
$327,000
$390,000
$113,500
$127,500
CPA-03807
Explanation
Choice "d" is correct. $127,500 dollar production budget for February:
March projected sales in units
.5 x in even months
February production budget in units
Variable cost per unit
(3.50 + 1.00 + 2.00 + .50)
Variable production costs
Fixed mfg overhead costs
Dollar production budget
33,000
×
.5
16,500
×
7.0
115,500
12,000
127,500
Daffy's policy ignores actual beginning inventory.
Choice "a" is incorrect. Since February is an even month, the production budget is based on .5 of the
following month's projected sales, not 1.5 of the previous month's projected sales.
Choice "b" is incorrect. Since February is an even month, the production budget is based on .5 of the
following month's projected sales, not 1.5 of the current month's projected sales.
Choice "c" is incorrect. The February production budget is based on March projected sales, not May
projected sales.
CPA-03809
Type1 M/C
A-D
Corr Ans: C
PM#6
B 5-06
67
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Lecture: Business 5
100. CPA-03809
D96 - 1.08
Page 94
Karmee Company has been accumulating operating data in order to prepare an annual profit plan.
Details regarding Karmee's sales for the first six months of the coming year are as follows.
Estimated Monthly Sales
January
$600,000
February
650,000
March
700,000
April
625,000
May
720,000
June
800,000
Type of Monthly Sale
Cash sales
20%
Credit sales
80%
Collection Pattern for Credit Sales
Month of sale
One month following sale
Second month following sale
30%
40%
25%
Karmee's cost of goods sold average 40 percent of the sales value. Karmee's objective is to maintain a
target inventory equal to 30 percent of the next month's sales. Purchases of merchandise for resale are
paid for in the month following the sale.
The variable operating expenses (other than cost of goods sold) for Karmee are 10 percent of sales and
are paid for in the month following the sale. The annual fixed operating expenses are presented below.
All of these are incurred uniformly throughout the year and paid monthly except for insurance and
property taxes. Insurance is paid quarterly in January, April, July, and October. Property taxes are paid
twice a year in April and October.
Annual Fixed Operating Costs
Advertising
$ 720,000
Depreciation
420,000
Insurance
180,000
Property taxes
240,000
Salaries
1,080,000
The purchases of merchandise that Karmee Company will need to make during February will be:
a.
b.
c.
d.
$254,000
$260,000
$266,000
$275,000
CPA-03809
Explanation
Choice "c" is correct. $266,000. Purchases of merchandise during February:
Beginning inventory, February 1:
(Note that January ending inventory was targeted at 30% of February sales)
February sales × cost% × inventory%
$650,000 × 40% × 30% =
$78,000
Purchases (squeeze)
266,000 C
Subtotal
344,000
Cost of sales
$650,000 × 40%
(260,000)
Ending inventory, February 28:
(Note that February ending inventory is targeted at 30% of March sales)
March sales × cost% × inventory%
$700,000 × 40% × 30% =
$84,000
Choices "a", "b", and "d" are incorrect based on the above explanation.
68
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-03814
Type1 M/C
101. CPA-03814
A-D
D94 - 1.17
Corr Ans: C
PM#8
B 5-06
Page 92
Simpson, Inc. is in the process of preparing its annual budget. The following beginning and ending
inventory levels (in units) are planned for the year ending December 31, 1995.
Raw material*
Work-in-process
Finished goods
Beginning
Inventory
40,000
10,000
80,000
Ending
Inventory
50,000
10,000
50,000
*Two units of raw material are needed to produce each unit of finished product.
If Simpson, Inc. plans to sell 480,000 units during 1995, the number of units it would have to manufacture
during the year would be:
a.
b.
c.
d.
440,000 units.
510,000 units.
450,000 units.
530,000 units.
CPA-03814
Explanation
Choice "c" is correct. 450,000 units would need to be manufactured during 1995 to support sales of
480,000 units:
Units
Projected sales
Desired ending inventory
Required units
Less: beginning inventory
Required units to manufacture
480,000
50,000
530,000
(80,000)
450,000
Choices "a", "b", and "d" are incorrect based on the above explanation.
CPA-03816
Type1 M/C
102. CPA-03816
A-D
D94 - 1.18
Corr Ans: B
PM#9
B 5-06
Page 94
Simpson, Inc. is in the process of preparing its annual budget. The following beginning and ending
inventory levels (in units) are planned for the year ending December 31, 1995.
Raw material*
Work-in-process
Finished goods
Beginning
Inventory
40,000
10,000
80,000
Ending
Inventory
50,000
10,000
50,000
*Two units of raw material are needed to produce each unit of finished product.
If 500,000 finished units were to be manufactured during 1995 by Simpson, Inc., the units of raw material
that must be purchased would be:
a.
b.
c.
d.
1,020,000 units.
1,010,000 units.
990,000 units.
1,050,000 units.
CPA-03816
Explanation
69
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "b" is correct. 1,010,000 units of raw material must be purchased if 500,000 finished units are to
be manufactured:
Units
Manufacture of finished goods
Units of raw material per unit of finished goods
Units of raw material required for manufacture
Add: desired ending inventory
Total required units of raw material
Less: beginning inventory
Required units to manufacture
500,000
x
2
1,000,000
50,000
1,050,000
(40,000)
1,010,000
Choices "a", "c", and "d" are incorrect based on the above explanation.
CPA-03818
Type1 M/C
103. CPA-03818
A-D
D94 - 1.19
Corr Ans: B
PM#10
B 5-06
Page 92
Superior Industries, sales budget shows quarterly sales for the next year as follows.
Quarter
1
2
3
4
Units
10,000
8,000
12,000
14,000
Company policy is to have a finished goods inventory at the end of each quarter equal to 20 percent of
the next quarter's sales. Budgeted production for the second quarter of the next year would be:
a.
b.
c.
d.
7,200 units.
8,800 units.
8,400 units.
10,400 units.
CPA-03818
Explanation
Choice "b" is correct. 8,800 units budgeted production for the second quarter:
Production needs to cover the current budgeted sales for the current quarter while also taking into
account desired inventory levels.
Second quarter sales
Desired ending inventory (20% × 12,000)
Total units required
Less: beginning inventory (20% x 8,000)
Budgeted production
8,000
2,400
10,400
(1,600)
8,800
Choices "a", "c", and "d" are incorrect based on the above explanation.
CPA-03819
Type1 M/C
104. CPA-03819
A-D
Corr Ans: C
ARE May 94 #37
PM#11
B 5-06
Page 58
A flexible budget is appropriate for a:
a.
b.
c.
d.
Marketing
budget
No
No
Yes
Yes
Direct material
usage budget
No
Yes
Yes
No
70
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-03819
Explanation
Choice "c" is correct. A flexible budget is a budget prepared at different levels of operating activity. It is
appropriate for any activity that has variable costs. It is not necessary for the control of fixed costs since
fixed costs do not vary with changes in the level of activity.
Choice "a" is incorrect. Both of these budgets have variable cost components, so flexible budgets would
be meaningful at different levels of activity.
Choice "b" is incorrect. The marketing budget would have variable costs, making a flexible budget
appropriate for control over marketing costs.
Choice "d" is incorrect. The direct materials usage budget includes variable costs, making a flexible
budget appropriate for control over direct material usage costs.
CPA-03821
Type1 M/C
105. CPA-03821
A-D
J94 - 1.11
Corr Ans: D
PM#12
B 5-06
Page 57
The master budget process usually begins with the:
a.
b.
c.
d.
Production budget.
Operating budget.
Financial budget.
Sales budget.
CPA-03821
Explanation
Choice "d" is correct. The master budget process usually begins with the sales budget.
Choices "a", "b", and "c" are incorrect, per the master budget flow chart:
71
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-03822
Type1 M/C
106. CPA-03822
A-D
Corr Ans: C
J94 - 1.12
PM#13
B 5-06
Page 57
The production budget process usually begins with the:
a.
b.
c.
d.
Direct labor budget.
Direct materials budget.
Sales budget.
Ending inventory budget.
CPA-03822
Explanation
Choice "c" is correct. The production budget process usually begins with sales budget and then adds in
the effect of any changes in inventory levels.
Choices "a" and "b" are incorrect. The direct labor, direct materials, and manufacturing overhead budgets
are based on the production budget, not vice versa.
Choice "d" is incorrect. The ending inventory budget affects the production budget, but it is not the
starting point.
CPA-03823
Type1 M/C
107. CPA-03823
A-D
Corr Ans: C
D93 - 1.16
PM#14
B 5-06
Page 103
Orion Corporation is preparing a cash budget for the six months beginning January 1, 1994. Shown
below are the company's historical collection pattern and the budgeted credit sales for the period.
65 percent collected in month of sale
20 percent collected in the first month after sale
10 percent collected in the second month after sale
4 percent collected in the third month after sale
1 percent uncollectible
January
February
March
April
May
June
$160,000
185,000
190,000
170,000
200,000
180,000
The estimated total cash collections during April from accounts receivable would be:
a.
b.
c.
d.
$154,900
$167,000
$173,400
$176,200
CPA-03823
Explanation
Choice "c" is correct. $173,400.
April
March
February
January
170,000
190,000
185,000
160,000
×
×
×
×
65%
20%
10%
4%
=
=
=
=
$110,500
38,000
18,500
6,400
$173,400
Choices "a", "b", and "d" are incorrect based on the above explanation.
72
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-03824
Type1 M/C
108. CPA-03824
A-D
D93 - 1.19
Corr Ans: C
PM#15
B 5-06
Page 102
The Raymar Company is preparing its cash budget for the months of April and May. The firm has
established a $200,000 line of credit with its bank at a 12 percent annual rate of interest on which
borrowings for cash deficits must be made in $10,000 increments. There is no outstanding balance on
the line of credit loan on April 1. Principal repayments are to be made in any month in which there is a
surplus of cash. Interest is to be paid monthly. If there are no outstanding balances on the loans,
Raymar will invest any cash in excess of its desired end-of-month cash balance in U.S. Treasury bills.
Raymar intends to maintain a minimum balance of $100,000 at the end of each month by either
borrowing for deficits below the minimum balance or investing any excess cash.
Monthly collection and disbursement patterns are expected to be the following:
•
•
•
Collections
50% of the current month's sales budget and 50% of the previous month's sales budget.
Accounts Payable Disbursements
75% of the current month's accounts payable budget and 25% of the previous month's accounts
payable budget.
All other disbursements occur in the month in which they are budgeted.
Budget Information
March
$40,000
30,000
60,000
25,000
Sales
Accounts payable
Payroll
Other disbursements
April
May
$50,000 $100,000
40,000
40,000
70,000
50,000
30,000
10,000
In April, Raymar's budget will result in:
a.
b.
c.
d.
$45,000 in excess cash.
A need to borrow $50,000 on its line of credit for the cash deficit.
A need to borrow $100,000 on its line of credit for the cash deficit.
A need to borrow $90,000 on its line of credit for the cash deficit.
CPA-03824
Explanation
Choice "c" is correct. In April, Raymar will need to borrow $100,000 ($92,500 deficit rounded up):
Current month sales
Previous months sales
Acct. Payable - current
Acct. Payable - previous
Payroll
Other disbursements
Net cash flow
$ 25,000
20,000
(30,000)
(7,500)
(70,000)
(30,000)
$(92,500)
Choices "a", "b", and "d" are incorrect based on the above explanation.
CPA-03825
Type1 M/C
109. CPA-03825
A-D
D93 - 1.20
Corr Ans: C
PM#16
B 5-06
Page 102
The Raymar Company is preparing its cash budget for the months of April and May. The firm has
established a $200,000 line of credit with its bank at a 12 percent annual rate of interest on which
borrowings for cash deficits must be made in $10,000 increments. There is no outstanding balance on
the line of credit loan on April 1. Principal repayments are to be made in any month in which there is a
surplus of cash. Interest is to be paid monthly. If there are no outstanding balances on the loans,
Raymar will invest any cash in excess of its desired end-of-month cash balance in U.S. Treasury bills.
73
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Raymar intends to maintain a minimum balance of $100,000 at the end of each month by either
borrowing for deficits below the minimum balance or investing any excess cash.
Monthly collection and disbursement patterns are expected to be the following:
•
•
•
Collections
50% of the current month's sales budget and 50% of the previous month's sales budget.
Accounts Payable Disbursements
75% of the current month's accounts payable budget and 25% of the previous month's accounts
payable budget.
All other disbursements occur in the month in which they are budgeted.
Budget Information
Sales
Accounts payable
Payroll
Other disbursements
March
$40,000
30,000
60,000
25,000
April
May
$50,000 $100,000
40,000
40,000
70,000
50,000
30,000
10,000
In May, Raymar will be required to:
a.
b.
c.
d.
Repay $20,000 principal and pay $1,000 interest.
Pay $900 interest.
Borrow an additional $20,000 and pay $1,000 interest.
Borrow an additional $20,000 and pay $1,200 interest.
CPA-03825
Explanation
Choice "c" is correct. In May, Raymar will need to borrow an additional $20,000 and pay $1,000 interest:
Current month sales
Previous months sales
Acct. Payable - current
Acct. Payable - previous
Payroll
Other disbursements
Net cash flow
April cash flow
Total deficit
Prev borrowing
Borrow in May
Total borrowed
$ 50,000
25,000
(30,000)
(10,000)
(50,000)
(10,000)
(25,000)
(92,500)
$(117,500)
$ 100,000
20,000
$ 120,000
Interest:
$100,000 × 12% × 1/12 = $1,000
Choices "a", "b", and "d" are incorrect based on the above explanation.
CPA-03827
Type1 M/C
110. CPA-03827
A-D
D96 - 1.14
Corr Ans: D
PM#17
B 5-06
Page 58
Flexible budgets:
a.
b.
c.
d.
Provide for external factors affecting company profitability.
Are used to evaluate capacity utilization.
Are budgets that project costs based on anticipated future improvements.
Accommodate changes in activity levels.
CPA-03827
Explanation
74
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "d" is correct. Flexible budgets accommodate changes in activity levels. They contain both fixed
and variable components. The actual activity level is used to create a budget for that level.
Choice "a" is incorrect. Flexible budgets are adjusted based on internal factors.
Choice "b" is incorrect. Marginal analysis, not flexible budgets, is used to evaluate capacity utilization.
Choice "c" is incorrect. Any type of budget can anticipate costs based on future improvements. This is
not the "flex" in a flexible budget.
CPA-03828
Type1 M/C
111. CPA-03828
A-D
D93 - 1.18
Corr Ans: A
PM#18
B 5-06
Page 58
The use of standard costs in the budgeting process signifies that an organization has most likely
implemented a:
a.
b.
c.
d.
Flexible budget.
Zero-based budget.
Static budget.
Strategic budget.
CPA-03828
Explanation
Choice "a" is correct. Standard costs usually means that a flexible budget is being used. Standard costs
per unit can be used to adjust the flexible budget to the actual volume.
Choice "b" is incorrect. A zero-based budget starts at zero. Everything must be justified.
Choice "c" is incorrect. Static budgets are the opposite of flexible budgets. Standard costs per unit would
not be required, since a static budget addresses costs at one specific volume.
Choice "d" is incorrect. A strategic budget is long-term and does not use standard costs.
CPA-04793
Type1 M/C
112. CPA-04793
A-D
Corr Ans: B
PM#19
B 5-06
2005 Released Page 55
Johnson Co. is preparing its master budget for the first quarter of next year. Budgeted sales and
production for one of the company's products are as follows:
Month
January
February
March
Sales
10,000
12,000
15,000
Production
12,000
11,000
16,000
Each unit of this product requires four pounds of raw materials. Johnson's policy is to have sufficient raw
materials on hand at the end of each month for 40 percent of the following month's production
requirements. The January 1 raw materials inventory is expected to conform with this policy.
How many pounds of raw materials should Johnson budget to purchase for January?
a.
b.
c.
d.
11,600
46,400
48,000
65,600
CPA-04793
Explanation
Choice "b" is correct.
75
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
The computation derives purchases using the BASE mnemonic where B is the beginning inventory
computed at 40% of January's production requirements and E is then ending inventory at 40% of
February's production requirements. Both are multiplied by the 4 pounds of raw material needed.
Amounts subtracted from inventory, the "S", are the items sold in February, produced in January,
multiplied by the 4 pounds of raw materials needed. We then squeeze the purchases from the formula:
ending inventory of 17,600 + 48,000 units sold - beginning inventory of 19,200, which equals 46,400.
Choice "a" is incorrect. It does not consider the raw material conversion of 4 pounds per unit.
Choice "c" is incorrect. This response purely considers the amount of units sold converted to raw
materials.
Choice "d" is incorrect. This response is the sum of the units sold in February and the ending inventory
requirements.
CPA-05568
Type1 M/C
113. CPA-05568
A-D
Corr Ans: D
PM#20
B 5-06
Released 2007 Page 105
Which of the following budgets provides information for preparation of the owner's equity section of a
budgeted balance sheet?
a.
b.
c.
d.
Sales budget.
Cash budget.
Capital expenditures budget.
Budgeted income statement.
CPA-05568
Explanation
Choice "d" is correct. The budgeted income statement produces anticipated accrual basis net income or
loss and is added to beginning owner's equity to generate the owner's equity section of the budgeted
balance sheet.
Choice "a" is incorrect. The sales budget is the starting point for all operating and cash flow budgets but
does not directly provide information for preparation of the owner's equity section of the budgeted balance
sheet.
Choice "b" is incorrect. The cash budget reconciles the budgeted income statement to the change in
cash and displays cash flow requirements but does not directly provide information for preparation of the
owner's equity section of the budgeted balance sheet.
Choice "c" is incorrect. The capital expenditures budget describes the amounts that will be paid for longlived assets but does not directly provide information for preparation of the owner's equity section of the
budgeted balance sheet.
CPA-05567
Type1 M/C
114. CPA-05567
A-D
Corr Ans: B
PM#20
B 5-06
Released 2007 Page 103
Ryan Co. projects the following monthly revenues for next year:
January
$100,000
July
$250,000
76
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
February
March
April
May
June
500,000
425,000
450,000
575,000
300,000
August
September
October
November
December
275,000
300,000
350,000
400,000
525,000
Ryan's terms are net 30 days. The company typically receives payment on 80% of sales the month
following the sale and 17% is collected two months after the sale. Approximately 3% of sales are
deemed bad debt. What amount represents the expected cash collection in the second calendar quarter
of next year?
a.
b.
c.
d.
$1,450,000
$1,393,750
$1,325,000
$1,234,250
CPA-05567
Explanation
Choice "b" is correct. Expected cash collections in the second calendar quarter are computed as follows:
Choice "a" is incorrect per the above computation. This proposed solution assumes 100% collections of
March, April, and May revenues during the quarter ended June 30.
Choice "c" is incorrect per the above computation. This proposed solution is purely the sum of revenue
amounts for the first quarter.
Choice "d" is incorrect, per the above computation.
CPA-05601
Type1 M/C
115. CPA-05601
A-D
Corr Ans: C
PM#20
B 5-06
Released 2007 Page 103
On June 30, 2003, a company is preparing the cash budget for the third quarter. The collection pattern
for credit sales has been 60% in the month of sale, 30% in the first month after sale, and the rest in the
second month after sales. Uncollectible accounts are negligible. There are cash sales each month equal
to 25% of total sales. The total sales for the quarter are estimated as follows: July, $30,000; August,
$15,000; September, $35,000. Accounts receivable on June 30, 2003, were $10,000. What amount
would be the projected cash collections for September?
a.
b.
c.
d.
$21,375
$28,500
$30,125
$37,250
CPA-05601
Explanation
Choice "c" is correct. Cash collections for the month of September are computed as follows using the fact
pattern described above.
77
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "a" is incorrect. The proposed solution excludes cash sales as a component of cash collections.
Choice "b" is incorrect, per the above calculation.
Choice "d" is incorrect. The proposed solution anticipates that all sales are credit sales collected over a
three month period and ignores the cash collection percentage in error.
CPA-05589
Type1 M/C
116. CPA-05589
A-D
Corr Ans: A
PM#20
B 5-06
Released 2007 Page 56
Fargo, Mfg., a small business, is developing a budget for next year. Which of the following steps should
Fargo perform first?
a.
b.
c.
d.
Forecast Fargo's sales volume.
Determine the price of Fargo's products.
Identify costs of Fargo's forecasted sales volume.
Compute the dollar amount of Fargo's forecasted sales.
CPA-05589
Explanation
Choice "a" is correct. Forecast of sales volume is the first step in the budget development process.
Sales volumes will drive product supply requirements and, by extension, purchasing and inventory
requirements.
Choice "b" is incorrect. Product pricing will serve as a basis for projecting sales revenue based on sales
volume. Pricing will generally be set at a rate to cover costs that were forecast based upon sales volume
amounts that were projected first.
Choice "c" is incorrect. Identifying the costs of goods manufactured to sustain sales volume would be
computed based upon the forecast of sales volume. Sales volume is forecasted first.
Choice "d" is incorrect. The dollar volume is Fargo's forecasted sales is projected as price times sales
volume. Price is generally set at a level to cover cost of goods sold, an amount dependent upon sales
volume. Sales volume is forecasted first.
Budget Variance Analysis
CPA-03829
Type1 M/C
117. CPA-03829
A-D
ARE R03 #23
Corr Ans: D
PM#1
B 5-07
Page 68
Baby Frames, Inc. evaluates manufacturing overhead by using variance analysis. The following
information applies to the month of May:
Number of frames manufactured
Variable overhead costs
Actual
19,000
$ 4,100
Budgeted
20,000
$
2 per direct labor hour
78
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Fixed overhead costs
Direct labor hours
$22,000
2,100 hours
$20,000; $1 per unit
0.1 hour per frame
What is the variable overhead efficiency variance?
a.
b.
c.
d.
$200 favorable.
$200 unfavorable.
$400 favorable.
$400 unfavorable.
CPA-03829
Explanation
Rule: The formula for the variable overhead efficiency variance is computed as budgeted variable
overhead based on standard hours minus budgeted variable overhead based on actual hours. The sole
difference between these two calculated amounts is the use of actual compared to standard hours for
variable overhead.
Choice "d" is correct. Volume variances are computed as follows:
Budgeted variable overhead based on standard hours:
Note that direct labor hours based on standard hours means the direct labor hours allowed for the actual
level of production, not the actual direct labor hours used.
Budgeted variable OH = standard direct labor hours allowed x standard variable overhead rate
Budgeted variable OH = 19,000 frames x .1 hour allowed per frame x $2.00 per hour = $3,800
Budgeted overhead based on actual hours:
Budgeted variable OH = actual direct labor hours x standard variable overhead rate
Budgeted variable OH = 2,100 actual direct labor hours x $2.00 per hour = $4,200
Variable overhead efficiency variance:
The difference between the two amounts is an unfavorable variance of $400 (= $4,200 - $3,800). The
variance is unfavorable because costs using actual direct labor hours exceeded the budgeted cost for
standard labor hours.
Choices "a", "b", and "c" are incorrect, per the computation above.
CPA-03833
Type1 M/C
118. CPA-03833
A-D
Corr Ans: D
ARE R02 #23
PM#3
B 5-07
Page 69
Baby Frames, Inc., evaluates manufacturing overhead in its factory by using variance analysis. The
following information applies to the month of May:
Number of frames manufactured
Variable overhead costs
Fixed overhead costs
Direct labor hours
Actual
19,000
$ 4,100
$ 22,000
2,100 hours
Budgeted
20,000
$
2 per direct labor hour
$ 20,000
0.1 hour per frame
What is the fixed overhead spending variance?
a.
b.
c.
d.
$1,000 favorable.
$1,000 unfavorable.
$2,000 favorable.
$2,000 unfavorable.
CPA-03833
Explanation
Choice "d" is correct. The fixed overhead spending variance is purely the difference between the amount
spent and the amount budgeted for fixed overhead. We planned to spend $20,000 and we actually spent
$22,000. These results represent a $2,000 unfavorable variance.
79
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Fixed overhead spent
Fixed overhead budgeted
Fixed overhead variance
$22,000
20,000
$ 2,000 Unfavorable
Choices "a", "b", and "c" are incorrect, per the above.
CPA-03838
Type1 M/C
119. CPA-03838
A-D
J95 - 1.26
Corr Ans: C
PM#5
B 5-07
Page 59
Clear Plus, Inc. manufactures and sells boxes of pocket protectors. The static master budget and the
actual results for May 1995 are as follows:
Actuals
12,000
$132,000
70,800
61,200
32,000
$ 29,200
Unit sales
Sales
Variable costs of sales
Contribution margin
Fixed costs
Operating income
Static Budget
10,000
$100,000
60,000
40,000
30,000
$ 10,000
The operating income for Clear Plus, Inc. using a flexible budget for May 1995 is:
a.
b.
c.
d.
$19,000
$21,000
$18,000
$16,000
CPA-03838
Explanation
Choice "c" is correct. $18,000 operating income using a flexible budget for May 1995.
12,000 units × $4/unit contribution margin = $48,000
Fixed costs
(30,000)
Net income per flexible budget
$18,000
Choices "a", "b", and "d" are incorrect based on the above explanation.
CPA-03842
Type1 M/C
120. CPA-03842
A-D
D94 - 1.26
Corr Ans: A
PM#6
B 5-07
Page 69
Water Control, Inc. manufactures water pumps and uses a standard cost system. The standard factory
overhead costs per water pump are based on direct labor hours and are shown below:
Variable overhead (4 hours at $8/hour)
Fixed overhead (4 hours at $5*/hour)
Total overhead cost per unit
$ 32
20
$ 52
*Based on a capacity of 100,000 direct labor hours per month.
The following additional information is available for the month of November.
•
•
•
•
•
•
22,000 pumps were produced although 25,000 had been scheduled for production.
94,000 direct labor hours were worked at a total cost of $940,000.
The standard direct labor rate is $9 per hour.
The standard direct labor time per unit is four hours.
Variable overhead costs were $740,000.
Fixed overhead costs were $540,000.
The fixed overhead spending variance for November was:
a. $40,000 unfavorable.
80
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Lecture: Business 5
b. $70,000 unfavorable.
c. $240,000 unfavorable.
d. $15,000 favorable.
CPA-03842
Explanation
Choice "a" is correct. $40,000 unfavorable overhead spending variance:
Actual fixed overhead
Budgeted fixed overhead 100,000 DL hrs. × $5/hr.
Unfavorable variance
$540,000
500,000
$ 40,000
Choices "b", "c", and "d" are incorrect based on the above explanation.
CPA-03845
Type1 M/C
121. CPA-03845
A-D
Corr Ans: B
D94 - 1.27
PM#7
B 5-07
Page 69
Water Control, Inc. manufactures water pumps and uses a standard cost system. The standard factory
overhead costs per water pump are based on direct labor hours and are shown below:
Variable overhead (4 hours at $8/hour)
Fixed overhead (4 hours at $5*/hour)
Total overhead cost per unit
$ 32
20
$ 52
*Based on a capacity of 100,000 direct labor hours per month.
The following additional information is available for the month of November.
•
•
•
•
•
•
22,000 pumps were produced although 25,000 had been scheduled for production.
94,000 direct labor hours were worked at a total cost of $940,000.
The standard direct labor rate is $9 per hour.
The standard direct labor time per unit is four hours.
Variable overhead costs were $740,000.
Fixed overhead costs were $540,000.
The variable overhead spending variance for November was:
a.
b.
c.
d.
$60,000 favorable.
$12,000 favorable.
$24,000 favorable.
$96,000 favorable.
CPA-03845
Explanation
Choice "b" is correct. $12,000 favorable variable overhead spending variance:
Budgeted variable overhead −
94,000 DL hrs. × $8/hr.
Actual variable overhead
Favorable variance
$ 752,000
740,000
$ 12,000
Choices "a", "c", and "d" are incorrect based on the above explanation.
CPA-03848
Type1 M/C
122. CPA-03848
A-D
Corr Ans: A
PM#8
B 5-07
Th May 93 #43 Page 68
Which of the following standard costing variances would be least controllable by a production supervisor?
a. Overhead volume.
b. Overhead efficiency.
81
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
c. Labor efficiency.
d. Material usage.
CPA-03848
Explanation
Choice "a" is correct. The overhead volume variance is a function of the budgeted amount of overhead
based on standard hours allowed compared with overhead applied, at a predetermined rate, to work-inprocess. The production supervisor has little control over established standard and budgeted amounts.
Choice "b" is incorrect. The overhead efficiency variance is a function of the budgeted amount of
overhead based on actual hours worked compared with the budgeted amount of overhead based on
standard hours allowed. The supervisor has some control over actual hours worked.
Choice "c" is incorrect. The labor efficiency variance is a function of the actual hours worked times the
standard labor rate compared with the standard hours allowed for that production level times the standard
labor rate. The supervisor has some control over actual hours worked.
Choice "d" is incorrect. The material usage variance is a function of actual quantity of materials used
times the standard price allowed for materials compared with the standard quantity allowed for that
production level times the standard materials price. The supervisor has some control over actual
production and consequently over raw materials usage.
CPA-03849
Type1 M/C
123. CPA-03849
A-D
D92 - 1.18
Corr Ans: A
PM#9
B 5-07
Page 68
Nanjones Company manufactures a line of products distributed nationally through wholesalers.
Presented below are planned manufacturing data for 1992 and actual data for November 1992. The
company applies overhead based on planned machine hours using a predetermined annual rate.
Fixed manufacturing overhead
Variable manufacturing overhead
Direct labor hours
Machine hours
1992 Planning Date
Annual
November
$1,200,000
$100,000
2,400,000
220,000
48,000
4,000
240,000
Direct labor hours (actual)
Direct labor hours
(plan based on output)
Machine hours (actual)
Machine hours
(plan based on output)
Fixed manufacturing overhead
Variable manufacturing overhead
22,000
Data for November 1992
4,200
4,000
21,600
21,000
$101,000
$214,000
The variable overhead spending variance for November 1992 was:
a.
b.
c.
d.
$2,000 favorable.
$6,000 favorable.
$6,000 unfavorable.
$2,000 unfavorable.
CPA-03849
Explanation
Choice "a" is correct. $2,000 favorable spending variance.
Actual machine hours
Variable OH application rate
Variable OH incurred
$ 21,600
$10 [$2,400,000 ÷ 240,000 hours]
$216,000
214,000
82
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Favorable variance
$
2,000
Choices "b", "c", and "d" are incorrect based on the above explanation.
CPA-03850
Type1 M/C
124. CPA-03850
A-D
D92 - 1.19
Corr Ans: C
PM#10
B 5-07
Page 68
Nanjones Company manufactures a line of products distributed nationally through wholesalers.
Presented below are planned manufacturing data for 1992 and actual data for November 1992. The
company applies overhead based on planned machine hours using a predetermined annual rate.
Fixed manufacturing overhead
Variable manufacturing overhead
Direct labor hours
Machine hours
1992 Planning Date
Annual
November
$1,200,000
$100,000
2,400,000
220,000
48,000
4,000
240,000
Direct labor hours (actual)
Direct labor hours
(plan based on output)
Machine hours (actual)
Machine hours
(plan based on output)
Fixed manufacturing overhead
Variable manufacturing overhead
22,000
Data for November 1992
4,200
4,000
21,600
21,000
$101,000
$214,000
The fixed overhead volume variance for November 1992 was:
a.
b.
c.
d.
$1,200 unfavorable.
$5,000 unfavorable.
$5,000 favorable.
$1,200 favorable.
CPA-03850
Explanation
Choice "c" is correct. $5,000 favorable.
•
•
•
The fixed overhead rate is $5 per machine hour [$1,200,000 / 240,000 = $5].
The amount of FIXED manufacturing overhead planned for November is $100,000.
Therefore, the standard production for FIXED overhead is 20,000 machine hours [$100,000/$5 =
20,000.]
The favorable variance is calculated as follows:
Applied FIXED Overhead
Standard Fixed OH Rate x Actual Production)
= $5.00 x 21,000 = $105,000
Budgeted Overhead Based on Standard Hours
Standard Fixed OH Rate x Standard Production)
= $5.00 x 20,000 = $100,000
FAVORABLE Fixed Overhead Volume Variance = $5,000
Choices "a", "b", and "d" are incorrect based on the above explanation.
83
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Lecture: Business 5
CPA-03852
Type1 M/C
125. CPA-03852
A-D
D91 - 1.16
Corr Ans: A
PM#11
B 5-07
Page 61
Folsom Fashions sells a line of women's dresses. Folsom's performance report for November 1991
follows.
Dresses sold
Sales
Variable costs
Contribution margin
Fixed costs
Operating income
Actual
5,000
$235,000
145,000
90,000
84,000
$ 6,000
Budget
6,000
$300,000
180,000
120,000
80,000
$ 40,000
The company uses a flexible budget to analyze its performance and to measure the effect on operating
income of the various factors affecting the difference between budgeted and actual operating income.
The variable cost flexible budget variance for November is:
a.
b.
c.
d.
$5,000 favorable.
$5,000 unfavorable.
$4,000 favorable.
$4,000 unfavorable.
CPA-03852
Explanation
Choice "a" is correct. $5,000 favorable.
Variable costs
Budgeted variable costs (5,000 × $30)
($180,000 ÷ 6,000 = $30/unit)
Variance
$145,000
150,000
$
5,000
Since the actual cost is less than the budgeted cost, this variance is favorable.
