Chapter 8   
 
Flexible Budgets, Overhead Cost Variances, and Management Control
 
1) 
 
Overhead costs are a major part of costs for most companiesmore than 50% of all costs for some companies..   
2) 
 
At the start of the budget period, management will have made most decisions regarding the level of variable costs to be incurred.   
3) 
 
One way to manage both variable and fixed overhead costs is to eliminate nonvalue-adding activities..   
4) 
 
The planning of fixed overhead costs does not differ from the planning of variable overhead costs.   
5) 
 
In a standard costing system, the variable-overhead rate per unit is generally expressed as a standard cost per output unit..   
6) 
 
For calculating the cost of products and services, a standard costing system does not have to track actual costs..   
7) 
 
Standard costing is a cost system that allocates overhead costs on the basis of overhead cost rates based on actual overhead costs times the standard quantities of the allocation bases allowed for the actual outputs produced.   
8) 
 
The budget period for variable-overhead costs is typically less than 3 months.   
9) 
 
A favorable variable overhead spending variance can be the result of paying lower prices than budgeted for variable overhead items such as energy..   
10) 
 
The variable overhead efficiency variance is computed in a different way than the efficiency variance for direct-cost items.   
11) 
 
The variable overhead flexible-budget variance measures the difference between standard variable overhead costs and flexible-budget variable overhead costs.   
12) 
 
The variable overhead efficiency variance measures the efficiency with which the cost-allocation base is used..   
13) 
 
The variable overhead efficiency variance can be interpreted the same way as the efficiency variance for direct-cost items.   
14) 
 
An unfavorable variable overhead efficiency variance indicates that variable overhead costs were wasted and inefficiently used.   
15) 
 
Causes of a favorable variable overhead efficiency variance might include using lower-skilled workers than expected.   
16) 
 
If the production planners set the budgeted machine hours standards too tight, one could anticipate there would be an unfavorable variable overhead efficiency variance..  
17) 
 
If the production planners set the budgeted machine hours standards too tight, one could anticipate there would be an unfavorable fixed overhead efficiency variance.  
18) 
 
For fixed overhead costs, the flexible-budget amount is always the same as the static-budget amount..   
19) 
 
The fixed overhead flexible-budget variance is the difference between actual fixed overhead costs and the fixed overhead costs in the flexible budget..   
20) 
 
There is never an efficiency variance for fixed costs..   
21) 
 
All unfavorable overhead variances decrease operating income compared to the budget..   
22) 
 
A favorable fixed overhead flexible-budget variance indicates that actual fixed costs exceeded the lump-sum amount budgeted.   
23) 
 
Fixed costs for the period are by definition a lump sum of costs that remain unchanged and therefore the fixed overhead spending variance is always zero.   
24) 
 
Caution is appropriate before interpreting the production-volume variance as a measure of the economic cost of unused capacity..   
25) 
 
The production-volume variance arises whenever the actual level of the denominator differs from the level used to calculate the budgeted fixed overhead rate..   
26) 
 
The lump sum budgeted for fixed overhead will always be the same amount for the static budget and the flexible budget..   
27) 
 
A favorable production-volume variance arises when manufacturing capacity planned for is not used.   
28) 
 
The fixed overhead flexible budget variance is the difference between actual fixed overhead costs and fixed overhead costs in the flexible budget..  
29) 
 
An unfavorable production-volume variance always infers that management made a bad planning decision regarding the plant capacity.   
30) 
 
Favorable overhead variances are always recorded with credits in a standard cost system..   
31) 
 
Under activity-based costing, the flexible-budget amount equals the static-budget amount for fixed overhead costs..   
32) 
 
Managers should use unitized fixed manufacturing overhead costs for planning and control.   
33) 
 
For purposes of allocating fixed overhead costs to products, managers may view the fixed overhead costs as if they had a variable-cost behavior pattern..   
34) 
 
Both financial and nonfinancial performance measures are key inputs when evaluating the performance of managers..   
35) 
 
In the journal entry that records overhead variances, the manufacturing overhead allocated accounts are closed..   
36) 
 
Variance analysis of fixed nonmanufacturing costs, such as distribution costs, can also be useful when planning for capacity..   
37) 
 
At the end of the fiscal year, the fixed overhead spending variance is always written off to cost of goods sold.  
38) 
 
Variance analysis of fixed overhead costs is also useful when a company uses activity-based costing..   
39) 
 
