MONTGOMERY COLLEGE
Department of Business and Economics
Rockville Campus
AC 202 REVIEW 3 (CHAPTERS 21, 23, 24, 25, 26)
SPRING 2014
I.
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TRUE/FALSE
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Sales budgets are prepared after the direct materials budget.
A benefit of budgeting is that it provides definite objectives for
evaluating performance.
A budget can be a means of communicating a company's objectives to
external parties.
A budget can be used as a basis for evaluating performance.
The master budget reflects management's long-term plans encompassing
five years or more.
The direct materials budget must be completed before the production
budget because the quantity of materials available for production must
be known.
The direct materials budget contains both quantity and cost data.
A cash budget is an example of a financial budget.
The budgeted income statement indicates the expected profitability of
operations for the next year.
The starting point when budgeting for a not-for-profit organization is
generally to budget expenditures first.
A critical factor in budgeting for a service firm is to determine the
amount of products to purchase.
A budget, if accurate, can be a substitute for management control.
Budget reports comparing actual results with planned objectives should be
prepared only once a year.
A static budget is one that is geared to one level of activity.
A flexible budget varies with different levels of activity.
A flexible budget can be prepared for each of the types of budgets
included in the master budget.
Total budgeted fixed costs appearing on a flexible budget will be the
same amount as total fixed costs on the master budget.
A formula used in developing a flexible budget is: Total budgeted cost =
fixed cost + (total variable cost per unit X activity level).
A flexible budget report will show both actual and budget cost based on
the actual activity level achieved.
A distinction should be made between controllable and non-controllable
costs when reporting information under responsibility accounting.
Responsibility centers also include investment centers.
In a responsibility accounting reporting system, as one moves up each
level of responsibility in an organization, the responsibility reports
become more summarized and show less detailed information.
A cost center incurs costs and generates revenues, and cost center
managers are evaluated on the profitability of their centers.
The formula for computing return on investment is controllable margin
divided by average operating assets.
Standard cost is the industry average cost for a particular item.
Normal standards should be rigorous but attainable.
Actual costs that vary from standard costs always indicate
inefficiencies.
In developing a standard cost for direct materials, a price factor and
a quantity factor must be considered.
A variance is the difference between actual costs and standard costs.
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54.
A materials quantity variance is calculated as the difference between the
standard direct material price and the actual direct material price
multiplied by the actual quantity of direct materials used.
The overhead controllable variance relates primarily to fixed overhead
costs.
The overhead volume variance relates only to fixed overhead costs.
An increase in the cost of indirect manufacturing costs such as fuel and
maintenance may cause an overhead volume variance.
A two-variance analysis of overhead consists of a controllable variance
and a volume variance.
A debit to the Overhead Volume Variance account indicates that the
standard hours allowed for the output produced was greater than the
standard hours at normal capacity.
A balanced scorecard considers both financial as well as non-financial
information.
Consideration of customer credit rating is an example of a financial
perspective.
Learning and growth perspective is that last step when linking processes
across a balanced scorecard.
An important step in management's decision-making process is to determine
and evaluate possible courses of action.
In making decisions, management considers only financial information
because accounting is presented in financial context.
In incremental analysis, total fixed costs will always remain constant
under alternative courses of action.
Decision-making involves reviewing the results of a decision once the
decision has been made.
A special one-time order is acceptable if the unit sales price is greater
than the unit variable cost.
A company should accept an order for its product at less than its regular
sales price if the incremental revenue exceeds the incremental costs.
A decision whether to continue to buy a product instead of producing it
internally depends specifically on the incremental costs and incremental
revenues of making the change.
In a sell or process further decision, management should process further
as long as the incremental revenues from additional processing are
greater than the incremental costs.
It is better to process further rather than sell now if the sales price
increases.
A company should eliminate any segment in which the contribution margin
is less than the fixed costs that are unavoidable.
When a company has limited resources to manufacture products, it should
manufacture those products which have the highest contribution margin
per unit.