Choices "b", "c", and "d" are incorrect based on the above explanation.
CPA-03854
Type1 M/C
126. CPA-03854
A-D
D91 - 1.17
Corr Ans: D
PM#12
B 5-07
Page 61
Folsom Fashions sells a line of women's dresses. Folsom's performance report for November 1991
follows.
Dresses sold
Sales
Variable costs
Contribution margin
Fixed costs
Operating income
Actual
5,000
$235,000
145,000
90,000
84,000
$ 6,000
Budget
6,000
$300,000
180,000
120,000
80,000
$ 40,000
The company uses a flexible budget to analyze its performance and to measure the effect on operating
income of the various factors affecting the difference between budgeted and actual operating income.
The fixed cost variance for November is:
a.
b.
c.
d.
$5,000 favorable.
$5,000 unfavorable.
$4,000 favorable.
$4,000 unfavorable.
CPA-03854
Explanation
84
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Lecture: Business 5
Choice "d" is correct. $4,000 unfavorable.
Actual fixed costs
Budgeted fixed costs
Variance
$84,000
80,000
$ 4,000
Since the actual cost is more than the budgeted cost, this variance is unfavorable.
Choices "a", "b", and "c" are incorrect based on the above explanation.
CPA-04797
Type1 M/C
127. CPA-04797
A-D
Corr Ans: A
PM#13
B 5-07
Released 2005 Page 70
Virgil Corp. uses a standard cost system. In May, Virgil purchased and used 17,500 pounds of materials
at a cost of $70,000. The materials usage variance was $2,500 unfavorable and the standard materials
allowed for May production was 17,000 pounds. What was the materials' price variance for May?
a.
b.
c.
d.
$17,500 favorable.
$17,500 unfavorable.
$15,000 favorable.
$15,000 unfavorable.
CPA-04797
Explanation
Choice "a", $17,500 favorable is correct per computations below:
Set up the PURE DADS mnemonic as shown below where PU is the materials variance and RE is the
Labor variance. Remember that the Difference is ALWAYS Standard minus Actual.
Plug in the amounts that are known: Enter amount of the Usage variance at $2,500U, compute the
amount of the difference associated with the usage variance (17,000 standard units minus 17,500 actual
units) and then in item (A) algebraically determine the amount of standard costs at $5.00.
Calculate the amount of actual costs per unit based on the information given: $70,000 in total costs
divided by 17,500 pounds purchased is $4.00 actual cost per unit. Compute the difference (B) between
Standard cost per unit of $5.00 and actual cost per unit of $4.00 to arrive at a difference of $1.00.
Compute the price variance (C) as the product of the difference in standard and actual costs per unit and
the actual pounds used as given in the problem.
85
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Lecture: Business 5
Choices "b", "c", and "d" are incorrect per the above computation.
CPA-05251
Type1 M/C
128. CPA-05251
A-D
Corr Ans: C
PM#14
B 5-07
Released 2006 Page 62
A company produces widgets with budgeted standard direct materials of 2 pounds per widget at $5 per
pound. Standard direct labor was budgeted at 0.5 hour per widget at $15 per hour. The actual usage in
the current year was 25,000 pounds and 3,000 hours to produce 10,000 widgets. What was the direct
labor usage variance?
a.
b.
c.
d.
$25,000 favorable.
$25,000 unfavorable.
$30,000 favorable.
$30,000 unfavorable.
CPA-05251
Explanation
Choice "c" is correct. The direct labor usage (efficiency) variance is computed as follows:
Direct labor usage variance = Difference in standard and actual hours x standard rate
Direct labor usage variance = ((10,000 units x .50 hour) - 3,000 hours) x $15 per hour
Direct labor usage variance = $30,000 favorable
The usage variance is favorable because the actual hours were less than the standard hours.
Choice "a" is incorrect. It is unclear how the $25,000 variance can be calculated in this question, but
$25,000 favorable or unfavorable is certainly not correct.
Choice "b" is incorrect. It is unclear how the $25,000 variance can be calculated in this question, but
$25,000 favorable or unfavorable is certainly not correct.
Choice "d" is incorrect. The variance was favorable, not unfavorable, because the actual hours were less
than the standard hours.
CPA-05253
Type1 M/C
129. CPA-05253
A-D
Corr Ans: A
PM#15
B 5-07
Released 2006 Page 62
During the current year, the following manufacturing activity took place for a company's products:
Beginning work-in-process, 70% complete
Units started into production during the year
Units completed during the year
Ending work-in-process, 25% complete
10,000 units
150,000 units
140,000 units
20,000 units
What was the number of equivalent units produced using the first-in, first-out method?
a.
b.
c.
d.
138,000
140,000
145,000
150,000
CPA-05253
Explanation
Choice "a" is correct. Using the FIFO method of process costing, the equivalent units produced (EQU)
are computed as follows:
EQU = EQU Beg WIP + EQU started and completed + EQU ending WIP
EQU = (10,000 x .30) + (130,000 x 1.00) + (20,000 x .25)
EQU = 3,000 + 130,000 + 5,000 = 138,000
86
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Lecture: Business 5
Note that the .30 is the percentage of Beg WIP completed in the period. It is the complement of the
percent complete.
Note that the 130,000 units started and completed is the 140,000 units started less the 10,000 units in the
beginning inventory.
An alternate computation (different from the formula in the text) is as follows (some people may be more
familiar with this alternate):
EQU = EQU End WIP + EQU completed - EQU ending WIP
EQU = (20,000 x .25) + (140,000 x 1.00) - (10,000 x .70)
EQU = 5,000 + 140,000 - 7,000 = 138,000
Choice "b" is incorrect. This answer apparently ignores the EQU in the beginning and ending inventories
and utilizes only the 140,000 units started and completed in the period.
Choice "c" is incorrect. This answer apparently uses the units completed during the year as the EQU.
Choice "d" is incorrect. This answer apparently uses the units started into production during the year as
the EQU.
CPA-05261
Type1 M/C
130. CPA-05261
A-D
Corr Ans: B
PM#16
B 5-07
Released 2006 Page 72
Central Winery manufactured two products, A and B. Estimated demand for product A was 10,000 bottles
and for product B was 30,000 bottles. The estimated sales price per bottle for A was $6.00 and for B was
$8.00. Actual demand for product A was 8,000 bottles and for product B was 33,000 bottles. The actual
price per bottle for A was $6.20 and for B was $7.70. What amount would be the total selling price
variance for Central Winery?
a.
b.
c.
d.
$3,700 unfavorable.
$8,300 unfavorable.
$3,700 favorable.
$14,100 favorable.
CPA-05261
Explanation
Choice "b" is correct. The selling price variance (SPV) is computed as follows:
SPV = (Actual selling price per unit - Budgeted selling price per unit) x Actual sold units
SPV for product A = ($6.20 - $6.00) x 8,000 = $1,600
SPV for product B = ($7.70 - $8.00) x 33,300 = ($9,900)
Total SPV = ($8,300) or $8,300 unfavorable
Choice "a" is incorrect, per the above calculation.
Choice "c" is incorrect. This answer is the same as choice "b" except that it is favorable instead of
unfavorable. The total variance is unfavorable due to the negative variance of product B.
Choice "d" is incorrect, per the above calculation.
CPA-05308
Type1 M/C
131. CPA-05308
A-D
Corr Ans: C
PM#17
B 5-07
Released 2006 Page 63
To meet its monthly budgeted production goals, Acme Mfg. Co. planned a need for 10,000 widgets at a
price of $20 per widget. Acme's actual units were 11,200 at a price of $18.50 per widget. What amount
reflected Acme's price variance?
a. $7,200 unfavorable.
b. $15,000 favorable.
87
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Lecture: Business 5
c. $16,800 favorable.
d. $24,000 unfavorable.
CPA-05308
Explanation
Choice "c" is correct. Price variance is computed as follows:
Price variance = (Standard price - Actual price) x Actual units
Price variance = ($20 - $18.50) x 11,200
Price variance = $1.50 x 11,200 = $16,800 favorable
The price variance is favorable because the actual price is less than the standard price.
Choice "a" is incorrect. The price variance cannot be unfavorable because the actual price is less than
the standard price. It is difficult to determine, however, where the $7,200 came from since there are
11,200 actual units; the price difference would have to be $.64 instead of $1.50, and there is nothing in
the question that clearly generates that difference.
Choice "b" is incorrect. In this answer, it seems that the price difference of $1.50 is incorrectly multiplied
by the 10,000 budgeted units rather than the 11,200 actual units.
Choice "d" is incorrect. The price variance cannot be unfavorable because the actual price is less than
the standard price. It is difficult to determine, however, where the $24,000 came from; the price
difference would have to be $2.14, and there is nothing in the question that clearly generates that
difference.
CPA-05602
Type1 M/C
132. CPA-05602
A-D
Corr Ans: D
PM#18
B 5-07
Released 2007 Page 61
Quick Co. was analyzing variances for one of its operations. The initial budget forecast production of
20,000 units during the year with a variable manufacturing overhead rate of $10 per unit. Quick produced
19,000 units during the year. Actual variable manufacturing costs were $210,000. What amount would
be Quick's flexible budget variance for the year?
a.
b.
c.
d.
$10,000 favorable.
$20,000 favorable.
$10,000 unfavorable.
$20,000 unfavorable.
CPA-05602
Explanation
Choice "d" is correct. The flexible budget variance is $20,000 unfavorable and represents the difference
between actual performance and the budget at the achieved volume. Actual expenses are greater than
the computed budget. The variance is unfavorable and is computed as follows:
Choice "a" is incorrect. The proposed answer is the volume variance, not the flexible budget variance.
The volume variance is $10,000 favorable and represents the difference between the master budget (the
budget at the initial volume forecast for the budget) and the flexible budget (the budget at the achieved
88
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Lecture: Business 5
volume). Because the achieved volume is less than the planned volume, the volume variance is
favorable.
Choice "b" is incorrect. The flexible budget variance is $20,000 unfavorable because actual expenditures
are greater than budget amounts.
Choice "c" is incorrect. The flexible budget variance is $20,000 unfavorable, not $10,000 unfavorable.
Organizational Performance Measures
CPA-03856
Type1 M/C
133. CPA-03856
A-D
3B.C02 - 10
Corr Ans: A
PM#1
B 5-08
Page 73
Strategic Business Units (SBUs) are classified into different types based on the responsibility levels
assigned to their managers. Which SBU has the least amount of responsibility?
a.
b.
c.
d.
Cost SBU.
Revenue SBU.
Profit SBU.
Investment SBU.
CPA-03856
Explanation
Choice "a" is correct. Managers in a cost SBU only have responsibility for one dimension of financial
performance and it is one that they control entirely, the level of costs incurred.
Choice "b" is incorrect. Revenue SBUs represent a greater responsibility than cost SBUs. Managers of a
revenue SBU only have responsibility for one dimension of financial performance, but revenue generation
is not under the control of the managers. Clearly the uncertainty associated with generating sales
increases the risk and difficulty associated with the manager's responsibility.
Choice "c" is incorrect. Profit SBUs represent a greater responsibility than either cost or revenue SBUs.
Profit SBUs require the manager to maintain control of revenues, and costs AND the relationship between
the two.
Choice "d" is incorrect. Investment SBUs represent the organizational segment with the highest level of
responsibility. Managers not only consider cost, revenues and their relationship, but also the relationship
between profits generated and assets invested.
CPA-03860
Type1 M/C
134. CPA-03860
A-D
Corr Ans: C
PM#3
B 5-08
Th Nov 93 #49 Page 73
Controllable revenue would be included in a performance report for a:
a.
b.
c.
d.
Profit
center
No
No
Yes
Yes
Cost
center
No
Yes
No
Yes
CPA-03860
Explanation
Choice "c" is correct. Profit centers generate revenues and incur costs, so controllable revenues would
be included in a profit center's performance report. Cost centers do not generate revenues and as such,
would not have any revenues to include in a performance report.
Choices "a", "b", and "d" are incorrect based on the above explanation.
CPA-03863
Type1 M/C
A-D
Corr Ans: A
PM#4
B 5-08
89
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Lecture: Business 5
135. CPA-03863
3C.C02 - 1
Page 75
The performance measurement tool generally associated with the display of information evaluating
multiple dimensions of business outcomes is referred to as the:
a.
b.
c.
d.
Balanced scorecard.
Return on Investment.
Kaizen.
Market value added.
CPA-03863
Explanation
Choice "a" is correct. The balanced scorecard reports management information regarding organizational
performance as defined by "critical success factors." These critical success factors are often classified as
human resource, business process, customer satisfaction, and financial performance, to demonstrate that
no single dimension of organizational performance can be relied upon to evaluate success.
Choice "b" is incorrect. Although return on investment evaluates business performance in terms of the
dimensions of revenue, expense and investment, the measurements are all financial.
Choice "c" is incorrect. Kaizen is synonymous with continuous improvement. Although this is a concept
that embraces multiple processes within a business it is not, in and of itself, representative of a
multidimensional performance report.
Choice "d" is incorrect. Market value added contemplates the degree to which management's actions
improve stockholder value. It does not specifically identify multiple dimensions of business performance.
CPA-03864
Type1 M/C
136. CPA-03864
A-D
3C.C02 - 2
Corr Ans: C
PM#5
B 5-08
Page 76
Although there is no single format for the balanced scorecard, the report generally includes a variety of
measurements associated with objectives classified by critical success factors. Critical success factors
often include:
a.
b.
c.
d.
Sales, net income, cash flow, and return on investment performance.
Shareholder satisfaction, customer satisfaction, vendor satisfaction and employee satisfaction issues.
Financial, internal business process, customer and human resource considerations.
Throughput and lifecycle times.
CPA-03864
Explanation
Choice "c" is correct. Critical success factors identified in the balanced scorecard generally include
human resource aspects, particularly as it relates to harnessing employee innovation, internal business
process improvement, customer satisfaction and financial performance.
Choice "a" is incorrect. Sales, net income, cash flow and return on investment represent elements of
critical financial success factors.
Choice "b" is incorrect. Shareholder, customer, vendor and employee satisfaction are significant
elements of critical success factors covering a broad dimension of business issues but are not in and of
themselves critical success factors.
Choice "d" is incorrect. Throughput and lifecycle times represent measures of internal business
improvement processes and do not represent critical success factors.
CPA-03866
Type1 M/C
137. CPA-03866
A-D
D95 - 1.05
Corr Ans: A
PM#6
B 5-08
Page 73
Responsibility accounting defines an operating center that is responsible for revenue and costs as a(n):
a. Profit center.
b. Revenue center.
c. Operating unit.
90
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
d. Investment center.
CPA-03866
Explanation
Choice "a" is correct. A profit center is responsible for revenue and costs.
Choice "b" is incorrect. A revenue center is responsible for revenue only.
Choice "c" is incorrect. An operating unit is typically a division, which is not precisely defined.
Choice "d" is incorrect. An investment center is responsible for revenues, expenses, and invested
capital.
CPA-03868
Type1 M/C
138. CPA-03868
A-D
J94 - 1.24
Corr Ans: D
PM#7
B 5-08
Page 73
Decentralized firms can delegate authority and yet retain control and monitor managers' performance by
structuring the organization into responsibility centers. Which one of the following organizational
segments is most like an independent business?
a.
b.
c.
d.
Revenue center.
Profit center.
Cost center.
Investment center.
CPA-03868
Explanation
Choice "d" is correct. An investment center is most like an independent business. Investment centers
are responsible for revenues, expenses, and invested capital.
Choice "a" is incorrect. A revenue center is responsible for revenues only.
Choice "b" is incorrect. A profit center is responsible for revenues and expenses, but not invested capital.
Choice "c" is incorrect. A cost center is responsible for costs only.
CPA-03869
Type1 M/C
139. CPA-03869
A-D
D93 - 1.21
Corr Ans: C
PM#8
B 5-08
Page 83
A successful responsibility accounting reporting system is dependent upon:
a.
b.
c.
d.
The correct allocation of controllable variable costs.
Identification of the management level at which all costs are controllable.
The proper delegation of responsibility and authority.
A reasonable separation of costs into their fixed and variable components since fixed costs are not
controllable and must be eliminated from the responsibility report.
CPA-03869
Explanation
Choice "c" is correct. Responsibility for costs, and the authority to do something about them, are
necessary for a successful responsibility accounting system.
Choice "a" is incorrect. Allocation of variable costs is easy; allocation of other controllable costs is harder.
Choice "b" is incorrect. All costs are not controllable at one level.
Choice "d" is incorrect. All costs, in the long run, are variable, and controllable at some level.
CPA-03870
Type1 M/C
140. CPA-03870
A-D
Corr Ans: A
PM#9
B 5-08
Th May 93 #49 Page 75
91
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Nonfinancial performance measures are important to engineering and operations managers in assessing
the quality levels of their products. Which of the following indicators can be used to measure product
quality?
I. Returns and allowances.
II. Number and types of customer complaints.
III. Production cycle time.
a.
b.
c.
d.
I and II only.
I and III only.
II and III only.
I, II, and III.
CPA-03870
Explanation
Choice "a" is correct. Returns and allowances and customer complaints may occur if a customer is
dissatisfied with the quality of the product purchased. Thus, these two indicators can be used to measure
product quality. Production cycle time indicates efficiency in production but does not assess product
quality levels.
Choices "b", "c", and "d" are incorrect based on the above explanation.
CPA-05263
Type1 M/C
141. CPA-05263
A-D
Corr Ans: B
PM#10
B 5-08
Released 2006 Page 76
Which of the following balanced scorecard perspectives examines a company's success in targeted
market segments?
a.
b.
c.
d.
Financial.
Customer.
Internal business process.
Learning and growth.
CPA-05263
Explanation
Choice "b" is correct. The financial perspective of a balanced scorecard is concerned with the capture of
increased market share, not "success in targeted market segments" (a customer measure).
Choice "a" is incorrect. The customer perspective of a balanced scorecard is concerned with target
markets (e.g., low-price leader), not with the capture of increased market share (a financial measure).
Choice "c" is incorrect. The internal business process perspective of a balanced scorecard is concerned
with maintaining low costs that are supported with low prices, not with the capture of increased market
share.
Choice "d" is incorrect. The learning and growth (advanced learning and innovation) perspective of a
balanced scorecard is concerned with linking strategy with reward and recognition, not with the capture of
increased market share.
CPA-04811
Type1 M/C
142. CPA-04811
A-D
Corr Ans: C
PM#11
B 5-08
Released 2005 Page 76
Under the balanced scorecard concept developed by Kaplan and Norton, employee satisfaction and
retention are measures used under which of the following perspectives?
a.
b.
c.
d.
Customer.
Internal business.
Learning and growth.
Financial.
CPA-04811
Explanation
92
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "c" is correct. Employee satisfaction and retention measures are used under the "learning and
growth" perspective of the balanced scorecard. Employee satisfaction typically correlates with
productivity, employee effectiveness, and retention. Retention itself often relates to reduced retraining,
increased opportunity for human resource development, and reduced investment in learning curves.
Choice "a" is incorrect. The customer perspective of the balanced scorecard measures results of
business operation (e.g., customer satisfaction and customer retention), not employee satisfaction and
retention.
Choice "b" is incorrect. The internal business perspective of the balanced scorecard measures results of
business operation (e.g., improvements in throughput and other measures of efficiency), not employee
satisfaction and retention.
Choice "d" is incorrect. The financial perspective of the balanced scorecard measures traditional results
of business operation (e.g., improved margins or improved cash flows), not employee satisfaction and
retention.
Benchmarking Techniques and Best Practices
CPA-03873
Type1 M/C
143. CPA-03873
A-D
ARE R02 #28
Corr Ans: B
PM#1
B 5-09
Page 82
Rework costs should be regarded as a cost of quality in a manufacturing company's quality control
program when they are:
I. Caused by the customer.
II. Caused by internal failure.
a.
b.
c.
d.
I only.
II only.
Both I and II.
Neither I nor II.
CPA-03873
Explanation
Choice "b" is correct. Rework cost is a cost of quality caused by internal failure. Cost of quality includes
conformance costs (the costs of prevention and appraisal activities before product shipment) and
nonconformance costs (the costs of internal and external failures that require either return of the product
or rework of the product).
Choice "a" is incorrect. Rework caused by a customer error is not a cost of quality.
Choices "c" and "d" are incorrect. Rework caused by internal failure is a cost of quality, but rework
caused by a customer is not a cost of quality.
CPA-03875
Type1 M/C
144. CPA-03875
A-D
3C.C02 - 3
Corr Ans: A
PM#2
B 5-09
Page 79
Quality programs normally include a number of techniques to find and analyze problems. The technique
commonly used to determine zero defects and goalpost conformance is called a:
a.
b.
c.
d.
Control Chart.
Pareto Diagram.
Fishbone Diagram.
Value Chain Analysis.
CPA-03875
Explanation
Choice "a" is correct. A control chart shows the performance of a particular process in relation to
acceptable upper and lower limits of deviation. Performance within the limits is termed statistical control.
Processes are designed to ensure that performance consistently falls within the acceptable range of
error.
93
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "b" is incorrect. A Pareto diagram represents an individual and cumulative graphical analysis of
errors by type.
Choice "c" is incorrect. A fishbone diagram describes a process, the contributions to the process, and the
potential problems that could occur at each phase of a process. The chronological sequence of events is
represented by a single horizontal line while the contributions to the process are represented by diagonal
lines that create the image of a fishbone.
Choice "d" is incorrect. A value chain analysis is a macro level flowchart that shows the relationship
between broad functional areas, the product delivered by the organization, and manner in which value is
added at each link in the chain.
CPA-03878
Type1 M/C
145. CPA-03878
A-D
3C.C02 - 5
Corr Ans: C
PM#3
B 5-09
Page 80
Quality programs normally include a number of techniques to find and analyze problems. The technique
commonly used to analyze the source of potential problems and their locations within a process is called
a:
a.
b.
c.
d.
Control Chart.
Pareto Diagram.
Fishbone Diagram.
Value Chain Analysis.
CPA-03878
Explanation
Choice "c" is correct. A fishbone diagram describes a process, the contributions to the process, and the
potential problems that could occur at each phase of a process. The process is represented by a single
horizontal line while the contributions to the process are represented by diagonal lines that create the
image of a fishbone. Fishbone diagrams provide a framework for managers to analyze the problems that
contibute to the occurrence of defects.
Choice "a" is incorrect. A control chart shows the performance of a particular process in relation to
acceptable upper and lower limits of deviation. Performance within the limits is termed statistical control.
Processes are designed to ensure that performance consistently falls within the acceptable range of
error.
Choice "b" is incorrect. A Pareto diagram represents an individual and cumulative graphical analysis of
errors by type. Individual error types are represented on a histogram (bar graph), while the cumulative
number of errors is presented on a line graph. The Pareto diagram is used to prioritize process
improvement efforts.
Choice "d" is incorrect. A value chain analysis is a macro level flowchart that shows the relationship
between broad functional areas, the product delivered by the organization, and manner in which value is
added at each link in the chain.
CPA-03881
Type1 M/C
146. CPA-03881
A-D
J97 - 1.27
Corr Ans: D
PM#5
B 5-09
Page 83
All of the following would generally be included in a cost of quality report, except:
a.
b.
c.
d.
Warranty claims.
Design engineering.
Supplier evaluations.
Lost contribution margin.
CPA-03881
Explanation
Choice "d" is correct. Lost contribution margin (an opportunity cost) would generally not be included in a
cost of quality report.
Choices "a", "b", and "c" are incorrect. Included in a cost of quality report would be:
94
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
a. Warranty claims (an external failure cost).
b. Design engineering (a prevention cost).
c. Supplier evaluations (a prevention cost).
CPA-03886
Type1 M/C
147. CPA-03886
A-D
Corr Ans: D
ARE May 95 #46
PM#7
B 5-09
Page 78
Which measures would be useful in evaluating the performance of a manufacturing system?
I. Throughput time.
II. Total setup time for machines/Total production time.
III. Number of rework units/Total number of units completed.
a.
b.
c.
d.
I and II only.
II and III only.
I and III only.
I, II, and III.
CPA-03886
Explanation
Choice "d" is correct. Throughput refers to the units of goods that are produced and sold within a period
of time. It is useful in evaluation. Setup versus production time helps evaluate efficiency-if setup time is
long relative to production time, longer production runs may be more efficient. Rework versus completion
is also part of the overall evaluation system, aiding in determining whether quality issues are being
appropriately addressed.
Choices "a", "b", and "c" are incorrect based on the above explanation.
CPA-03888
Type1 M/C
148. CPA-03888
A-D
Corr Ans: B
ARE May 95 #47
PM#8
B 5-09
Page 8
Which changes in costs are most conducive to switching from a traditional inventory ordering system to a
just-in-time ordering system?
a.
b.
c.
d.
Cost per
purchase order
Increasing
Decreasing
Decreasing
Increasing
Inventory unit
carrying costs
Increasing
Increasing
Decreasing
Decreasing
CPA-03888
Explanation
Choice "b" is correct. A just-in-time system is used to lower inventory levels and results in more purchase
orders of fewer units each. If carrying costs are increasing, JIT would be beneficial. Costs per purchase
order that are decreasing would also be conducive to JIT.
Changes in costs related to adoption of JIT represent a sophisticated version of an old theme in
accounting: What happens to fixed costs as volume either increases or decreases?
Carrying costs should decrease in total; however, they will do so only as a result of ordering more
frequently and maintaining fewer items in stock. Ordering more frequently will spread the costs of the
purchasing department over more orders, thereby decreasing the cost per PO. Maintaining fewer items
in inventory or holding items for a shorter period of time will actually increase the inventory unit carrying
costs.
Choices "a", "c", and "d" are incorrect based on the above explanation.
CPA-03893
Type1 M/C
A-D
Corr Ans: A
PM#11
B 5-09
95
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
149. CPA-03893
J94 - 1.16
Page 82
In 1992, a manufacturing company instituted a Total Quality Management (TQM) program producing the
report shown below:
Summary Cost of Quality Report
(in thousands)
1991
1992
%Change
$ 200
$ 300
+50
210
315
+50
190
114
−40
621
−48
1,200
$1,350
−25
$1,800
Prevention costs
Appraisal costs
Internal failure costs
External failure costs
Total quality costs
On the basis of this report, which one of the following statements is most likely correct?
a. An increase in conformance costs resulted in a higher quality product, and therefore, resulted in a
decrease in non-conformance costs.
b. An increase in inspection costs was solely responsible for the decrease in quality costs.
c. Quality costs such as scrap and rework decreased by 48 percent.
d. Quality costs such as returns and repairs under warranty decreased by 40 percent.
CPA-03893
Explanation
Choice "a" is correct. An increase in conformance costs (prevention and appraisal) resulted in a higher
quality product and a decrease in non-conformance costs (internal and external failure costs).
Choice "b" is incorrect. There is more than one factor responsible for the decrease in quality costs.
Choice "c" is incorrect. Scrap and rework are part of internal failure costs.
Choice "d" is incorrect. Returns and repairs under warranty are part of external failure costs.
CPA-03894
Type1 M/C
150. CPA-03894
A-D
J94 - 1.17
Corr Ans: C
PM#12
B 5-09
Page 82
An example of an internal failure cost is:
a.
b.
c.
d.
Maintenance.
Inspection.
Rework.
Product recalls.
CPA-03894
Explanation
Choice "c" is correct. Rework is an internal failure cost.
Choice "a" is incorrect. Maintenance is a prevention cost.
Choice "b" is incorrect. Inspection is a prevention cost.
Choice "d" is incorrect. Product recalls is an external failure cost.
CPA-03896
Type1 M/C
151. CPA-03896
A-D
J93 - 1.13
Corr Ans: B
PM#14
B 5-09
Page 82
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):
a.
b.
c.
d.
Prevention cost.
Appraisal cost.
Internal failure cost.
External failure cost.
96
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-03896
Explanation
Choice "b" is correct. Appraisal costs would detect individual products that do not conform to
specifications. Examples of appraisal costs include:
Statistical quality checks
Inspections
Testing
Maintenance of lab
Choice "a" is incorrect. Prevention costs would prevent defective products.
Choice "c" is incorrect. Internal failure costs are the costs of fixing defective products, not detecting them.
Choice "d" is incorrect. External failure costs result when defective goods are not detected and are sold
to a customer.
CPA-03897
Type1 M/C
152. CPA-03897
A-D
D92 - 1.20
Corr Ans: D
PM#15
B 5-09
Page 82
In recent years, much attention has been placed on product quality and total quality control. Which one of
the following items would not normally be considered a cost of quality?
a.
b.
c.
d.
Costs incurred in detecting defective products during production.
Costs incurred in detecting defective products produced before they are shipped to customers.
Costs incurred after defective products have been shipped to customers.
Costs incurred in shortening production lead times and achieving on-time deliveries.
CPA-03897
Explanation
Choice "d" is correct. Costs incurred in shortening product lead times and achieving on-time deliveries
are measures of performance and not a cost of quality.
Choices "a", "b", and "c" are incorrect, which are all costs of quality.
CPA-03898
Type1 M/C
153. CPA-03898
A-D
J91 - 1.21
Corr Ans: A
PM#16
B 5-09
Page 82
The four categories of cost associated with product quality costs are:
a.
b.
c.
d.
External failure, internal failure, prevention, and appraisal.
External failure, internal failure, training, and appraisal.
Warranty, product liability, training, and appraisal.
Warranty, product liability, prevention, and appraisal.
CPA-03898
Explanation
Choice "a" is correct. The four categories of cost associated with product quality are:
Prevention
Appraisal
Internal failure
External failure
Choice "b" is incorrect. "Training" is a part of prevention.
Choices "c" and "d" are incorrect. "Warranty" and "product liability" are a cost of external failure.
CPA-03900
Type1 M/C
154. CPA-03900
A-D
J91 - 1.22
Corr Ans: D
PM#17
B 5-09
Page 82
The cost of statistical quality control in a product quality cost system is categorized as a(n):
97
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
a.
b.
c.
d.
Internal failure cost.
Training cost.
Prevention cost.
Appraisal cost.
CPA-03900
Explanation
Choice "d" is correct. Appraisal includes the cost of statistical quality control.
Choice "a" is incorrect. Statistical quality control may indicate internal failures but is a cost of appraisal.
Choice "b" is incorrect. Training costs are a part of prevention.
Choice "c" is incorrect. Statistical quality control happens after prevention measures.
CPA-03902
Type1 M/C
155. CPA-03902
A-D
J91 - 1.23
Corr Ans: B
PM#18
B 5-09
Page 82
The cost of scrap, rework, and tooling changes in a product quality cost system are categorized as a(n):
a.
b.
c.
d.
External failure cost.
Internal failure cost.
Training cost.
Prevention cost.
CPA-03902
Explanation
Choice "b" is correct. Cost of scrap, rework, and tooling changes are a result of internal failure.
Choice "a" is incorrect. Tooling changes may occur as a result of an external failure, but scrap and
rework costs will rarely result.
Choice "c" is incorrect. Training costs are a part of prevention.
Choice "d" is incorrect. Prevention aims to minimize or eliminate failures, which may result in scrap,
rework and tooling costs.
Supplemental Questions
CPA-03785
Type1 M/C
156. CPA-03785
A-D
ARE R02 #27
Corr Ans: A
PM#1
B 5-99
Page 53
Given that demand exceeds capacity, that there is no spoilage or waste, and that there is full utilization of
a constant number of assembly hours, the number of components needed for an assembly operation with
an 80 percent learning curve should
I. Increase for successive periods.
II. Decrease per unit of output.
a.
b.
c.
d.
I only.
II only.
Both I and II.
Neither I nor II.
CPA-03785
Explanation
Choice "a" is correct. The learning curve relates to the efficiency with which productive resources,
typically labor, are employed, and it suggests that productivity will increase over time. Therefore, the
number of components needed for an assembly operation with an 80 percent learning curve will increase
for successive periods to accommodate increased production, assuming demand exceeds capacity, there
is no spoilage and that there is full utilization of a constant number of assembly hours.
Choice "b" is incorrect. The learning curve relates to the efficiency with which productive resources,
typically labor, are employed. Assuming constant hours and no spoilage, the number of components per
98
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
unit of output will remain unchanged, but productivity will increase. This in turn will cause the number of
components needed for assembly to increase for successive periods, to accommodate increased
production.
Choice "c" is incorrect. Only the number of units will increase to accommodate increased production.
The number of components per unit of output will not decrease since we assume that there is not
spoilage or waste. Yield per direct material is unchanged, yield per hour of work and, by extension,
demand for components (direct material), will increase.
Choice "d" is incorrect. The number of units will increase to accommodate increased production, but the
number of components per unit of output will not decrease since we assume that there is not spoilage or
waste. Yield per direct material is unchanged, yield per hour of work and, by extension, demand for
components (direct material), will increase.
CPA-03786
Type1 M/C
157. CPA-03786
A-D
ARE R01 #11
Corr Ans: D
PM#2
B 5-99
Page 51
Multiple regression differs from simple regression in that it:
a.
b.
c.
d.
Provides an estimated constant term.
Has more dependent variables.
Allows the computation of the coefficient of determination.
Has more independent variables.
CPA-03786
Explanation
Choice "d" is correct. Multiple regression analysis is an expansion of simple regression because it allows
consideration of more than one independent variable. The other elements are consistent in simple and
multiple regression analysis.