An unfavorable fixed setup overhead spending variance could be due to higher lease costs of new setup equipment..   
40) 
 
A favorable variable setup overhead efficiency variance could be due to actual setup-hours exceeding the setup-hours planned for the units produced.   
41) 
 
Overhead costs have been increasing due to all of the following EXCEPT:   
C) 
 
tracing more costs as direct costs with the help of technology 
           42) 
 
Effective planning of variable overhead costs means that a company performs those variable overhead costs that primarily add value for:   
B) 
 
the customer using the products or services  
43) 
 
Variable overhead costs include:   
D) 
 
machine maintenance  
44) 
 
Fixed overhead costs include:   
B) 
 
property taxes paid on plant facilities   
45) 
 
Effective planning of fixed overhead costs includes all of the following EXCEPT:   
A) 
 
planning day-to-day operational decisions   
46) 
 
Effective planning of variable overhead includes all of the following EXCEPT:   
A) 
 
choosing the appropriate level of capacity   
47) 
 
Choosing the appropriate level of capacity:   
A) 
 
is a key strategic decision   
48) 
 
The MAJOR challenge when planning fixed overhead is:   
C) 
 
choosing the appropriate level of capacity   
49) 
 
In a standard costing system, a cost-allocation base would MOST likely be:   
C) 
 
standard machine-hours   
50) 
 
For calculating the costs of products and services, a standard costing system:   
D) 
 
All of these answers are correct.  
51) 
 
The variable overhead flexible-budget variance measures the difference between:   
B) 
 
actual variable overhead costs and the flexible budget for variable overhead costs   
52) 
 
A $5,000 unfavorable flexible-budget variance indicates that:    
B) 
 
the actual variable manufacturing overhead exceeded the flexible-budget amount by $5,000   
53) 
 
Which of the following is NOT a step in developing budgeted variable overhead rates?   
B) 
 
estimating the budgeted denominator level based on expected utilization of available capacity   
54) 
 
In flexible budgets, costs that remain the same regardless of the output levels within the relevant range are:   
C) 
 
fixed costs   
55) 
 
What is the budgeted variable overhead cost rate per output unit?   
A) 
 
$10.75   
56) 
 
What is the flexible-budget amount for variable manufacturing overhead?   
B) 
 
$236,500   
57) 
 
What is the flexible-budget variance for variable manufacturing overhead?   
B) 
 
$5,500 unfavorable   
58) 
 
Variable manufacturing overhead costs were ________ for actual output.   
A) 
 
higher than expected   
59) 
 
What is the budgeted variable overhead cost rate per output unit?   
C) 
 
$18.00   
60) 
 
What is the flexible-budget amount for variable manufacturing overhead?   
A) 
 
$324,000   
61) 
 
What is the flexible-budget variance for variable manufacturing overhead?   
B) 
 
$18,000 unfavorable   
62) 
 
Variable-manufacturing overhead costs were ________ for actual output.   
A) 
 
higher than expected   
63) 
 
What is the budgeted variable overhead cost rate per output unit?   
B) 
 
$125.00  
64) 
 
What is the flexible-budget amount for variable manufacturing overhead?   
B) 
 
$39,375  
65) 
 
What is the flexible-budget variance for variable manufacturing overhead?   
A) 
 
$1,125 favorable   
66) 
 
Variable-manufacturing overhead costs were ________ for actual output.   
C) 
 
lower than expected   
67) 
 
The variable overhead flexible-budget variance can be further subdivided into the:   
C) 
 
spending variance and the efficiency variance   
68) 
 
An unfavorable variable overhead spending variance indicates that:   
B) 
 
the price of variable overhead items was more than budgeted   
69) 
 
When machine-hours are used as an overhead cost-allocation base, the MOST likely cause of a favorable variable overhead spending variance is:   
C) 
 
a decline in the cost of energy   
70) 
 
When machine-hours are used as an overhead cost-allocation base and the unexpected purchase of a new machine results in fewer expenditures for machine maintenance, the MOST likely result would be to report a(n):   
A) 
 
favorable variable overhead spending variance   
71) 
 
For variable manufacturing overhead, there is no:   
D) 
 
production-volume variance   
72) 
 
Kellar. What is the variable overhead flexible-budget variance?   
A) 
 
$1,200 favorable   
73) 
 
What is the variable overhead spending variance?   
D) 
 
