chp - cpa diary · web viewthe static-budget variance is the difference between an actual result...

CHAPTER 14: COST ALLOCATION, CUSTOMER-PROFITABILITY ANALYSIS, AND SALES-VARIANCE ANALYSIS

TRUE/FALSE

1. Indirect costs are costs that cannot be traced to cost objects in an economically feasible way.

Answer: True Difficulty: 1 Objective: 1

2. To motivate engineers to design simpler products, costs for production, distribution, and customer service may be included in product-cost estimates.


3. For external reporting, inventoriable costs under GAAP sometimes include R&D costs.

Answer: False Difficulty: 2 Objective: 1

Under GAAP, inventoriable costs include only the costs of producing and sometimes the design costs of the product.

4. Today, companies are simplifying their cost systems and moving toward less-detailed and less-complex cost allocation bases.

Answer: False Difficulty: 3 Objective: 2Companies are moving toward more-detailed and more-complex cost allocations because today technology can capture these costs in a relatively inexpensive manner.

5. When using the cause-and-effect criterion, cost drivers are selected as the cost allocation bases.


6. The ability-to-bear criterion is considered superior when the purpose of cost allocation is motivation.

Answer: False Difficulty: 2 Objective: 2The cause-and-effect or benefits-received criteria is considered superior when the purpose of cost allocation is motivation.

7. The benefits of implementing a more-complex cost allocation system are relatively easy to quantify for application of the cost-benefit approach.

Answer: False Difficulty: 2 Objective: 2The benefits of implementing a more-complex cost allocation system are difficult to measure.

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8. Each company must decide which corporate cost categories should be included in the indirect costs of the divisions -- all, only a subset, or none.


9. Full allocation of corporate costs to divisions is justified when the notion of controllability is applied.

Answer: False Difficulty: 3 Objective: 3The controllability notion is used to justify excluding some or all corporate costs from division reports, not to justify including full costs.

10. When there is a lesser degree of homogeneity, fewer cost pools are required to accurately explain the use of company resources.

Answer: False Difficulty: 2 Objective: 3The greater the degree of homogeneity, the fewer the cost pools required to accurately explain the use of company resources.

11. If a cost pool is homogeneous, the cost allocations using that pool will be the same as they would be if costs of each individual activity in that pool were allocated separately.


12. Facility-sustaining costs do not have a cause-and-effect relationship with individual products.


13. An individual cost item can be simultaneously a direct cost of one cost object and an indirect cost of another cost object.


14. All customers are equally important to a company and should receive equal levels of attention.

Answer: False Difficulty: 3 Objective: 4Customers should receive a level of attention from the company that matches their contribution to the company’s profitability.

15. The purpose of price discounting is to encourage increases in customer purchases.


16. There are two elements that influence customer profitability – revenues and costs.


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17. Companies that only record the invoice price can usually track the magnitude of price discounting.

Answer: False Difficulty: 2 Objective: 4In order to track discounting, the discount must be recorded.

18. An activity-based costing system may focus on customers rather than products.


19. A customer cost hierarchy may include distribution-channel costs.


20. The cost of visiting customers is an example of a customer output unit-level cost.

Answer: False Difficulty: 2 Objective: 5The cost of visiting customers is an example of a customer-sustaining cost.

21. In general, distribution-channel costs are more easily influenced by customer actions than customer batch-level costs.

Answer: False Difficulty: 3 Objective: 6In general, customer batch-level costs are more easily influenced by customer actions than distribution-channel costs.

22. If one of four distribution channels is discontinued, corporate-sustaining costs such as general administration costs will most likely be reduced by 25%.

Answer: False Difficulty: 3 Objective: 6If one of four distribution channels is discontinued, corporate-sustaining costs such as general administration costs will most likely not be affected.

23. To more accurately assess customer profitability, corporate-sustaining costs should be allocated.

Answer: False Difficulty: 3 Objective: 6The allocation of corporate-sustaining costs serves no useful purpose in assessing customer profitability, decision making, performance evaluation, or motivation.

24. It is common to find that a small number of customers generate a high percentage of operating income.


25. The static-budget variance is the difference between an actual result and a budgeted amount in the static budget.


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26. The flexible-budget variance is the difference between an actual result and the flexible-budget amount based on the level of output actually achieved in the budget period.


27. Additional insight can be gained by dividing the sales-mix variance into the flexible-budget variance and the sales-volume variance.

Answer: False Difficulty: 1 Objective: 7Additional insight can be gained by dividing the static-budget variance into the flexible-budget variance and the sales-volume variance.

28. A favorable sales-mix variance arises when the actual sales-mix percentage is less than the budgeted sales-mix percentage.

Answer: False Difficulty: 3 Objective: 7A favorable sales-mix variance arises when the actual sales-mix percentage exceeds the budgeted sales-mix percentage.

29. A composite unit is a hypothetical unit with weights based on the mix of individual units.


30. The sales-mix variance can be explained in terms of the budgeted contribution margin per composite unit of the sales mix.


31. The sales-quantity variance is favorable when budgeted unit sales exceed actual unit sales.

Answer: False Difficulty: 3 Objective: 7The sales-quantity variance is unfavorable when budgeted unit sales exceed actual unit sales.

32. The market-share variance is caused solely by the actual market share being different than the budgeted market share.


33. A favorable market-size variance results with a decrease in market size.

Answer: False Difficulty: 3 Objective: 8A favorable market-size variance results with an increase in market size.

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34. The flexible-budget variance can be further divided into the sales-mix variance and the sales-quantity variance.

Answer: False Difficulty: 1 Objective: 8The sales-volume variance can be further divided into the sales-mix variance and the sales-quantity variance.

35. The direct materials mix variance is the sum of the direct materials mix variances for each input.

Answer: True Difficulty: 1 Objective: A

36. An unfavorable direct materials mix variance results when cheaper direct materials are substituted for more expensive direct materials.

Answer: False Difficulty: 2 Objective: AA favorable direct materials mix variance results when cheaper direct materials are substituted for more expensive direct materials.

37. A favorable direct materials yield variance results when less direct materials are used than planned.

Answer: True Difficulty: 2 Objective: A

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MULTIPLE CHOICE

38. Costs which are not economically feasible to trace but are related to a cost object are known asa. fixed costs.b. direct costs.c. indirect costs.d. variable costs.