Choices "a", "b", and "c" are incorrect based on the above explanation.
CPA-03788
Type1 M/C
158. CPA-03788
A-D
Corr Ans: C
ARE May 94 #47
PM#3
B 5-99
Page 51
Probability (risk) analysis is:
a.
b.
c.
d.
Used only for situations involving five or fewer possible outcomes.
Used only for situations in which the summation of probability weights is greater than one.
An extension of sensitivity analysis.
Incompatible with sensitivity analysis.
CPA-03788
Explanation
Choice "c" is correct. Probability (risk) analysis is used to examine the possible outcomes given different
alternatives. Sensitivity analysis uses a trial and error method in which the sensitivity of the solution to
changes in variables is calculated. Therefore, probability analysis is an extension of sensitivity analysis.
Choice "a" is incorrect. Probability analysis is not limited to five or fewer possible outcomes.
Choice "b" is incorrect. The summation of the probability weights must equal one.
Choice "d" is incorrect. Probability analysis is compatible with sensitivity analysis.
CPA-03789
Type1 M/C
159. CPA-03789
A-D
Corr Ans: B
PM#4
B 5-99
Th May 93 #50 Page 51
Using regression analysis, Fairfield Co. graphed the following relationship of its cheapest product line's
sales with its customers' income levels:
99
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
If there is a strong statistical relationship between the sales and customers' income levels, which of the
following numbers best represents the correlation coefficient for this relationship?
a.
b.
c.
d.
- 9.00
- 0.93
+0.93
+9.00
CPA-03789
Explanation
Choice "b" is correct. The correlation coefficient measures the strength of the relationship between
variables. It is a number between -1 and +1. If the relationship is strong, it will have a coefficient near +1
or -1 depending on the slope of the relationship. In this case, the descending relationship has a negative
slope. The correlation coefficient will be close to -1, or -0.93 as given.
Choice "a" is incorrect. The correlation coefficient is a number between +1 and -1.
Choice "c" is incorrect. The relationship between sales and income levels is downward sloping, indicating
a negative relationship, not a positive one.
Choice "d" is incorrect. The correlation coefficient is a number between +1 and -1.
CPA-03905
Type1 M/C
160. CPA-03905
A-D
J93 - 1.03
Corr Ans: D
PM#5
B 5-99
Page 4
A cost driver is defined as:
a.
b.
c.
d.
The largest cost in a manufacturing process.
The significant factor in the development of a new product.
An indirect cost that cannot be traced to a particular cost objective but is essential to the business.
A causal factor that increases the total cost of a cost objective.
CPA-03905
Explanation
Choice "d" is correct. A cost driver is a causal factor (the cause) that increases the cost (the effect) of a
cost objective.
Choices "a", "b", and "c" are incorrect, per the above definition.
CPA-03907
Type1 M/C
161. CPA-03907
A-D
J93 - 1.05
Corr Ans: C
PM#6
B 5-99
Page 4
Inventoriable costs:
a.
b.
c.
d.
Include only the prime costs of manufacturing a product.
Include only the conversion costs of manufacturing a product.
Are regarded as assets before the products are sold.
Exclude fixed factory overhead.
100
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-03907
Explanation
Choice "c" is correct. Inventoriable costs are assets until sold, when they become "cost of goods sold."
Choice "a" is incorrect. Prime costs include direct materials and direct labor, but not factory overhead.
Choice "b" is incorrect. Conversion costs are direct labor and overhead, but exclude direct material.
Choice "d" is incorrect. Fixed factory overhead is capitalized as part of inventoriable costs.
CPA-03908
Type1 M/C
162. CPA-03908
A-D
D93 - 1.01
Corr Ans: A
PM#7
B 5-99
Page 3
Cost drivers are:
a. Activities that cause costs to increase as the activity increases.
b. Accounting measurements used to evaluate whether or not performance is proceeding according to
plan.
c. A mechanical basis, such as machine hours, computer time, size of equipment, or square footage of
factory, used to assign to activities.
d. Costs linked to two or more other costs.
CPA-03908
Explanation
Choice "a" is correct. Cost drivers are activities that cause costs to increase as the activity increases.
The cost driver is often non-financial.
Choice "b" is incorrect. Cost drivers are not accounting measurements; often they are non-financial-for
example, the number of parts ordered rather than the dollar value.
Choice "c" is incorrect. Often cost drivers are a mechanical basis used to assign costs, but they may also
have a financial basis.
Choice "d" is incorrect. Cost drivers are not necessarily cost, but the cause of costs being incurred.
CPA-03910
Type1 M/C
163. CPA-03910
A-D
D95 - 1.28
Corr Ans: C
PM#8
B 5-99
Page 36
The difference between the sales price and total variable costs is:
a.
b.
c.
d.
Gross operating profit.
The break-even point.
The contribution margin.
Cost-volume-profit analysis.
CPA-03910
Explanation
Choice "c" is correct. The contribution margin is the difference between the sales price and total variable
costs.
Choice "a" is incorrect. Gross operating profit is the difference between total sales and total operating
expenses.
Choice "b" is incorrect. The breakeven point determines the sales (in dollars or units) required to have no
profit or loss from operations.
Choice "d" is incorrect. Cost-volume-profit analysis examines the effect that volume changes have on
variable and fixed costs and the resulting profit or loss.
CPA-03911
Type1 M/C
164. CPA-03911
A-D
J96 - 1.18
Corr Ans: A
PM#9
B 5-99
Page 21
Conversion costs do not include:
101
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
a.
b.
c.
d.
Direct materials.
Indirect labor.
Indirect materials.
Direct labor.
CPA-03911
Explanation
Choice "a" is correct. Conversion costs consist of direct labor and overhead. Accordingly, conversion
costs include all product costs except direct materials.
Choice "b" is incorrect. Indirect labor is overhead.
Choice "c" is incorrect. Indirect materials is overhead.
Choice "d" is incorrect. Conversion costs include direct labor.
CPA-03912
Type1 M/C
165. CPA-03912
A-D
J96 - 1.20
Corr Ans: D
PM#10
B 5-99
Page 36
Contribution margin is the excess of revenues over:
a.
b.
c.
d.
Cost of goods sold.
Manufacturing cost.
Direct cost.
All variable costs.
CPA-03912
Explanation
Choice "d" is correct. Contribution margin is the excess of revenues over all variable costs.
Choice "a" is incorrect. Cost of (finished) goods sold, when deducted from net sales, results in gross
margin.
Choice "b" is incorrect. Manufacturing cost includes direct materials, direct labor, and indirect
manufacturing costs (fixed and variable).
Choice "c" is incorrect. Direct cost is a cost that can be identified with or traced to a given cost object.
CPA-03913
Type1 M/C
166. CPA-03913
A-D
A97 - 1.03
Corr Ans: C
PM#11
B 5-99
Page 87
Which of the following is the best example of a committed cost?
a.
b.
c.
d.
Advertising expenses.
Company picnic.
Business license cost.
Travel expense.
CPA-03913
Explanation
Choice "c" is correct. Committed costs are those costs necessary to operate at the present level that
cannot be changed in the short-run. Because a business must have a license to legally operate, it is not
a cost that can be done away with in the short-run.
Choice "a" is incorrect. While advertising may be necessary for the long-term survival of the company, it
can be eliminated in the short term.
Choices "b" and "d" are incorrect. Both of these costs could be eliminated in the short-run.
CPA-03914
Type1 M/C
167. CPA-03914
A-D
A97 - 1.05
Corr Ans: D
PM#12
B 5-99
Page 10
In managerial accounting, the term "relevant range" is often used to describe:
102
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
a.
b.
c.
d.
The theoretical maximums and minimum ranges the company could operate in.
The range over which costs fluctuate.
The range over which relevant costs are incurred.
The range over which cost relationships are valid.
CPA-03914
Explanation
Choice "d" is correct. Relevant range is the range of activity within which the relationships of fixed costs
and variable costs are meaningful and valid.
Choice "a" is incorrect. Theoretical maximums and minimums may have nothing to do with actual
operating characteristics of a given firm.
Choice "b" is incorrect. For most companies, costs fluctuate over the entire range of operations.
Choice "c" is incorrect. Costs are incurred at every possible operating point.
CPA-03915
Type1 M/C
168. CPA-03915
A-D
J97 - 1.01
Corr Ans: D
PM#13
B 5-99
Page 87
Which one of the following best describes direct labor?
a.
b.
c.
d.
A prime cost.
A product cost.
Both a period cost and a prime cost.
Both a product cost and a prime cost.
CPA-03915
Explanation
Choice "d" is correct. Direct labor is a prime cost, a conversion cost and a product cost. "d" is the best
answer because it includes two of these costs.
Choice "a" is incorrect. Prime cost is the sum of direct labor and direct material.
Choice "b" is incorrect. Product costs are direct material, direct labor and overhead.
Choice "c" is incorrect. Direct labor is not a period cost.
CPA-03916
Type1 M/C
169. CPA-03916
A-D
J97 - 1.02
Corr Ans: B
PM#14
B 5-99
Page 8
Which one of the following is correct regarding a relevant range?
a.
b.
c.
d.
Total variable costs will not change.
Total fixed costs will not change.
The relevant range cannot be changed after being established.
The relevant range will remain the same as long as prices do not change.
CPA-03916
Explanation
Choice "b" is correct. The relevant range is the range within which the relationship between a cost and its
cost driver remain valid. Within this range the fixed cost will remain fixed and the variable cost per unit
will not change.
Choice "a" is incorrect. While cost per unit does not change within the relevant range, total variable cost
does change.
Choice "c" is incorrect. The relevant range will change when cost relationships change or when additional
capacity is added to production.
Choice "d" is incorrect. Cost relationships determine when the relevant range will change, not prices.
CPA-03917
Type1 M/C
A-D
Corr Ans: B
PM#15
B 5-99
103
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
170. CPA-03917
A97 - 1.10
Page 8
A cost that is fixed per unit is an example of a:
a.
b.
c.
d.
Fixed cost.
Variable cost.
Mixed cost.
Direct cost.
CPA-03917
Explanation
Choice "b" is correct. A variable cost is one that varies in total but is fixed per unit. For example, if a
starter is needed in the manufacture of an automobile, the cost of starters varies with the number of
automobiles. The more automobiles, the greater the cost of starters. However, the cost for each starter
remains constant.
Choice "a" is incorrect. A fixed cost is one that is fixed in total but varies per unit.
Choice "c" is incorrect. A mixed cost is one that contains both fixed and variable costs.
Choice "d" is incorrect. A direct cost can be either fixed or variable.
CPA-03918
Type1 M/C
171. CPA-03918
A-D
J90 - 1.10
Corr Ans: D
PM#16
B 5-99
Page 21
During May 1990, Mercer Company completed 50,000 units costing $600,000, exclusive of spoilage
allocation. Of these completed units, 25,000 were sold during the month. An additional 10,000 units,
costing $80,000, were 50 percent complete at May 31. All units are inspected between the completion of
manufacturing and transfer to finished goods inventory. Normal spoilage for the month was $20,000, and
abnormal spoilage of $50,000 was also incurred during the month.
The portion of total spoilage that should be charged against revenue in May is:
a.
b.
c.
d.
$50,000
$20,000
$70,000
$60,000
CPA-03918
Explanation
Choice "d" is correct.
Normal spoilage is allocated to good production
(Normal spoilage)
$20,000
×
(Percent sold)
50%
=
Abnormal spoilage is charged to the income statement
Abnormal spoilage
$10,000
50,000
$60,000
Note that since inspection of units does not occur until the completion of manufacturing, none of the
spoilage is allocated to the partially completed units.
Choices "a", "b", and "c" are incorrect based on the above explanation.
CPA-03923
Type1 M/C
172. CPA-03923
A-D
D96 - 1.03
Corr Ans: B
PM#17
B 5-99
Page 87
Conversion cost pricing:
a. Places minimal emphasis on the cost of materials used in manufacturing a product.
b. Could be used when the customer furnishes the material used in manufacturing a product.
c. Places heavy emphasis on indirect costs and disregards consideration of direct costs.
104
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
d. Places heavy emphasis on direct costs and disregards consideration of indirect costs.
CPA-03923
Explanation
Choice "b" is correct. Conversion cost pricing could be used when the customer furnishes the material
used in manufacturing a product.
Choice "a" is incorrect. Conversion cost pricing places no (not minimal) emphasis on the cost of materials
used in manufacturing a product.
Choices "c" and "d" are incorrect. Conversion cost pricing places heavy emphasis on indirect (overhead)
costs and direct labor, but disregards consideration of direct materials.
CPA-03924
Type1 M/C
173. CPA-03924
A-D
D95 - 1.27
Corr Ans: A
PM#18
B 5-99
Page 87
A cost that bears an observable and known relationship to a quantifiable activity base is a(n):
a.
b.
c.
d.
Engineered cost.
Indirect cost.
Target cost.
Fixed cost.
CPA-03924
Explanation
Choice "a" is correct. An engineered cost bears an observable and known relationship to a quantifiable
activity base.
Choice "b" is incorrect. Indirect costs (overhead costs) are all manufacturing costs other than direct
material and direct labor.
Choice "c" is incorrect. A target cost is carefully predetermined standard cost that should be attained.
Choice "d" is incorrect. Fixed costs are all those organization and plant costs that continue to be incurred
and cannot be reduced without damaging the organization's ability to meet long-range goals.
CPA-03925
Type1 M/C
174. CPA-03925
A-D
A97 - 1.01
Corr Ans: D
PM#19
B 5-99
Page 115
Which of the following costs are not included in inventoriable costs under a variable (or direct) costing
system?
a.
b.
c.
d.
Direct material.
Direct labor.
Variable overhead.
Fixed overhead.
CPA-03925
Explanation
Choice "d" is correct. Variable (or direct) costing systems capitalize as a part of product or inventoriable
cost only variable cost. On the CPA exam, direct material and direct labor are presumed to be variable
unless otherwise stated.
Choices "a", "b", and "c" are incorrect, per above.
CPA-03928
Type1 M/C
175. CPA-03928
A-D
A97 - 1.02
Corr Ans: B
PM#20
B 5-99
Page 115
Which of the following costs are included in product or inventoriable costs in an absorption costing
system?
a. Direct material, direct labor and variable overhead.
b. Direct material, direct labor and all overhead.
105
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
c. Direct material, direct labor, all overhead, and selling expenses.
d. Direct material, direct labor, all overhead, and all period expenses.
CPA-03928
Explanation
Choice "b" is correct. In an absorption costing system, all product costs and no period expenses are put
into product cost.
Choice "a" is incorrect. Fixed overhead is a product cost under absorption costing. This would be the
correct answer if the question had used a direct or variable costing system.
Choice "c" is incorrect. Selling expenses are period costs and would not be included in product cost.
Choice "d" is incorrect, per above. No period expenses are capitalized in either absorption or variable
costing.
CPA-03930
Type1 M/C
176. CPA-03930
A-D
J97 - 1.03
Corr Ans: C
PM#21
B 5-99
Page 115
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:
a.
b.
c.
d.
Direct costing.
Variable costing.
Absorption costing.
Conversion costing.
CPA-03930
Explanation
Choice "c" is correct. Absorption costing (required for external reporting) charges direct material, direct
labor, variable overhead and fixed overhead as inventoriable costs.
Choices "a" and "b" are incorrect. Direct costing (also called variable costing) is the same as absorption
costing except that it does not consider fixed manufacturing overhead as an inventoriable cost.
Choice "d" is incorrect. Conversion costing does not include direct material in inventoriable cost.
CPA-03932
Type1 M/C
177. CPA-03932
A-D
A97 - 1.12
Corr Ans: D
PM#22
B 5-99
Page 51
There are a variety of ways of classifying costs of an object as either fixed or variable. The most accurate
method is considered to be:
a.
b.
c.
d.
The engineering method.
The account analysis method.
The high-low method.
The regression analysis method.
CPA-03932
Explanation
Choice "d" is correct. Regression analysis is a statistical method that fits a line to the data by the method
of least squares. It is the most accurate way to classify costs of an object as either fixed or variable.
Choice "a" is incorrect. The engineering method uses such methods as time and motion study to classify
costs. It can only be used where there is an observable relationship between the inputs and the outputs.
Choice "b" is incorrect. The account analysis method is merely a review of all the accounts by someone
knowledgeable of the activities of the firm. It is only as good as the person making the judgments.
Choice "c" is incorrect. The high-low method is a simplified approach that uses only the points of highest
and lowest activity. The regression method considers every point of activity.
CPA-03933
Type1 M/C
A-D
Corr Ans: B
PM#23
106
B 5-99
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
178. CPA-03933
D93 - 1.09
Page 87
An operation costing system is:
a. Identical to a process costing system except that actual cost is used for manufacturing overhead.
b. The same as a process costing system except that materials are allocated on the basis of batches of
production.
c. The same as a job order costing system except that materials are accounted for in the same way as
they are in a process costing system.
d. The same as a job order costing system except that no overhead allocations are made as actual
costs are used throughout.
CPA-03933
Explanation
Choice "b" is correct. Operation costing is process costing applied on individual batches.
Choice "a" is incorrect. In both operation costing and process costing, overhead is applied on an average
cost per unit basis.
Choice "c" is incorrect. Materials are accounted for differently in a process costing system than they are
in an operation costing system. An operation costing system allocates materials on the basis of batches
of production. This is similar to the method used in job costing.
Choice "d" is incorrect. Overhead allocations are still made.
CPA-03935
Type1 M/C
179. CPA-03935
A-D
A97 - 1.23
Corr Ans: D
PM#24
B 5-99
Page 87
Which of the following is a true statement regarding operation costing?
a. Operation costing has features of both job and process costing.
b. It is a hybrid system that is usually applied to batches of similar products.
c. It is similar to process costing except that materials are allocated on the basis of batches of
production.
d. All of the above are true statements about operation costing.
CPA-03935
Explanation
Choice "d" is correct. Operation costing is a hybrid system that is usually applied to batches of similar
products. In that way it is similar to process costing. The difference, however, is that materials are
allocated on the basis of batches of production in a manner similar to job costing. Because of this,
operation costing has features of both job and process costing.
Choices "a", "b", and "c" are incorrect, per above.
CPA-03936
Type1 M/C
180. CPA-03936
A-D
J97 - 1.04
Corr Ans: D
PM#25
B 5-99
Page 20
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:
a.
b.
c.
d.
Operation costing.
Activity-based costing.
Job order costing.
Process costing.
CPA-03936
Explanation
Choice "d" is correct. Process costing is a method of allocating production costs to products and services
by averaging the cost over the total units produced. Costs are usually accumulated by department rather
than by job.
107
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "a" is incorrect. Operation costing is a hybrid system that allows the company to use job order
costing for some costs of production and process costing for other costs.
Choice "b" is incorrect. Activity-based costing is a system that accumulates all costs of overhead for each
of the activities of the organization and then allocates those activity costs to the cost objects that caused
the activity.
Choice "c" is incorrect. Job order costing is a method of allocating production costs to products and
services that are identifiable as separate units and require greater or lesser amounts of work to complete.
CPA-03938
Type1 M/C
181. CPA-03938
A-D
J93 - 1.02
Corr Ans: B
PM#26
B 5-99
Page 26
Because of changes that are occurring in the basic operations of many firms, all of the following represent
trends in the way indirect costs are allocated, except:
a. Using throughput time as an application base to increase awareness of the costs associated with
lengthened throughput time.
b. Preferring plant-wide application rates that are applied to machine hours rather than incurring the cost
of detailed allocations.
c. Using several machine cost pools to measure product costs on the basis of time in a machine center.
d. Using cost drivers as application bases to increase the accuracy of reported product costs.
CPA-03938
Explanation
Choice "b" is correct. Plant-wide application rates applied to machine hours is a traditional costing
approach. More detailed cost allocations are now preferred.
Choices "a", "c", and "d" are incorrect. These are all trends in the revolution occurring in cost accounting
(in the manufacturing environment).
CPA-03940
Type1 M/C
182. CPA-03940
A-D
A92 - 1.35
Corr Ans: A
PM#27
B 5-99
Page 6
The distribution of overhead costs is known as:
a.
b.
c.
d.
Cost allocation.
Cost management.
Burden distribution.
Uncontrollable cost allocation.
CPA-03940
Explanation
Choice "a" is correct. Cost allocation is the distribution of overhead or support costs based on any one of
a variety of methods.
Choice "b" is incorrect. Cost management refers to the control of costs.
Choice "c" is incorrect. Although the term is descriptive, it is not used.
Choice "d" is incorrect. Overhead costs are not "uncontrollable."
CPA-03941
Type1 M/C
183. CPA-03941
A-D
D92 - 1.01
Corr Ans: B
PM#28
B 5-99
Page 6
Costs are allocated to cost objectives in many ways and for many reasons. Which one of the following is
a purpose of cost allocation?
a.
b.
c.
d.
Evaluating revenue center performance.
Measuring income and assets for external reporting.
Aiding in variable costing for internal reporting.
Implementing activity-based costing.
108
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-03941
Explanation
Choice "b" is correct. Cost allocation is essential for measuring income and assets for external reporting.
Choice "a" is incorrect. Revenue centers are responsible for revenues only. Cost allocation is not
relevant.
Choice "c" is incorrect. Variable costing matches costs directly variable with volume to the items
produced or sold. Costs are not allocated as it is clear to which items they relate.
Choice "d" is incorrect. Cost allocation will not aid in implementing ABC. ABC requires determining the
cost drivers (cause) and cost (effect).
CPA-03943
Type1 M/C
184. CPA-03943
A-D
D93 - 1.15
Corr Ans: A
PM#29
B 5-99
Page 26
Multiple or departmental overhead rates are considered preferable to a single or plant-wide overhead rate
when:
a. Various products are manufactured that do not pass through the same departments or use the same
manufacturing techniques.
b. Cost drivers, such as direct labor, are the same over all processes.
c. Individual cost drivers cannot accurately be determined with respect to cause-and-effect
relationships.
d. The single or plant-wide rate is related to several identified cost drivers.
CPA-03943
Explanation
Choice "a" is correct. When various products are manufactured, multiple overhead rates are preferable to
a single overhead rate. Activity-based costing would be better still.
Choice "b" is incorrect. If cost drivers were the same over all processes, a single rate could be used.
Choice "c" is incorrect. If individual cost drivers cannot be determined, multiple overhead rates will be
meaningless.
Choice "d" is incorrect. If a single or plant-wide rate is related to several identified cost drivers, then the
single rate is accurate and appropriate.
CPA-03945
Type1 M/C
185. CPA-03945
A-D
J96 - 1.21
Corr Ans: D
PM#30
B 5-99
Page 6
The appropriate method for the disposition of underapplied or overapplied factory overhead:
a.
b.
c.
d.
Is to cost of goods sold only.
Is to finished goods inventory only.
Is apportioned to cost of goods sold and finished goods inventory.
Depends on the significance of the amount.
CPA-03945
Explanation
Choice "d" is correct. The appropriate method for the disposition of underapplied or overapplied factory
overhead depends on the significance of the amount. If insignificant, it goes to cost of goods sold only. If
it is significant, it must be apportioned to cost of goods sold and finished goods inventory.
Choice "a" is incorrect. Cost of goods sold is only appropriate if the under/overapplied factory overhead is
insignificant.
Choice "b" is incorrect. Finished goods inventory only is not appropriate.
Choice "c" is incorrect. Under/overapplied factory overhead is only apportioned between cost of goods
sold and finished goods inventory if it is significant; otherwise it goes entirely to cost of good sold.
109
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-03946
Type1 M/C
186. CPA-03946
A-D
A97 - 1.51
Corr Ans: B
PM#31
B 5-99
Page 19
Which of the following would cause overhead to be overapplied?
a.
b.
c.
d.
Actual overhead is greater than overhead applied.
Actual overhead is less than overhead applied.
Actual overhead was equal to the budgeted amount but fewer items were manufactured.
The number of units produced was the budgeted amount but a larger amount of overhead was
actually incurred.
CPA-03946
Explanation
Choice "b" is correct. Overapplied overhead occurs when the amount of overhead applied exceeds the
actual amount of overhead incurred.
Choices "a", "c", and "d" are incorrect. Each of these would cause overhead to be underapplied.
CPA-03947
Type1 M/C
187. CPA-03947
A-D
D96 - 1.19
Corr Ans: D
PM#32
B 5-99
Page 26
Generally, individual departmental rates rather than a plant-wide rate for applying overhead would be
used if:
a.
b.
c.
d.
A company's manufacturing operations are all highly automated.
A company's manufacturing operations are basically labor based.
Manufacturing overhead is the largest cost component of its product cost.
The manufactured products differ in the resources consumed from the individual departments in the
plant.
CPA-03947
Explanation
Choice "d" is correct. 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.
Choice "a" is incorrect. Plant-wide rates would probably be used if a company's manufacturing
operations are all highly automated.
Choice "b" is incorrect. Plant-wide rates would probably be used if a company's manufacturing
operations are basically labor based.
Choice "c" is incorrect. Plant-wide rates would probably be used if manufacturing overhead is the largest
cost component of its product cost.
CPA-03950
Type1 M/C
188. CPA-03950
A-D
D92 - 1.02
Corr Ans: C
PM#33
B 5-99
Page 26
In allocating factory service department costs to producing departments, which one of the following items
would most likely be used as an activity base?
a.
b.
c.
d.
Units of product sold.
Salary of service department employees.
Units of electrical power consumed.
Direct materials usage.
CPA-03950
Explanation
Choice "c" is correct. Units of electrical power consumed would be a good indication of producing
departments' demand on the service department.
110
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "a" is incorrect. Units sold is not a good base with which to allocate to production departments. It
relates more to a sales department.
Choice "b" is incorrect. The salaries of service department employees represent the costs to be
allocated, not the activity base on which to base the allocation.
Choice "d" is incorrect. Although direct materials are used in production, they may not be the best base
for allocation because they do not always have a direct relationship to the incurrence of service
department costs.
CPA-03952
Type1 M/C
189. CPA-03952
A-D
J90 - 1.01
Corr Ans: A
PM#34
B 5-99
Page 19
Alex Company had the following inventories at the beginning and end of the month of January.
Finished Goods
Work-in-process
Direct materials
January 1
$125,000
235,000
134,000
January 31
$117,000
251,000
124,000
The following additional manufacturing data was available for the month of January.
Direct materials purchased
Purchase returns and allowances
Transportation in
Direct labor
Actual factory overhead
$189,000
1,000
3,000
300,000
175,000
Alex Company applies factory overhead at a rate of 60 percent of direct labor cost, and any overapplied
or underapplied factory overhead is deferred until the end of the year, December 31.
Alex Company's prime cost for January was:
a.
b.
c.
d.
$501,000
$489,000
$201,000
$499,000
CPA-03952
Explanation
Choice "a" is correct. Prime costs are direct materials and direct labor:
Beginning inventory, direct materials
Purchases during January
Less: purchase returns and allowances
Add: transportation in
Total direct materials available
Less: ending inventory, direct materials
Direct materials used during January
Add: direct labor cost
Total prime cost
$134,000
189,000
(1,000)
3,000
$325,000
(124,000)
$201,000
300,000
$501,000
Choices "b", "c", and "d" are incorrect based on the above explanation.
CPA-03953
Type1 M/C
190. CPA-03953
A-D
J90 - 1.02
Corr Ans: A
PM#35
B 5-99
Page 6
Alex Company had the following inventories at the beginning and end of the month of January.
Finished Goods
January 1
$125,000
January 31
$117,000
111
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Work-in-process
Direct materials
235,000
134,000
251,000
124,000
The following additional manufacturing data was available for the month of January.
Direct materials purchased
Purchase returns and allowances
Transportation in
Direct labor
Actual factory overhead
$189,000
1,000
3,000
300,000
175,000
Alex Company applies factory overhead at a rate of 60 percent of direct labor cost, and any overapplied
or underapplied factory overhead is deferred until the end of the year, December 31.
Alex Company's total manufacturing cost for January was:
a.
b.
c.
d.
$681,000
$669,000
$671,000
$679,000
CPA-03953
Explanation
Choice "a" is correct. $681,000. Note that applied overhead is determined as 60% of direct labor, and
actual overhead is irrelevant until over- or underapplications are handled in December.
Direct materials used
Direct labor
Factory overhead ($300,000 × .6)
Total manufacturing cost
$201,000 [Note A]
300,000
180,000
$681,000
Note A:
Beginning inventory, direct materials
Purchases during January
Less: purchase returns and allowances
Add: transportation in
Total direct materials available
Less: ending inventory, direct materials
Direct materials used during January
$134,000
189,000
(1,000)
3,000
$325,000
(124,000)
$201,000
Choices "b", "c", and "d" are incorrect based on the above explanation.
CPA-03954
Type1 M/C
191. CPA-03954
A-D
J90 - 1.03
Corr Ans: A
PM#36
B 5-99
Page 17
Alex Company had the following inventories at the beginning and end of the month of January.
Finished Goods
Work-in-process
Direct materials
January 1
$125,000
235,000
134,000
January 31
$117,000
251,000
124,000
The following additional manufacturing data was available for the month of January.
Direct materials purchased
Purchase returns and allowances
Transportation in
Direct labor
Actual factory overhead
$189,000
1,000
3,000
300,000
175,000
Alex Company applies factory overhead at a rate of 60 percent of direct labor cost, and any overapplied
or underapplied factory overhead is deferred until the end of the year, December 31.
112
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Alex Company's cost of goods manufactured for January was:
a.
b.
c.
d.
$665,000
$689,000
$663,000
$687,000
CPA-03954
Explanation
Choice "a" is correct. $665,000.
Total manufacturing cost
Add: beginning WIP
Less: ending WIP
Cost of goods manufactured
$681,000 [Note A]
235,000
(251,000)
665,000
Note A:
Applied overhead is determined as 60% of direct labor, and actual overhead is irrelevant until over- or
underapplications are handled in December.
Direct materials used
Direct labor
Factory overhead ($300,000 × .6)
Total manufacturing cost
$201,000 [Note 1]
300,000
180,000
$681,000
Note 1:
Beginning inventory, direct materials
Purchases during January
Less: purchase returns and allowances
Add: transportation in
Total direct materials available
Less: ending inventory, direct materials
Direct materials used during January
$134,000
189,000
(1,000)
3,000
$325,000
(124,000)
$201,000
Choices "b", "c", and "d" are incorrect based on the above explanation.
CPA-03956
Type1 M/C
192. CPA-03956
A-D
J90 - 1.04
Corr Ans: B
PM#37
B 5-99
Page 18
Alex Company had the following inventories at the beginning and end of the month of January.
Finished Goods
Work-in-process
Direct materials
January 1
$125,000
235,000
134,000
January 31
$117,000
251,000
124,000
The following additional manufacturing data was available for the month of January.
Direct materials purchased
Purchase returns and allowances
Transportation in
Direct labor
Actual factory overhead
$189,000
1,000
3,000
300,000
175,000
Alex Company applies factory overhead at a rate of 60 percent of direct labor cost, and any overapplied
or underapplied factory overhead is deferred until the end of the year, December 31.
Alex Company's cost of goods sold for January was:
a. $681,000
b. $673,000
c. $657,000
113
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
d. $671,000
CPA-03956
Explanation
Choice "b" is correct. $673,000.
Cost of goods manufactured
Add: beginning finished goods inventory
Less: ending finished goods inventory
Cost of goods sold
$ 665,000 [Note A]
125,000
(117,000)
673,000
Note A:
Total manufacturing cost
Add: beginning WIP
Less: ending WIP
Cost of goods manufactured
$ 681,000 [Note 1]
235,000
(251,000)
665,000
Note 1:
Applied overhead is determined as 60% of direct labor, and actual overhead is irrelevant until over- or
underapplications are handled in December.
Direct materials used
Direct labor
Factory overhead ($300,000 × .6)
Total manufacturing cost
$201,000 [Note a]
300,000
180,000
$681,000
Note a:
Beginning inventory, direct materials
Purchases during January
Less: purchase returns and allowances
Add: transportation in
Total direct materials available
Less: ending inventory, direct materials
Direct materials used during January
$134,000
189,000
(1,000)
3,000
$325,000
(124,000)
$201,000
Choices "a", "c", and "d" are incorrect based on the above explanation.
CPA-03959
Type1 M/C
193. CPA-03959
A-D
J94 - 1.25
Corr Ans: A
PM#38
B 5-99
Page 19
Zeta Company is preparing its annual profit plan. As part of its analysis of the profitability of individual
products, the controller estimates the amount of overhead that should be allocated to the individual
product lines from the information given below.
Wall
Mirrors
25
5
200
Units produced
Material moves per product line
Direct labor hours per unit
Budgeted materials handling costs
Specialty
Windows
25
15
200
$50,000
Under a costing system that allocates overhead on the basis of direct labor hours, the materials handling
costs allocated to one unit of wall mirrors would be:
a.
b.
c.
d.
$1,000
$500
$2,000
$5,000
114
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-03959
Explanation
Choice "a" is correct. $1,000.
Wall mirrors − 25 units × 200 hours per unit
Specialty windows − 25 units × 200 hours per unit
Total hours
Budgeted materials handling costs
Divided by total hours
Materials handling cost per hour
Hours per unit
Costs allocated to one unit
5,000 hours
5,000 hours
10,000 hours
$50,000
÷10,000
$
5
× 200
$ 1,000
Choices "b", "c", and "d" are incorrect based on the above explanation.