$1,560 favorable   
74) 
 
Patel. What is the variable overhead flexible-budget variance?   
A) 
 
$600 favorable   
75) 
 
What is the variable overhead spending variance?   
D) 
 
$780 favorable   
76) 
 
Roberts. What is the actual variable overhead cost?   
C) 
 
$51,450   
77) 
 
What is the flexible-budget amount?   
B) 
 
$50,000   
78) 
 
What is the variable overhead spending variance?   
C) 
 
$2,450 unfavorable   
79) 
 
What is the variable overhead efficiency variance?   
A) 
 
$1,000 favorable   
80) 
 
Roberson. What is the actual variable overhead cost?   
C) 
 
$165,000   
81) 
 
What is the flexible-budget amount?   
B) 
 
$151,875   
82) 
 
What is the variable overhead spending variance?   
A) 
 
$3,750 favorable   
83) 
 
What is the variable overhead efficiency variance?   
B) 
 
$16,875 unfavorable   
84) 
 
Russo. What is the actual variable overhead cost?   
A) 
 
$122,063  
85) 
 
What is the flexible-budget amount?   
B) 
 
$126,000.00  
86) 
 
What is the variable overhead spending variance?   
D) 
 
$1,968.75 favorable   
87) 
 
What is the variable overhead efficiency variance?   
A) 
 
$1,968.75 favorable  
88) 
 
What is the total variable overhead variance  
C) 
 
$3,937.50 favorable   
89) 
 
The variable overhead efficiency variance is computed ________ and interpreted ________ the direct-cost efficiency variance.   
B) 
 
the same as; differently than   
90) 
 
An unfavorable variable overhead efficiency variance indicates that:   
C) 
 
the variable overhead cost-allocation base was not used efficiently   
91) 
 
Variable overhead costs can be managed by:   
D) 
 
Both A and B are correct.   
92) 
 
When machine-hours are used as a cost-allocation base, the item MOST likely to contribute to a favorable variable overhead efficiency variance is:   
B) 
 
the production scheduler's impressive scheduling of machines   
93) 
 
When machine-hours are used as a cost-allocation base, the item MOST likely to contribute to an unfavorable variable overhead efficiency variance is:   
A) 
 
using more machine hours than budgeted   
94) 
 
When machine-hours are used as an overhead cost-allocation base, a rush order resulting in unplanned overtime that used less-skilled workers on the machines would MOST likely contribute to reporting a(n):   
B) 
 
unfavorable variable overhead efficiency variance   
95) 
 
When machine-hours are used as an overhead cost-allocation base and annual leasing costs for equipment unexpectedly increase, the MOST likely result would be to report a(n):   
C) 
 
unfavorable fixed overhead flexible-budget variance   
96) 
 
The fixed overhead cost variance can be further subdivided into the:   
D) 
 
flexible-budget variance and the production-volume variance   
97) 
 
The amount reported for fixed overhead on the static budget is also reported:   
C) 
 
on the flexible budget   
98) 
 
An unfavorable fixed overhead spending variance indicates that:  
 
B) 
 
the price of fixed overhead items cost more than budgeted   
99) 
 
A favorable fixed overhead spending variance might indicate that:   
D) 
 
a plant expansion did not proceed as originally planned   
100) 
 
For fixed manufacturing overhead, there is no:   
B) 
 
efficiency variance   
101) 
 
Jenny’s.What is the flexible-budget amount?   
A) 
 
$120,000   
102) 
 
What is the amount of fixed overhead allocated to production?   
D) 
 
$125,000   
103) 
 
What is the fixed overhead spending variance?   
C) 
 
$3,000 unfavorable   
104) 
 
What is the fixed overhead production-volume variance?   
D) 
 
$5,000 favorable   
105) 
 
Rutch. What is the flexible-budget amount?   
C) 
 
$57,500  
106) 
 
What is the amount of fixed overhead allocated to production?   
A) 
 
$51,750  
107) 
 
What is the fixed overhead spending variance?   
C) 
 
$4,100 favorable   
108) 
 
Matthew’s. What is the flexible-budget amount?   
C) 
 
$120,000   
109) 
 
What is the amount of fixed overhead allocated to production?   
A) 
 
$100,000   
110) 
 
What is the fixed overhead production-volume variance?   
C) 
 
$20,000 unfavorable   
111) 
 
Fixed overhead is:   
D) 
 
underallocated by $22,000   
112) 
 