Answer: c Difficulty: 1 Objective: 1

39. Any item for which a separate measurement of cost is desired is known asa. cost allocation.b. a cost object.c. a direct cost.d. an indirect cost.

Answer: b Difficulty: 1 Objective: 1

40. Indirect costsa. often comprise a large percentage of overall costs assigned to a cost object.b. specifically exclude marketing costs.c. cannot be used for external reporting.d. are treated as period costs and not as product costs.

Answer: a Difficulty: 3 Objective: 1

41. All of the following illustrate purposes for allocating costs to cost objects EXCEPTa. to provide information for economic decisions.b. to motivate managers and employees.c. to determine a selling price the market will bear.d. to measure income and assets for reporting to external parties.


42. The costs of all six value-chain functions should be included when determininga. whether to add a new product line.b. the selling price of a service.c. whether to make or buy a component part from another manufacturer. d. all of the above.

Answer: d Difficulty: 3 Objective: 1

43. R&D costs are used for which purpose of cost allocation?a. To provide information for economic decisionsb. To report to external parties when using generally accepted accounting principlesc. To calculate costs of a government contractd. All of the above purposes


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44. Which purpose of cost allocation is used to encourage sales representatives to push high-margin products or services?a. To provide information for economic decisionsb. To motivate managers and other employeesc. To justify costs or compute reimbursementd. To measure income and assets for reporting to external parties


45. Which purpose of cost allocation is used to decide on the selling price for a customized product or service?a. To provide information for economic decisionsb. To motivate managers and other employeesc. To justify costs or compute reimbursementd. To measure income and assets for reporting to external parties


46. To guide cost allocation decisions, the cause-and-effect criterion a. is used less frequently than the other criteria.b. is the primary criterion used in activity-based costing. c. is a difficult criterion on which to obtain agreement.d. may allocate corporate salaries to divisions based on profits.


47. To guide cost allocation decisions, the benefits-received criteriona. generally uses the cost driver as the cost allocation base.b. results in subsidizing products that are not profitable.c. is the primarily criterion used in activity-based costing.d. may use an allocation base of division revenues to allocate advertising costs.


48. To guide cost allocation decisions, the fairness or equity criteriona. is the criterion often cited in government contracts.b. is superior when the purpose of cost allocation is for economic decisions.c. is used more frequently than the other criteria.d. is the primary criterion used in activity-based costing.


49. To guide cost allocation decisions, the ability to bear criteriona. is likely to be the most credible to operating personnel.b. allocates costs in proportion to the benefits received. c. results in subsidizing products that are not profitable.d. is the criterion often cited in government contracts.


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50. Which cost-allocation criterion is appropriate when making an economic decision?a. The fairness or equity criterionb. The ability to bear criterionc. The cause-and-effect criteriond. Any of the above criteria are appropriate


51. Which cost-allocation criterion is MOST likely to subsidize poor performers at the expense of the best performers?a. The fairness or equity criterionb. The benefits-received criterionc. The ability to bear criteriond. The cause-and-effect criterion


52. A challenge to using cost-benefit criteria for allocating costs is thata. the costs of designing and implementing complex cost allocations are not readily

apparent.b. the benefits of making better-informed pricing decisions are difficult to measure.c. cost systems are being simplified and fewer multiple cost-allocation bases are

being used.d. the costs of collecting and processing information keep spiraling upward.


53. Corporate overhead costs can be allocateda. using a single cost pool.b. to divisions using one cost pool and then reallocating costs to products using

multiple cost pools.c. using numerous individual corporate cost pools.d. using any of the above methods.


54. The MOST likely reason for allocating all corporate costs to divisions include thata. division managers make decisions that ultimately control corporate costs. b. divisions receive benefits from all corporate costs.c. the hierarchy of costs promotes cost management.d. it is best to use multiple cost objects.


55. The MOST likely reason for NOT allocating corporate costs to divisions include thata. these costs are not controllable by division managers.b. these costs are incurred to support division activities, not corporate activities.c. division resources are already used to attain corporate goals.d. divisions receive no benefits from corporate costs.


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56. Some companies only allocate corporate costs to divisions that a. are planned and under the control of division managers.b. are output unit-level costs.c. are perceived as causally related to division activities.d. are direct costs.


57. Not allocating some corporate costs to divisions and products results ina. an increase in overall corporate profitability.b. the sum of individual product profitability being less than overall company

profitability.c. the sum of individual product profitability being greater than overall company

profitability.d. a decrease in overall corporate profitability.


58. The greater the degree of homogeneity,a. the greater the number of needed cost pools.b. the fewer the number of needed cost pools.c. the less accurate the costs of a particular cost object.d. the greater the variety of cause-and-effect relationships with the cost driver.


59. When individual activities within a cost pool have a similar relationship with the cost driver, those costsa. need to be reallocated.b. need multiple cost drivers.c. are considered a homogeneous cost pool.d. are considered an allocated cost pool.


60. Homogeneous cost pools lead toa. more accurate costs of a given cost object.b. more resources being assigned to that cost object.c. the need for more cost drivers.d. both (a) and (c).


61. Identifying homogeneous cost pools a. requires judgment and should be reevaluated on a regular basis.b. should include the input of management.c. should include a cost-benefit analysis.d. should include all of the above.


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62. To allocate corporate costs to divisions, the allocation base used should a. be an output unit-level base.b. have the best cause-and-effect relationship with the costs.c. combine administrative costs and human resource management costs.d. allocate the full costs.


63. Corporate administrative costs allocated to a division cost pool are MOST likelya. output unit-level costs.b. facility-sustaining costs.c. product-sustaining costs.d. batch-level costs.


64. To manage setup costs, a corporation might focus ona. the number of setup-hours.b. the number of units included in each production run.c. the batch-level costs incurred per setup-hour.d. both (a) and (c).


THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 65 THROUGH 67.The Hassan Corporation has an Electric Mixer Division and an Electric Lamp Division. Of a $20,000,000 bond issuance, the Electric Mixer Division utilized $14,000,000 and the Electric Lamp Division utilized $6,000,000 for expansion. Interest costs on the bond totaled $1,500,000 for the year.