CPA-03961
Type1 M/C
194. CPA-03961
A-D
J94 - 1.26
Corr Ans: B
PM#39
B 5-99
Page 32
Zeta Company is preparing its annual profit plan. As part of its analysis of the profitability of individual
products, the controller estimates the amount of overhead that should be allocated to the individual
product lines from the information given below.
Wall
Mirrors
25
5
200
Units produced
Material moves per product line
Direct labor hours per unit
Budgeted materials handling costs
Specialty
Windows
25
15
200
$50,000
Under activity-based costing (ABC), the materials handling costs allocated to one unit of wall mirrors
would be:
a.
b.
c.
d.
$1,000
$500
$1,500
$2,500
CPA-03961
Explanation
Choice "b" is correct. $500.
Activity-based costing allocates costs based on the activity driving those costs (material moves in this
example). In comparing the activity required for wall mirrors and specialty windows, an allocation factor
can be developed:
Total material moves: 5 + 15 = 20
Percentage of moves related to wall mirrors: 5 ÷ 20 = 25%
Percentage of moves related to specialty windows: 15 ÷ 20 = 75%
Budgeted materials handling costs
Allocation factor
Costs allocated to wall mirrors
Units produced
Costs allocated to one wall mirror
$50,000
×
.25
$12,500
÷
25
$ 500
Choices "a", "c", and "d" are incorrect based on the above explanation.
CPA-03963
Type1 M/C
195. CPA-03963
A-D
J90 - 5B
Corr Ans: D
PM#40
B 5-99
Page 6
115
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
The benefit that management can expect from traditional costing includes which of the following:
a. Leads to a more competitive position by evaluating cost drivers, i.e., costs associated with the
complexity of the transaction rather than the production volume.
b. Streamlines production processes by reducing non-value adding activities, e.g., reduced set-up times,
optimal plant layout, and improved quality.
c. Provides management with a more thorough understanding of product costs and product profitability
for strategies and pricing decisions.
d. Uses a common departmental or factory wide measure of activity, such as direct labor hours or
dollars to distribute manufacturing overhead to products.
CPA-03963
Explanation
Choice "d" is correct. The benefit that management can expect from traditional costing includes using a
common departmental or factory wide measure of activity, such as direct labor hours or dollars, to
distribute manufacturing overhead to products.
Choices "a", "b", and "c" are incorrect. They are characteristics of activity-based costing.
CPA-03964
Type1 M/C
196. CPA-03964
A-D
J90 - 5A
Corr Ans: C
PM#41
B 5-99
Page 27
Activity based costing refines product cost information because the cost system:
a. Was designed to value inventory in the aggregate and not relate to product cost information.
b. Uses a common departmental or factory wide measure of activity, such as direct labor hours or
dollars to distribute manufacturing overhead to products.
c. Emphasizes long-term product analysis (when fixed costs become variable costs).
d. Causes managers, who are aware of distortions in the traditional cost system, to make intuitive,
imprecise adjustments to the traditional cost information without understanding the complete impact.
CPA-03964
Explanation
Choice "c" is correct. Activity-based costing refines product cost information because the cost system
emphasizes long-term product analysis (when fixed costs become variable costs).
Choices "a", "b", and "d" are incorrect. They are characteristics of traditional cost systems.
CPA-03965
Type1 M/C
197. CPA-03965
A-D
J90 - 5C
Corr Ans: B
PM#42
B 5-99
Page 26
The steps that a company, using a traditional cost system, would take to implement activity-based costing
include:
I.
Evaluation of the existing system to assess how well the system supports the objective of an activitybased cost system.
II. Identification of the activities for which cost information is needed with differentiation between value
adding and non-value adding activities.
a.
b.
c.
d.
Only I.
Both I and II.
Only II.
Neither I nor II.
CPA-03965
Explanation
Choice "b" is correct. Both steps are essential to implementing activity-based costing.
CPA-03966
Type1 M/C
198. CPA-03966
A-D
D92 - 1.06
Corr Ans: A
PM#43
B 5-99
Page 27
116
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
The costing method that is properly classified for both external and internal reporting purposes is:
a.
b.
c.
d.
External
Reporting
No
No
Yes
No
Activity-based costing.
Job costing.
Variable costing.
Process costing.
Internal
Reporting
Yes
Yes
No
Yes
CPA-03966
Explanation
Choice "a" is correct. Activity-based costing uses cause and effect relationships to capitalize costs to
inventory. This is not acceptable for external reporting and useful for internal reporting to management.
Choice "b" is incorrect. Job costing (a simple accumulation of cost associated with a specific job) is
acceptable for both internal and external purposes.
Choice "c" is incorrect. Variable costing does not capitalize fixed factory overhead into inventory. It is not
acceptable for external reporting but is often used for internal purposes.
Choice "d" is incorrect. Process costing is acceptable for both internal and external purposes. It is an
averaging of actual costs.
CPA-03967
Type1 M/C
199. CPA-03967
A-D
J93 - 1.01
Corr Ans: B
PM#44
B 5-99
Page 36
Under ABC, the allocation of costs to particular cost objectives allows a firm to analyze all of the following,
except:
a.
b.
c.
d.
Whether a particular department should be expanded.
Why the sales of a particular product have increased.
Whether a product line should be discontinued.
Whether a particular manager earns a bonus.
CPA-03967
Explanation
Choice "b" is correct. Cost allocation and analysis will not explain a sales increase.
Choices "a", "c", and "d" are incorrect. Analysis of each of these is facilitated by allocating costs to
particular cost objectives via activity-based costing.
CPA-03968
Type1 M/C
200. CPA-03968
A-D
D95 - 1.26
Corr Ans: B
PM#45
B 5-99
Page 26
An accounting system that collects financial and operating data on the basis of the underlying nature and
extent of the cost drivers is:
a.
b.
c.
d.
Direct costing.
Activity-based costing.
Target costing.
Variable costing.
CPA-03968
Explanation
Choice "b" is correct. Activity-based costing is an accounting system that collects financial and operating
data on the basis of the underlying nature and extent of the cost drivers.
Choices "a" and "d" are incorrect. Direct costing (more accurately called variable or marginal costing)
capitalizes only the variable production costs (direct materials, direct labor, and variable overhead) to
inventory (product costs), while fixed costs are expensed.
Choice "c" is incorrect. Target costing carefully predetermines standard costs that should be attained.
117
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-03970
Type1 M/C
201. CPA-03970
A-D
J96 - 1.30
Corr Ans: C
PM#46
B 5-99
Page 29
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 costs. 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.
Activity
Incoming
material
Quantity for
Satin Sheen
12
types
Cost Driver
Type of
material
inspection
Cost Rates
$11.50
per type
In-process
inspection
Number
of units
$0.14
per unit
17,500
units
Product
certification
Per
order
$77
per order
25
orders
The monthly quality control cost assigned to Satin Sheen makeup using activity-based costing is:
a.
b.
c.
d.
$88.64 per order.
$525.50 lower than the cost using the traditional system.
$525.50 higher than the cost using the traditional system.
$3,987.50
CPA-03970
Explanation
Choice "c" is correct. Activity-based costing of $4,513.00 is $525.50 higher than the $3,987.50 cost using
the traditional system.
Incoming material inspection
In-process inspection
Product certification
Total activity-based cost (ABC)
Traditional cost
Excess of ABC over traditional
Cost
Rates
$11.50
$ 0.14
$77.00
Total
Quantity
×
12 =
× 17,500 =
×
25 =
14.5%
× $27,500
=
Costs
$ 138.00
2,450.00
1,925.00
4,513.00
3,987.50
$ 525.50
Choice "a" is incorrect. The cost rates should not be added, but rather should be applied to the related
activity to determine allocated costs.
Choice "b" is incorrect. The traditional costing system results in a lower cost, as shown above.
Choice "d" is incorrect. $3,987.50 is the cost using the traditional system.
CPA-03972
Type1 M/C
202. CPA-03972
A-D
D96 - 1.28
Corr Ans: A
PM#47
B 5-99
Page 32
The use of activity-based costing normally results in:
a. Substantially greater unit costs for low-volume products than is reported by traditional product
costing.
b. Substantially lower unit costs for low-volume products than is reported by traditional product costing.
c. Decreased set-up costs being charged to low-volume products.
d. Equalizing set-up costs for all product lines.
118
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-03972
Explanation
Choice "a" is correct. The use of activity-based costing normally results in substantially greater unit costs
for low-volume products than is reported by traditional product costing.
Choice "b" is incorrect, per "a" above.
Choice "c" is incorrect. Increased (not decreased) set-up costs are charged to low-volume products
under activity-based costing.
Choice "d" is incorrect. Activity-based costing does not equalize set-up costs for all product lines.
CPA-03976
Type1 M/C
203. CPA-03976
A-D
J96 - 1.29
Corr Ans: D
PM#48
B 5-99
Page 17
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:
a.
b.
c.
d.
$6.50
$6.00
$5.70
$5.50
CPA-03976
Explanation
Choice "d" is correct. $5.50 cost of goods sold ($38,500 ÷ 7,000 units).
Total
Costs
Job ICU2 Costs
Good
Units
Unit
Cost
Direct materials
$13,700
Direct labor
4,800
Factory overhead 800 hrs × $25 = 20,000
38,500 ÷ 7,000 = $5.50 D
5,600
1,400
Total mfg cost
Selling
Administrative
$45,500 ÷ 7,000 =
Total cost
$6.50 Not A
Choices "a", "b", and "c" are incorrect based on the above explanation.
CPA-03978
Type1 M/C
204. CPA-03978
A-D
D96 - 1.18
Corr Ans: D
PM#49
B 5-99
Page 17
Which one of the following alternatives correctly classifies the business application to the appropriate
costing system?
a.
b.
c.
d.
Job
Costing System
Wallpaper manufacturer
Aircraft assembly
Paint manufacturer
Print shop manufacturer
Process
Costing System
Oil refinery
Public accounting firm
Retail banking
Beverage drink
CPA-03978
Explanation
Choice "d" is correct. A print shop would use a job costing system, while a beverage drink manufacturer
would use a process costing system.
119
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Job costing is used in the production of tailor-made or unique goods, including:
Construction of buildings or ships
Aircraft assembly
Printing
Special-purpose machinery (microcomputer manufacturer)
Public accounting firm
Management consulting firm
Repair shops
Industrial research projects
Process costing is used where the product is composed of mass produced homogeneous units such as:
Gasoline and oil
Chemicals
Steel
Textiles (wallpaper)
Plastics
Paints
Flour
Meatpacking
Canneries
Rubber
Lumber
Food processing (beverage drink manufacturer)
Glass
Mining
Cement
Check clearing in banks
Mail sorting in post offices
Food preparation in fast-food outlets
Premium handling in insurance companies
Choices "a", "b", and "c" are incorrect based on the above explanation.
CPA-03982
Type1 M/C
205. CPA-03982
A-D
D92 - 1.12
Corr Ans: D
PM#50
B 5-99
Page 32
The definition of economic cost is:
a.
b.
c.
d.
All the dollar costs employers pay for all inputs purchased.
The opportunity cost of all inputs minus the dollar cost of those inputs.
The difference between all implicit and explicit costs of the business firm.
The sum of all explicit and implicit costs of the business firm.
CPA-03982
Explanation
Choice "d" is correct. The definition of economic cost is the sum of all explicit and implicit (opportunity)
costs of the business firm.
Choices "a", "b", and "c" are incorrect. They are "far-out distractors."
CPA-03985
Type1 M/C
206. CPA-03985
A-D
D94 - 1.15
Corr Ans: D
PM#51
B 5-99
Page 105
The goals and objectives upon which an annual profit plan is most effectively based are:
a. Quantitative measures such as growth in unit sales, number of employees, and manufacturing
capacity.
120
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
b. Qualitative measures of organizational activity such as product innovation leadership, product quality
levels, and product safety.
c. Financial and quantitative measures.
d. A combination of financial, quantitative, and qualitative measures.
CPA-03985
Explanation
Choice "d" is correct. The goals and objectives upon which an annual profit plan (also known as
budgeted, targeted or estimated financial statements) is most effectively based are a combination of
financial, quantitative (number of units), and qualitative (e.g., to be the best) measures. Not all goals and
objectives can be quantified.
Choice "a" is incorrect. To ignore qualitative measures is to miss many important items.
Choice "b" is incorrect. Qualitative measures are important, but financial and quantitative measures are
important, too.
Choice "c" is incorrect. Qualitative measures should not be ignored.
CPA-03988
Type1 M/C
207. CPA-03988
A-D
J97 - 1.21
Corr Ans: C
PM#52
B 5-99
Page 105
The Yummy Dog Bone Company is anticipating that a major supplier might experience a strike this year.
Because of the nature of the product and emphasis on quality, extra production cannot be stored as
finished goods inventory. When developing a contingency budget that would anticipate a raw material
buildup, the two most significant items that will be affected are:
a.
b.
c.
d.
Production volume and raw material.
Production and cash flow.
Raw material and cash flow.
Production volume and sales.
CPA-03988
Explanation
Choice "c" is correct. The two most significant items affected are raw material (to be built up) and cash
flow (needed to pay for the build up).
Choices "a" and "b" are incorrect. Production volume will not be affected, because the question states
that extra production cannot be stored as finished goods inventory. This implies that the company will
need to store the additional raw materials purchased, as opposed to using them to increase production.
Choice "d" is incorrect. Production volume will not be affected, because the question states that extra
production cannot be stored as finished goods inventory. This implies that the company will need to store
the additional raw materials purchased, as opposed to using them to increase production. Sales will also
be unaffected by the increase in raw materials purchased.
CPA-03990
Type1 M/C
208. CPA-03990
A-D
3B.C02 - 4
Corr Ans: B
PM#53
B 5-99
Page 76
Organizations focus on both financial and non-financial features of their operations to evaluate the degree
to which they will be successful in their strategies. These financial and non-financial dimensions of their
operations are sometimes referred to as:
a.
b.
c.
d.
The total quality management continuum.
Critical success factors.
Balanced scorecards.
Benchmarks.
CPA-03990
Explanation
Choice "b" is correct. Financial and non-financial features of an organization that contribute to its success
in achieving strategy are referred to as critical success factors and are normally classified as:
121
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
1.
2.
3.
4.
Financial solvency and return
Customer satisfaction
Internal business processes
Human resource innovation
Choice "a" is incorrect. The term total quality management continuum is a distracter.
Choice "c" is incorrect. Balanced scorecards serve to document the measurements of critical success
factors. Although balanced scorecards include measurements that are classified by critical success
factors, they are not, themselves, the features of the organization that contribute to its success.
Choice "d" is incorrect. Benchmarks represent the best practices within an industry or within a function.
They may serve as the individual standards that serve to evaluate the achievement of goals classified
within the context of critical success factors but they are not, themselves, the features that an
organization must possess to accomplish their strategy.
CPA-03993
Type1 M/C
209. CPA-03993
A-D
J96 - 1.05
Corr Ans: C
PM#54
B 5-99
Page 55
The process of developing plans for a company's expected operations and controlling the operations to
help carry out those plans is known as:
a.
b.
c.
d.
Preparing a period budget.
Preparing a master budget.
Budgetary control.
Participative budgeting.
CPA-03993
Explanation
Choice "c" is correct. Budgetary control is the process of developing plans for a company's expected
operations and controlling the operations to help carry out those plans.
Choice "a" is incorrect. All budgets are for a "period."
Choice "b" is incorrect. The master budget is the quantification of the company's overall plan. The
budget does not provide the "controlling of operations" aspect that the question asks for.
Choice "d" is incorrect. Participative budgeting involves people throughout the organization in the
budgetary process.
CPA-03995
Type1 M/C
210. CPA-03995
A-D
D92 - 1.13
Corr Ans: C
PM#55
B 5-99
Page 60
When comparing performance report information for top management with that for lower-level
management:
a.
b.
c.
d.
Lower-level management reports are typically for longer time periods.
Top management reports show control over fewer costs.
Lower-level management reports are likely to contain more quantitative data and less financial data.
Top management reports are usually not of the exception type but present a complete analysis of all
variances.
CPA-03995
Explanation
Choice "c" is correct. Lower level management reports are likely to include more quantitative data (units,
time, etc.), which is more detailed. Financial data provides a broader overview.
Choice "a" is incorrect. Lower-level management reports are typically for shorter time periods.
Choice "b" is incorrect. Top management reports show control over a greater number of costs.
Choice "d" is incorrect. Top management would actually typically receive exception type reports.
122
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Lecture: Business 5
CPA-03996
Type1 M/C
211. CPA-03996
A-D
D92 - 1.25
Corr Ans: D
PM#56
B 5-99
Page 61
Performance reports should be formatted and designed to meet organizational needs. In this regard,
performance reports normally include all of the following, except:
a.
b.
c.
d.
Exceptional items that are controllable.
Specific time horizons.
A user focus.
Strategic plans.
CPA-03996
Explanation
Choice "d" is correct. Strategic plans are broad-based and long-term in nature. Performance reports are
much more specific and shorter term. A performance report would not normally include strategic plans.
Choices "a", "b", and "c" are incorrect. All of these items would be included in performance reports.
CPA-04000
Type1 M/C
212. CPA-04000
A-D
D92 - 1.08
Corr Ans: B
PM#57
B 5-99
Page 49
A budget manual, which enhances the operation of a budget system, is most likely to include:
a.
b.
c.
d.
A chart of accounts.
Distribution instructions for budget schedules.
Documentation of the accounting system software.
Company policies regarding the authorization of transactions.
CPA-04000
Explanation
Choice "b" is correct. The budget manual provides guidance during the preparation of the budgets.
Among other things, the budget manual would include instructions on the distribution of budget
schedules.
Choices "a", "c", and "d" are incorrect. These items are not likely to be incuded in the budget manual.
CPA-04001
Type1 M/C
213. CPA-04001
A-D
D95 - 1.01
Corr Ans: C
PM#58
B 5-99
Page 55
The process of creating a formal plan and translating goals into a quantitative format is:
a.
b.
c.
d.
Activity-based costing.
Job order costing.
Budgeting.
Variance analysis.
CPA-04001
Explanation
Choice "c" is correct. Budgeting is the process of creating a formal plan and translating goals into a
quantitative format.
Choice "a" is incorrect. Activity-based costing is costing based on activities (cost drivers) and cost pools.
Choice "b" is incorrect. Job order costing is costing by specific identification; it is the opposite of process
costing.
Choice "d" is incorrect. Variance analysis is the comparison of actual and budgeted results.
CPA-04002
Type1 M/C
214. CPA-04002
A-D
3B.C02 - 11
Corr Ans: C
PM#59
B 5-99
Page 73
123
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Strategic Business Units (SBUs) are classified into different types based on the responsibility levels
assigned to their managers. Each of the following items are reasons for classifying Strategic Business
Units as cost, revenue, profit, or investment, except to:
a.
b.
c.
d.
Promote goal congruence.
Communicate segment goals to managers for improved operational and financial control.
Highlight different responsibility levels among managers in highly centralized organizations.
Isolate financial measurement for segment performance.
CPA-04002
Explanation
Choice "c" is correct. Strategic Business Units are established in a decentralized environment not a
centralized environment. Highlighting different responsibility levels in centralized environments is not a
reason for using cost, revenue, profit and investment SBUs.
Choice "a" is incorrect. Goal congruence is a valid reason for SBU classification.
Choice "b" is incorrect. Improved operational and financial control is a valid reason for classification of
SBUs by type.
Choice "d" is incorrect. Isolating the relevant measure of financial performance is appropriate to SBU
classification.
CPA-04003
Type1 M/C
215. CPA-04003
A-D
3B.C02 - 13
Corr Ans: A
PM#60
B 5-99
Page 49
Organic Enterprises cultivates potted plants and hybrids. Management conducted a careful engineering
study of product requirements and has developed standards to control production. Standards of this type
are also referred to as:
a.
b.
c.
d.
Authoritative standards.
Participative standards.
Ideal standards.
Attainable standards.
CPA-04003
Explanation
Choice "a" is correct. Standards imposed by management without employee input are referred to as
authoritative standards.
Choice "b" is incorrect. Standards imposed by management without employee input are referred to as
authoritative standards. Standards developed in collaboration with employees involved with the work are
referred to as participative standards.
Choice "c" is incorrect. Ideal standards are based on optimum conditions. The question gives no
indication whether the assumptions used by the engineering group were based on optimal, normal, or
less than optimal conditions.
Choice "d" is incorrect. Attainable standards represent per unit budgets that assume normal conditions.
The question gives no indication whether the assumptions used by the engineering group were based on
optimal, normal, or less than optimal conditions.
CPA-04004
Type1 M/C
216. CPA-04004
A-D
D95 - 1.18
Corr Ans: D
PM#61
B 5-99
Page 57
All of the following are considered operating/financial budgets, except the:
a.
b.
c.
d.
Cash budget.
Sales budget.
Production budget.
Capital budget.
124
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-04004
Explanation
Choice "d" is correct. Operating budgets describe the plan for revenue and expenses and the supporting
schedules that go with them. Examples include sales, materials, labor, overhead, production, purchases
and the forecasting of cash that will be necessary to pay for them. Capital budgets plan for the purchase
of capital assets, which will only affect the operating budget through their subsequent effect on expense
via depreciation.
Choices "a", "b", and "c" are incorrect, per above.
CPA-04005
Type1 M/C
217. CPA-04005
A-D
J96 - 1.07
Corr Ans: C
PM#62
B 5-99
Page 57
For the month of December, Crystal Clear Bottling expects to sell 12,500 cases of Cranberry Sparkling
Water at $24.80 per case and 33,100 cases of Lemon Dream Cola at $32.00 per case. Sales personnel
receive 6 percent commission on each case of Cranberry Sparkling Water and 8 percent commission on
each case of Lemon Dream Cola. In order to receive a commission on a product, the sales personnel
team must meet the individual product revenue quota. The sales quota for Cranberry Sparkling Water is
$500,000, and the sales quota for Lemon Dream Cola is $1,000,000. The sales commission that should
be budgeted for December is:
a.
b.
c.
d.
$4,736
$82,152
$84,736
$103,336
CPA-04005
Explanation
Choice "c" is correct. $84,736 budgeted sales commission.
Lemon dream cola:
Projected case sales
Price per case
Sales
Commission rate
Budgeted sales commission
33,100
×
$32
$1,059,200
×
8%
$ 84,736 C
Note: Sales of cranberry sparkling water (12,500 cases × $24.80 = $310,000) are not expected to reach
the sales quota of $500,000.
Choices "a", "b", and "d" are incorrect based on the above explanation.
CPA-04007
Type1 M/C
218. CPA-04007
A-D
J93 - 1.07
Corr Ans: A
PM#63
B 5-99
Page 57
Wellfleet Company manufactures recreational equipment and prepares annual operational budgets for
each department. The Purchasing Department is finalizing plans for the fiscal year ending June 30, 1994,
and has gathered the following information regarding two of the components used in both tricycles and
bicycles. Wellfleet uses the first-in, first-out inventory method.
Beginning inventory July 1, 1993
A19
3,500
B12
1,200
Tricycles
800
Bicycles
2,150
Ending inventory June 30, 1994
2,000
1,800
1,000
900
Unit cost
$1.20
$4.50
$54.50
$89.60
-
-
96,000
130,000
Projected 1993-94 unit sales
Component usage:
125
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Tricycles
Bicycles
2/unit
2/unit
1/unit
4/unit
-
-
The budgeted dollar value of Wellfleet Company's purchases of Component A19 for the fiscal year ending
June 30, 1994 is:
a.
b.
c.
d.
$538,080
$540,600
$2,022,300
$2,027,250
CPA-04007
Explanation
Choice "a" is correct. $538,080 purchases for the fiscal year ending 6-30-94.
Production of tricycles/bicycles:
Trikes
96,000
1,000
97,000
(800)
96,200
Projected sales
Desired ending inventory
Required units
Less: beginning inventory
Required production
Bikes
130,000
900
130,900
(2,150)
128,750
Required units of A19 to meet production budget:
Tricycles − 96,200 × 2
Bicycles − 128,750 × 2
Total units required to meet production
192,400
257,500
449,900
Purchases of A19:
A19
449,900
2,000
451,900
(3,500)
448,400
Units required to meet production
Desired ending inventory
Total units required
Less: beginning inventory
Units to be purchased
Budgeted purchases = 448,400 units × $1.20 per unit = $538,080
Choices "b", "c", and "d" are incorrect based on the above explanation.
CPA-04008
Type1 M/C
219. CPA-04008
A-D
J93 - 1.08
Corr Ans: D
PM#64
B 5-99
Page 57
Wellfleet Company manufactures recreational equipment and prepares annual operational budgets for
each department. The Purchasing Department is finalizing plans for the fiscal year ending June 30, 1994,
and has gathered the following information regarding two of the components used in both tricycles and
bicycles. Wellfleet uses the first-in, first-out inventory method.
Beginning inventory July 1, 1993
A19
3,500
B12
1,200
Tricycles
800
Bicycles
2,150
Ending inventory June 30, 1994
2,000
1,800
1,000
900
Unit cost
$1.20
$4.50
$54.50
$89.60
−
−
96,000
130,000
2/unit
2/unit
126
1/unit
4/unit
Projected 1993-94 unit sales
Component usage:
Tricycles
Bicycles
−
−
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
−
−
Becker CPA Review, PassMaster Questions
Lecture: Business 5
If the economic order quantity of Component B12 is 70,000 units, the number of times that Wellfleet
Company should purchase this component during the fiscal year ended June 30, 1994 is:
a.
b.
c.
d.
Five times.
Seven times.
Eight times.
Nine times.
CPA-04008
Explanation
Choice "d" is correct. Nine times.
Production of tricycles/bicycles:
Trikes
96,000
1,000
97,000
(800)
96,200
Projected sales
Desired ending inventory
Required units
Less: beginning inventory
Required production
Required units of B12 to meet production budget:
Tricycles − 96,200 × 1
Bicycles − 128,750 × 4
Total units required to meet production
Bikes
130,000
900
130,900
(2,150)
128,750
96,200
515,000
611,200
Purchases of B12:
A19
611,200
1,800
613,000
(1,200)
611,800
Units required to meet production
Desired ending inventory
Total units required
Less: beginning inventory
Units to be purchased
611,800 ÷ 70,000 EOQ = 8.74 orders; round up to 9
Choices "a", "b", and "c" are incorrect based on the above explanation.
CPA-04010
Type1 M/C
220. CPA-04010
A-D
J95 - 1.14
Corr Ans: A
PM#65
B 5-99
Page 57
Rokat Corporation is a manufacturer of tables sold to schools, restaurants, hotels, and other institutions.
The tabletops are manufactured by Rokat, but the table legs are purchased from an outside supplier. The
Assembly Department takes a manufactured tabletop and attaches the four purchased table legs. It
takes 20 minutes of labor to assemble a table. The company follows a policy of producing enough tables
to insure that 40 percent of next month's sales are in the finished goods inventory. Rokat also purchases
sufficient raw materials to insure that raw materials inventory is 60 percent of the following month's
scheduled production. Rokat's sales budget in units for the next quarter is as follows.
July
August
September
2,300
2,500
2,100
Rokat's ending inventories in units for June 30, 1995, are:
Finished goods
Raw materials (legs)
1,900
4,000
127
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
The number of tables to be produced during August 1995 is:
a.
b.
c.
d.
2,340 tables.
1,440 tables.
1,600 tables.
2,380 tables.
CPA-04010
Explanation
Choice "a" is correct. 2,340 tables to be produced during August 1995.
Budgeted sales - August
Desired ending inventory, 8/31 (40% × 2,100 Sept. sales)
Total required
Less: beginning inventory 8/1 (40% × 2,500 Aug. Sales)
Production
Units
2,500
840
3,340
(1,000)
2,340
Choices "b", "c", and "d" are incorrect based on the above explanation.
CPA-04012
Type1 M/C
221. CPA-04012
A-D
J95 - 1.15
Corr Ans: A
PM#66
B 5-99
Page 57
Rokat Corporation is a manufacturer of tables sold to schools, restaurants, hotels, and other institutions.
The tabletops are manufactured by Rokat, but the table legs are purchased from an outside supplier. The
Assembly Department takes a manufactured tabletop and attaches the four purchased table legs. It
takes 20 minutes of labor to assemble a table. The company follows a policy of producing enough tables
to insure that 40 percent of next month's sales are in the finished goods inventory. Rokat also purchases
sufficient raw materials to insure that raw materials inventory is 60 percent of the following month's
scheduled production. Rokat's sales budget in units for the next quarter is as follows.
July
August
September
2,300
2,500
2,100
Rokat's ending inventories in units for June 30, 1995, are:
Finished goods
Raw materials (legs)
1,900
4,000
Disregarding your response to Item J95 - 1.14, assume the required production for August and
September is 1,600 and 1,800 units, respectively, and the July 31, 1995, raw materials inventory is 4,200
units. The number of table legs to be purchased in August is:
a.
b.
c.
d.
6,520 legs.
5,080 legs.
6,400 legs.
6,840 legs.
CPA-04012
Explanation
Choice "a" is correct. 6,520 legs to be purchased in August.
Note that August and September production is provided as 1,600 and 1,800 units, respectively. This
translates (at 4 legs per table) into 6,400 and 7,200 required table legs. Also, the company wishes to
maintain an August ending inventory sufficient to meet 60% of September's production, or 4,320 legs
(7,200 x .6 = 4,320).
Raw Material
(Legs)
6,400
Legs required to produce 1,600 tables in August
128
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Desired ending inventory, 8/31:
Total required table legs
Less: beginning inventory, 8/1 (given)
Table legs to be purchased
4,320
10,720
(4,200)
6,520
Choices "b", "c", and "d" are incorrect based on the above explanation.
CPA-04013
Type1 M/C
222. CPA-04013
A-D
J95 - 1.18
Corr Ans: D
PM#67
B 5-99
Page 57
There are various budgets within the master budget cycle. One of these budgets is the production
budget. Which one of the following best describes the production budget?
a.
b.
c.
d.
It includes required direct labor hours.
It includes required material purchases.
It aggregates the monetary details of the operating budget.
It is calculated from the desired ending inventory and the sales forecast.
CPA-04013
Explanation
Choice "d" is correct. The production budget is based on the sales budget (or forecast), with modification
for increases or decreases in inventory levels.
Choice "a" is incorrect. The production budget does include direct labor hours, but it also includes much
more.
Choice "b" is incorrect. The production budget does include the cost of materials used in production, but
it also includes much more.
Choice "c" is incorrect. The operating budget includes all budgets (except capital purchases and cash)
and includes the pro forma income statement; it goes beyond the production budget.
CPA-04016
Type1 M/C
223. CPA-04016
A-D
J95 - 1.19
Corr Ans: B
PM#68
B 5-99
Page 58
A plan that is created using budgeted revenue and costs but is based on the actual units of output is
known as a:
a.
b.
c.
d.
Continuous budget.
Flexible budget.
Static budget.
Master budget.
CPA-04016
Explanation
Choice "b" is correct. A flexible budget uses budgeted revenue and costs per unit, but it is adjusted
based on actual units of output.
Choice "a" is incorrect. A continuous (or rolling) budget continues to add an addition period with the
passage of each period.
Choice "c" is incorrect. A static budget is based on one level of activity, and it is not adjusted for actual
units.
Choice "d" is incorrect. A master (comprehensive) budget is the quantification of the company's overall
plan and consists of many small budgets.
CPA-04017
Type1 M/C
224. CPA-04017
A-D
J97 - 1.14
Corr Ans: C
PM#69
B 5-99
Page 57
Jordan Auto has developed the following production plan.
129
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Month
January
February
March
April
Units
10,000
8,000
9,000
12,000
Each unit contains three pounds of raw material. The desired raw material ending inventory each month
is 120 percent of the next month's production, plus 500 pounds. (The beginning inventory meets this
requirement.) Jordan has developed the following direct labor standards for production of these units.
Department 1
2.0
$6.75
Hours per unit
Hourly rate
Department 2
0.5
$12.00
How much raw material should Jordan Auto purchase in March?
a.
b.
c.
d.
32,900 pounds.
36,000 pounds.
37,800 pounds.
43,700 pounds.
CPA-04017
Explanation
Choice "c" is correct. 37,800 pounds must be purchased in March:
Begin bal. (9,000 × 120% × 3) + 500 =
Purchases (squeeze)
Subtotal
Transfer out (9000 × 3)
3/31 End bal. (12,000 × 120% × 3) + 500 =
3/1
32,900
37,800
70,700
(27,000)
$43,700
Choices "a", "b", and "d" are incorrect, per the above calculation.
CPA-04019
Type1 M/C
225. CPA-04019
A-D
J95 - 1.16
Corr Ans: B
PM#70
B 5-99
Page 57
Rokat Corporation is a manufacturer of tables sold to schools, restaurants, hotels, and other institutions.
The tabletops are manufactured by Rokat, but the table legs are purchased from an outside supplier. The
Assembly Department takes a manufactured tabletop and attaches the four purchased table legs. It
takes 20 minutes of labor to assemble a table. The company follows a policy of producing enough tables
to insure that 40 percent of next month's sales are in the finished goods inventory. Rokat also purchases
sufficient raw materials to insure that raw materials inventory is 60 percent of the following month's
scheduled production. Rokat's sales budget in units for the next quarter is as follows.