The production-volume variance may also be referred to as the:   
B) 
 
denominator-level variance   
113) 
 
A favorable production-volume variance indicates that the company:   
B) 
 
has allocated more fixed overhead costs than budgeted   
114) 
 
An unfavorable production-volume variance of $40,000 indicates that the company has:   
A) 
 
unused fixed manufacturing overhead capacity   
115) 
 
When machine-hours are used as a cost-allocation base, the item MOST likely to contribute to a favorable production-volume variance is:   
D) 
 
strengthened demand for the product   
116) 
 
When machine-hours are used as a cost-allocation base, the item MOST likely to contribute to an unfavorable production-volume variance is:   
A) 
 
a new competitor gaining market share   
117) 
 
Excess capacity is a sign:   
B) 
 
that capacity may need to be re-evaluated   
118) 
 
An unfavorable production-volume variance:   
C) 
 
measures the amount of extra fixed costs planned for but not used   
119) 
 
The difference between budgeted fixed manufacturing overhead and the fixed manufacturing overhead allocated to actual output units achieved is called the fixed overhead:   
D) 
 
production-volume variance   
120) 
 
Variable overhead costs:   
D) 
 
All of these answers are correct.   
121) 
 
Fixed overhead costs:   
C) 
 
are unaffected by the degree of operating efficiency in a given budget period   
122) 
 
Fixed overhead costs must be unitized for:   
D) 
 
Both A and C are correct.   
123) 
 
Generally Accepted Accounting Principles require that unitized fixed manufacturing costs be used for:   
C) 
 
external reporting   
124) 
 
A nonfinancial measure of performance evaluation is:   
C) 
 
energy used per machine-hour   
125) 
 
Variance information regarding nonmanufacturing costs can be used to:   
D) 
 
All of these answers are correct.   
126) 
 
Tucker Company uses a standard cost system. In March, $133,000 of variable manufacturing overhead costs were incurred and the flexible-budget amount for the month was $150,000. Which of the following variable manufacturing overhead entries would have been recorded for March?   
D) 
 
Variable Manufacturing Overhead Control  133,000
  Accounts Payable Control and other accounts  133,000  
127) 
 
Alvarado Company made the following journal entry: 

Variable Manufacturing Overhead Allocated  100,000
Variable Manufacturing Overhead Efficiency Variance  30,000
  Variable Manufacturing Overhead Control  125,000
  Variable Manufacturing Overhead Spending Variance  5,000
  
B) 
 
A $5,000 favorable spending variance was recorded.   
128) 
 
John's Football Manufacturing Company reported:
  Actual fixed overhead  $800,000
  Fixed manufacturing overhead spending variance  $20,000 favorable
  Fixed manufacturing production-volume variance  $30,000 unfavorable 

To isolate these variances at the end of the accounting period, John would debit Fixed Manufacturing Overhead Allocated for:   
B) 
 
$790,000   
129) 
 
Brandon's Basketball Manufacturing Company reported:
  Actual fixed overhead  $1,000,000
  Fixed manufacturing overhead spending variance  $60,000 unfavorable
  Fixed manufacturing production-volume variance  $40,000 unfavorable

To isolate these variances at the end of the accounting period, Brandon would:   
B) 
 
debit Fixed Manufacturing Overhead Spending Variance for $60,000   
130) 
 
Jovana Company uses a standard cost system. In March, $117,000 of variable manufacturing overhead costs were incurred and the flexible-budget amount for the month was $120,000. Which of the following variable manufacturing overhead entries would have been recorded for March?   
B) 
 
Work-in-Process Control  120,000
  Variable Manufacturing Overhead Allocated  120,000  
131) 
 
Tate Company makes the following journal entry: 

Variable Manufacturing Overhead Allocated  150,000
Variable Manufacturing Overhead Efficiency Variance  5,000
  Variable Manufacturing Overhead Control  125,000
  Variable Manufacturing Overhead Spending Variance  30,000
  
D) 
 
A $25,000 favorable flexible-budget variance was recorded.   
132) 
 
Jeremy's Football Manufacturing Company reported:
  Actual fixed overhead  $500,000
  Fixed manufacturing overhead spending variance  $30,000 favorable
  Fixed manufacturing production-volume variance  $20,000 unfavorable 

To isolate these variances at the end of the accounting period, Jeremy would debit Fixed Manufacturing Overhead Allocated for:   
D) 
 