65. What amount of interest costs should be allocated to the Electric Mixer Division?a. $450,000b. $1,050,000c. $4,200,000d. $14,000,000

Answer: b Difficulty: 2 Objective: 3$14,000,000/ $20,000,000 x $1,500,000= $1,050,000

66. What amount of interest costs should be allocated to the Electric Lamp Division?a. $450,000b. $1,050,000c. $4,200,000d. $6,000,000

Answer: a Difficulty: 2 Objective: 3$6,000,000 / $20,000,000 x $1,500,000 = $450,000

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67. The above interest costs would be considered a(n)a. output unit-level cost.b. facility-sustaining cost.c. product-sustaining cost.d. batch-level cost.


68. Customers making large contributions to the profitability of the company should a. be treated the same as other customers since all customers are important.b. receive a higher level of attention from the company than less profitable

customers.c. be charged higher prices for the same products than less profitable customers.d. not be offered the volume-based price discounts offered to less profitable

customers.


69. Price discounts are influenced bya. the volume of product purchased.b. a desire to sell to a customer in an area with high-growth potential.c. negotiating skills of the sales person.d. all of the above.


70. To improve customer profitability, companies should tracka. only the final invoice price of a sale.b. the volume of the products purchased by each customer.c. discounts taken by each customer. d. both (b) and (c).


71. To improve customer profitability, companies should a. strictly enforce their volume-based price discounting policy.b. track discounts by customer.c. track discounts by sales person.d. both (b) and (c).


72. A customer cost hierarchy categorizes costs related to customers into different cost pools on the basis of a. different types of cost drivers.b. different benefits-received relationships.c. different levels of cause-and-effect relationships.d. all of the above.


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73. Costs incurred to process orders would MOST likely be classified as a. a customer output unit-level cost.b. a customer batch-level cost.c. a customer-sustaining cost.d. a corporate-sustaining cost.


74. Top management and general administration costs would MOST likely be classified as a. a customer output unit-level cost.b. a customer batch-level cost.c. a customer-sustaining cost.d. a corporate-sustaining cost.


75. The cost of visiting customers would MOST likely be classified as a. a customer output unit-level cost.b. a customer batch-level cost.c. a customer-sustaining cost.d. a corporate-sustaining cost.


76. Costs incurred to handle each unit sold would MOST likely be classified as a. a customer output unit-level cost.b. a customer batch-level cost.c. a customer-sustaining cost.d. a corporate-sustaining cost.


77. _______________ categorizes costs related to customers into different cost pools on the basis of either different classes of cost drivers or different degrees of difficulty in determining the cause-and-effect (or benefits-received) relationships.a. Customer-profitability analysisb. Customer revenuesc. Customer cost hierarchyd. Price discounting


78. An advantage of using a bar chart to visualize customer profitability is thata. differences in commissions paid to sales persons stand out.b. loss customers stand out.c. trends in the volume of purchases become apparent. d. all of the above are advantages.


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79. Customer actions will LEAST affect a. customer output unit-level costs.b. customer batch-level costs.c. customer-sustaining costs.d. distribution-channel costs.


80. To reduce distribution-channel costs, a company could a. improve the efficiency of the ordering process.b. make fewer customer visits.c. eliminate distribution to retailers and only service wholesalers.d. do any of the above.


81. Corporate-sustaining costs a. are common to all individual customers.b. have a clear cause-and-effect relationship with several cost-allocation bases.c. should be allocated for decisions regarding reducing customer costs.d. apply to all of the above.


82. The allocation of corporate-sustaining costs is useful fora. evaluating the performance of salespersons with individual customer accounts.b. motivating distribution-channel management.c. focusing on the cause-and-effect relationships with the cost-allocation bases.d. none of the above.


83. If deciding whether to eliminate a distribution channel, allocating corporate-sustaining costs to distribution channelsa. helps define cost reduction possibilities.b. gives the misleading impression of potential cost savings.c. identifies administrative inefficiencies.d. evaluates the effectiveness of sales personnel.


84. When corporate-sustaining costs are fully allocated to distribution channels then the sum of the distribution-channel operating incomesa. is less than company-wide operating income.b. is equal to company-wide operating income.c. is greater than company-wide operating income.d. cannot be determined.


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85. Corporate-sustaining costs should be allocated a. to motivate changes in customer behavior.b. to evaluate distribution-channel managers.c. to determine the selling price that will cover all costs.d. to identify the most profitable customers.


86. A common finding in many studies is that a high percentage of operating income is a. contributed by a small number of customers.b. contributed to evenly by most customers.c. the result of high discounting.d. the result of cooperative efforts by many low-volume customers.


87. Loss-causing customersa. should be eliminated.b. should be evaluated for ways to become profitable customers.c. should be retained because each customer adds to long-run profitability.d. do not exist because additional customer sales always increase profits.


88. Customers are more valuable when they are all EXCEPTa. well known in the community.b. expected to continue to do business with a company.c. in an industry with high-growth potential.d. require special attention on a regular basis.


89. Dropping an unprofitable customer willa. eliminate long-run costs assigned to that customer.b. eliminate most short-run costs assigned to that customer.c. decrease long-run profitability.d. increase the potential to cross-sell other products that are more desirable.


90. More insight into the static-budget variance can be gained by subdividing it into a. the sales-mix variance and the sales-quantity variance.b. the market-share variance and the market-size variance.c. the flexible-budget variance and the sales-volume variance.d. a cost hierarchy.


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91. The static-budget variance will be favorable whena. actual unit sales are less than budgeted unit sales.b. the actual contribution margin is greater than the static-budget contribution

margin.c. the actual sales mix shifts toward the less profitable units.d. the composite unit for the actual mix is greater than for the budgeted mix.


92. More insight into the sales-volume variance can be gained by subdividing it into a. the sales-mix variance and the sales-quantity variance.b. the market-share variance and the market-size variance.c. the flexible-budget variance and the market-size variance.d. a cost hierarchy.