July
August
September
2,300
2,500
2,100
Rokat's ending inventories in units for June 30, 1995, are:
Finished goods
Raw materials (legs)
1,900
4,000
Assume that Rokat Corporation will produce 1,800 units in the month of September 1995. How many
employees will be required for the Assembly Department? (Fractional employees are acceptable since
employees can be hired on a part-time basis. Assume a 40-hour week and a 4-week month.)
a. 15 employees.
130
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
b. 3.75 employees.
c. 60 employees.
d. 1.5 employees.
CPA-04019
Explanation
Choice "b" is correct. 3.75 employees required.
Units produced
3 per hour (20 mins. Ea.)
Hours required
Monthly hours per employee (40 × 4)
Employees needed
1,800
÷ 3
600
÷ 160
3.75 B
Choices "a", "c", and "d" are incorrect, per the above calculation.
CPA-04021
Type1 M/C
226. CPA-04021
A-D
D95 - 1.09
Corr Ans: D
PM#71
B 5-99
Page 57
Individual budget schedules are prepared to develop an annual comprehensive or master budget. The
budget schedule that would provide the necessary input data for the Direct Labor Budget would be the:
a.
b.
c.
d.
Sales forecast.
Raw materials purchases budget.
Schedule of manufacturing overhead.
Production budget.
CPA-04021
Explanation
Choice "d" is correct. The production budget (which includes projected units to be produced) would
provide the necessary input data for the direct labor budget.
131
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choices "a", "b", and "c" are incorrect, per the above information.
CPA-04022
Type1 M/C
227. CPA-04022
A-D
J97 - 1.15
Corr Ans: A
PM#72
B 5-99
Page 95
Jordan Auto has developed the following production plan.
Month
January
February
March
April
Units
10,000
8,000
9,000
12,000
132
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Each unit contains three pounds of raw material. The desired raw material ending inventory each month
is 120 percent of the next month's production, plus 500 pounds. (The beginning inventory meets this
requirement.) Jordan has developed the following direct labor standards for production of these units.
Hours per unit
Hourly rate
Department 1
2.0
$6.75
Department 2
0.5
$12.00
Jordan Auto's total budgeted direct labor dollars for February usage should be:
a.
b.
c.
d.
$156,000
$165,750
$175,500
$210,600
CPA-04022
Explanation
Choice "a" is correct. $156,000 budgeted direct labor dollars for February, calculated as follows:
8,000 units × 2.0 hrs × $6.75 =
8,000 units × 0.5 hrs × $12.00 =
Total budgeted direct labor dollars for February
$108,000
48,000
$156,000
Choices "b", "c", and "d" are incorrect, per the above calculation.
CPA-04023
Type1 M/C
228. CPA-04023
A-D
D92 - 1.09
Corr Ans: A
PM#73
B 5-99
Page 57
The information contained in a cost of goods manufactured budget would most directly relate to the:
a. Materials used, direct labor, overhead applied, and work-in-process inventories budgets.
b. Materials used, direct labor, overhead applied, work-in-process inventories, and finished goods
inventories budgets.
c. Materials used, direct labor, overhead applied, and finished goods inventories budgets.
d. Materials used, direct labor, overhead applied, unit production, and raw materials inventories
budgets.
CPA-04023
Explanation
Choice "a" is correct. Materials, labor, and overhead applied are all "inputs" to the cost of goods
manufactured. Work-in-process affects both inputs (for beginning W-I-P) and outputs (for ending W-I-P).
Choice "b" is incorrect. Finished goods inventory is not necessary for the determination of cost of goods
manufactured.
Choice "c" is incorrect. Finished goods inventory is not necessary for the determination of cost of goods
manufactured. WIP inventoiry IS necessary to calculate cost if goods manufactured.
Choice "d" is incorrect. Raw materials inventory is not sufficient information to assist in the calculatation
cost of goods manufactured, nor is units of production. WIP inventory is necessary.
CPA-04024
Type1 M/C
229. CPA-04024
A-D
D96 - 1.09
Corr Ans: C
PM#74
B 5-99
Page 99
Karmee Company has been accumulating operating data in order to prepare an annual profit plan.
Details regarding Karmee's sales for the first six months of the coming year are as follows.
Estimated Monthly Sales
January
$600,000
Type of Monthly Sale
Cash sales
20%
133
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
February
March
April
May
June
650,000
700,000
625,000
720,000
800,000
Credit sales
80%
Collection Pattern for Credit Sales
Month of sale
30%
One month following sale
40%
Second month following sale
25%
Karmee's cost of goods sold average 40 percent of the sales value. Karmee's objective is to maintain a
target inventory equal to 30 percent of the next month's sales. Purchases of merchandise for resale are
paid for in the month following the sale.
The variable operating expenses (other than cost of goods sold) for Karmee are 10 percent of sales and
are paid for in the month following the sale. The annual fixed operating expenses are presented below.
All of these are incurred uniformly throughout the year and paid monthly except for insurance and
property taxes. Insurance is paid quarterly in January, April, July, and October. Property taxes are paid
twice a year in April and October.
Annual Fixed Operating Costs
Advertising
$ 720,000
Depreciation
420,000
Insurance
180,000
Property taxes
240,000
Salaries
1,080,000
The amount for cost of goods sold that will appear on Karmee Company's pro forma income statement for
the month of February will be:
a.
b.
c.
d.
$254,000
$266,000
$260,000
$272,000
CPA-04024
Explanation
Choice "c" is correct. $260,000. Cost of goods sold for February:
Estimated sales
Cost%
Cost of sales
$650,000
40%
$260,000
Choices "a", "b", and "d" are incorrect, per the above calculation.
CPA-04030
Type1 M/C
230. CPA-04030
A-D
D96 - 1.07
Corr Ans: B
PM#75
B 5-99
Page 102
Karmee Company has been accumulating operating data in order to prepare an annual profit plan.
Details regarding Karmee's sales for the first six months of the coming year are as follows.
Estimated Monthly Sales
January
$600,000
February
650,000
March
700,000
April
625,000
May
720,000
June
800,000
Type of Monthly Sale
Cash sales
20%
Credit sales
80%
134
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Collection Pattern for Credit Sales
Month of sale
30%
One month following sale
40%
Second month following sale
25%
Karmee's cost of goods sold average 40 percent of the sales value. Karmee's objective is to maintain a
target inventory equal to 30 percent of the next month's sales. Purchases of merchandise for resale are
paid for in the month following the sale.
The variable operating expenses (other than cost of goods sold) for Karmee are 10 percent of sales and
are paid for in the month following the sale. The annual fixed operating expenses are presented below.
All of these are incurred uniformly throughout the year and paid monthly except for insurance and
property taxes. Insurance is paid quarterly in January, April, July, and October. Property taxes are paid
twice a year in April and October.
Annual Fixed Operating Costs
Advertising
$ 720,000
Depreciation
420,000
Insurance
180,000
Property taxes
240,000
Salaries
1,080,000
Karmee Company's total cash receipts for the month of April will be:
a.
b.
c.
d.
$504,000
$629,000
$653,000
$665,400
CPA-04030
Explanation
Choice "b" is correct. 629,000 cash receipts for April:
April cash sales $625,000 × 20% =
Credit sales collected − April − $625,000 × 80% × 30% =
March − $700,000 × 80% × 40% =
February − $650,000 × 80% × 25% =
Total
$125,000
150,000
224,000
130,000
$629,000
Choices "a", "c", and "d" are incorrect, per the above calculation.
CPA-04039
Type1 M/C
231. CPA-04039
A-D
J97 - 1.17
Corr Ans: D
PM#76
B 5-99
Page 55
Which one of the following statements regarding selling and administrative budgets is most accurate?
a. Selling and administrative budgets are fixed in nature.
b. Selling and administrative budgets are difficult to allocate by month and are best presented as one
number for the entire year.
c. Selling and administrative budgets should be a certain percentage of sales, and should be developed
using a bottom-up approach.
d. Selling and administrative budgets need to be detailed in order that the key assumptions can be
better understood.
CPA-04039
Explanation
Choice "d" is correct. Selling and administrative budgets, like any budgets, need to be detailed in order
that the key assumptions are better understood.
Choice "a" is incorrect. Selling and administrative budgets are not fixed in nature; they generally are
related to sales volume.
135
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "b" is incorrect. Selling and administrative budgets are usually based on sales and easy to
allocate by month.
Choice "c" is incorrect. Selling and administrative budgets are often, but not always, a percentage of
sales. When a fixed percentage is used, it is usually determined by top management.
CPA-04040
Type1 M/C
232. CPA-04040
A-D
J93 - 1.10
Corr Ans: D
PM#77
B 5-99
Page 55
A firm develops an annual cash budget in order to:
a. Support the preparation of its cash flow statement for the annual report.
b. Ascertain which capital expenditure projects are feasible and which capital expenditure projects
should be deferred.
c. Balance the noncash and cash activities of the company.
d. Avoid the opportunity costs of noninvested excess cash and minimize the cost of interim financing.
CPA-04040
Explanation
Choice "d" is correct. The main reason for preparing a cash budget is to anticipate cash flows so that
excess cash can be invested and to minimize the need for interim financing.
Choices "a" and "c" are incorrect. A budget would not be used to support the statement of cash flows or
balance noncash and cash activities of the company (which are based on actual uses of cash, not
budgeted).
Choice "b" is incorrect. Capital projects often require the use of various types of financing. The annual
cash budget, while it considers these issues in determining the amount of external financing to obtain, is
not specifically developed to ascertain which capital expenditure projects are feasible, etc. The capital
expenditure budget must be done before the cash budget can be prepared.
CPA-04041
Type1 M/C
233. CPA-04041
A-D
D93 - 1.06
Corr Ans: C
PM#78
B 5-99
Page 94
Midwest Fabricators is building a corporate planning model to predict cash flows. The company
maintains end-of-the-month inventories that cover 20 percent of the following month's sales.
Merchandise costs average 55 percent of selling prices, and payment is made at the time of purchase. If
Sn = sales in month n, an appropriate notation for total monthly cash payments for merchandise
purchases would be:
a.
b.
c.
d.
0.11Sn + 1
0.11Sn − 1
0.44Sn + 0.11Sn + 1
0.44Sn + 0.11Sn − 1
CPA-04041
Explanation
Choice "c" is correct. 0.445n + 0.11Sn + 1
Monthly Cash
Payments
=
Cost Complement =
Monthly Cash
Payments
80% for current month's sales
+ 20% for next month's sales
55%
=
(80% × 55%) Sn + (20% × 55%) Sn + 1
=
0.445Sn + 0.11Sn + 1
Choices "a", "b", and "d" are incorrect, per the above calculation.
136
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-04043
Type1 M/C
234. CPA-04043
A-D
J94 - 3A
Corr Ans: C
PM#79
B 5-99
Page 102
The cash budget is a useful tool in the planning process. Which of the following is not a true statement
relating to the preparation of a cash budget?
a. The cash budget is usually broken down into monthly periods.
b. The cash budget shows itemized cash receipts and disbursements during the period, including the
financing activities and the beginning and ending cash balances.
c. The cash budget is typically done before all other budgets.
d. The cash budget alerts management to periods when there will be excess cash available for
investment.
CPA-04043
Explanation
Choice "c" is correct. The cash budget is done after all budgets have been prepared.
Choices "a", "b", and "d" are incorrect. They are all true.
CPA-04045
Type1 M/C
235. CPA-04045
A-D
J94 - 3B
Corr Ans: B
PM#80
B 5-99
Page 57
The cash budget provides management with information. Which of the following is not an example of
information a cash budget provides?
a.
b.
c.
d.
Availability of funds for distribution to owners.
The need for internal financing.
Availability of funds for the repayment of debt.
Availability of funds for investment purposes.
CPA-04045
Explanation
Choice "b" is correct. The cash budget provides information concerning the need for external financing,
not internal financing.
Choices "a", "c", and "d" are incorrect. They are all examples of information a cash budget provides.
CPA-04047
Type1 M/C
236. CPA-04047
A-D
D94 - 1.07
Corr Ans: D
PM#81
B 5-99
Page 103
Super Drive, a computer disk storage and back-up company, uses accrual accounting. The company's
Statement of Financial Position for the year ended November 30, 1994, is shown below.
Super Drive
Statement of Financial Position
November 30, 1994
Assets
Cash
Accounts receivable, net
Inventory
Property, plant, and equipment
Total assets
$
52,000
150,000
315,000
1,000,000
$1,517,000
Liabilities
Accounts payable
Common stock
Retained earnings
Total liabilities and shareholders' equity
$ 175,000
900,000
$ 442,000
$1,517,000
137
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Additional information regarding Super Drive's operations includes the following.
• Sales are budgeted at $520,000 for December 1994 and $500,000 for January 1995.
• Collections are expected to be 60 percent in the month of sale and 40 percent in the month following
the sale.
• Eighty percent of the disk drive components are purchased in the month prior to the month of sale, and
20 percent are purchased in the month of sale. Purchased components comprise 40 percent of the
cost of goods sold.
• Payment for the components is made in the month following the purchase.
• Cost of goods sold is 80 percent of sales.
The budgeted cash collections for the month of December 1994 are:
a.
b.
c.
d.
$520,000
$402,000
$312,000
$462,000
CPA-04047
Explanation
Choice "d" is correct. $462,000 cash collections for December 1994:
December sales $520,000 × 60% =
November sales (11/30 AR)
Cash collections for December
$312,000
150,000
$462,000
Note: The November sales were 60% collected in November. The remaining 40% ($150,000 net) will be
collected in December.
Choices "a", "b", and "c" are incorrect, per the above calculation.
CPA-04054
Type1 M/C
237. CPA-04054
A-D
D94 - 1.08
Corr Ans: A
PM#82
B 5-99
Page 103
Super Drive, a computer disk storage and back-up company, uses accrual accounting. The company's
Statement of Financial Position for the year ended November 30, 1994, is shown below.
Super Drive
Statement of Financial Position
November 30, 1994
Assets
Cash
Accounts receivable, net
Inventory
Property, plant, and equipment
Total assets
$
52,000
150,000
315,000
1,000,000
$1,517,000
Liabilities
Accounts payable
Common stock
Retained earnings
Total liabilities and shareholders' equity
$ 175,000
900,000
$ 442,000
$1,517,000
Additional information regarding Super Drive's operations includes the following.
• Sales are budgeted at $520,000 for December 1994 and $500,000 for January 1995.
• Collections are expected to be 60 percent in the month of sale and 40 percent in the month following
the sale.
138
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
• Eighty percent of the disk drive components are purchased in the month prior to the month of sale, and
20 percent are purchased in the month of sale. Purchased components comprise 40 percent of the
cost of goods sold.
• Payment for the components is made in the month following the purchase.
• Cost of goods sold is 80 percent of sales.
The projected balance in accounts payable on December 31, 1994, is:
a.
b.
c.
d.
$161,280
$326,400
$165,120
$403,200
CPA-04054
Explanation
Choice "a" is correct. $161,280 projected accounts payable on 12/31/94:
Dec
$520,000
80%
416,000
40%
166,400
20%
$ 33,280
Budgeted sales
Cost of goods %
Cost of goods sold
Purchased %
Purchased components
20% current month, 80% prior month
Payable at 12/31/94
Jan
$500,000
80%
400,000
40%
160,000
80%
$128,000
$33,280 + $128,000 = $161,280
Choices "b", "c", and "d" are incorrect, per the above calculation.
CPA-04064
Type1 M/C
238. CPA-04064
A-D
D94 - 1.09
Corr Ans: B
PM#83
B 5-99
Page 17
Super Drive, a computer disk storage and back-up company, uses accrual accounting. The company's
Statement of Financial Position for the year ended November 30, 1994, is shown below.
Super Drive
Statement of Financial Position
November 30, 1994
Assets
Cash
Accounts receivable, net
Inventory
Property, plant, and equipment
Total assets
$
52,000
150,000
315,000
1,000,000
$1,517,000
Liabilities
Accounts payable
Common stock
Retained earnings
Total liabilities and shareholders' equity
$ 175,000
900,000
$ 442,000
$1,517,000
Additional information regarding Super Drive's operations includes the following.
• Sales are budgeted at $520,000 for December 1994 and $500,000 for January 1995.
• Collections are expected to be 60 percent in the month of sale and 40 percent in the month following
the sale.
139
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
• Eighty percent of the disk drive components are purchased in the month prior to the month of sale, and
20 percent are purchased in the month of sale. Purchased components comprise 40 percent of the
cost of goods sold.
• Payment for the components is made in the month following the purchase.
• Cost of goods sold is 80 percent of sales.
The projected gross profit for the month ending December 31, 1994, is:
a.
b.
c.
d.
$416,000
$104,000
$134,000
$0
CPA-04064
Explanation
Choice "b" is correct. $104,000 gross profit for December 1994:
Projected sales
Cost of goods sold
Gross profit
%
100%
80%
20%
Amount
$520,000
(416,000)
$104,000
Choices "a", "c", and "d" are incorrect, per the above calculation.
CPA-04070
Type1 M/C
239. CPA-04070
A-D
J95 - 1.21
Corr Ans: B
PM#84
B 5-99
Page 103
KAB, Inc., a small retail store, had the following results of operations for May 1995. The budget for June
and July 1995 are also given.
Sales
Cost of sales
Gross margin
Other cash expenses
Operating income
May
$ 42,000
( 21,000)
21,000
( 20,000)
$ 1,000
June
$ 40,000
( 20,000)
20,000
( 20,000)
$
0
July
$ 45,000
( 22,500)
22,500
( 20,000)
$ 2,500
Sales are collected 80 percent in the month of the sale and the balance in the month following the sale.
The goods contained in cost of sales were purchased in the month prior to the month of sale, and vendor
payment is in the month following the sale. All other cash expenses are paid in the month of the sale.
The amount of cash collected during the month of June 1995 will be:
a.
b.
c.
d.
$40,000
$40,400
$41,000
$41,600
CPA-04070
Explanation
Choice "b" is correct. $40,400 cash collected during June 1995:
June sales − $40,000 × 80% collected in mo. of sale
May sales − $42,000 × 20% collected 1 month later
Total cash collected in June
=
=
$32,000
8,400
$ 40,400 B
Choices "a", "c", and "d" are incorrect, per the above calculation.
140
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Lecture: Business 5
CPA-04085
Type1 M/C
240. CPA-04085
A-D
J95 - 1.22
Corr Ans: C
PM#85
B 5-99
Page 103
KAB, Inc., a small retail store, had the following results of operations for May 1995. The budget for June
and July 1995 are also given.
May
$42,000
21,000
21,000
20,000
$ 1,000
Sales
Cost of sales
Gross margin
Other cash expenses
Operating income
June
$40,000
20,000
20,000
20,000
$
0
July
$45,000
22,500
22,500
20,000
$ 2,500
Sales are collected 80 percent in the month of the sale and the balance in the month following the sale.
The goods contained in cost of sales were purchased in the month prior to the month of sale, and vendor
payment is in the month following the sale. All other cash expenses are paid in the month of the sale.
Cash disbursements for KAB, Inc. for the month of June 1995 will be:
a.
b.
c.
d.
$20,000
$40,000
$41,000
$42,500
CPA-04085
Explanation
Choice "c" is correct. $41,000 cash disbursements during June 1995:
May cost of sales (paid 1 month later)
June other cash expenses (paid in month of sale)
Total disbursements in June 1995
$21,000
20,000
$41,000 C
Choices "a", "b", and "d" are incorrect, per the above calculation.
CPA-04094
Type1 M/C
241. CPA-04094
A-D
J96 - 1.06
Corr Ans: D
PM#86
B 5-99
Page 102
The cash receipts budget includes:
a.
b.
c.
d.
Funded depreciation.
Extinguishment of debt.
Interest expense.
Loan proceeds.
CPA-04094
Explanation
Choice "d" is correct. The cash receipts budget includes loan proceeds.
Choices "a", "b", and "c" are incorrect. All of these would be cash disbursements.
CPA-04095
Type1 M/C
242. CPA-04095
A-D
J96 - 1.08
Corr Ans: B
PM#87
B 5-99
Page 57
The cash budget must be prepared before you can complete the:
a.
b.
c.
d.
Capital expenditure budget.
Forecasted balance sheet.
Production budget.
Forecasted income statement.
CPA-04095
Explanation
141
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "b" is correct. The cash budget must be prepared before you can complete the forecasted
balance sheet.
Choice "a" is incorrect. The capital expenditure budget must be done before the cash budget.
Choice "c" is incorrect. The production budget must be done before purchases, labor and overhead
budgets can be prepared, all of which impact the cash budget.
Choice "d" is incorrect. The forecasted income statement may be prepared before the cash budget.
CPA-04097
Type1 M/C
243. CPA-04097
A-D
J96 - 1.09
Corr Ans: A
PM#88
B 5-99
Page 103
Trumbull Company budgeted sales on account of $120,000 for July, $211,000 for August, and $198,000
for September. Collection experience indicates that 60 percent of the budgeted sales will be collected the
month after the sale, 36 percent the second month, and 4 percent will be uncollectible. The cash receipts
from accounts receivable that should be budgeted for September would be:
a.
b.
c.
d.
$169,800
$147,960
$197,880
$194,760
CPA-04097
Explanation
Choice "a" is correct. $169,800 cash receipts budgeted for September:
July sales:
Aug. Sales:
$120,000 × 36%
$211,000 × 60%
=
=
$ 43,200
126,600
$169,800 A
Choices "b", "c", and "d" are incorrect, per the above calculation.
CPA-04098
Type1 M/C
244. CPA-04098
A-D
D96 - 1.06
Corr Ans: C
PM#89
B 5-99
Page 57
Karmee Company has been accumulating operating data in order to prepare an annual profit plan.
Details regarding Karmee's sales for the first six months of the coming year are as follows.
Estimated Monthly Sales
January
$600,000
February
650,000
March
700,000
April
625,000
May
720,000
June
800,000
Type of Monthly Sale
Cash sales
20%
Credit sales
80%
Collection Pattern for Credit Sales
Month of sale
30%
One month following sale
40%
Second month following sale
25%
Karmee's cost of goods sold average 40 percent of the sales value. Karmee's objective is to maintain a
target inventory equal to 30 percent of the next month's sales. Purchases of merchandise for resale are
paid for in the month following the sale.
The variable operating expenses (other than cost of goods sold) for Karmee are 10 percent of sales and
are paid for in the month following the sale. The annual fixed operating expenses are presented below.
142
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
All of these are incurred uniformly throughout the year and paid monthly except for insurance and
property taxes. Insurance is paid quarterly in January, April, July, and October. Property taxes are paid
twice a year in April and October.
Annual Fixed Operating Costs
Advertising
$ 720,000
Depreciation
420,000
Insurance
180,000
Property taxes
240,000
Salaries
1,080,000
The amount of cash collected in March for Karmee Company from the sales made during March will be:
a.
b.
c.
d.
$140,000
$210,000
$308,000
$350,000
CPA-04098
Explanation
Choice "c" is correct. $308,000 cash collected in March from March sales:
Cash sales ($700,000 × 20% =)
Credit sale collections ($700,000 × 80% × 30% =)
Total
$140,000
168,000
$308,000
Choices "a", "b", and "d" are incorrect, per the above calculation.
CPA-04100
Type1 M/C
245. CPA-04100
A-D
D96 - 1.10
Corr Ans: C
PM#90
B 5-99
Page 103
Karmee Company has been accumulating operating data in order to prepare an annual profit plan.
Details regarding Karmee's sales for the first six months of the coming year are as follows.
Estimated Monthly Sales
January
$600,000
February
650,000
March
700,000
April
625,000
May
720,000
June
800,000
Type of Monthly Sale
Cash sales
20%
Credit sales
80%
Collection Pattern for Credit Sales
Month of sale
30%
One month following sale
40%
Second month following sale
25%
Karmee's cost of goods sold average 40 percent of the sales value. Karmee's objective is to maintain a
target inventory equal to 30 percent of the next month's sales. Purchases of merchandise for resale are
paid for in the month following the sale.
The variable operating expenses (other than cost of goods sold) for Karmee are 10 percent of sales and
are paid for in the month following the sale. The annual fixed operating expenses are presented below.
All of these are incurred uniformly throughout the year and paid monthly except for insurance and
property taxes. Insurance is paid quarterly in January, April, July, and October. Property taxes are paid
twice a year in April and October.
Annual Fixed Operating Costs
Advertising
$ 720,000
Depreciation
420,000
143
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Insurance
Property taxes
Salaries
180,000
240,000
1,080,000
The total cash disbursements that Karmee Company will make for the operating expenses (expenses
other than the cost of goods sold) during the month of April will be:
a.
b.
c.
d.
$290,000
$377,500
$385,000
$420,000
CPA-04100
Explanation
Choice "c" is correct. $385,000. Cash disbursements for April operating expenses:
Variable operating expenses − $700,000 × 10% =
Advertising − $720,000 × 1/12 =
Insurance − $180,000 × 1/4
Property tax − $240,000 × 1/2 =
Salaries − $1,080,000 × 1/12 =
Total
$ 70,000
60,000
45,000
120,000
90,000
$385,000
Note: Variable operating expense disbursements are based on March expenses. Depreciation is a noncash expense.
Choices "a", "b", and "d" are incorrect, per the above calculation.
CPA-04103
Type1 M/C
246. CPA-04103
A-D
D96 - 1.20
Corr Ans: D
PM#91
B 5-99
Page 57
Which one of the following items would have to be included for a company preparing a schedule of cash
receipts and disbursements for the calendar year 1996?
a. A purchase order issued in December 1996 for items to be delivered in February 1997.
b. Dividends declared in November 1996 to be paid in January 1997 to shareholders of record as of
December 1996.
c. The amount of uncollectible customer accounts for 1996.
d. Borrowing funds from a bank on a note payable taken out in June 1996 and agreeing to pay the
principal and interest in June 1997.
CPA-04103
Explanation
Choice "d" is correct. Borrowing funds on a note in June 1996 would be a cash inflow in 1996 and would
have to be included in a schedule of cash receipts and disbursements for 1996. The repayment would be
a cash outflow in 1997.
Choice "a" is incorrect. A purchase order is a commitment, but not a cash event.
Choice "b" is incorrect. Dividends declared are a non-cash item until paid in 1997.
Choice "c" is incorrect. Uncollectible accounts are a non-cash item.
CPA-04105
Type1 M/C
247. CPA-04105
A-D
J97 - 1.18
Corr Ans: C
PM#92
B 5-99
Page 102
Historically, Pine Hill Wood Products has had no significant bad debt experience with its customers.
Cash sales have accounted for ten percent of total sales and payments for credit sales have been
received as follows.
40% of credit sales in the month of the sale.
144
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
30% of credit sales in the first subsequent month.
25% of credit sales in the second subsequent month.
5% of credit sales in the third subsequent month.
The forecast for both cash and credit sales is as follows.
Month
January
February
March
April
May
Sales
$95,000
65,000
70,000
80,000
85,000
What is the forecasted cash inflow for Pine Hill Wood Products for May?
a.
b.
c.
d.
$70,875
$76,500
$79,375
$82,100
CPA-04105
Explanation
Choice "c" is correct. $79,375 cash inflow for May:
Cash sales − $85,000 × 10% =
Collection Of Credit Sales:
$ 8,500
May
$85,000 × 90% × 40% =
Apr
$80,000 × 90% × 30% =
Mar
$70,000 × 90% × 25% =
Feb
$65,000 × 90% × 5% =
Total cash inflow for May
30,600
21,600
15,750
2,925
$79,375
Choices "a", "b", and "d" are incorrect, per the above calculation.
CPA-04107
Type1 M/C
248. CPA-04107
A-D
J97 - 1.19
Corr Ans: C
PM#93
B 5-99
Page 90
Historically, Pine Hill Wood Products has had no significant bad debt experience with its customers.
Cash sales have accounted for ten percent of total sales and payments for credit sales have been
received as follows.
40% of credit sales in the month of the sale.
30% of credit sales in the first subsequent month.
25% of credit sales in the second subsequent month.
5% of credit sales in the third subsequent month.
The forecast for both cash and credit sales is as follows.
Month
January
February
March
April
May
Sales
$95,000
65,000
70,000
80,000
85,000
Due to deteriorating economic conditions, Pine Hill Wood Products has now decided that its cash forecast
should include a bad debt adjustment of two percent of credit sales, beginning with sales for the month of
April. Because of this policy change, the total expected cash inflow related to sales made in April will:
145
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
a.
b.
c.
d.
Decrease by $1,210.50.
Decrease by $1,345.00.
Decrease by $1,440.00.
Decrease by $1,600.00.
CPA-04107
Explanation
Choice "c" is correct. Cash inflow related to sales made in April will decrease by $1,440.00:
April total sales
Credit sales percentage
Credit sales
Bad debt estimate
Decrease in collections
$80,000
90%
72,000
×
2%
$ 1,440
Choices "a", "b", and "d" are incorrect, per the above calculation.
CPA-04110
Type1 M/C
249. CPA-04110
A-D
D92 - 1.10
Corr Ans: D
PM#94
B 5-99
Page 106
Pro forma financial statements are part of the budgeting process. Normally, the last pro forma statement
prepared is:
a.
b.
c.
d.
Capital expenditure plan.
Income statement.
Statement of cost of goods sold.
Statement of cash flows.
CPA-04110
Explanation
Choice "d" is correct. The statement of cash flows is usually the last pro forma statement prepared. This
is because everything affects cash. Only when everything else has been estimated can cash flow be
projected.
Choices "a", "b", and "c" are incorrect, per the above explanation.
CPA-04112
Type1 M/C
250. CPA-04112
A-D
J96 - 1.13
Corr Ans: B
PM#95
B 5-99
Page 49
The first step in the sales planning process is to:
a. Assemble all the data that are relevant in developing a comprehensive sales plan.
b. Develop management guidelines specific to sales planning, including the sales planning process and
planning responsibilities.
c. Prepare a sales forecast consistent with specified forecasting guidelines, including assumptions.
d. Apply management evaluation and judgment to develop a comprehensive sales plan.
CPA-04112
Explanation
Choice "b" is correct. The first step in the sales planning process is to develop management guidelines
specific to sales planning, including the sales planning process and planning responsibilities.
Choice "a" is incorrect. While this has appeal because it is nonspecific, it is not correct because you
cannot assemble the needed data until you know what data is needed. Furthermore, until responsibilities
are assigned, it is unclear who will gather what data.
Choice "c" is incorrect. A sales forecast consistent with specified guidelines cannot be gathered until the
guidelines are developed.
Choice "d" is incorrect. Management cannot judge and evaluate a sales plan until the guidelines for the
plan have been developed.
146
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Lecture: Business 5
CPA-04113
Type1 M/C
251. CPA-04113
A-D
D89 - 3.4
Corr Ans: D
PM#96
B 5-99
Page 57
The benefits a company could realize from improved cash budgeting include:
I.
Displaying the cash effects of the master budget on the actual cash inflows and outflows from
operations.
II. Determining when additional sources of financing (either short-term or long-term) are necessary and
planning cash expenditures with cash availability.
III. The optimal use of trade credit.
a.
b.
c.
d.
I and II.
II and III.
I and III.
I, II, and III.
CPA-04113
Explanation
Choice "d" is correct. I, II, and III.
Choices "a", "b", and "c" are incorrect, per above.
CPA-04114
Type1 M/C
252. CPA-04114
A-D
D92 - 1.07
Corr Ans: A
PM#97
B 5-99
Page 57
In developing a comprehensive profit planning and control system, the best chronological order of
significant components of the system is to develop:
a. Long-range goals and objectives, long-range profit plan, short-range profit plan, and then establish a
system of performance reports.
b. Long-range profit plan, system of performance reports, short-range profit plan, and then long-range
goals and objectives.
c. System of performance reports, long-range profit plan, long-range goals and objectives, and the
short-range profit plan.
d. Long-range profit plan, long-range goals and objectives, system of performance reports, and shortrange profit plan.
CPA-04114
Explanation
Choice "a" is correct. Long-range objectives, including a long-range profit plan, must be set before shortrange objectives and profit plans can be made. Once short-range tactics and profit plans are set, a
system of performance reporting can be established.
Choices "b", "c", and "d" are incorrect, per above.
CPA-04115
Type1 M/C
253. CPA-04115
A-D
J94 - 1.10
Corr Ans: D
PM#98
B 5-99
Page 56
The financial budget process includes:
a.
b.
c.
d.
The cash budget.
The budgeted statement of cash flows.
The budgeted balance sheet.
All of the above.
CPA-04115
Explanation
Choice "d" is correct. All of the above.
The financial budget process includes:
147
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
1. Cash and capital purchases budgets.
2. Balance sheet and statement of cash flows.
The operating budget process includes:
1. All budgets except cash and capital purchases.
2. The pro forma income statement.
Choices "a", "b", and "c" are incorrect, per the above explanation.
CPA-04117
Type1 M/C
254. CPA-04117
A-D
D95 - 1.17
Corr Ans: C
PM#99
B 5-99
Page 106
When preparing the series of annual operating budgets, management usually starts the process with the:
a.
b.
c.
d.
Balance sheet.
Capital budget.
Sales budget.
Production budget.
CPA-04117
Explanation
Choice "c" is correct. The budgeting process usually begins with the sales budget.