$510,000   
133) 
 
Kristin's Basketball Manufacturing Company reported:
  Actual fixed overhead  $800,000
  Fixed manufacturing overhead spending variance  $60,000 favorable
  Fixed manufacturing production-volume variance  $40,000 favorable 

To isolate these variances at the end of the accounting period, Kristin would debit:   
A) 
 
Fixed Manufacturing Overhead Allocated for $900,000   
134) 
 
Above is a:   
A) 
 
4-variance analysis   
135) 
 
In the above chart, the amounts for (A) and (B), respectively, are:   
D) 
 
Zero; Zero   
136) 
 
In a 3-variance analysis the spending variance should be:   
C) 
 
$ 5,500 U   
137) 
 
In a 2-variance analysis the flexible-budget variance and the production-volume variance should be ________, respectively.   
B) 
 
$20,500 U; $40,000 U   
138) 
 
In a 1-variance analysis the total overhead variance should be:   
B) 
 
$60,500 U   
139) 
 
Calculate the efficiency variance for variable setup overhead costs.   
B) 
 
$600 unfavorable   
140) 
 
Calculate the spending variance for variable setup overhead costs.   
C) 
 
$600 unfavorable   
141) 
 
Calculate the flexible-budget variance for variable setup overhead costs.   
B) 
 
$1,300 favorable   
142) 
 
Calculate the spending variance for fixed setup overhead costs.   
B) 
 
$400 unfavorable   
143) 
 
Calculate the production-volume variance for fixed setup overhead costs.   
C) 
 
$4,666.67 favorable   
144) 
 
Lukehart. Calculate the efficiency variance for variable setup overhead costs.   
A) 
 
$150 favorable   
145) 
 
Calculate the spending variance for variable setup overhead costs.   
C) 
 
$264 unfavorable   
146) 
 
Calculate the flexible-budget variance for variable setup overhead costs.   
D) 
 
$114 unfavorable   
147) 
 
Calculate the spending variance for fixed setup overhead costs.   
C) 
 
$250 favorable   
148) 
 
Calculate the production-volume variance for fixed setup overhead costs.   
B) 
 
$1,800 unfavorable   
149) 
 
Fixed and variable cost variances can ________ be applied to activity-based costing systems.   
A) 

 
always



















Chapter 9   
 
Inventory Costing and Capacity Analysis
 
1) 
 
The two most common methods of costing inventories in manufacturing companies are variable costing and fixed costing.  
2) 
 
Absorption costing "absorbs" only variable manufacturing costs.   
3) 
 
Variable costing includes all variable costsboth manufacturing and nonmanufacturingin inventory.   
4) 
 
Under both variable and absorption costing, all variable manufacturing costs are inventoriable costs..   
5) 
 
The main difference between variable costing and absorption costing is the way in which fixed manufacturing costs are accounted for..  
6) 
 
Under variable costing, fixed manufacturing costs are treated as an expense of the period..   
7) 
 
The contribution-margin format of the income statement is used with absorption costing.   
8) 
 
The contribution-margin format of the income statement distinguishes manufacturing costs from nonmanufacturing costs.   
9) 
 
The gross-margin format of the income statement highlights the lump sum of fixed manufacturing costs.   
10) 
 
In absorption costing, all nonmanufacturing costs are subtracted from gross margin..   
11) 
 
Direct costing is a perfect way to describe the variable-costing inventory method.   
12) 
 
When variable costing is used, an income statement will show gross margin.   
13) 
 
The income under variable costing will always be the same as the income under absorption costing.   
14) 
 
Absorption costing is required by GAAP (Generally Accepted Accounting Principles) for external reporting..   
15) 
 
When production deviates from the denominator level, a production-volume variance always exists under absorption costing..   
16) 
 
Fixed manufacturing costs included in cost of goods available for sale + the production-volume variance will always = total fixed manufacturing costs under absorption costing..   
17) 
 
The production-volume variance only exists under absorption costing and not under variable costing..   
18) 
 
When the unit level of inventory increases during an accounting period, operating income is greater under variable costing than absorption costing.   
19) 
 
The difference in operating income under absorption costing and variable costing is due solely to the timing difference of expensing fixed manufacturing costs..   
20) 
 
If managers report inventories of zero at the start and end of each accounting period, operating incomes under absorption costing and variable costing will be the same..   
21) 
 