If a company has limited machine hours available for production, it is
generally more profitable to produce and sell the product with the
highest contribution margin per machine hour.
One incremental analysis decision is the allocation of limited resources.
If a company is operating at less than capacity, the incremental costs of
a special order will likely include variable manufacturing costs, but not
fixed costs.
In deciding on the future status of an unprofitable segment, management
should recognize that net income will increase by eliminating the
unprofitable segment.
Direct materials, direct labor, and allocated fixed and variable
manufacturing overhead are all relevant in a make or buy decision.
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68.
Sunk costs are considered relevant when choosing among alternatives
because they are differential.
If an unprofitable product is eliminated, fixed expenses allocated to the
eliminated segment will likely be eliminated.
A disadvantage of using an outside supplier is the associated loss of
control over the production process.
Internal rate of return (IRR) is that rate which causes net present value
to be positive.
If net present value (NPV) of a possible investment currently equals
zero, raising the interest rate will cause the NPV to become positive.
Capital budgeting decisions usually involve large investments and can
have a significant impact on a company's future profitability.
The annual rate of return technique requires dividing a project's annual
cash inflows by the economic life of the project.
A hurdle rate is the rate of return set by applying ideal standards.
A major advantage of the annual rate of return technique is that it
considers the time value of money.
The cash payback capital budgeting technique is a quick way to calculate
a project's net present value.
The cash payback method is frequently used as a screening tool but it
does not take into consideration the profitability of a project.
Using the net present value method, a net present value that is positive
indicates that the project would be acceptable.
The net present value method can only be used in capital budgeting if the
expected cash flows from a project are an equal amount each year.
“Mutually exclusive” means that if one adopts a course of action, another
course of action can also be taken at the same time.
Page 3 of 9
II(A).
BUDGETARY PLANNING
Kleinfeld Company produces and sells a widget.
QUARTER
1
2
WIDGET
10,000
18,000
The 2005 sales budget is as follows:
QUARTER
3
4
WIDGET
20,000
35,000
The January 1, 2005 inventory is 6,000. Management desires an ending inventory each
quarter equal to 60% of the next quarter's sales. Sales in the first quarter of 2006
are expected to be 20% higher than sales in the same quarter in 2005.
Instructions:
II(B).
Prepare a production budget by quarters for 2005.
BUDGETARY PLANNING
Kleinfeld Company is preparing its direct labor budget for 2005.
2 hours of direct labor.
Instructions:
Each unit requires
Using the production data developed in part II(A)., prepare a
direct labor cost budget by quarter for 2005. Wage rates are expected
to be $14 for the first 2 quarters and $16 for quarters 3 and 4.
Page 4 of 9
II(C).
BUDGETARY PLANNING
Kleinfeld Company expects to have a cash balance of $50,000 on January 1, 2005.
Relevant monthly budget data for the first 2 months of 2005 are as follows:
Collections from Customers
Payments to Suppliers
Direct Labor
Manufacturing Overhead
Selling and Administrative Expenses
JANUARY
$80,000
50,000
30,000
20,000
10,000
FEBRUARY
$120,000
75,000
45,000
31,000
20,000
Additional Data:
Wages are paid in the month they are incurred.
Manufacturing Overhead costs include depreciation of $1,000 per month. All other
overhead costs are paid as incurred.
Selling and Administrative expenses are exclusive of depreciation. They are paid
as incurred.
Kleinfeld Company has a line of credit at a local bank that enables it to borrow
up to $60,000. The company wants to maintain a minimum monthly cash balance of
$20,000.
Instructions:
Prepare a cash budget for January and February.
Page 5 of 9
III.
BUDGETARY CONTROL
For its investment center, Norwalk Company accumulates the following data:
Sales
Controllable margin
Average operating assets
$ 4,000,000
3,200,000
10,000,000
Compute the return on investment (ROI).
IV.