Choices "a", "b", and "d" are incorrect, per the master budget flow chart:
148
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-04118
Type1 M/C
255. CPA-04118
A-D
D96 - 1.13
Corr Ans: B
PM#100
B 5-99
Page 106
Which one of the following items should be done first when developing a comprehensive budget for a
manufacturing company?
a.
b.
c.
d.
Determination of the advertising budget.
Development of a sales budget.
Determination of equipment acquisitions.
Preparation of a pro forma income statement.
CPA-04118
Explanation
Choice "b" is correct. The first step in developing a comprehensive budget is development of a sales
budget.
Choice "a" is incorrect. An advertising budget is usually based on sales.
149
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "c" is incorrect. Determination of equipment acquisitions is part of the capital budget.
Choice "d" is incorrect. Preparation of a pro forma income statement is one of the last steps in a
comprehensive budget.
CPA-04121
Type1 M/C
256. CPA-04121
A-D
D96 - 1.15
Corr Ans: A
PM#101
B 5-99
Page 106
Which one of the following items is the last schedule to be prepared in the normal budget preparation
process?
a.
b.
c.
d.
Cash budget.
Cost of goods sold budget.
Manufacturing overhead budget.
Selling expense budget.
CPA-04121
Explanation
Choice "a" is correct. When preparing a budget, the last schedule to be prepared is the cash budget.
Sometimes, pro forma accrual financial statements are prepared after this last schedule.
Choices "b", "c", and "d" are incorrect. The cost of good sold budget, direct labor budget, manufacturing
overhead budget, and selling expense budget are all intermediate steps in the budgeting process.
150
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Lecture: Business 5
CPA-04122
Type1 M/C
257. CPA-04122
A-D
J97 - 1.16
Corr Ans: D
PM#102
B 5-99
Page 106
After the goals of the company have been established and communicated, the next step in the planning
process would be the development of the:
a.
b.
c.
d.
Production budget.
Capital expenditure budget.
Selling and administrative budget.
Sales budget.
CPA-04122
Explanation
Choice "d" is correct. The sales budget is usually the first budget prepared.
Choice "a" is incorrect. The production budget is based on the sales budget, with adjustment for any
changes in planned inventory levels.
Choice "b" is incorrect. The capital expenditure budget is developed independently but must take into
account the cash available.
Choice "c" is incorrect. The selling and administrative budget is based on the sales budget.
CPA-04123
Type1 M/C
258. CPA-04123
A-D
A97 - 1.90
Corr Ans: D
PM#103
B 5-99
Page 73
Often a manager cannot wait for accounting reports to make necessary changes. Which of the following
steps might a manager take to analyze the performance of a production line?
a.
b.
c.
d.
Physical observations of the process.
Measurements of percentage of defects.
Measurements of production schedule attainment.
All of the above.
CPA-04123
Explanation
Choice "d" is correct. A good production manager who is knowledgeable of the process will closely
observe it to identify defects, attainment of production schedule and take other such measurements as
needed to evaluate the performance of a line. Additional measurements might include overtime usage,
scrap rates, downtime, etc.
Choices "a", "b", and "c" are incorrect. They are all suitable steps to take in performance evaluation.
CPA-04124
Type1 M/C
259. CPA-04124
A-D
A97 - 1.91
Corr Ans: A
PM#104
B 5-99
Page 75
Which of the following is a true statement regarding nonfinancial measures of a process?
a.
b.
c.
d.
They are best viewed as attention directors.
They are best viewed as problem solvers.
They are an effective substitute for financial measures.
All of the above are true.
CPA-04124
Explanation
Choice "a" is correct. Nonfinancial measures are an effective way to observe problems as they occur.
Thus, some action can be taken prior to the release of financial information.
Choice "b" is incorrect. While nonfinancial measures are good at directing management to a problem,
they often do not serve as good problem solvers.
Choice "c" is incorrect. Nonfinancial measures are a good complement to financial measures but they are
not a substitute.
151
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Lecture: Business 5
Choice "d" is incorrect, per above.
CPA-04126
Type1 M/C
260. CPA-04126
A-D
A97 - 1.93
Corr Ans: B
PM#105
B 5-99
Page 73
Which of the following will most likely encourage the use of nonfinancial measures by a manager?
a.
b.
c.
d.
Tying incentives to the overall profit of the firm.
Tying incentives to the manager's individual effort.
Tying incentives to the salary level of the manager.
All of the above can be equally effective.
CPA-04126
Explanation
Choice "b" is correct. Managers are more likely to react to incentives where the manager can control the
outcome. They therefore have less risk to them.
Choice "a" is incorrect. Tying incentives to the overall profit of the firm means the individual manager has
less control of the outcome and may not be as motivated.
Choice "c" is incorrect. While a bonus on salary is often very effective, tying the bonus to the salary often
makes persons in lower paying jobs feel they are being treated unfairly and that their supervisor will reap
the rewards of their hard work.
Choice "d" is incorrect, per above.
CPA-04127
Type1 M/C
261. CPA-04127
A-D
A92 - 1.38
Corr Ans: A
PM#106
B 5-99
Page 58
A budget that accommodates many levels of production volume is a:
a.
b.
c.
d.
Flexible budget.
Zero based budget.
Cash budget.
Sales budget.
CPA-04127
Explanation
Choice "a" is correct. A flexible budget has fixed and variable components and can accommodate many
levels of production.
Choice "b" is incorrect. Zero-based budgeting requires justification of all expenditures each year.
Choice "c" is incorrect. Cash budgets are done after all other budgets are completed; it budgets cash
flow.
Choice "d" is incorrect. Sales budgets don't forecast production.
CPA-04128
Type1 M/C
262. CPA-04128
A-D
D92 - 1.14
Corr Ans: B
PM#107
B 5-99
Page 60
When preparing a performance report for a cost center using flexible budgeting techniques, the "planned
cost" column should be based on the:
a.
b.
c.
d.
Budgeted amount in the original budget prepared before the beginning of the year.
Budget adjusted to the actual level of activity for the period being reported.
Budget adjusted to the planned level of activity for the period being reported.
Costs incorporated in the master budget.
CPA-04128
Explanation
Choice "b" is correct. Planned cost using a flexible budget is adjusted to the actual level of activity.
152
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choices "a", "c", and "d" are incorrect, per the above explanation.
CPA-04132
Type1 M/C
263. CPA-04132
A-D
D95 - 1.10
Corr Ans: B
PM#108
B 5-99
Page 58
Which one of the following statements regarding the difference between a flexible budget and a static
budget is correct?
a. A flexible budget primarily is prepared for planning purposes while a static budget is prepared for
performance evaluation.
b. A flexible budget provides cost allowances for different levels of activity whereas a static budget
provides costs for one level of activity.
c. A flexible budget includes only variable costs whereas a static budget includes only fixed costs.
d. A flexible budget is established by operating management while a static budget is determined by top
management.
CPA-04132
Explanation
Choice "b" is correct. A flexible budget provides cost allowances (adjustments) for different levels of
activity. A static budget provides costs for one level of activity.
Choice "a" is incorrect. Both types of budgets are used for planning. A flexible budget is better than a
static budget for performance evaluation since it can be adjusted to the actual production level.
Choice "c" is incorrect. Both flexible and static budgets include both variable and fixed costs.
Choice "d" is incorrect. Both flexible and static budgets can be prepared at any level of management.
CPA-04133
Type1 M/C
264. CPA-04133
A-D
D95 - 1.24
Corr Ans: D
PM#109
B 5-99
Page 61
Based on past experience, a company has developed the following budget formula for estimating its
shipping expenses. The company's shipments average 12 pounds per shipment.
Shipping costs = $16,000 + ($0.50 × pounds shipped)
The planned activity and actual activity regarding orders and shipments for the current month are given in
the following schedule.
Sales orders
Shipments
Units shipped
Sales
Total pounds shipped
Plan
800
800
8,000
$120,000
9,600
Actual
780
820
9,000
$144,000
12,300
The actual shipping costs for the month amounted to $21,000. The appropriate monthly flexible budget
allowance for shipping costs for the purpose of performance evaluation would be:
a.
b.
c.
d.
$20,920
$20,800
$21,000
$22,150
CPA-04133
Explanation
Choice "d" is correct. $22,150 monthly flexible budget allowance for shipping costs:
$16,000 + ($0.50 × 12,300 pounds shipped)
$16,000 + $6,150 = $22,150
153
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Lecture: Business 5
Choices "a", "b", and "c" are incorrect, per the above calculation.
CPA-04135
Type1 M/C
265. CPA-04135
A-D
J96 - 1.14
Corr Ans: D
PM#110
B 5-99
Page 61
Comparing actual results with a budget based on achieving volume is possible with the use of a:
a.
b.
c.
d.
Step budget.
Master budget.
Rolling budget.
Flexible budget.
CPA-04135
Explanation
Choice "d" is correct. A flexible budget allows comparison of actual results with a budget based on
achieved volume. The flexible nature of this type of budget allows adjustment to the actual volume.
Choice "a" is incorrect. Step budget is a distractor.
Choice "b" is incorrect. A master budget is comprehensive and consists of many small budgets.
Choice "c" is incorrect. A rolling or continuous budget continuously adds a future period so that a time
period (often a year) is always projected into the future.
CPA-04137
Type1 M/C
266. CPA-04137
A-D
A97 - 1.100
Corr Ans: B
PM#111
B 5-99
Page 58
Which is the true statement regarding flexible budgets?
a.
b.
c.
d.
They are designed to accommodate changes in the inflation rate.
They are designed to accommodate changes in the activity level.
They are budgets used to evaluate capacity utilization.
They are similar to static budgets but are adjusted for inflation.
CPA-04137
Explanation
Choice "b" is correct. A flexible budget is one where the budgeted amounts are adjusted for the actual
level of activity.
Choice "a" is incorrect. Flexible budgets are adjusted for inflation the same way as static budgets.
Choice "c" is incorrect. Flexible budgets cannot be used to evaluate capacity utilization.
Choice "d" is incorrect. Flexible budgets are not similar to a static budget, which cannot adjust (flex) to
accommodate changes in the activity level.
CPA-04139
Type1 M/C
267. CPA-04139
A-D
J88 - 3A
Corr Ans: D
PM#112
B 5-99
Page 62
In general, the purchasing manager is held responsible for unfavorable material price variances. Causes
of these variances include all of the following, except:
a.
b.
c.
d.
Failure to correctly forecast price increases.
Purchasing nonstandard or uneconomical lots.
Purchasing from suppliers other than those offering the most favorable terms.
Inadequate supervision.
CPA-04139
Explanation
154
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "d" is correct. Inadequate supervision pertains to management of employees, materials, and
equipment by the production manager, and results in material usage variances.
Choices "a", "b", and "c" are incorrect. All of these are causes of unfavorable material price variances.
CPA-04140
Type1 M/C
268. CPA-04140
A-D
J88 - 3B
Corr Ans: D
PM#113
B 5-99
Page 62
In general, the production manager or foreman is held responsible for unfavorable labor efficiency
variances. Causes of these variances include all of the following, except:
a.
b.
c.
d.
Poorly trained labor.
Substandard or inefficient equipment.
Inadequate supervision.
High hourly rates.
CPA-04140
Explanation
Choice "d" is correct. High hourly rates are the responsibility of the Personnel Dept, and pertain to labor
rate variances.
Choices "a", "b", and "c" are incorrect. All of these are causes of unfavorable labor efficiency variances.
CPA-04142
Type1 M/C
269. CPA-04142
A-D
D91 - 1.14
Corr Ans: C
PM#114
B 5-99
Page 70
Folsom Fashions sells a line of women's dresses. Folsom's performance report for November 1991
follows.
Dresses sold
Sales
Variable costs
Contribution margin
Fixed costs
Operating income
Actual
5,000
$235,000
145,000
90,000
84,000
$ 6,000
Budget
6,000
$300,000
180,000
120,000
80,000
$ 40,000
The company uses a flexible budget to analyze its performance and to measure the effect on operating
income of the various factors affecting the difference between budgeted and actual operating income.
The effect of the sales volume variance on the contribution margin for November is:
a.
b.
c.
d.
$30,000 unfavorable.
$18,000 unfavorable.
$20,000 unfavorable.
$15,000 unfavorable.
CPA-04142
Explanation
Choice "c" is correct. $20,000 unfavorable.
Variance in units sold (6,000 − 5,000)
Contribution margin per unit (120,000 ÷ 6,000)
Variance due to sales volume variance
1,000
× $20
$20,000
Choices "a", "b", and "d" are incorrect, per the above calculation.
CPA-04144
Type1 M/C
A-D
Corr Ans: D
PM#115
155
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B 5-99
Becker CPA Review, PassMaster Questions
Lecture: Business 5
270. CPA-04144
D91 - 1.15
Page 72
Folsom Fashions sells a line of women's dresses. Folsom's performance report for November 1991
follows.
Actual
5,000
$235,000
145,000
90,000
84,000
$ 6,000
Dresses sold
Sales
Variable costs
Contribution margin
Fixed costs
Operating income
Budget
6,000
$300,000
180,000
120,000
80,000
$ 40,000
The company uses a flexible budget to analyze its performance and to measure the effect on operating
income of the various factors affecting the difference between budgeted and actual operating income.
The sales price variance for November is:
a.
b.
c.
d.
$30,000 unfavorable.
$18,000 unfavorable.
$20,000 unfavorable.
$15,000 unfavorable.
CPA-04144
Explanation
Choice "d" is correct. $15,000 unfavorable.
Budgeted sales price ($300,000 ÷ 6,000)
Actual sales price ($235,000 ÷ 5,000)
Variance per unit
Actual unit sales
Variance due to sales price
$
50
47
3
× 5,000
$15,000
Choices "a", "b", and "c" are incorrect, per the above calculation.
CPA-04145
Type1 M/C
271. CPA-04145
A-D
J93 - 1.16
Corr Ans: C
PM#116
B 5-99
Page 72
In analyzing company operations, the controller of the Jason Corporation found a $250,000 favorable
flexible-budget revenue variance. The variance was calculated by comparing the actual results with the
flexible budget. This variance can be wholly explained by:
a.
b.
c.
d.
The total flexible budget variance.
The total sales volume variance.
Changes in unit selling prices.
Changes in the number of units sold.
CPA-04145
Explanation
Choice "c" is correct. A revenue variance (also known as a sales price variance) is due to a change in
unit selling prices.
Choice "a" is incorrect. A flexible budget variance deals with costs, not revenues.
Choice "b" is incorrect. A sales volume variance results from a change in the number of units sold. A
flexible budget adjusts for this volume change.
Choice "d" is incorrect. A change in the number of units sold is compensated for by the flex in the flexible
budget.
CPA-04147
Type1 M/C
A-D
Corr Ans: C
PM#117
156
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B 5-99
Becker CPA Review, PassMaster Questions
Lecture: Business 5
272. CPA-04147
D93 - 1.24
Page 64
ChemKing uses a standard costing system in the manufacture of its single product. The 35,000 units of
raw material in inventory were purchased for $105,000, and two units of raw material are required to
produce one unit of final product. In November, the company produced 12,000 units of product. The
standard allowed for material was $60,000, and there was an unfavorable quantity variance of $2,500.
The materials price variance for the units used in November was:
a.
b.
c.
d.
$2,500 unfavorable.
$11,000 unfavorable.
$12,500 unfavorable.
$2,500 favorable.
CPA-04147
Explanation
Choice "c" is correct. $12,500 unfavorable materials price variance.
Standard price per unit $60,000 ÷ 12,000 units =
Actual price per unit $105,000 ÷ 35,000 units =
Unfavorable price variance per unit
Actual units of material
Unfavorable materials price variance
$
2.50
3.00
.50
×25,000
$12,500
From our SAD DADS mnemonics, we know that the material price variance is calculated as follows:
P
=
D
x
A
Price variance
=
Difference in price
x
Actual units
We also know that the difference is "SAD", as follows:
S
-
A
=
D
Actual Amount of Materials Used:
The actual amount of materials used is actually calculated in a separate question (D93-1.23). The
calculated units actually used is 25,000. We know that the usage variance is unfavorable $2,500. So, we
solve for the "difference in usage" as follows:
U
($2,500)
=
=
D
D
($2,500) / $2.50
(1,000)
x
x
=
=
S
$2.50
D
D
So, the unfavorable units used amounted to 1,000. The facts of the question tell us that 12,000 units
were produced in November. At two units of raw materials per unit produced, that’s a standard of 24,000
units of raw materials. Actual units used (S - A = D) are then 25,000 units to produce the unfavorable
usage variance of $2,500 (alternatively, 24,000 standard units plus 1,000 unfavorable units used = 25,000
units used).
Standard units − 12,000 × 2 per unit
Unfavorable quantity variance of %
$2,500 ÷ $2.50 per unit standard
Actual units used to produce non output
=
24,000
=
1,000
25,000
So, we have the "A" amount for the actual amount used.
Standard Cost Per Unit
The standard cost per unit is actually calculated in a separate question (D93-1.22). The calculated
standard cost per unit is $2.50. The standard allowed for the material was $60,000, and 12,000 units
were produced in November. Therefore, the materials cost on the "standard" was $5.00 per unit
157
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
[$60,000/12,000 units]. However, we are told that it takes two units of raw material to make one unit of
completed goods. So, the standard price for one unit of material is $2.50 [$5.00/2].
We have the "S" now.
Final Step
All that is left if to calculate the "D", and the only part of it we need is the actual price per unit paid. We
know that 35,000 units of material was purchased for $105,000, so the actual cost per unit was
$105,000/35,000, or $3.00/unit. Now, we can calculate the "difference" as follows:
S
$2.50
-
A
$3.00
($0.50)
=
=
D
D
=
D
x
x
A
25,000 units
Putting this into the PURE mnemonic, we get the following:
P
P
=
=
P
=
D
($0.50)
($12,500)
NOTE: Typically, the materials price variance is based on units purchased (35,000 in this case);
however, in this case, the question specifically asks for the materials price variance for units USED
(25,000 in this case).
CPA-04149
Type1 M/C
273. CPA-04149
A-D
J94 - 1.20
Corr Ans: C
PM#118
B 5-99
Page 62
Under a standard cost system, the material price variances are usually the responsibility of the:
a.
b.
c.
d.
Production manager.
Cost accounting manager.
Purchasing manager.
Industrial engineering manager.
CPA-04149
Explanation
Choice "c" is correct. The purchasing manager would usually be responsible for a material price
variance.
Choices "a", "b", and "d" are incorrect. All these people have no control over how the price of materials
purchased differs from standard.
CPA-04150
Type1 M/C
274. CPA-04150
A-D
J94 - 1.22
Corr Ans: A
PM#119
B 5-99
Page 62
Under a standard cost system, labor price variances are usually not attributable to:
a.
b.
c.
d.
Union contracts approved before the budgeting cycle.
Labor rate predictions.
The use of a single average standard rate.
The payment of hourly rates instead of prescribed piecework rates.
CPA-04150
Explanation
Choice "a" is correct. Labor price variances would not be attributable to union contracts approved before
the budgeting cycle. If the contracts are approved before, they would be used as the basis for the
budget.
158
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "b" is incorrect. Labor rate predictions, if wrong, will cause a labor price variance.
Choice "c" is incorrect. A single average standard rate will cause variances when compared to actual
rates.
Choice "d" is incorrect. Payment of hourly rates rather than prescribed piecework rates will usually result
in labor price variances. Standards will be based on an amount per piece.
CPA-04152
Type1 M/C
275. CPA-04152
A-D
J94 - 1.23
Corr Ans: D
PM#120
B 5-99
Page 62
A favorable material price variance coupled with an unfavorable material usage variance would most
likely result from:
a.
b.
c.
d.
Machine efficiency problems.
Product mix production changes.
The purchase and use of higher than standard quality material.
The purchase of lower than standard quality material.
CPA-04152
Explanation
Choice "d" is correct. The purchase of lower than standard quality material will often result in an
unfavorable material usage variance (the inferior material causes more waste) and a favorable material
price variance (the inferior material costs less).
Choice "a" is incorrect. Machine efficiency problems would not affect the price variance.
Choice "b" is incorrect. Product mix changes would affect sales volumes, not material price or production
efficiency.
Choice "c" is incorrect. Higher than standard material would likely lead to unfavorable price variances
and favorable efficiency variances.
CPA-04154
Type1 M/C
276. CPA-04154
A-D
D94 - 1.23
Corr Ans: C
PM#121
B 5-99
Page 49
The best basis upon which cost standards should be set to measure controllable production inefficiencies
is:
a.
b.
c.
d.
Normal capacity.
Recent average historical performance.
Engineering standards based on attainable performance.
Practical capacity.
CPA-04154
Explanation
Choice "c" is correct. The best basis for setting standards is engineering standards based on attainable
performance. Tight standards are good, but if unattainable, employees will not be motivated.
Choice "a" is incorrect. Normal capacity may be inefficient.
Choice "b" is incorrect. Historical performance may be poor.
Choice "d" is incorrect. Practical capacity is close, but may be too low to serve as the standard.
CPA-04156
Type1 M/C
277. CPA-04156
A-D
D94 - 1.25
Corr Ans: B
PM#122
Page 62
An unfavorable direct labor efficiency variance could be caused by a(n):
a. Unfavorable variable overhead spending variance.
b. Unfavorable material usage variance.
159
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B 5-99
Becker CPA Review, PassMaster Questions
Lecture: Business 5
c. Unfavorable fixed overhead volume variance.
d. Favorable variable overhead spending variance.
CPA-04156
Explanation
Choice "b" is correct. An unfavorable direct labor efficiency variance could be caused by an unfavorable
material usage variance. Poor quality materials could mean unfavorable material usage and cause
inefficient labor usage.
Choices "a", "c", and "d" are incorrect. Overhead variances would not affect the direct labor variance.
CPA-04158
Type1 M/C
278. CPA-04158
A-D
D94 - 1.28
Corr Ans: A
PM#123
B 5-99
Page 68
Water Control, Inc. manufactures water pumps and uses a standard cost system. The standard factory
overhead costs per water pump are based on direct labor hours and are shown below.
Variable overhead (4 hours at $8/hour)
Fixed overhead (4 hours at $5*/hour)
Total overhead cost per unit
$32
20
$52
*Based on a capacity of 100,000 direct labor hours per month.
The following additional information is available for the month of November.
•
•
•
•
•
•
22,000 pumps were produced although 25,000 had been scheduled for production.
94,000 direct labor hours were worked at a total cost of $940,000.
The standard direct labor rate is $9 per hour.
The standard direct labor time per unit is four hours.
Variable overhead costs were $740,000.
Fixed overhead costs were $540,000.
The variable overhead efficiency variance for November was:
a.
b.
c.
d.
$48,000 unfavorable.
$60,000 favorable.
$96,000 favorable.
$32,000 favorable.
CPA-04158
Explanation
Choice "a" is correct. $48,000 unfavorable variable overhead efficiency variance:
Flexible budget based on actual DL hours: 94,000 × $8/hr.
Flexible budget based on standard DL hours: 22,000 units × $4 hrs/unit × $8/hr.
Unfavorable variance
See the following through method displayed below:
160
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
$752,000
704,000
$ 48,000
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choices "b", "c", and "d" are incorrect, per the above calculation.
CPA-04163
Type1 M/C
279. CPA-04163
A-D
D94 - 1.29
Corr Ans: B
PM#124
B 5-99
Page 67
Water Control, Inc. manufactures water pumps and uses a standard cost system. The standard factory
overhead costs per water pump are based on direct labor hours and are shown below.
Variable overhead (4 hours at $8/hour)
Fixed overhead (4 hours at $5*/hour)
Total overhead cost per unit
$32
20
$52
*Based on a capacity of 100,000 direct labor hours per month.
The following additional information is available for the month of November.
•
•
•
•
•
•
22,000 pumps were produced although 25,000 had been scheduled for production.
94,000 direct labor hours were worked at a total cost of $940,000.
The standard direct labor rate is $9 per hour.
The standard direct labor time per unit is four hours.
Variable overhead costs were $740,000.
Fixed overhead costs were $540,000.
The direct labor price variance for November was:
a.
b.
c.
d.
$54,000 favorable.
$94,000 unfavorable.
$60,000 favorable.
$40,000 unfavorable.
CPA-04163
Explanation
Choice "b" is correct. $94,000 unfavorable direct labor price variance.
Actual labor price − $940,000 ÷ 94,000 hours =
Standard labor price
$ 10 per hr
9 per hr
161
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Variance per hour
Direct labor hours worked
Direct labor price variance - unfavorable
$ 1
× 94,000
$ 94,000
Choices "a", "c", and "d" are incorrect, per the above calculation.
CPA-04164
Type1 M/C
280. CPA-04164
A-D
D94 - 1.30
Corr Ans: C
PM#125
B 5-99
Page 67
Water Control, Inc. manufactures water pumps and uses a standard cost system. The standard factory
overhead costs per water pump are based on direct labor hours and are shown below.
Variable overhead (4 hours at $8/hour)
Fixed overhead (4 hours at $5*/hour)
Total overhead cost per unit
$32
20
$52
*Based on a capacity of 100,000 direct labor hours per month.
The following additional information is available for the month of November.
•
•
•
•
•
•
22,000 pumps were produced although 25,000 had been scheduled for production.
94,000 direct labor hours were worked at a total cost of $940,000.
The standard direct labor rate is $9 per hour.
The standard direct labor time per unit is four hours.
Variable overhead costs were $740,000.
Fixed overhead costs were $540,000.
The direct labor efficiency variance for November was:
a.
b.
c.
d.
$108,000 favorable.
$60,000 favorable.
$54,000 unfavorable.
$60,000 unfavorable.
CPA-04164
Explanation
Choice "c" is correct. $54,000 unfavorable direct labor efficiency variance:
Direct labor hours worked
Standard direct labor hours 22,000 pumps × 4 hours
Excess labor hours
Standard labor rate
Direct labor efficiency variance − Unfavorable
94,000
88,000
6,000
×
$9
$54,000
Choices "a", "b", and "d" are incorrect, per the above calculation.
CPA-04166
Type1 M/C
281. CPA-04166
A-D
J95 - 1.23
Corr Ans: C
PM#126
B 5-99
Page 65
Blaster, Inc., a manufacturer of portable radios, purchases the components from subcontractors to use to
assemble into a complete radio. Each radio requires three units each of Part XBEZ52, which has a
standard cost of $1.45 per unit. During May 1995, Blaster experienced the following with respect to part
XBEZ52.
Purchases ($18,000)
Units
12,000
162
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Consumed in manufacturing
Radios manufactured
10,000
3,000
During May 1995, Blaster Inc. incurred a purchase price variance of:
a.
b.
c.
d.
$450 unfavorable.
$450 favorable.
$600 unfavorable.
$600 favorable.
CPA-04166
Explanation
Choice "c" is correct. $600 unfavorable purchase price variance.
Choices "a", "b", and "d" are incorrect, per the above calculation.
CPA-04168
Type1 M/C
282. CPA-04168
A-D
J95 - 1.24
Corr Ans: A
PM#127
B 5-99
Page 63
Blaster, Inc., a manufacturer of portable radios, purchases the components from subcontractors to use to
assemble into a complete radio. Each radio requires three units each of Part XBEZ52, which has a
standard cost of $1.45 per unit. During May 1995, Blaster experienced the following with respect to part
XBEZ52.
Purchases ($18,000)
Consumed in manufacturing
Radios manufactured
Units
12,000
10,000
3,000
During May 1995, Blaster, Inc. incurred a material efficiency variance of:
a.
b.
c.
d.
$1,450 unfavorable.
$1,450 favorable.
$4,350 unfavorable.
$4,350 favorable.
CPA-04168
Explanation
Choice "a" is correct. $1,450 unfavorable material efficiency variance.
163
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choices "b", "c", and "d" are incorrect, per the above calculation.
CPA-04170
Type1 M/C
283. CPA-04170
A-D
J95 - 1.25
Corr Ans: D
PM#128
B 5-99
Page 62
Price variances and efficiency variances can be key to the performance measurement within a company.
In evaluating the performance within a company, a material efficiency variance can be caused by all of
the following, except the:
a.
b.
c.
d.
Actions of the Purchasing Department.
Design of the product.
Skill level of the labor force.
Sales volume of the product.
CPA-04170
Explanation
Choice "d" is correct. Material efficiency variance cannot be caused by sales volume of the product.
Material efficiency variance can be caused by:
a. Actions of the purchasing department.
b. Design of the product.
c. Skill level of the labor force.
Choices "a", "b", and "c" are incorrect, per the above explanation.
CPA-04172
Type1 M/C
284. CPA-04172
A-D
J95 - 1.29
Corr Ans: C
PM#129
B 5-99
Page 61
For a company that produces more than one product, the sales volume variance can be divided into
which two of the following additional variances?
a.
b.
c.
d.
Sales price variance and flexible budget variance.
Sales efficiency variance and sales price variance.
Sales quantity variance and sales mix variance.
Sales mix variance and production volume variance.
CPA-04172
Explanation
Choice "c" is correct. For a company that produces more than one product, the sales volume variance
can be divided into sales quantity variance and sales mix variance.
Choice "a" is incorrect. Sales price variance is not part of sales volume variance; and flexible budget
variance part of overhead volume variance.
164
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "b" is incorrect. Sales efficiency variance is not part of sales volume variance; and sales price
variance is not.
Choice "d" is incorrect. Sales mix variance is part of sales volume variance; but production volume
variance is part of overhead volume variance.
CPA-04173
Type1 M/C
285. CPA-04173
A-D
J95 - 1.30
Corr Ans: C
PM#130
B 5-99
Page 63
The production volume variance is due to:
a. Inefficient or efficient use of direct labor hours.
b. Efficient or inefficient use of variable overhead.
c. Difference from the planned level of the base used for overhead allocation and the actual level
achieved.
d. A significant shift in the mix and yield of direct labor relative to the static budget.
CPA-04173
Explanation
Choice "c" is correct. The production volume variance is due to difference from:
1000 Planned level of the base used for overhead allocation
800 Actual level achieved
200 Production volume variance (difference)
Choice "a" is incorrect. Direct labor efficiency variance is due to inefficient or efficient use of direct labor
hours.
Choice "b" is incorrect. Variable overhead efficiency variance is due to efficient or inefficient use of
variable overhead.
Choice "d" is incorrect. A significant shift in the mix of direct labor relative to the flexible (not static)
budget would result in labor rate variance, while a significant shift in the yield of direct labor would result
in labor efficiency variance.
CPA-04175
Type1 M/C
286. CPA-04175
A-D
D95 - 1.03
Corr Ans: C
PM#131
B 5-99
Page 70
The variance that arises solely because the quantity actually sold differs from the quantity budgeted to be
sold is:
a.
b.
c.
d.
Static budget variance.
Sales mix variance.
Sales volume variance.
Flexible budget variance.
CPA-04175
Explanation
Choice "c" is correct. Sales volume variance arises solely because the quantity actually sold differs from
the quantity budgeted to be sold.
Choice "a" is incorrect. Static budget variance does not occur when a flexible budget is used, and
variance analysis usually requires use of a flexible budget.
Choice "b" is incorrect. For a company that produces more than one product, the sales volume variance
can be divided into sales quantity variance and sales mix variance.
Choice "d" is incorrect. Flexible budget variance deals with costs, not revenues. It is the difference
between the actual amounts and the flexible budget amounts for the actual output achieved.
CPA-04176
Type1 M/C
A-D
Corr Ans: B
PM#132
165
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
B 5-99
Becker CPA Review, PassMaster Questions
Lecture: Business 5
287. CPA-04176
D95 - 1.04
Page 63
Variable overhead is applied on the basis of standard direct labor hours. If for a given period, the direct
labor efficiency variance is unfavorable, the variable overhead efficiency variance will be:
a.
b.
c.
d.
Favorable.
Unfavorable.
The same amount as the labor efficiency variance.
Indeterminable since it is not related to the labor efficiency variance.
CPA-04176
Explanation
Choice "b" is correct. If variable overhead is applied on the basis of standard direct labor hours, and
direct labor efficiency variance is unfavorable, the variable overhead efficiency will (also) be unfavorable.
Choices "a", "c", and "d" are incorrect, per the above.
CPA-04177
Type1 M/C
288. CPA-04177
A-D
D95 - 1.06
Corr Ans: B
PM#133
B 5-99
Page 61
The difference between the actual amounts and the flexible budget amounts for the actual output
achieved is the:
a.
b.
c.
d.
Production volume variance.
Flexible budget variance.
Sales volume variance.
Standard cost variance.
CPA-04177
Explanation
Choice "b" is correct. Flexible budget variance is the difference between the actual amounts and the
flexible budget amounts for the actual output achieved.
Choice "a" is incorrect. Production volume variance is 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.
Choice "c" is incorrect. Sales volume variance arises solely because the quantity actually sold differs
from the quantity budgeted to be sold.
Choice "d" is incorrect. Standard cost variance is the net difference between total actual cost and
standard cost.
CPA-04178
Type1 M/C
289. CPA-04178
A-D
D95 - 1.07
Corr Ans: C
PM#134
B 5-99
Page 68
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:
a.
b.
c.
d.
Efficiency variance.
Sales volume variance.
Production volume variance.
Flexible budget variance.
CPA-04178
Explanation
Choice "c" is correct. Production volume variance is 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.