93. The budgeted contribution margin per composite unit for the budgeted mix can be computed bya. dividing the total budgeted contribution margin by the actual total units.b. dividing the total budgeted contribution margin by the total budgeted units.c. dividing the actual total contribution margin by the total actual total unitsd. dividing the actual total contribution margin by the total budgeted units.


94. The sales-mix variance results from a difference between thea. actual market share and the budgeted market share.b. actual contribution margin and the budgeted contribution margin.c. budgeted contribution margin per composite unit for the actual mix and the

budgeted contribution margin per composite unit for the budgeted mix.d. actual market size in units and the budgeted market size in units.


95. The sales-mix variance will be unfavorable whena. the actual sales mix shifts toward the less profitable units.b. the composite unit for the actual mix is greater than for the budgeted mix.c. actual unit sales are less than budgeted unit sales.d. the actual contribution margin is greater than the static-budget contribution

margin.


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96. The sales-mix variance will be favorable whena. the actual contribution margin is greater than the static-budget contribution

margin.b. actual unit sales are less than budgeted unit sales.c. the actual sales mix shifts toward the less profitable units.d. the composite unit for the actual mix is greater than for the budgeted mix.


97. An unfavorable sales-mix variance would MOST likely be caused bya. a new competitor providing better service in the high-margin product sector.b. a competitor having distribution problems with high-margin products.c. the company offering low-margin products at a higher price.d. the company experiencing quality-control problems that get negative media

coverage of low-margin products.


98. A shift towards a mix of products with a lower contribution-margin per unit will MOST likely result ina. an unfavorable sales-mix variance.b. an unfavorable sales-quantity variance.c. a favorable sales-mix variance.d. a favorable sales-quantity variance.


99. The sales-quantity variance will be unfavorable whena. the composite unit for the actual mix is greater than for the budgeted mix.b. actual unit sales are less than budgeted unit sales.c. the actual contribution margin is greater than the static-budget contribution

margin.d. the actual sales mix shifts toward the less profitable units.


100. A favorable sales-quantity variance would MOST likely be caused bya. a new competitor providing better service in the high-margin product sector.b. a competitor having distribution problems with high-margin products.c. the company offering low-margin products at a higher price.d. the company experiencing quality-control problems that get negative media

coverage of low-margin products.


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101. (Actual sales quantity in units - Static budget sales quantity in units) x Budgeted contribution margin per unit =a. the sales-volume variance.b. the sales-mix variance.c. the sales-quantity variance.d. the market-share variance.


102. The sales-quantity variance results from a difference betweena. the actual sales mix and the budgeted sales mix.b. the actual quantity of units sold and the budgeted quantity of unit sales in the

static budget.c. actual contribution margin and the budgeted contribution margin.d. actual market size in units and the budgeted market size in units.


THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 103 THROUGH 106.Ceylon Tea Products has an exclusive contract with British Distributors. Calamine and Ceylon are two brands of teas that are imported and sold to retail outlets. The following information is provided for the month of March:

Actual BudgetCalamine Ceylon Calamine Ceylon

Sales in pounds 1,700 lbs. 1,800 lbs. 2,000 lbs. 1,500 lbsPrice per pound $2.50 $2.50 $2.00 $3.00Variable cost per pound 1.00 2.00 1.00 1.50Contribution margin $1.50 $0.50 $1.00 $1.50

Budgeted and actual fixed corporate-sustaining costs are $1,750 and $2,000, respectively.

103. What is the actual contribution margin for the month?a. $3,750b. $4,400c. $4,250d. $3,450

Answer: d Difficulty: 2 Objective: 7(1,700 x $1.50) + (1,800 x $0.50) = $3,450

104. What is the contribution margin for the flexible budget?a. $3,750b. $4,400c. $4,250d. $3,450

Answer: b Difficulty: 2 Objective: 7(1,700 x $1.00) + (1,800 x $1.50) = $4,400

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105. For the contribution margin, what is the total static-budget variance?a. $300 favorableb. $950 unfavorablec. $500 favorabled. $800 unfavorable

Answer: d Difficulty: 2 Objective: 7$800 unfavorable = $4,250 - $3,450

106. For the contribution margin, what is the total flexible-budget variance?a. $300 favorableb. $950 unfavorablec. $500 favorabled. $800 unfavorable

Answer: b Difficulty: 2 Objective: 7$950 unfavorable = $4,400 - $3,450

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 107 THROUGH 109.Edna’s Flowering Plants provides the following information for the month of May:

Actual BudgetTulips Geraniums Tulips Geraniums

Sales in units 1,950 1,800 2,250 1,500Contribution margin per unit $11 $18 $10 $20

107. What is the budgeted contribution margin per composite unit for the actual mix?a. $13.80b. $14.00c. $14.36d. $14.80

Answer: d Difficulty: 2 Objective: 7[$10 x (1,950/3,750)] + [$20 x (1,800/3,750)] = $14.80

108. What is the budgeted contribution margin per composite unit for the budgeted mix?a. $13.80b. $14.00c. $14.36d. $14.80

Answer: b Difficulty: 2 Objective: 7[$10 x (2,250/3,750)] + [$20 x (1,500/3,750)] = $14.00

109. For May, Edna will reporta. a favorable sales-mix variance.b. an unfavorable sales-mix variance.c. a favorable sales-volume variance.d. an unfavorable sales-volume variance.


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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 110 THROUGH 112.Edna’s Flowering Plants provides the following information for the month of May:

Actual BudgetFuchsia Dogwood Fuchsia Dogwood

Sales in units 10,000 2,500 8,000 2,000Contribution margin per unit $9 $7 $10 $8

110. What is the budgeted contribution margin per composite unit for the actual mix?a. $8.00b. $8.60c. $9.00d. $9.60


111. What is the budgeted contribution margin per composite unit for the budgeted mix?a. $8.00b. $8.60c. $9.00d. $9.60


112. For May, Edna will reporta. a favorable sales-mix variance.b. an unfavorable sales-mix variance.c. a favorable sales-volume variance.d. an unfavorable sales-volume variance.