BUDGETARY CONTROL
B. Blanco, Inc. uses a flexible budget for manufacturing overhead based on direct labor
hours. Variable manufacturing overhead costs per direct labor hour are as follows:
Indirect labor
Indirect materials
Utilities
$1.00
.60
.40
Fixed overhead costs per month are: Supervision $4,000, Depreciation $1,500, and
Property Taxes $800. The company believes it will normally operate in a range of
8,000-10,000 direct labor hours per year.
Instructions:
Prepare a flexible manufacturing overhead budget for 2005 for
the expected range of activity, using increments of 1,000 direct
labor hours.
Page 6 of 9
V.
STANDARD COSTING
The following direct materials and direct labor data pertain to the operations of
Taglialucci Company for the month of August. Taglialucci produced 1,000 lots during
August.
Standard Materials Price
Actual Materials Price
COST
$130 per Ton
$128 per Ton
Standard Labor Rate
Actual Labor Rate
$12 per Hour
$13 per Hour
Instructions:
Standard Materials Quantity
Actual Quantity of Materials Used
(No beginning or ending inventory)
Standard Direct Labor Hours Allowed
Actual Labor Hours Incurred and Used
QUANTITY
1 Ton per Lot
1,200 Tons
4.2 Hours per Lot
4.1 Hours per Lot
Compute the total, price, and quantity variances for materials and labor.
Page 7 of 9
VI.
INCREMENTAL ANALYSIS
Gayle Company is a manufacturer of brass fittings and rolled brass piping. Gayle
has traditionally machined its own piping at a per yard cost of $15.80.
The direct
materials and direct labor cost to manufacture each yard of piping are $5.00 and $6.00,
respectively. And variable manufacturing overhead is charged to production at the rate
of 60% of direct labor cost. Normal production is 50,000 yards per month. A supplier
offers to roll the piping at a price of $15 per yard. If Gayle Company accepts this
offer, all variable manufacturing costs will be eliminated, but $50,000 of the $60,000
of fixed manufacturing overhead currently being charged to the Rolling Department will
have to be absorbed by the Fitting Department. The company is currently operating at
100% capacity.
Instructions:
Prepare an incremental analysis in support of a decision to make or
buy the piping. Should Gayle Company buy the piping from the
outside supplier?
Instructions:
Would your analysis differ from the above if Gayle Company were able
to lease out the production facilities, previously used to roll the
piping, to an outside contractor at $25,000 per month? Under this
assumption should Gayle Company buy the piping from the outside
supplier?
Page 8 of 9
VII.
CAPITAL BUDGETING
The Brigante Company is considering an investment of $125,000 in new equipment which
will be depreciated on a straight-line basis (5-year life, no salvage value). The
expected annual revenues and costs of the new product that will be produced from the
equipment are:
Sales
Less costs and expenses:
Manufacturing costs
Equipment depreciation
Selling and administrative
Income before income taxes
Income tax expense (30%)
Net income
$175,000
$95,000
25,000
30,000
150,000
25,000
7,500
$17,500
PRESENT VALUE OF AN ANNUITY OF $1.00 TABLE
Periods (n)
8%
9%
10%
11%
12%
15%
18%
20%
24%
3
4
5
6
7
8
9
2.5771
3.3121
3.9927
4.6229
5.2064
5.7466
6.2469
2.5313
3.2397
3.8897
4.4859
5.0330
5.5348
5.9953
2.4869
3.1699
3.7908
4.3553
4.8684
5.3349
5.7590
2.4437
3.1025
3.6959
4.2305
4.7122
5.1461
5.5371
2.4018
3.0374
3.6048
4.1114
4.5638
4.9676
5.3283
2.2832
2.8550
3.3522
3.7845
4.1604
4.4873
4.7716
2.1743
2.6901
3.1272
3.4976
3.8115
4.0776
4.3030
2.1065
2.5887
2.9906
3.3255
3.6046
3.8372
4.0310
1.9813
2.4043
2.7454
3.0205
3.2423
3.4212
3.5655
Instructions:
(a)
Compute the annual rate of return.
(b)
Compute the cash payback period.
(c)
Compute the net present value assuming a 10% required rate of return.
(d)
Determine the internal rate of return.
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