Choice "a" is incorrect. Efficiency variance = (STD hours required − actual hours) × STD variable OH rate
Choice "b" is incorrect. Sales volume variance = (budgeted unit sales) − (actual unit sales) × budgeted
contribution margin
166
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "d" is incorrect. Flexible budget variance is the difference between the actual amounts and the
flexible budget amounts for the actual output achieved.
CPA-04180
Type1 M/C
290. CPA-04180
A-D
D95 - 1.25
Corr Ans: A
PM#135
B 5-99
Page 62
Which one of the following variances is most controllable by the production control supervisor?
a.
b.
c.
d.
Material usage variance.
Variable overhead spending variance.
Fixed overhead budget variance.
Fixed overhead volume variance.
CPA-04180
Explanation
Choice "a" is correct. Material usage variance is most controllable by the production control supervisor.
Choice "b" is incorrect. Variable overhead spending variance is most controllable by the plant manager
and somewhat by production control.
Choice "c" is incorrect. Fixed overhead budget variance is most controllable by other than production
control.
Choice "d" is incorrect. Fixed overhead volume variance is most controllable by other than production
control.
CPA-04181
Type1 M/C
291. CPA-04181
A-D
J96 - 1.22
Corr Ans: C
PM#136
B 5-99
Page 63
Ardmore Enterprises uses a standard cost system in its small appliance division. The standard cost of
manufacturing one unit of Zeb is as follows:
Materials [60 pounds at $1.50 per pound]
Labor [3 hours at $12 per hour]
Factory overhead [3 hours at $8 per hour]
Total standard cost per unit
$ 90
36
24
$150
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:
Materials (purchased and used)
[58 pounds at $1.65 per pound]
Labor [3.1 hours at $12 per hour]
Factory overhead [$39,930 per 1,650 units]
Total actual cost per unit
$ 95.70
37.20
24.20
$157.10
The total material quantity variance for May is:
a.
b.
c.
d.
$14,850 favorable.
$14,850 unfavorable.
$4,950 favorable.
$4,950 unfavorable.
CPA-04181
Explanation
Choice "c" is correct. Quantity variance is the difference between the amount of direct materials that
should have been used and the amount of materials actually used times the standard price per unit.
Amount required for actual output (60 PDS × 1650)
Amount actually used (58 PD. × 1650)
Difference
99,000 PDS
(95,700) PDS
3,300 PDS
167
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
× 1.50 per PD
$4,950
Times the standard price
Material quantity variance
Because less material was used than standard, the variance is favorable.
Use the mnemonics you learned!
The difference is always "SAD"-and it would be sad if you forgot that!
99,000 - 95,700 = 3,300 difference
U
=
D
x
S
U
=
3,300
x
$1.50
U
=
$4,950 FAVORABLE
Choices "a", "b", and "d" are incorrect, per the above calculation.
CPA-04182
Type1 M/C
292. CPA-04182
A-D
J96 - 1.23
Corr Ans: A
PM#137
B 5-99
Page 63
Ardmore Enterprises uses a standard cost system in its small appliance division. The standard cost of
manufacturing one unit of Zeb is as follows:
Materials [60 pounds at $1.50 per pound]
Labor [3 hours at $12 per hour]
Factory overhead [3 hours at $8 per hour]
Total standard cost per unit
$ 90
36
24
$150
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:
Materials (purchased and used)
[58 pounds at $1.65 per pound]
Labor [3.1 hours at $12 per hour]
Factory overhead [$39,930 per 1,650 units]
Total actual cost per unit
$ 95.70
37.20
24.20
$157.10
The material price variance for May is:
a.
b.
c.
d.
$14,355 unfavorable.
$14,850 unfavorable.
$14,355 favorable.
$14,850 favorable.
CPA-04182
Explanation
Choice "a" is correct. Price variance is the difference between the standard price and the actual price
times the actual quantity used.
Standard price
Actual price
Difference
$
1.50
1.65
.15
168
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Times the actual quantity (58 PDS × 1,650)
Material price variance
95,700
$ 14,355
PDS
Because the price paid for the material was higher than standard, the variance is unfavorable.
Use the mnemonics you learned!
The difference is always "SAD"-and it would be sad if you forgot that!
$1.50 - $1.65 = ($0.15) difference
P
=
D
x
A
P
=
($0.15) x
P
=
($14,355) UNFAVORABLE
95,700
Choices "b", "c", and "d" are incorrect, per above.
CPA-04184
Type1 M/C
293. CPA-04184
A-D
J96 - 1.24
Corr Ans: B
PM#138
B 5-99
Page 63
Ardmore Enterprises uses a standard cost system in its small appliance division. The standard cost of
manufacturing one unit of Zeb is as follows:
Materials [60 pounds at $1.50 per pound]
Labor [3 hours at $12 per hour]
Factory overhead [3 hours at $8 per hour]
Total standard cost per unit
$ 90
36
24
$150
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:
Materials (purchased and used)
[58 pounds at $1.65 per pound]
Labor [3.1 hours at $12 per hour]
Factory overhead [$39,930 per 1,650 units]
Total actual cost per unit
$ 95.70
37.20
24.20
$157.10
The labor rate variance for May is:
a.
b.
c.
d.
$1,650 unfavorable.
$0
$3,300 unfavorable.
$3,300 favorable.
CPA-04184
Explanation
Choice "b" is correct. The labor rate variance is the difference between the standard rate and the actual
rate times the actual hours of labor.
Standard rate
Actual rate
$12
12
169
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Difference
Times the actual hours worked
(3.1 × 1,650)
Labor rate variance
0
51,150 hour
0
Since there is no difference between the rates, the variance is neither favorable nor unfavorable.
Use the mnemonics you learned!
The difference is always "SAD"-and it would be sad if you forgot that!
$12.00 - $12.00 = $0 difference
R
=
D
x
A
R
=
$0
x
51,150
R
=
$0
Choices "a", "c", and "d" are incorrect, per the above calcuations.
CPA-04185
Type1 M/C
294. CPA-04185
A-D
J96 - 1.25
Corr Ans: D
PM#139
B 5-99
Page 68
Ardmore Enterprises uses a standard cost system in its small appliance division. The standard cost of
manufacturing one unit of Zeb is as follows:
Materials [60 pounds at $1.50 per pound]
Labor [3 hours at $12 per hour]
Factory overhead [3 hours at $8 per hour]
Total standard cost per unit
$ 90
36
24
$150
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:
Materials (purchased and used)
[58 pounds at $1.65 per pound]
Labor [3.1 hours at $12 per hour]
Factory overhead [$39,930 per 1,650 units]
Total actual cost per unit
$ 95.70
37.20
24.20
$157.10
The flexible budget overhead variance for May is:
a.
b.
c.
d.
$2,250 unfavorable.
$2,250 favorable.
$1,920 unfavorable.
$1,920 favorable.
CPA-04185
Explanation
Choice "d" is correct. The flexible budget variance is the difference between the actual cost and the
amount that would be arrived at using the flexible budget formula.
170
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Flexible budget formula
Fixed overhead (given)
Variable overhead ($3 per hour ×
3 hrs × 1,650)
Flexible budget for overhead
$27,000
14,850
$ 41,850
Actual amount spent for overhead
Flexible budget variance for overhead
(39,930)
$ 1,920
Because the actual amount spent is lower than the standard amount, the variance is favorable.
Choices "a", "b", and "c" are incorrect, per the above calculation.
CPA-04186
Type1 M/C
295. CPA-04186
A-D
J97 - 1.23
Corr Ans: C
PM#140
B 5-99
Page 63
The controller for Durham Skates is reviewing the production cost report for July. An analysis of direct
material costs reflects an unfavorable flexible budget variance of $25. The plant manager believes this is
excellent performance on a flexible budget for 5,000 units of direct material. However, the production
supervisor is not pleased with this result as he claims to have saved $1,200 in material cost on actual
production using 4,900 units of direct material. The standard material cost is $12 per unit. Actual
material used for the month amounted to $60,025.
If the direct material variance was investigated further, it would reflect a price variance of:
a.
b.
c.
d.
$850 unfavorable.
$1,200 favorable.
$1,225 unfavorable.
$2,500 favorable.
CPA-04186
Explanation
Choice "c" is correct. The price variance is the difference between the standard price and the actual price
times the actual volume.
Standard price (given)
Actual price (determined above)
Difference
Times actual volume
Equals price variance
$
12.00
12.25
$
.25
4,900.00
$1,225.00
Use the mnemonics you learned!
The difference is always "SAD"-and it would be sad if you forgot that!
$12.00 - $12.25 = ($0.25) difference
P
=
D
x
A
P
=
($0.25) x
P
=
($1,225) UNFAVORABLE
4,900
171
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choices "a", "b", and "d" are incorrect, per the above calculations.
CPA-04189
Type1 M/C
296. CPA-04189
A-D
D93 - 1.22
Corr Ans: B
PM#141
B 5-99
Page 63
ChemKing uses a standard costing system in the manufacture of its single product. The 35,000 units of
raw material in inventory were purchased for $105,000, and two units of raw material are required to
produce one unit of final product. In November, the company produced 12,000 units of product. The
standard allowed for material was $60,000, and there was an unfavorable quantity variance of $2,500.
ChemKing's standard price for one unit of material is:
a.
b.
c.
d.
$2.00
$2.50
$3.00
$5.00
CPA-04189
Explanation
Choice "b" is correct. $2.50 standard price for one unit of material.
The standard allowed for the material was $60,000, and 12,000 units were produced in November.
Therefore, the materials cost on the "standard" was $5.00 per unit [$60,000/12,000 units]. However, we
are told that it takes two units of raw material to make one unit of completed goods. So, the standard
price for one unit of material is $2.50 [$5.00/2].
$60,000 / 12,000 units of finished goods = $5
$5 / 2 units of direct material = $2.50 per unit
Choices "a", "c", and "d" are incorrect, per the above calculation.
CPA-04190
Type1 M/C
297. CPA-04190
A-D
D93 - 1.23
Corr Ans: D
PM#142
B 5-99
Page 63
ChemKing uses a standard costing system in the manufacture of its single product. The 35,000 units of
raw material in inventory were purchased for $105,000, and two units of raw material are required to
produce one unit of final product. In November, the company produced 12,000 units of product. The
standard allowed for material was $60,000, and there was an unfavorable quantity variance of $2,500.
The units of material used to produce November output totaled:
a.
b.
c.
d.
12,000 units.
12,500 units.
24,000 units.
25,000 units.
CPA-04190
Explanation
Choice "d" is correct. 25,000 units used to produce November output.
Mnemonic:
P
U
R
E
Price variance (for DM)
Usage (quantity) variance (for DM)
Rate variance (for DL)
Efficiency variance (for DL)
Memorize how these variances are calculated:
Your dad always gave you advice about life, and memorizing variance formulas is easy if you remember
him! Apply "DADS" twice to set up a schedule you cannot forget!
172
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
DA
DS
DA
DS
Difference
Difference
Difference
Difference
x Actual
x Standard
x Actual
x Standard
Easy Schedule
P
U
R
E
Dx
Dx
Dx
Dx
A
S
A
S
The facts for the question tell us that the quantity (usage) variance is an unfavorable $2,500. How is the
materials usage variance calculated? Take a look at PURE with DADS twice, and don't forget the
difference is SAD!!!
U=DxS
Usage variance = difference in usage x standard price
Standard price per unit:
The standard price per unit ($2.50) is actually calculated in a separate question (D93-1.22), but the
explanation is included here as well. The standard allowed for the material was $60,000, and 12,000
units were produced in November. Therefore, the materials cost on "standard" was $5.00 per unit
[$60,000/12,000 units]. However, we are told that it takes two units of raw material to make one unit of
completed goods. So, the standard price for one unit of material is $2.50 [$5.00/2].
We also know that the usage variance is unfavorable $2,500. So, we solve for the "difference in usage"
as follows:
U
($2,500)
=
=
D
D
($2,500) / $2.50
(1,000)
x
x
=
=
S
$2.50
D
D
So, the unfavorable units used amounted to 1,000. The facts of the question tell us that 12,000 units
were produced in November. At two units of raw materials per unit produced, that's a standard of 24,000
units of raw materials. Actual units used (S - A = D) are then 25,000 units to produce the unfavorable
usage variance of $2,500 (alternatively, 24,000 standard units plus 1,000 unfavorable units used = 25,000
units used).
Standard units − 12,000 × 2 per unit
Unfavorable quantity variance of %
$2,500 ÷ $2.50 per unit standard
Actual units used to produce non output
CPA-04191
Type1 M/C
298. CPA-04191
A-D
D94 - 1.24
Corr Ans: C
=
24,000
=
1,000
25,000
PM#143
B 5-99
Page 63
Tower Company planned to produce 3,000 units of its single product, Titactium, during November. The
standard specifications for one unit of Titactium includes six pounds of materials at $.30 per pound.
Actual production in November was 3,100 units of Titactium. The accountant computed a favorable
materials purchase price variance of $380 and an unfavorable materials quantity variance of $120.
Based on these variances, one could conclude that:
a. More materials were purchased than were used.
b. More materials were used than were purchased.
173
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
c. The actual cost of materials was less than the standard cost.
d. The actual usage of materials was less than the standard allowed.
CPA-04191
Explanation
Choice "c" is correct. The favorable materials purchase price variance means that the actual cost of
materials was less than the standard cost:
Standard = 3100 units × 6# = 18600# × $.30 = $5,580
Unfavorable quantity variance = $120 ÷ $.30 std. Cost = 400 units
Favorable purchase price variance:
Standard units
Add unfavorable quantity units
Actual units purchased
$380 ÷ 19,000 = $.02 per unit.
18,600
400
19,000
Choices "a" and "b" are incorrect. Materials purchased and used were the same.
Choice "d" is incorrect. The unfavorable quantity variance means more were used than standard allowed.
CPA-04192
Type1 M/C
299. CPA-04192
A-D
J95 - 1.10
Corr Ans: C
PM#144
B 5-99
Page 61
A standard costing system is most often used by a firm in conjunction with:
a.
b.
c.
d.
Management by objectives.
Participative management programs.
Flexible budgets.
Job order cost systems.
CPA-04192
Explanation
Choice "c" is correct. A standard costing system is most often used by a firm in conjunction with flexible
budgets.
Choice "a" is incorrect. Management by objectives simply requires that objectives be defined before
resources are used to achieve them.
Choice "b" is incorrect. Participative management programs bring "managers" and "workers" together to
participate in management decisions.
Choice "d" is incorrect. Job order cost systems may use standard costs.
CPA-04195
Type1 M/C
300. CPA-04195
A-D
J97 - 1.22
Corr Ans: D
PM#145
B 5-99
Page 63
The controller for Durham Skates is reviewing the production cost report for July. An analysis of direct
material costs reflects an unfavorable flexible budget variance of $25. The plant manager believes this is
excellent performance on a flexible budget for 5,000 units of direct material. However, the production
supervisor is not pleased with this result as he claims to have saved $1,200 in material cost on actual
production using 4,900 units of direct material. The standard material cost is $12 per unit. Actual
material used for the month amounted to $60,025.
The actual average cost per unit for materials was:
a.
b.
c.
d.
$12.00
$12.01
$12.24
$12.25
174
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-04195
Explanation
Choice "d" is correct. If material cost for the month is $60,025 for 4,900 units, the average cost is
$60,025 ÷ 4,900 = $12.25.
Choices "a", "b", and "c" are incorrect, per above.
CPA-04197
Type1 M/C
301. CPA-04197
A-D
J96 - 1.17
Corr Ans: D
PM#146
B 5-99
Page 49
The upper limit of a company's productive output capacity given its existing resources is called:
a.
b.
c.
d.
Excess capacity.
Relevant range capacity.
Practical capacity.
Theoretical capacity.
CPA-04197
Explanation
Choice "d" is correct. Theoretical capacity is the level of production capacity that occurs at maximum
efficiency all of the time. Accordingly, it is the upper limit of a company's productive output capacity given
its existing resources.
Choice "a" is incorrect. Excess capacity is the difference between the capacity available and the capacity
required to meet product demand.
Choice "b" is incorrect. The relevant range is the area over which a specific cost function is valid. While
relevant range is not tied specifically to capacity, it does normally represent the range over which the
company is likely to actually operate.
Choice "c" is incorrect. Practical capacity is the theoretical capacity minus the capacity lost for
unavoidable delays such as maintenance, worker inefficiencies, etc.
CPA-04198
Type1 M/C
302. CPA-04198
A-D
J97 - 1.25
Corr Ans: C
PM#147
B 5-99
Page 78
Fabro, Inc. produced 1,500 units of Product RX-6 last week. The inputs to the production process for
Product RX-6 were as follows.
450 pounds of Material A at a cost of $1.50 per pound.
300 pounds of Material Z at a cost of $2.75 per pound.
300 labor hours at a cost of $15.00 per hour.
What is the total factor productivity for Product RX-6?
a.
b.
c.
d.
1.00 unit per dollar input.
5.00 units per hour.
0.25 units per dollar input.
0.33 units per dollar input.
CPA-04198
Explanation
Choice "c" is correct. Total factor productivity is 0.25 units per dollar input.
450 pounds of Material A @ $1.50/lb
300 pounds of Material Z @ $2.75/lb
300 hours @ $15.00/hr
Total dollars input
Units produced
Total dollars input
$ 675
825
4,500
$6,000
1,500
= .25
$6,000
175
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choices "a", "b", and "d" are incorrect, per the above calculation.
CPA-04200
Type1 M/C
303. CPA-04200
A-D
J97 - 1.26
Corr Ans: A
PM#148
B 5-99
Page 78
Fabro, Inc. produced 1,500 units of Product RX-6 last week. The inputs to the production process for
Product RX-6 were as follows.
450 pounds of Material A at a cost of $1.50 per pound.
300 pounds of Material Z at a cost of $2.75 per pound.
300 labor hours at a cost of $15.00 per hour.
What is the best productivity measure for the first-line supervisor in Fabro, Inc.'s production plant?
a.
b.
c.
d.
5.00 units per labor hour.
0.33 units per dollar input.
2.00 units per pound.
$15.00 per labor hour.
CPA-04200
Explanation
Choice "a" is correct. The best productivity measure for the production supervisor is 5.00 units per labor
hour. This measures the efficiency and productivity of plant labor, which is within the supervisor's control.
Choice "b" is incorrect. Most of the cost factors are outside the control of the production supervisor.
Choice "c" is incorrect. The supervisor can affect the efficiency of material usage but not the units per
pound.
Choice "d" is incorrect. The supervisor has no control over the hourly cost of labor.
CPA-04202
Type1 M/C
304. CPA-04202
A-D
D95 - 1.11
Corr Ans: C
PM#149
B 5-99
Page 62
In a standard cost system, the investigation of an unfavorable material use variance should begin with
the:
a.
b.
c.
d.
Production manager only.
Purchasing manager only.
Production manager and/or the purchasing manager.
Engineering manager and/or the purchasing manager.
CPA-04202
Explanation
Choice "c" is correct. In a standard cost system, the investigation of an unfavorable material use variance
should begin with the production manager and/or the purchasing manager.
Choice "a" is incorrect. Purchasing manager may also be involved because quality of material purchased
may be the cause of the material usage variance.
Choice "b" is incorrect. Production manager may also be involved because material usage may be the
result of poor production work - too much scrap.
Choice "d" is incorrect. Engineering manager may be consulted by purchasing or production, but does
not initiate the investigation.
CPA-04204
Type1 M/C
305. CPA-04204
A-D
D96 - 1.21
Corr Ans: A
PM#150
Page 62
176
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
B 5-99
Becker CPA Review, PassMaster Questions
Lecture: Business 5
David Rogers, purchasing manager at Fairway Manufacturing Corporation, was able to acquire a large
quantity of raw material from a new supplier at a discounted price. Marion Conner, inventory supervisor,
is concerned because the warehouse has become crowded and some things had to be rearranged. Brian
Jones, vice president of production, is concerned about the quality of the discounted material. However,
the Engineering Department had tested the new raw material and indicated that it is of acceptable quality.
At the end of the month, Fairway experienced a favorable material usage variance, a favorable labor
usage variance, and a favorable material price variance. The usage variances were solely the result of a
higher yield from the new raw material. The favorable material price variance would be considered the
responsibility of the:
a.
b.
c.
d.
Purchasing manager.
Inventory supervisor.
Vice president of production.
Engineering manager.
CPA-04204
Explanation
Choice "a" is correct. The purchasing manager would be responsible for a price variance.
Choices "b", "c", and "d" are incorrect. None of these parties are responsible for making purchases, so
they are not responsible for material price variances.
CPA-04205
Type1 M/C
306. CPA-04205
A-D
D96 - 1.24
Corr Ans: D
PM#151
B 5-99
Page 62
The inventory control supervisor at Wilson Manufacturing Corporation reported that a large quantity of a
part purchased for a special order that was never completed remains in stock. The order was not
completed because the customer defaulted on the order. The part is not used in any of Wilson's regular
products. After consulting with Wilson's engineers, the vice president of production approved the
substitution of the purchased part for a regular part in a new product. Wilson's engineers indicated that
the purchased part could be substituted providing it was modified. The units manufactured using the
substituted part required additional direct labor hours resulting in an unfavorable direct labor efficiency
variance in the Production Department. The unfavorable direct labor efficiency variance resulting from
the substitution of the purchased part in inventory would best be assigned to the:
a.
b.
c.
d.
Sales manager.
Engineering manager.
Production manager.
Vice president of production.
CPA-04205
Explanation
Choice "d" is correct. The direct labor efficiency variance was expected once the vice president of
production made the decision to substitute the non-standard part.
Choices "a", "b", and "c" are incorrect. All of these parties had input to the decision, but the responsibility
belongs to the vice president of production.
CPA-04207
Type1 M/C
307. CPA-04207
A-D
A92 - 1.34
Corr Ans: C
PM#152
B 5-99
Page 73
Which is not an example of responsibility accounting?
a.
b.
c.
d.
Cost center.
Profit center.
Product center.
Investment center.
CPA-04207
Explanation
Choice "c" is correct. Product center does not refer to any responsibility or decision center.
177
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "a" is incorrect. Cost centers are responsible for costs only.
Choice "b" is incorrect. Profit centers are responsible for revenues and expenses.
Choice "d" is incorrect. Investment centers are responsible for revenues, expenses and invested capital.
CPA-04209
Type1 M/C
308. CPA-04209
A-D
D94 - 1.20
Corr Ans: A
PM#153
B 5-99
Page 73
Fairmount, Inc. uses an accounting system that charges costs to the manager who has been delegated
the authority to make the decisions incurring the costs. For example, if the sales manager accepts a rush
order that will result in higher than normal manufacturing costs, these additional costs are charged to the
sales manager because the authority to accept or decline the rush order was given to the sales manager.
This type of accounting system is known as:
a.
b.
c.
d.
Responsibility accounting.
Functional accounting.
Transfer price accounting.
Contribution accounting.
CPA-04209
Explanation
Choice "a" is correct. Responsibility accounting is a system of accounting that recognizes various
responsibility or decision centers throughout an organization and reflects the plans and actions of each of
these centers by assigning particular revenues and costs to the one having the responsibility for making
decisions about these revenues and costs.
Choice "b" is incorrect. This term is not defined.
Choice "c" is incorrect. Transfer pricing deals with prices charged by one business segment to another
within a company.
Choice "d" is incorrect. Contribution accounting measures performance based on the contribution of a
business segment.
CPA-04210
Type1 M/C
309. CPA-04210
A-D
A97 - 1.94
Corr Ans: B
PM#154
B 5-99
Page 73
Many firms have made significant strides in reducing their inventories. Which of the following would be
least likely to encourage managers to reduce inventory?
a.
b.
c.
d.
Using variable costing.
Using absorption costing.
Using throughput costing.
Instituting a charge against the budget for managers based on the size of the inventory.
CPA-04210
Explanation
Choice "b" is correct. Absorption costing (as the name implies) absorbs fixed overhead cost into the units
produced. Those units placed in inventory can absorb some of the manager's cost and raise profits. This
method encourages larger inventories.
Choice "a" is incorrect. Variable costing places only variable costs into products and all fixed overhead is
charged to cost of goods sold. This does not give an incentive to overproduce.
Choice "c" is incorrect. Throughput costing is an inventory costing method that places only variable direct
material in inventoriable cost. All other costs are treated as costs of the period. This also does not give
an incentive to overproduce.
Choice "d" is incorrect. Clearly, putting a charge against the budget for inventory will discourage excess
inventory.
178
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-04212
Type1 M/C
310. CPA-04212
A-D
D96 - 1.23
Corr Ans: A
PM#155
B 5-99
Page 73
The purpose of identifying manufacturing variances and assigning their responsibility to a
person/department should be to:
a. Use the knowledge about the variances to promote learning and continuous improvement in the
manufacturing operations.
b. Trace the variances to finished goods so that the inventory can be properly valued at year-end.
c. Determine the proper cost of the products produced so that selling prices can be adjusted
accordingly.
d. Pinpoint fault for operating problems in the organization.
CPA-04212
Explanation
Choice "a" is correct. The purpose of identifying and assigning responsibility for a variance to a
person/department should be to use the knowledge to promote learning and continuous improvement.
Choice "b" is incorrect. Proper valuation of inventory can occur without assigning responsibility to a
person or department.
Choice "c" is incorrect. Selling prices depend on the market, not cost variances.
Choice "d" is incorrect. Pinpointing fault is not productive.
CPA-04214
Type1 M/C
311. CPA-04214
A-D
D89 - 3.01
Corr Ans: A
PM#156
B 5-99
Page 73
The advantages of using cash flow as a basis for the evaluation of the performance of a business
segment include the following:
I.
Assesses the organization's liquidity position and the ability to pay liabilities, indicating cash payment
capacity constraints.
II. Provides a means for evaluating the effects of, and needs for, additional sources of financing.
III. Involves the complex understanding necessary to evaluate the organization based on the accrual
method of accounting.
a.
b.
c.
d.
I and II.
I and III.
II and III.
I, II, and III.
CPA-04214
Explanation
Choice "a" is correct. Both I and II are advantages, but III is not.
Choices "b", "c", and "d" are incorrect. An advantage of using cash flow as a basis for the evaluation of
the performance of a business segment does not involve the complex understanding necessary to
evaluate the organization based on the accrual method of accounting.
CPA-04216
Type1 M/C
312. CPA-04216
A-D
D89 - 3.02
Corr Ans: B
PM#157
B 5-99
Page 73
The disadvantages of using cash flow as a basis for the evaluation of the performance of a business
segment include the following:
I.
The focus is on the long-term and not on the short-term, and can be misleading when evaluating an
organization's profitability. Short-term cash allotments are distorted by long-term cash outlays (capital
purchases).
II. Cash flows related to normal operations could be confused with the cash flows from other activities
(e.g., financing), leading to the misinterpretation of results.
179
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Becker CPA Review, PassMaster Questions
Lecture: Business 5
III. Other information besides cash flow needs to be considered when comparing one organization's
financial position to other organizations.
a.
b.
c.
d.
I and II.
II and III.
I and III.
I, II, and III.
CPA-04216
Explanation
Choice "b" is correct. Only II and III are correct.
Choices "a", "c", and "d" are incorrect. A disadvantage of using cash flow as a basis for the evaluation of
the performance of a business segment is that the focus is on the short-term (cash flow) - not long-term and not on the longevity of the organization, and can be misleading when evaluating an organization's
profitability. Short-term cash allotments are distorted by long-term cash outlays (capital purchases).
CPA-04218
Type1 M/C
313. CPA-04218
A-D
3C.C02 - 4
Corr Ans: B
PM#158
B 5-99
Page 80
Quality programs normally include a number of techniques to find and analyze problems. The technique
commonly used to rank and analyze the individual and cumulative causes of defects is called a:
a.
b.
c.
d.
Control Chart.
Pareto Diagram.
Fishbone Diagram.
Value Chain Analysis.
CPA-04218
Explanation
Choice "b" is correct. A Pareto diagram represents an individual and cumulative graphical analysis of
errors by type. Individual error types are represented on a histogram (bar graph) while the cumulative
number of errors is presented on a line graph. The Pareto diagram is used to prioritize process
improvement efforts.
Choice "a" is incorrect. A control chart shows the performance of a particular process in relation to
acceptable upper and lower limits of deviation. Performance within the limits is termed statistical control.
Processes are designed to ensure that performance consistently falls within the acceptable range of
error.
Choice "c" is incorrect. A fishbone diagram describes a process, the contributions to the process and the
potential problems that could occur at each phase of a process. The chronological sequence of events is
represented by a single horizontal line while the contributions to the process are represented by diagonal
lines that create the image of a fishbone.
Choice "d" is incorrect. A value chain analysis is a macro level flowchart that shows the relationship
between broad functional areas, the product delivered by the organization and manner in which value is
added at each link in the chain.
CPA-04221
Type1 M/C
314. CPA-04221
A-D
3C.C02 - 6
Corr Ans: B
PM#159
B 5-99
Page 82
Quality programs that demand compliance with the most rigorous standards apply the concept of:
a.
b.
c.
d.
Goalpost conformance.
Absolute conformance.
Conforming costs.
Nonconforming costs.
CPA-04221
Explanation
180
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "b" is correct. Absolute conformance is the most rigorous standard of quality because it
represents a perfect, or ideal, level of compliance.
Choice "a" is incorrect. Goalpost conformance assumes a range of acceptable results. Because it
represents achievement of compliance within an established range of tolerable error, goalpost
conformance is considered less rigorous than absolute conformance.
Choice "c" is incorrect. Conforming costs are those preventative and appraisal costs invested to detect
and prevent errors and do not represent quality standards.
Choice "d" is incorrect. Nonconforming costs are those internal and external failures associated with
correcting quality errors associated with non-compliance and do not represent quality standards.
CPA-04224
Type1 M/C
315. CPA-04224
A-D
Corr Ans: A
PM#160
B 5-99
Th May 93 #46 Page 55
The basic difference between a master budget and a flexible budget is that a master budget is:
a. Based on one specific level of production and a flexible budget can be prepared for any production
level within a relevant range.
b. Only used before and during the budget period and a flexible budget is only used after the budget
period.
c. Based on a fixed standard, whereas a flexible budget allows management latitude in meeting goals.
d. For an entire production facility whereas a flexible budget is applicable to single departments only.
CPA-04224
Explanation
Choice "a" is correct. The master budget is based on one production level and a flexible budget is
designed to reflect any production level within a relevant range of production activities.
Choice "b" is incorrect. The flexible budget is used before and during the budget period.
Choice "c" is incorrect. The flexible budget is based on fixed standards which are appropriately
developed for the relevant range of production activity.
Choice "d" is incorrect. The flexible budget is developed for single departments and for the production
facility as a whole.
CPA-04237
Type1 M/C
316. CPA-04237
A-D
J91 - 1.09
Corr Ans: D
PM#161
B 5-99
Page 57
The most direct way to prepare a cash budget for a manufacturing firm is to include:
a.
b.
c.
d.
Projected sales, credit terms, and net income.
Projected net income, depreciation, and goodwill amortization.
Projected purchases, percentages of purchases paid, and net income.
Projected sales and purchases, percentages of collections, and terms of payments.
CPA-04237
Explanation
Choice "d" is correct. The simplest (most direct) cash budget would include the components of cash
collections (sales and percentage of collection) and cash disbursements (purchases and terms of
payment).
Choices "a", "b", and "c" are incorrect, per answer above.
CPA-04238
Type1 M/C
317. CPA-04238
A-D
J94 - 1.20
Corr Ans: B
PM#162
B 5-99
Page 33
Management accountants are frequently asked to analyze various decision situations including the
following.
181
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
I.
II.
III.
IV.
V.
The cost of a special device that is necessary if a special order is accepted.
The cost proposed annually for the plant service for the grounds at corporate headquarters.
Joint production costs incurred, to be considered in a sell-at-split versus a process-further decision.
The costs associated with alternative uses of plant space, to be considered in a make/buy decision.
The cost of obsolete inventory acquired several years ago, to be considered in a keep-versusdisposal decision.
The costs described in situations III and V above are:
a.
b.
c.
d.
Prime costs.
Sunk costs.
Discretionary costs.
Relevant costs.
CPA-04238
Explanation
Choice "b" is correct. Sunk costs are costs previously incurred, unavoidable, and not relevant to decisionmaking. Joint production costs, before split-off, are considered sunk. The cost of obsolete inventory is
also a sunk cost.
Choice "a" is incorrect. Prime costs include direct material and direct labor.
Choice "c" is incorrect. Discretionary costs are avoidable. Neither III nor V describe costs that are
avoidable.
Choice "d" is incorrect. Relevant costs are the opposite of sunk costs.
CPA-04241
Type1 M/C
318. CPA-04241
A-D
J96 - 1.15
Corr Ans: C
PM#163
B 5-99
Page 8
In a decision analysis situation, which one of the following costs is not likely to contain a variable cost
component?
a.
b.
c.
d.
Labor.
Overhead.
Depreciation.
Selling.
CPA-04241
Explanation
Choice "c" is correct. Depreciation is not likely to contain a variable cost component in a decision
analysis situation.
All of the following costs could contain a variable cost component in a decision analysis situation:
a. Labor.
b. Overhead.
d. Selling.
CPA-04243
Type1 M/C
319. CPA-04243
A-D
D96 - 1.01
Corr Ans: D
PM#164
B 5-99
Page 33
The term that best refers to past costs that have been incurred and are not relevant to any future
decisions is:
a.
b.
c.
d.