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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 113 THROUGH 116.The XTRA Appliance Manufacturing Corporation manufactures two vacuum cleaners, the Standard and the Super. The following information was gathered about the two products:

Standard SuperBudgeted sales in units 3,200 800Budgeted selling price $300 $850Budgeted contribution margin per unit $210 $550Actual sales in units 3,500 1,500Actual selling price $325 $840

113. What is the budgeted sales-mix percentage for the Standard and the Super vacuum cleaners, respectively?a. 0.80 and 0.20b. 0.70 and 0.30c. 0.20 and 0.80d. 0.30 and 0.70

Answer: a Difficulty: 1 Objective: 73,200/(3,200 + 800) and 800/(3,200 + 800)

114. What is the total sales-volume variance in terms of the contribution margin?a. $108,000 unfavorableb. $108,000 favorablec. $278,000 favorabled. $448,000 favorable

Answer: d Difficulty: 2 Objective: 7Standard = (3,500 - 3,200) x $210 = $ 63,000 FSuper = (1,500 - 800) x $550 = 385,000 F

$448,000 F

115. What is the total sales-quantity variance in terms of the contribution margin?a. $110,000 favorableb. $170,000 favorablec. $278,000 favorabled. $448,000 favorable

Answer: c Difficulty: 2 Objective: 7Standard = (5,000 - 4,000) x .8 x 210 = $168,000 FSuper = (5,000 - 4,000) x .2 x 550 = 110,000 F

$278,000 F

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116. What is the total sales-mix variance in terms of the contribution margin?a. $110,000 favorableb. $170,000 favorablec. $278,000 favorabled. $448,000 favorable

Answer: b Difficulty: 2 Objective: 7Standard = 5,000 x (.7 - .8) x 210 = $105,000 USuper = 5,000 x (.3 - .2) x 550 = $275,000 F

$170,000 F

117. More insight into the sales-quantity variance can be gained by subdividing it into a. the sales-mix variance and the sales-volume variance.b. the market-share variance and the market-size variance.c. the flexible-budget variance and the sales-volume variance.d. a cost hierarchy.


118. The market-share variance results from a difference between thea. actual market share and the budgeted market share.b. actual contribution margin and the budgeted contribution margin.c. budgeted contribution margin per composite unit for the actual mix and the



119. The market-share variance will be favorable whena. the flexible-budget contribution margin is greater than the static-budget

contribution margin.b. the actual market share is greater than the budgeted market share.c. actual market size in units is less than budgeted market size in units.d. actual unit sales are less than budgeted unit sales.


120. The market-share variance is MOST influenced bya. economic downturns in the economy.b. how well managers perform relative to their peers.c. shifts in consumer preferences that are outside of the manager’s control.d. rates of inflation.


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121. An unfavorable market-share variance would MOST likely be caused bya. a competitor providing better service.b. a competitor having distribution problems.c. the company offering products at a lower price.d. the company experiencing quality-control problems that get negative media

coverage.


122. The market-size variance results from a difference between thea. actual market share and the budgeted market share.b. actual contribution margin and the budgeted contribution margin.c. budgeted contribution margin per composite unit for the actual mix and the



123. The market-size variance will be unfavorable whena. the flexible-budget contribution margin is greater than the static-budget

contribution margin.b. the actual market share is greater than the budgeted market share.c. actual market size in units is less than budgeted market size in units.d. actual unit sales are less than budgeted unit sales.


124. A favorable market-size variance would MOST likely be caused bya. the company reducing the services provided to customers.b. an increase in overall market size.c. a new competitor moving into the area.d. a competitor providing better prices.


125. Reliable information about market size and market share is availablea. for no industries.b. for the management consulting and personal financial planning industries.c. for the automobile and television industries.d. for all industries.


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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 126 THROUGH 128.Zorro Company manufactures remote control devices for garage doors. The following information was collected during June:

Actual market size (units) 10,000Actual market share 32%Actual average selling price $10.00Budgeted market size (units) 11,000Budgeted market share 30%Budgeted average selling price $11.00Budgeted contribution margin percomposite unit for budgeted mix $ 5.00

126. What is the market-size variance?a. $500 Ub. $1,500 Uc. $1,600 Fd. $1,000 F

Answer: b Difficulty: 2 Objective: 8(10,000 – 11,000) x 0.30 x $5 = $1,500 U

127. What is the market-share variance?a. $1,000 Fb. $1,100 Fc. $500 Ud. $1,500 U

Answer: a Difficulty: 2 Objective: 810,000 x (0.32 – 0.30) x $5 = $1,000 F

128. What is the sales-quantity variance?a. $1,500 Ub. $1,000 Fc. $500 Ud. The variance cannot be determined.

Answer: c Difficulty: 2 Objective: 8$1,500 U + $1,000 F = $500 U

Chapter 14

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 129 THROUGH 137.The Sasita Corporation manufactures two types of vacuum cleaners, the ZENITH for commercial building use and the House-Helper for residences. Budgeted and actual operating data for the year 20x3 were as follows:

Static Budget ZENITH House-Helper Total Number sold 5,000 20,000 25,000Contribution margin $1,500,000 $3,000,000 $4,500,000

Actual Results ZENITH House-Helper Total Number sold 4,000 28,000 32,000Contribution margin $1,280,000 $3,920,000 $5,200,000

Prior to the beginning of the year, a consulting firm estimated the total volume for vacuum cleaners of the ZENITH and House-Helper category to be 250,000 units, but actual industry volume was 256,000 units.

129. What is the contribution margin for the flexible budget?a. $1,200,000b. $4,200,000c. $5,200,000d. $5,400,000

Answer: d Difficulty: 2 Objective: 7Budgeted contribution margin per unit:ZENITH = $1,500,000/5,000 = $300 House-Helper = $3,000,000/20,000 = $150Flexible-budget contribution margin: 4,000 x $300 = $1,200,000

28,000 x $150 = 4,200,000$5,400,000

130. What is the total static-budget variance in terms of the contribution margin?a. $900 favorableb. $700 favorablec. $200 unfavorabled. $360 unfavorable

Answer: b Difficulty: 1 Objective: 7$700 favorable = $4,500,000 - $5,200,000

131. What is the total flexible-budget variance in terms of the contribution margin?a. $900 favorableb. $700 favorablec. $200 unfavorabled. $360 unfavorable