Discretionary costs.
Full absorption costs.
Incurred marginal costs.
Sunk costs.
CPA-04243
Explanation
182
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "d" is correct. Sunk costs refer to past costs that have been incurred and are not relevant to any
future decisions.
Choice "a" is incorrect. Discretionary costs are costs arising from periodic budgeting decisions by
management to spend in certain areas not directly related to manufacturing.
Choice "b" is incorrect. Full absorption costs are fixed and variable costs related to production and
inventory.
Choice "c" is incorrect. Incurred marginal costs are the sum of variable and avoidable fixed costs
necessary to have a one-unit increase in activity.
CPA-04245
Type1 M/C
320. CPA-04245
A-D
J91 - 1.13
Corr Ans: A
PM#165
B 5-99
Page 34
American Coat Company estimates that 60,000 special zippers will be used in the manufacture of men's
jackets during the next year. Reese Zipper Company has quoted a price of $.60 per zipper. American
would prefer to purchase 5,000 units per month, but Reese is unable to guarantee this delivery schedule.
In order to ensure availability of these zippers, American is considering the purchase of all 60,000 units at
the beginning of the year. Assuming American can invest cash at eight percent, the company's
opportunity cost of purchasing the 60,000 units at the beginning of the year is?
a.
b.
c.
d.
$1,320
$1,440
$1,500
$2,640
CPA-04245
Explanation
Choice "a" is correct.
Cost to purchase 60,000 zippers:
60,000 × .60 = $36,000
The opportunity cost is the forgone interest on the $33,000 cash payment (the first $3,000 would have
had to be paid in either case).
The $33,000 cash payment made evenly throughout the period is the same as making the total payment
in the middle of the period. The solution is:
Principal
33,000
×
Rate
Time
.08 ×
1/2
Interest
= $1,320
Another way to express the formula is as follows:
[($3,000 x 1/12) + ($3,000 x2/12) + ($3,000 x 3/12 ... + ($3,000 x 11/12) x .08 =
$3,000 x [1/12 + 2/12 + 3/12 ... + 11/12] x .08 =
$3,000 x (66/12) x .08 =
$3,000 x 66/6 x 1/2 x .08 =
$33,000 x .08 x 1/2 = $1,320
The computation represents the weighted average of the payments throughout the time period.
CPA-04249
Type1 M/C
321. CPA-04249
A-D
D92 - 1.01
Corr Ans: C
PM#166
B 5-99
Page 34
The opportunity cost of making a component part in a factory with no excess capacity is the:
a. Fixed manufacturing cost of the component.
183
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
b. Cost of the production given up in order to manufacture the component.
c. Net benefit given up from the best alternative use of the capacity.
d. Total manufacturing cost of the component.
CPA-04249
Explanation
Definition: Opportunity cost is the maximum benefit foregone by using a scarce resource for a given
purpose. It is the benefit provided by the next best use of that resource.
Choice "c" is correct. Opportunity cost is the net benefit given up from the best alternative use of the
capacity.
Choices "a", "b", and "d" are incorrect, per above definition.
CPA-04251
Type1 M/C
322. CPA-04251
A-D
D92 - 1.02
Corr Ans: D
PM#167
B 5-99
Page 34
The opportunity cost of making a component part where there is no alternative use for the factory is:
a.
b.
c.
d.
The total manufacturing cost of the component.
The total variable cost of the component.
The fixed manufacturing cost of the component.
Zero.
CPA-04251
Explanation
Choice "d" is correct. Zero. If there is excess capacity, then it is not possible to have an opportunity cost
because nothing is being foregone.
Choices "a", "b", and "c" are incorrect, per above.
CPA-04252
Type1 M/C
323. CPA-04252
A-D
D96 - 1.05
Corr Ans: C
PM#168
B 5-99
Page 34
An important concept in decision-making is described as "the contribution to income that is foregone by
not using a limited resource to its best alternative use." This concept is called:
a.
b.
c.
d.
Marginal cost.
Incremental cost.
Opportunity cost.
Irrelevant cost.
CPA-04252
Explanation
Choice "c" is correct. Opportunity cost is the contribution to income that is foregone by not using a limited
resource for its best alternative use.
Choice "a" is incorrect. Marginal costs are the sum of the variable and avoidable fixed costs necessary to
have a one-unit increase in activity.
Choice "b" is incorrect. Incremental costs (differential costs) are future costs that will vary with the course
of action taken. They refer to additional costs to make more products.
Choice "d" is incorrect. An irrelevant cost (sunk cost) is a past cost that will not influence future decisions.
CPA-04253
Type1 M/C
324. CPA-04253
A-D
J91 - 7A
Corr Ans: C
PM#169
B 5-99
Page 38
Almo developed its business plan based on the assumption that canopies would sell at a price of $400
each. The variable costs for each canopy were projected at $200, and the annual fixed-costs were
budgeted at $100,000. Almo's after-tax profit objective was $240,000; the company's effective tax rate is
184
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
40 percent. If no changes are made to the selling price or cost structure, determine the number of units
that Almo Company must sell in order to break-even.
a.
b.
c.
d.
167 units.
250 units.
500 units.
750 units.
CPA-04253
Explanation
Choice "c" is correct. 500 units must be sold to breakeven.
Total fixed cost $100,000 ÷ contribution margin per unit of $200 = 500 units to breakeven.
Choices "a", "b", and "d" are incorrect, per the above calculation.
CPA-04254
Type1 M/C
325. CPA-04254
A-D
J91 - 7B
Corr Ans: B
PM#170
B 5-99
Page 39
Almo developed its business plan based on the assumption that canopies would sell at a price of $400
each. The variable costs for each canopy were projected at $200, and the annual fixed-costs were
budgeted at $100,000. Almo's after-tax profit objective was $240,000; the company's effective tax rate is
40 percent. If no changes are made to the selling price or cost structure, determine the number of units
that Almo Company must sell to achieve its after-tax profit objective.
a.
b.
c.
d.
1,700 units.
2,500 units.
3,500 units.
4,500 units.
CPA-04254
Explanation
Choice "b" is correct. 2,500 units must be sold to achieve a profit of $240,000.
$240,000
.6
Target after-tax profit of $240,000 ÷ (1 − tax rate) =
= $400,000
Total fixed cost + target after-tax profit ÷ contribution margin per unit =
$100,000 + 400,000
$200
= 2,500 units to achieve after-tax profit objective
Choices "a", "c", and "d" are incorrect, per the above calculation.
CPA-04255
Type1 M/C
326. CPA-04255
A-D
J91 - 7C
Corr Ans: B
PM#171
B 5-99
Page 35
Assumptions underlying cost-volume-profit analysis include all of the following, except:
a.
b.
c.
d.
All costs can be divided into fixed and variable elements.
Total costs are directly proportional to volume over the relevant range.
Selling prices are to be unchanged.
Volume is the only relevant factor affecting cost.
CPA-04255
Explanation
Choice "b" is correct. Only total variable costs are directly proportional to volume over the relevant range.
Choices "a", "c", and "d" are incorrect, because all are underlying assumptions of cost-volume-profit.
185
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-04256
Type1 M/C
327. CPA-04256
A-D
J93 - 1.01
Corr Ans: C
PM#172
B 5-99
Page 38
Delphi Company has developed a new product that will be marketed for the first time during the next
fiscal year. Although the Marketing Department estimates that 35,000 units could be sold at $36 per unit,
Delphi's management has allocated only enough manufacturing capacity to produce a maximum of
25,000 units of the new product annually. The fixed-costs associated with the new product are budgeted
at $450,000 for the year, which includes $60,000 for depreciation on new manufacturing equipment. Data
associated with each unit of product are presented below. Delphi is subject to a 40 percent income tax
rate.
Direct material
Direct labor
Manufacturing overhead
Total variable manufacturing cost
Selling expenses
Total variable cost
Variable Costs
$ 7.00
3.50
4.00
14.50
1.50
$ 16.00
The number of units of the new product that Delphi Company must sell during the next fiscal year in order
to break even is:
a.
b.
c.
d.
20,930
18,140
22,500
19,500
CPA-04256
Explanation
Choice "c" is correct. 22,500 units.
Selling price
Total variable cost
$ 36.00
16.00
$ 20.00
Fixed costs ÷ contribution margin = breakeven units
$450,000 ÷
$20.00
=
22,500 units
Choices "a", "b", and "d" are incorrect, per the above calculation.
CPA-04257
Type1 M/C
328. CPA-04257
A-D
J93 - 1.02
Corr Ans: A
PM#173
B 5-99
Page 35
Delphi Company has developed a new product that will be marketed for the first time during the next
fiscal year. Although the Marketing Department estimates that 35,000 units could be sold at $36 per unit,
Delphi's management has allocated only enough manufacturing capacity to produce a maximum of
25,000 units of the new product annually. The fixed-costs associated with the new product are budgeted
at $450,000 for the year, which includes $60,000 for depreciation on new manufacturing equipment. Data
associated with each unit of product are presented below. Delphi is subject to a 40 percent income tax
rate.
Direct material
Direct labor
Manufacturing overhead
Total variable manufacturing cost
Selling expenses
Total variable cost
Variable Costs
$ 7.00
3.50
4.00
14.50
1.50
$ 16.00
186
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
The maximum after-tax profit that can be earned by Delphi Company from sales of the new product
during the next fiscal year is:
a.
b.
c.
d.
$30,000
$50,000
$110,000
$66,000
CPA-04257
Explanation
Choice "a" is correct. $30,000.
Contribution margin per unit ($36 − $16)
Maximum capacity allocated
Pretax contribution margin
Less fixed costs
Pretax profit
Less tax ($50,000 × 40%)
After-tax profit
$ 20.00
× 25,000
500,000
(450,000)
50,000
(20,000)
$ 30,000
Choices “b”, “c”, and “d” are incorrect, per the above calculation.
CPA-04258
Type1 M/C
329. CPA-04258
A-D
J93 - 1.03
Corr Ans: D
PM#174
B 5-99
Page 39
Delphi Company has developed a new product that will be marketed for the first time during the next
fiscal year. Although the Marketing Department estimates that 35,000 units could be sold at $36 per unit,
Delphi's management has allocated only enough manufacturing capacity to produce a maximum of
25,000 units of the new product annually. The fixed-costs associated with the new product are budgeted
at $450,000 for the year, which includes $60,000 for depreciation on new manufacturing equipment. Data
associated with each unit of product are presented below. Delphi is subject to a 40 percent income tax
rate.
Direct material
Direct labor
Manufacturing overhead
Total variable manufacturing cost
Selling expenses
Total variable cost
Variable Costs
$ 7.00
3.50
4.00
14.50
1.50
$ 16.00
Delphi Company's management has stipulated that it will not approve the continued manufacture of the
new product after the next fiscal year unless the after-tax profit is at least $75,000 the first year. The unit
selling price to achieve this target profit must be at least:
a.
b.
c.
d.
$36.60
$34.60
$41.40
$39.00
CPA-04258
Explanation
Choice "d" is correct. $39.00.
After-tax profit
Reciprocal of tax rate (100% − 40%)
Pre-tax profit
Fixed cost
$ 75,000
÷
60%
125,000
450,000
575,000
187
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Maximum volume
Required contribution margin per unit
Variable cost per unit
Required selling price
÷ 25,000
23
16
$
39
Choices "a", "b", and "c" are incorrect, per the above calculation.
CPA-04259
Type1 M/C
330. CPA-04259
A-D
D93 - 1.03
Corr Ans: C
PM#175
B 5-99
Page 35
Marston Enterprises sells three chemicals: petrol, septine, and tridol. Petrol is the company's most
profitable product; tridol is the least profitable. Which one of the following events will definitely decrease
the firm's overall breakeven point for the upcoming accounting period?
a. The installation of new computer-controlled machinery and subsequent layoff of assembly-line
workers.
b. An increase in the overall market for septine.
c. An increase in anticipated sales of petrol relative to sales of septine and tridol.
d. An increase in petrol's raw material cost.
CPA-04259
Explanation
Choice "c" is correct. An increase in anticipated sales of petrol relative to sales of septine and tridol will
decrease the breakeven point. This is because the product mix has changed in favor of the more
profitable (higher contribution margin) products. The composite contribution margin is higher, and the
breakeven point is lower.
Choice "a" is incorrect. The effect on breakeven cannot be determined.
Choice "b" is incorrect. An increase in market will not affect breakeven unless the price of the product
changes.
Choice "d" is incorrect. An increase in material cost will decrease contribution margin and increase
breakeven.
CPA-04260
Type1 M/C
331. CPA-04260
A-D
J94 - 1.04
Corr Ans: A
PM#176
B 5-99
Page 38
The breakeven point in units increases when unit costs:
a.
b.
c.
d.
Increase and sales price remain unchanged.
Remain unchanged and sales price increases.
Decrease and sales price increases.
Increase and sales price increases.
CPA-04260
Explanation
Choice "a" is correct. The breakeven point in units will increase when units costs increase and sales
price remain unchanged. Higher unit costs, without a change in sales price, will decrease contribution
margin and increase the number of units required to break even.
Choice "b" is incorrect. If units costs are unchanged and sales price increases, contribution margin will
increase and breakeven will decrease.
Choice "c" is incorrect. If unit costs decrease and sales price increase, contribution margin will increase
and breakeven will go down.
Choice "d" is incorrect. If unit costs increase and sales price increases, the effect on contribution margin
and breakeven point are uncertain.
CPA-04261
Type1 M/C
A-D
Corr Ans: C
PM#177
188
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
B 5-99
Becker CPA Review, PassMaster Questions
Lecture: Business 5
332. CPA-04261
J94 - 1.28
Page 38
Bruell Electronics Co. is developing a new product, surge protectors for high-voltage electrical flows. The
following cost information relates to the product.
Unit Costs
$3.25
4.00
.75
Direct materials
Direct labor
Distribution
The company will also be absorbing $120,000 of additional fixed-costs associated with this new product.
A corporate fixed charge of $20,000 currently absorbed by other products will be allocated to this new
product.
If the selling price is $14 per unit, the breakeven point in units (rounded to the nearest hundred) for surge
protectors is:
a.
b.
c.
d.
10,000 units.
15,000 units.
20,000 units.
23,300 units.
CPA-04261
Explanation
Choice "c" is correct. $20,000 units.
Price
Direct materials
Direct labor
Distribution
Contribution margin
Additional "fixed" costs
Contribution margin
Units to breakeven
$
14.00
(3.25)
(4.00)
(.75)
$
6.00
$ 120,000
÷
6
20,000
Note: The $20,000 of allocated fixed costs are irrelevant.
Choices "a", "b", and "d" are incorrect, per the above calculation.
CPA-04262
Type1 M/C
333. CPA-04262
A-D
J94 - 1.29
Corr Ans: C
PM#178
B 5-99
Page 39
Bruell Electronics Co. is developing a new product, surge protectors for high-voltage electrical flows. The
following cost information relates to the product.
Unit Costs
$3.25
4.00
.75
Direct materials
Direct labor
Distribution
The company will also be absorbing $120,000 of additional fixed-costs associated with this new product.
A corporate fixed charge of $20,000 currently absorbed by other products will be allocated to this new
product.
How many surge protectors (rounded to the nearest hundred) must Bruell Electronics sell at a selling
price of $14 per unit to gain $30,000 additional income before taxes?
a.
b.
c.
d.
12,100 units.
20,000 units.
25,000 units.
28,300 units.
CPA-04262
Explanation
189
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "c" is correct. $25,000 units.
Price
Direct materials
Direct labor
Distribution
Contribution margin
$
Additional "fixed" costs
Additional income before taxes
$ 120,000
30,000
150,000
÷
6
25,000
$
Contribution margin
Units to achieve + $30,000
14.00
(3.25)
(4.00)
(.75)
6.00
Choices "a", "b", and "d" are incorrect, per the above calculation.
CPA-04263
Type1 M/C
334. CPA-04263
A-D
J94 - 1.30
Corr Ans: D
PM#179
B 5-99
Page 39
Bruell Electronics Co. is developing a new product, surge protectors for high-voltage electrical flows. The
following cost information relates to the product.
Unit Costs
$3.25
4.00
.75
Direct materials
Direct labor
Distribution
The company will also be absorbing $120,000 of additional fixed-costs associated with this new product.
A corporate fixed charge of $20,000 currently absorbed by other products will be allocated to this new
product.
How many surge protectors (rounded to the nearest hundred) must Bruell Electronics sell at a selling
price of $14 per unit to increase after-tax income by $30,000? Bruell Electronics' effective income tax
rate is 40 percent.
a.
b.
c.
d.
12,100 units.
20,000 units.
25,000 units.
28,300 units.
CPA-04263
Explanation
Choice "d" is correct. $28,300 units.
Price
Direct materials
Direct labor
Distribution
Contribution margin
$
Additional "fixed" costs
Pretax profit − $30,000 ÷ 60%
$120,000
50,000
170,000
÷
6
28,300
$
Contribution margin
Units to achieve $30,000 additional after tax income
14.00
(3.25)
(4.00)
(.75)
6.00
Choices "a", "b", and "c" are incorrect, per the above calculation.
CPA-04264
Type1 M/C
335. CPA-04264
A-D
J96 - 1.22
Corr Ans: C
PM#180
Page 112
190
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
B 5-99
Becker CPA Review, PassMaster Questions
Lecture: Business 5
When a multi-product plant operates at full capacity, quite often decisions must be made as to which
products to emphasize. These decisions are frequently made with a short-run focus. In making such
decisions, managers should select products with the:
a.
b.
c.
d.
Highest sales price per unit.
Highest individual unit contribution margin.
Highest contribution margin per unit of the constraining resource.
Lowest variable cost per unit.
CPA-04264
Explanation
Choice "c" is correct. In making decisions about which products to emphasize, managers should select
products with the highest contribution margin per unit of the constraining resource.
Choice "a" is incorrect. Highest sales price per unit may be overshadowed by high cost of goods sold.
Choice "b" is incorrect. Highest individual unit contribution margin ignores the presence of constraining
resources.
Choice "d" is incorrect. If selling price is quite low, even with the lowest variable cost per unit, contribution
margin is quite low.
CPA-04265
Type1 M/C
336. CPA-04265
A-D
D94 - 1.02
Corr Ans: A
PM#181
B 5-99
Page 36
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.
Tape Duplicator
$ 44.00
18.00
30.00
36.00
18.00
$ 146.00
Raw materials
Machining @ $12/hr.
Assembly @ $10/hr.
Variable overhead @ $8/hr.
Fixed overhead @ $4/hr.
Total cost
Suggested selling price
Actual research and development costs
Proposed advertising and promotion costs
$ 169.95
$240,000
$500,000
Cleaning Unit
$ 36.00
15.00
10.00
18.00
9.00
$ 88.00
$ 99.98
$175,000
$350,000
The difference between the $99.98 suggested selling price for Huron's laser disc cleaning unit and its
total unit cost of $88.00 represents the unit's:
a.
b.
c.
d.
Gross profit.
Contribution.
Gross profit margin ratio.
Residual income.
CPA-04265
Explanation
Choice "a" is correct. Gross profit is the difference between selling price and cost of goods sold, including
overhead.
Choice "b" is incorrect. Contribution is sales price less variable costs.
Choice "c" is incorrect. Gross profit margin ratio is the complement of the cost of sales (absorption
costing) ratio.
191
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Choice "d" is incorrect. Residual income is income in excess of a fixed return on invested capital.
CPA-04266
Type1 M/C
337. CPA-04266
A-D
D96 - 1.06
Corr Ans: C
PM#182
B 5-99
Page 87
Several surveys point out that most managers use full product costs, including unit fixed-costs and unit
variable costs, in developing cost-based pricing. Which one of the following is least associated with costbased pricing?
a.
b.
c.
d.
Price stability.
Price justification.
Target pricing.
Fixed-cost recovery.
CPA-04266
Explanation
Choice "c" is correct. Target pricing is least associated with (full) cost-based pricing.
Cost-based pricing is associated with:
a. Price stability.
b. Price justification.
d. Fixed-cost recovery.
CPA-04267
Type1 M/C
338. CPA-04267
A-D
D96 - 1.02
Corr Ans: B
PM#183
B 5-99
Page 87
Kator Co. is a manufacturer of industrial components. One of their products that is used as a subcomponent in auto manufacturing is KB-96. This product has the following financial structure per unit.
Selling Price
$150
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Shipping and handling
Fixed selling and administrative
Total costs
$ 20
15
12
30
3
10
$ 90
Kator Co. has received a special, one-time, order for 1,000 KB-96 parts. Assuming Kator has excess
capacity, the minimum price that is acceptable for this one-time, special order is in excess of:
a. $47
b. $50
c. $60
d. $90
CPA-04267
Explanation
Choice "b" is correct. $50 (variable cost) is the minimum price that is acceptable for this one-time, special
order, assuming excess capacity is available.
Variable
cost
Selling price
$150.00
Direct materials
Direct labor
Variable manufacturing overhead
$ 20
15
12
20
15
12
192
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
Fixed manufacturing overhead
Shipping and handling
Fixed selling and administrative
Total costs
30
3
10
$ 90
−
3
−
50
Choices "a", "c", and "d" are incorrect, per the above calculation.
CPA-04268
Type1 M/C
339. CPA-04268
A-D
D96 - 1.04
Corr Ans: B
PM#184
B 5-99
Page 87
Kator Co. has received a special, one-time, order for 1,000 KB-96 parts. Assume that Kator is operating
at full capacity, and the next best alternative use of their capacity on existing equipment is LB-64 that
would produce a contribution of $10,000. This product has the following financial structure per unit.
Selling Price
$150
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Shipping and handling
Fixed selling and administrative
Total costs
$ 20
15
12
30
3
10
$ 90
The minimum price that is acceptable for this one-time, special order is in excess of:
a.
b.
c.
d.
$57
$60
$70
$87
CPA-04268
Explanation
Choice "b" is correct. $60 is the minimum price that is acceptable, using the original data, for this onetime, special order.
$60 opportunity cost equals variable cost of $50 plus alternative use contribution of $10 ($10,000 profit +
1,000 units).
Direct materials
Direct labor
Variable Mfg OH
Variable selling
Variable cost
Alternative use contribution
Opportunity cost
20
15
12
3
50
10
60
Choices "a", "c", and "d" are incorrect, per the above calculation.
CPA-04269
Type1 M/C
340. CPA-04269
A-D
D92 - 1.04
Corr Ans: A
PM#185
B 5-99
Page 112
In joint-product costing and analysis, which one of the following costs is relevant when deciding the point
at which a product should be sold in order to maximize profits?
a.
b.
c.
d.
Separable costs after the split-off point.
Joint costs to the split-off point.
Purchase costs of the materials required for the joint product.
The company president's salary.
193
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Business 5
CPA-04269
Explanation
Choice "a" is correct. Costs subsequent to split-off, and revenues, are relevant to maximizing profits.
Choice "b" is incorrect, since joint costs to the split-off point are unavoidable and irrelevant to one
particular product.
Choice "c" is incorrect. Purchase cost of materials for joint products could not be separated for one
product.
Choice "d" is incorrect. The president's salary is a fixed period cost.
CPA-04270
Type1 M/C
341. CPA-04270
A-D
D92 - 1.05
Corr Ans: D
PM#186
B 5-99
Page 36
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.
a.
b.
c.
d.
Manufacturing supplies.
Insurance on factory.
Direct labor cost.
Packaging and shipping costs.
Part of Product Cost Under
Absorption
Variable
Cost
Cost
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
CPA-04270
Explanation
Choice "d" is correct. Shipping costs are not a part of product cost under absorption costing. Shipping
costs are variable and would be a part of the calculation of contribution margin.
Choice "a" is incorrect. Manufacturing supplies are properly a part of product cost under both methods.
Choice "b" is incorrect. Insurance on factory is a product cost for absorption costing and a period cost for
variable costing.
Choice "c" is incorrect. Direct labor is a product cost under both methods.
CPA-04271
Type1 M/C
342. CPA-04271
A-D
J96 - 1.21
Corr Ans: C
PM#187
B 5-99
Page 110
Costs relevant to a make-or-buy decision include variable labor and variable materials as well as:
a.
b.
c.
d.
Depreciation.
Factory management costs.
Avoidable fixed-costs.
Property taxes.
CPA-04271
Explanation
Choice "c" is correct. Costs relevant to a make-or-buy decision include variable labor and variable
materials as well as avoidable fixed costs. Avoidable fixed costs "attach" to a specific decision and are
incurred only if that decision is taken. They are relevant in a marginal analysis.
The following are not relevant to a make-or-buy decision:
a. Depreciation.
b. Factory management costs.
d. Property taxes.
CPA-04272
Type1 M/C
A-D
Corr Ans: C
PM#188
194
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B 5-99
Becker CPA Review, PassMaster Questions
Lecture: Business 5
343. CPA-04272
D96 - 1.22
Page 110
In a make-versus-buy decision, the relevant costs include variable manufacturing costs as well as:
a.
b.
c.
d.
Factory management costs.
Unavoidable costs.
Avoidable fixed-costs.
Depreciation costs.
CPA-04272
Explanation
Choice "c" is correct. In a make-versus-buy decision, the relevant costs include variable manufacturing
costs as well as avoidable fixed costs.
The following costs are not relevant in a make-versus-buy decision:
a. Factory management costs.
b. Unavoidable costs.
d. Depreciation costs.
CPA-04273
Type1 M/C
344. CPA-04273
A-D
D93 - 1.01
Corr Ans: B
PM#189
B 5-99
Page 110
Copeland Inc. produces X-547 in a joint manufacturing process. The company is studying whether to sell
X-547 at the split-off point or upgrade the product to become Xylene. The following information has been
gathered.
(1)
(2)
(3)
(4)
(5)
Selling price per pound of X-547
Variable manufacturing costs of upgrade process.
Avoidable fixed-costs of upgrade process.
Selling price per pound of Xylene.
Joint manufacturing costs to produce X-547
Which items should be reviewed when making the upgrade decision?
a.
b.
c.
d.
1, 2, 4
1, 2, 3, 4
1, 2, 3, 4, 5
1, 2, 4, 5
CPA-04273
Explanation
Choice "b" is correct. (1), (2), (3), and (4) are all relevant to the decision. Item (5), joint costs, is not
relevant. Any allocation of joint costs is arbitrary.
CPA-04276
Type1 M/C
345. CPA-04276
A-D
D96 - 1.07
Corr Ans: D
PM#190
B 5-99
Page 112
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 AM12 after further processing. The further processing will cost Whitehall $90,000.
Concerning AM-12, which one of the following alternatives is most advantageous?
a. 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.
b. 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.
c. 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.
195
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Lecture: Business 5
d. Whitehall should process further and sell to Flank if the total selling price per unit after further
processing is greater than $5.00.
CPA-04276
Explanation
Choice "d" is correct. Whitehall should process further and sell to flank if the total selling price per unit
after further processing is greater than $5.00.
Per unit
AM-12
Units
1
Joint costs
Totals
BM-36
AM-12
60,000
Combined
40,000
100,000
$180,000 + $120,000
$3.00
Further costs
1.50
90,000
Total costs
4.50
$270,000
=
$300,000
Add gross margin at split-off:
($3.50 − 3.00) = .50
Minimum
$5.00
Choices "a", "b", and "c" are incorrect, per the above calculation.
CPA-04277
Type1 M/C
346. CPA-04277
A-D
D96 - 1.08
Corr Ans: B
PM#191
B 5-99
Page 36
Assume that Whitehall Corporation agreed to sell AM-12 to Flank Corporation after further processing for
$5.50 per unit. During the first month of production, Whitehall sold 50,000 units with 10,000 units
remaining in inventory at the end of the month. Joint costs attributable to AM-12 were $180,000, and
costs of processing AM-12 further were $90,000. With respect to AM-12, which one of the following
statements is correct?
a.
b.
c.
d.
The operating profit last month was $50,000 and the inventory value is $15,000
The operating profit last month was $50,000 and the inventory value is $45,000
The operating profit last month was $125,000 and the inventory value is $30,000
The operating profit last month was $200,000 and the inventory value is $45,000
CPA-04277
Explanation
Choice "b" is correct. The operating profit last month was $50,000, and the inventory value is $45,000.
Per Unit ×
Units
=
Income
$5.50
×
50,000 = $275,000
Cost of goods sold
4.50
×
50,000 =
Inventory
Operating profit
Inventory
4.50
×
10,000 =
Sales
Inventory
225,000
45,000
50,000
45,000
50,000 unit sales + 10,000 inventory =
60,000 unit production
$180,000 in joint costs divided by 60,000 units =
3.00 unit costs
$90,000 further processing divided by 60,000 units =
1.50 unit costs
Total costs per unit
4.50
Choices "a", "c", and "d" are incorrect, per the above calculation.
CPA-04278
Type1 M/C
A-D
Corr Ans: C
PM#192
196
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B 5-99
Becker CPA Review, PassMaster Questions
Lecture: Business 5
347. CPA-04278
D96 - 1.12
Page 33
In making capital budget decisions, management considers factors that are far broader than costs alone.
Which one of the following factors is least likely to be considered a non-financial or qualitative factor?
a.
b.
c.
d.
Increase in manufacturing flexibility.
Improved product delivery and service.
Less scrap and rework.
Reduction in new product development time.
CPA-04278
Explanation
Choice "c" is correct. Less scrap and rework is least likely to be considered a non-financial or qualitative
factor because it is the most easily quantifiable of the selections and therefore most likely to be included
as a relevant avoidable cost in the capital budgeting analysis.
Choices "a", "b", and "d" are incorrect. All are important factors in a capital budgeting decision, but they
can be difficult to quantify and therefore are more likely to be considered non-financial or qualitative
factors.
CPA-04641
Type1 M/C
348. CPA-04641
A-D
Corr Ans: A
BEC C05 #18
PM#195
B 5-99
Page 54
Day Mail Order Co. applied the high-low method of cost estimation to customer order data for the first 4
months of 2005. What was the variable order filling cost component per order?
Month
January
February
March
April
a.
b.
c.
d.
Orders
1,200
1,300
1,800
1,700
Cost
$3,120
3,185
4,320
3,895
$2.00
$2.42
$2.48
$2.50
CPA-04641
Explanation
Choice "a" is correct. The high-low method uses the high and the low activity levels (orders) in order to
determine the equation of a straight line [Y=(VC * X) + FC], thus separating the total costs into variable
and fixed costs.
$4,320 - $3,120
= $2.00 per order
1,800 - 1,200
Choice "b" is incorrect. Total orders and total costs are not used. The high-low method uses the high
and the low activity levels (orders) in order to determine the equation of a straight line [Y=(VC * X) + FC],
thus separating the total costs into variable and fixed costs.
Choices "c" and "d" are incorrect. The high-low method uses the high and the low activity levels (orders)
in order to determine the equation of a straight line [Y=(VC * X) + FC], thus separating the total costs into
variable and fixed costs.
CPA-04642
Type1 M/C
349. CPA-04642
A-D
BEC C05 #19
Corr Ans: B
PM#196
B 5-99
Page 54
Trijonis Company estimated its material handling costs at two activity levels, as follows:
Kilos Handled
80,000
Cost
$160,000
197
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Lecture: Business 5
60,000
$132,000
What is Trijonis’ estimated cost for handling 75,000 kilos?
a.
b.
c.
d.
$150,000
$153,000
$157,500
$165,000
CPA-04642
Explanation
Choice "b" is correct. Using the high-low method, the variable cost per kilo can be determined by dividing
the change in cost ($160,000 - $132,000) by the change in volume (80,000 - 60,000):
$160,000 - $132,000
= $1.40 per kilo
80,000 - 60,000
The fixed portion of the cost can be determined by substituting the volume and variable in the equation Y
= a + bx, or
Y = a + bx
$160,000 = a + $1.40(80,000)
a = $48,000
At 75,000 kilos, the total cost would be:
Y = $48,000 + $1.40x
Y = $48,000 + $1,40(75,000)
Y = $153,000
Choices "a", "c", and "d" are incorrect. Using the high-low method, the variable cost per kilo can be
determined by dividing the change in cost by the change in volume. The fixed portion of the cost can be
determined by substituting the volume and the variable in the equation Y = a + bx.
CPA-04843
Type1 M/C
350. CPA-04843
A-D
Corr Ans: C
PM#197
B 5-99
Released 2005 Page 95
Which of the following forecasting methods relies mostly on judgment?
a.
b.
c.
d.
Time series models.
Econometric models.
Delphi.
Regression.
CPA-04843
Explanation
Choice "c" is correct. The Delphi method of forecasting involves the use of multiple teams in
geographically remote locations. Information is shared and gathered in a central point and compiled and
then redistributed for comment. The method is highly interpersonal and requires significant judgment.
Choice "a" is incorrect. Although all forecast methods require some judgment regarding both variables
used and the evaluation of results, quantitative methods, such as time series models, rely more heavily
on mathematical relationships than pure judgment.
Choice "b" is incorrect. Although all forecast methods require some judgment regarding both variables
used and the evaluation of results, quantitative methods, such as econometric models, rely more heavily
on mathematical relationships than pure judgment.
Choice "d" is incorrect. Although all forecast methods require some judgment regarding both variables
used and the evaluation of results, quantitative methods, such as regression analysis, rely more heavily
on mathematical relationships than pure judgment.
198
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Lecture: Business 5
199
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