Answer: c Difficulty: 2 Objective: 7$200 unfavorable = $5,400,000 - $5,200,000

Chapter 14

132. What is the total sales-volume variance in terms of the contribution margin?a. $900 favorableb. $1,260 favorablec. $200 unfavorabled. $360 unfavorable

Answer: a Difficulty: 2 Objective: 7$900 favorable = $4,500,000 - $5,400,000

133. What is the total sales-quantity variance in terms of the contribution margin?a. $200 unfavorableb. $900 favorablec. $360 unfavorabled. $1,260 favorable

Answer: d Difficulty: 3 Objective: 7Budgeted sales-mix percentage:

ZENITH = 5,000/25,000 = 0.20 House-Helper = 20,000/25,000 = 0.80Actual sales-mix percentage:ZENITH = 4,000/32,000 = 0.125 House-Helper = 28,000/32,000 = 0.875

Sales-quantity variance

Actual units of all products sold – Budgeted units of all products sold

Budgeted sales-mix %

Budgeted CMper unit


ZENITH (32,000 – 25,000) x 0.20 x $300 = $ 420,000 FHouse-Helper (32,000 – 25,000) x 0.80 x $150 = $ 840,000 F Total $1,260,000 F

134. What is the total sales-mix variance in terms of the contribution margin?a. $200 unfavorableb. $360 unfavorablec. $900 favorabled. $1,260 favorable

Answer: b Difficulty: 3 Objective: 7Sales-mix variance

Actual units of all products

sold

Actual sales-mix % - Budgeted sales-mix %

Budgeted CMper unit

Sales-mix variance

ZENITH 32,000 x (0.125 - 0.200) x $300 = $720,000 FHouse-Helper 32,000 x (0.875 - 0.800) x $150 = $360,000 U Total $360,000 U

Chapter 14

135. What is the budgeted contribution margin per composite unit of the budgeted mix?a. $140.625b. $180.000c. $208.000d. $162.500

Answer: b Difficulty: 2 Objective: 8ZENITH = $300 x .2 = $ 60House-Helper = $150 x .8 = 120OR $4,500,000/25,000 = $180

136. What is the market-size variance?a. $1,152,000 Fb. $108,000 Fc. $360,000 Ud. $1,260,000 F

Answer: b Difficulty: 3 Objective: 8Actual market share = 32,000/256,000 = 0.125Budgeted market share = 25,000/250,000 = 0.100.

Market-size variance

Actual market size in units - Budgeted market size in units

Budgeted market share

Budgeted CMper composite unit for budgeted mix


Sasita Corp (256,000 - 250,000) x 0.100 x $180 = $108,000 F

137. What is the market-share variance?a. $360,000 Ub. $1,260,000 Fc. $1,152,000 Fd. $108,000 F


Market-share variance

Actual market size in units

Actual market share – Budgeted market share



Sasita Corp 256,000 x (0.125 - 0.100)x $180 = $1,152,000 F

Chapter 14

138. More insight into the flexible-budget variance for direct materials can be gained by subdividing it into the direct materialsa. mix and volume variances.b. market-share and market-size variances.c. mix and yield variances.d. price and efficiency variances.

Answer: d Difficulty: 2 Objective: A

139. More insight into the efficiency variance for direct materials can be gained by subdividing it into the direct materialsa. mix and volume variances.b. market-share and market-size variances.c. mix and yield variances.d. price and efficiency variances.

Answer: c Difficulty: 2 Objective: A

140. The direct materials mix variance will be favorable whena. the flexible-budget contribution margin is greater than the actual contribution

margin.b. the actual direct materials input mix is less expensive than the budgeted direct

materials input mix.c. the actual quantity of total inputs used is greater than the flexible budget for total

inputs.d. actual unit sales are less than budgeted unit sales.

Answer: b Difficulty: 2 Objective: A

141. The materials yield variance will be unfavorable whena. the flexible-budget contribution margin is greater than the actual contribution

margin.b. the actual direct materials input mix is less expensive than the budgeted direct

materials input mix.c. the actual quantity of total inputs used is greater than the flexible budget for total

inputs.d. actual unit sales are less than budgeted unit sales.

Answer: c Difficulty: 2 Objective: A

142. The direct materials mix variance is the a. average of the direct materials mix variances for each input.b. sum of the direct materials mix variances for each input.c. difference between the direct materials mix variances for each input.d. multiple of the direct materials mix variances for each input.

Answer: b Difficulty: 2 Objective: A

Chapter 14

EXERCISES AND PROBLEMS

143. For each cost pool listed select an appropriate allocation base from the list below. An allocation base may be used only once. Assume a manufacturing company.

Allocation bases for which the information system can provide data:

1. Number of employees per department2. Employee wages and salaries per department3. Production facility square footage4. Hours of operation of each production department5. Machine hours by department6. Operations costs of each department7. Hours of computer use per month per department8. Indirect labor-hours per department

Cost pools:

_______ a. Vice President of Finance’s office expenses_______ b. Computer operations used in conjunction with manufacturing_______ c. Personnel Department_______ d. Manufacturing machinery cost_______ e. Energy costs

Answer:

a. Operations costs of each departmentb. Hours of computer use per month per departmentc. Number of employees per departmentd. Machine-hours by department e. Hours of operation of each production department

Difficulty: 2 Objective: 3

Chapter 14

144. Handy-Man Services is a repair-service company specializing in small household jobs. Each client pays a fixed monthly service fee based on the number of rooms in the house. Records are kept on the time and material costs used for each repair. The following profitability data apply to five customers:

Customer Revenues Customer CostsMarveline Burnett $300 $225J Jackson 200 305Roger Jones 80 75Paul Saas 75 110Becky Stephan 350 220

Required:a. Compute the operating income for each of the five customers.b. What options should Handy-Man Services consider in light of the customer-

profitability results?c. What problems might Handy-Man Services encounter in accurately estimating the

operating costs of each customer?

Answer:a.

Customer Revenues Customer Costs Operating incomeMarveline Burnett $300 $225 $ 75J Jackson 200 305 (105)Roger Jones 80 75 5Paul Saas 75 110 (35)Becky Stephan 350 220 130

b. 1. Pay increased attention to the profitable customers Stephan and Burnett. 2. Seek ways of reducing costs and increasing revenues for the loss accounts of J

Jackson and Paul Saas. Work with the customers so their behavior reduces overall costs. Reduce costs with better scheduling. Maybe a different fee schedule needs to be implemented depending on the age of the house, the distance to the home, if the repair is preventive or an emergency, etc. Determine whether the operating income pattern will probably continue or not and why.

3. As a last resort, the company may want to discontinue the Jackson account if the customer does not agree to a fee increase and the operating loss pattern is expected to continue.

c. Problems in accurately estimating operating costs of each customer include:1. The basic underlying records may not be accurate.2. Some repair personnel may be efficient and more experienced, others may be

less experienced and slower, and still others may chit-chat more with the clients than others.

3. Costs that are allocated to more than one customer may be distorting operating income. For example, how is the cost of a trip for parts for three different customers allocated?


Chapter 14

145. Aromatic Coffee, Inc., sells two types of coffee, Colombian and Blue Mountain. The monthly budget for U.S. coffee sales is based on a combination of last year's performance, a forecast of industry sales, and the company's expected share of the U.S. market. The following information is provided for March:

Actual BudgetColombian Blue Mountain Colombian Blue Mountain

Sales in pounds 7,000 lbs. 8,000 lbs. 6,400 lbs. 8,600 lbs

Price per pound $25 $30 $25 $30Variable cost per pound 11 14 12 13

Contribution margin $14 $16 $13 $17

Budgeted and actual fixed corporate-sustaining costs are $60,000 and $72,000, respectively.

Required:

a. Calculate the actual contribution margin for the month.b. Calculate the contribution margin for the static budget.c. Calculate the contribution margin for the flexible budget.d. Determine the total static-budget variance, the total flexible-budget variance,

and the total sales-volume variance in terms of the contribution margin.

Answer:

a. Actual contribution margin: 7,000 x $14 = $ 98,0008,000 x $16 = 128,000

$226,000

b. Static-budget contribution margin: 6,400 x $13 = $ 83,2008,600 x $17 = 146,200

$229,400

c. Flexible-budget contribution margin: 7,000 x $13 = $ 91,0008,000 x $17 = 136,000

$227,000

d. Static-budget variance is $3,400 unfavorable = $229,400 - $226,000Flexible-budget variance is $1,000 unfavorable = $227,000 - $226,000Sales-volume variance is $2,400 unfavorable = $229,400 - $227,000


Chapter 14

146. Harry's Electronics manufactures TVs and VCRs. During February, the following activities occurred:

TVs VCRs Budgeted units sold 17,640 66,360Budgeted contribution margin per unit $90 $156Actual units sold 20,000 80,000Actual contribution margin per unit $100 $158

Required:

Compute the following variances in terms of the contribution margin.

a. Determine the total sales-mix variance.

b. Determine the total sales-quantity variance.

c. Determine the total sales-volume variance.

Answer:

a. TVs [(100,000 x 0.20) x $90] = $1,800,000[(100,000 x 0.21) x $90] = 1,890,000

$ 90,000 unfavorable

VCRs [(100,000 x 0.80) x $156] = $12,480,000(100,000 x 0.79) x $156] = 12,324,000

$ 156,000 favorable

Total sales-mix variance = $90,000 unfavorable + $156,000 favorable = $66,000 favorable.

b. TVs {[(100,000 - 84,000) x 0.21] x $90} = $ 302,400 favorableVCRs {[(100,000 - 84,000) x 0.79] x $156} = 1,971,840 favorable Total sales-quantity variance $2,274,240 favorable

c. Total sales-volume variance = $66,000 favorable + $2,274,240 favorable = $2,340,240 favorable


Chapter 14

147. Speedy Printing manufactures soft cover books. For January, the following information is available:

Budgeted market size (units) 125,000Budgeted market share 18%Budgeted average contribution margin per unit $1.20Actual market size (units) 100,000Actual market share 19%Actual average contribution margin per unit $1.22

Required:

Compute the market-share variance, the market-size variance, and the sales-quantity variance in terms of the contribution margin.

Answer:

100,000 x 0.19 x $1.20 100,000 x 0.18 x $1.20 125,000 x 0.18 x $1.20= $22,800 = $21,600 = $27,000

Market-share variance $1,200 F Market-size variance $5,400 U

Sales-quantity variance $4,200 U


Chapter 14

148. The Omega Corporation manufactures two types of vacuum cleaners, the ZENITH for commercial building use and the House-Helper for residences. Budgeted and actual operating data for the year 20x3 are as follows:



Required:

a. Calculate the contribution margin for the flexible budget.b. Determine the total static-budget variance, the total flexible-budget variance,

and the total sales-volume variance in terms of the contribution margin.

Answer:

Budgeted contribution margin per unit:ZENITH = $3,750,000/15,000 = $250 House-Helper = $12,000,000/60,000 = $200

a. Flexible-budget contribution margin: 16,500 x $250 = $ 4,125,00038,500 x $200 = 7,700,000

$11,825,000

b. Static-budget variance is $650 favorable = $15,750,000- $16,400,000Flexible-budget variance is $4,575 favorable = $11,825,000 - $16,400,000Sales-volume variance is $3,925 unfavorable = $15,750,000- $11,825,000


Chapter 14




Required:Compute the sales-mix variance and the sales-quantity variance by type of vacuum cleaner, and in total. (In terms of the contribution margin.)

Answer:Budgeted sales-mix percentage:

ZENITH = 15,000/75,000 = 20% House-Helper = 60,000/75,000 = 80%

Actual sales-mix percentage:ZENITH = 16,500/55,000 = 30% House-Helper = 38,500/55,000 = 70%

Budgeted contribution margin per unit:ZENITH = $3,750,000/15,000 = $250 House-Helper = $12,000,000/60,000 = $200

Sales-mix variance

Actual units of all products sold


Budgeted CMper unit

Sales-mix variance

ZENITH 55,000 x (0.3 - 0.2) x $250 = $1,375,000 FHouse-Helper 55,000 x (0.7 -0.8) x $200 = $1,100,000 U Total $ 275,000 F




Budgeted CMper unit


ZENITH (55,000 – 75,000) x 0.2 x $250 = $1,000,000 UHouse-Helper (55,000 – 75,000) x 0.8 x $200 = $3,200,000 U Total $4,200,000 U


Chapter 14




Prior to the beginning of the year, a consulting firm estimated the total volume for vacuum cleaners of the Zenith and House-Helper category to be 300,000 units, but actual industry volume was only 275,000 units.

Required: Compute the market-share variance and market-size variance in terms of the contribution margin.

Answer:Actual market share: = 55,000/275,000 = 0.20

Budgeted market share: = 75,000/300,000 = 0.25

Budgeted contribution margin per composite unit of budgeted mix:ZENITH = $250 x 0.2 = $ 50House-Helper = $200 x 0.8 = 160OR $15,750,000/75,000= $210






Omega Corp 275,000 x (0.2 - 0.25) x $210 = $2,887,500 U






Omega Corp (275,000 - 300,000) x 0.25 x $210 = $1,312,500 U


Chapter 14

151. The Chair Company manufactures two modular types of chairs, one for the residential market, and the other for the office market. Budgeted and actual operating data for the year 20x3 are:

Static Budget Residential Office Total Number of chairs sold 260,000 140,000 400,000Contribution margin $26,000,000 $11,200,000 $37,200,000

Actual Results Residential Office Total Number of chairs sold 248,400 165,600 414,000Contribution margin $22,356,000 $13,248,000 $35,604,000

Prior to the beginning of the year, an office products research firm estimated the industry volume for residential and office chairs of the type sold by the Chair Company to be 2,400,000. Actual industry volume for the year 20x3 was only 2,200,000 chairs.

Required:

Compute the following variances in terms of contribution margin.a. Compute the total static-budget variance, the total flexible-budget variance,

and the total sales-volume variance.b. Compute the sale-mix variance and the sales-quantity variance by type of

chair, and in total.c. Compute the market-share variance and market-size variance.

Answer:

a. Budgeted contribution margin per unit:Residential = $26,000,000/260,000 = $100Office = $11,200,000/140,000 = $80

Flexible-budget contribution margin:Residential 248,400 x $100 = $24,840,000Office 165,600 x $80 = $13,248,000

$38,088,000

Static-budget variance is $1,596,000 unfavorable= $37,200,000 - $35,604,000

Sales-volume variance is $888,000 favorable= $37,200,000 - $38,088,000

Flexible-budget variance is $2,484,000 unfavorable= $38,088,000 - $35,604,000

b. Actual sales-mix percentage:Residential = 248,400/414,000 = 60%Office = 165,600/414,000 = 40%

Chapter 14

151. Answer: (continued)

b. Budgeted sales-mix percentage:Residential = 260,000/400,000 = 65%Office = 140,000/400,000 = 35%

Sales-mix variance

Actual units of all products sold


Budgeted CMper unit

Sales-mix variance

Residential 414,000 x (0.6 - 0.65) x $100 = $2,070,000 UOffice 414,000 x (0.4 - 0.35) x $80 = $1,656,000 F Total $ 414,000 U




Budgeted CMper unit


Residential (414,000 - 400,000) x 0.65 x $100 = $ 910,000 FOffice (414,000 - 400,000) x 0.35 x $80 = $ 392,000 F Total $1,302,000 F

c. Actual market share = 414,000/ 2,200,000 = 18.81818% or 0.1881818Budgeted market share = 400,000/ 2,400,000 = 16.66667% or 0.1666667

Budgeted contribution margin per composite unit of budgeted mix:Residential = $100 x .65 = $65Office = $80 x .35 = 28 OR $37,200,000/400,000 $93






Chair Company 2,200,000 x (0.1881818-

0.1666667) x $93= $4,402,000 F(Answers may vary

due to rounding)






Chair Company

(2,200,000 - 2,400,000) x

0.1666667 x $93

= $3,100,000 U(Answers may vary

due to rounding)

Difficulty: 3 Objectives: 7, 8

Chapter 14

CRITICAL THINKING

152. A company might choose to allocate corporate costs to various divisions within the company for what four purposes? Give an example of each.

Answer:

1. To provide information for economic decisions. For example, allocating costs from all six value-chain functions to decide on the selling price of a customized product.

2. To motivate managers and employees. For example, allocating corporate costs such as accounting support to division managers to discourage requesting a multitude of unnecessary financial reports.

3. To justify costs or compute reimbursement. For example, to allocate fixed design and production costs when arriving at a fair price for a government contract.

4. To measure income and assets for reporting to external parties. For example, allocating manufacturing overhead when costing inventories for financial statements presented in the company’s annual report.

Note: Examples will vary.


153. An electronics manufacturer is trying to encourage its engineers to design simpler products so that overall costs are reduced.

Required:

Which of the value-chain function costs (R&D, design, production, marketing, distribution, customer service) should be included in product-cost estimates to achieve the above purpose? Why?

Answer:

All costs that are affected by the design should be included in the product cost estimate. These costs include the cost of design, production, distribution, and customer service.


Chapter 14

154. List at least three different levels of costs in a customer-cost hierarchy and an example of each.

Answer:

List any three of the following:1. Customer output unit-level costs, product-handling costs of each product sold2. Customer batch-level costs, order processing costs incurred3. Customer-sustaining costs, costs of visits to the customer4. Distribution-channel costs, a particular distribution channel manager’s salary5. Corporate-sustaining costs, costs of top management

Note: Examples will vary.


155. Why would a manager perform customer-profitability analysis?

Answer:

Customer profitability analysis highlights how individual customers contribute to profitability. It helps managers determine whether customers who are contributing significantly to profits are receiving a comparable level of attention from the organization.


156. Why would a manager want to calculate the sale-mix and the sales-quantity variances? Market-share and market-size variances?

Answer:

In order to manage effectively and make proper decisions, a manager must keep informed on whether organizational initiatives are progressing as planned. Variances help to inform managers about the reasons (whether favorable or unfavorable) for the differences between the actual result and the budgeted result.

Specifically, the sale-mix and the sales-quantity variances help to explain the sales-volume variance, and the market-share and market-size variances help to explain the sales-quantity variance.

Difficulty: 2 Objectives: 7, 8

Chapter 14

chp - cpa diary · web viewthe static-budget variance is the difference between an actual result...

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