Under absorption costing, managers can increase operating income by holding more inventories at the end of the period..  
22) 
 
Many companies use variable costing for internal reporting to reduce the undesirable incentive to build up inventories..   
23) 
 
Under variable costing, managers can increase operating income by simply producing more inventory at the end of the accounting period even if that inventory never gets sold.   
24) 
 
Nonfinancial measures such as comparing units in ending inventory this period to units in ending inventory last period can help reduce buildup of excess inventory..   
25) 
 
One of the most common problems reported by companies using variable costing is the difficulty of classifying costs into fixed or variable categories..   
26) 
 
Managers can increase operating income when absorption costing is used by producing more inventory..   
27) 
 
A manager can increase operating income by deferring maintenance beyond the current accounting period when absorption costing is used..   
28) 
 
Throughput costing considers only direct materials and direct manufacturing labor to be truly variable costs.   
29) 
 
Throughput costing is also referred to as super-variable costing..  
30) 
 
When production quantity exceeds sales, throughput costing results in reporting greater operating income than variable costing.   
31) 
 
Throughput costing provides more incentive to produce for inventory than does absorption costing.   
32) 
 
A company may use absorption costing for external reports and still choose to use throughput costing for internal reports..   
33) 
 
Throughput contribution equals revenues minus all product costs.   
  
34) 
 
Throughput costing results in a higher amount of manufacturing costs being placed in inventory than either variable or absorption costing.   
35) 
 
Determining the "right" level of capacity is one of the most strategic and difficult decisions managers face..  
36) 
 
Both theoretical and practical capacity measure capacity in terms of demand for the output.   
37) 
 
Normal capacity utilization is the expected level of capacity utilization for the current budget period, which is typically one year.   
38) 
 
Normal capacity utilization is not the same as master-budget capacity utilization..  
39) 
 
Theoretical capacity is generally much larger than master-budget capacity utilization..   
40) 
 
Theoretical capacity allows time for regular machine maintenance.   
41) 
 
Estimates of human factors such as the increased risk of injury when machines work at faster speeds are important when estimating practical capacity..   
42) 
 
Theoretical capacity is unattainable in the real world..   
43) 
 
Theoretical capacity is the capacity level that represents what the firm is able to obtain under reasonable circumstances.   
44) 
 
Fixed manufacturing cost per unit will be the same no matter what capacity concept is used.  
45) 
 
Data from normal costing and standard costing are used in pricing and product-mix decisions..  
46) 
 
If a company chooses practical capacity for planning purposes, it must also use practical capacity for performance evaluation.   
47) 
 
Theoretical capacity is most often used to cost a product.   
48) 
 
Practical capacity highlights capacity acquired but currently not used..   
49) 
 
For benchmarking purposes it is best to use master-budget capacity because all competitors use about the same about of capacity for production.   
50) 
 
Using normal capacity for pricing decisions can lead to setting noncompetitive selling prices..   
51) 
 
Using master-budget capacity for pricing purposes can lead to a downward demand spiral..   
52) 
 
Using practical capacity is best for evaluating the marketing manager's performance for a particular year.   
53) 
 
The production-volume variance is affected by the choice of capacity concept used to determine the denominator level..   
54) 
 
The higher the denominator level the higher the budgeted fixed manufacturing cost rate per unit.   
55) 
 
Master-budget capacity utilization can be more reliably estimated than normal capacity utilization..   
56) 
 
Unused capacity is considered wasted resources and the result of poor planning.   
57) 
 
Challenges only result from estimating the denominator level, but not the costs in the numerator of the fixed manufacturing cost rate.   
58) 
 
Estimating capacity costs is unique to manufacturing and it is not applicable to nonmanufacturing entities.   
59) 
 
If the capacity level chosen to calculate the budgeted fixed overhead cost rate is more than the actual production, an unfavorable production-volume variance will result..   
60) 
 
The breakeven points are the same under both variable costing and absorption costing.   
61) 
 
Which of the following cost(s) are inventoried when using variable costing?   
A) 
 
direct manufacturing costs   
62) 
 
Which of the following cost(s) are inventoried when using absorption costing?   
D) 
 
Both A and C are correct.   
63) 
 
________ is a method of inventory costing in which all variable and fixed manufacturing costs are included as inventoriable costs.  
C) 
 
Absorption costing  
64) 
 
Absorption costing is required for all of the following EXCEPT:   
B) 
 
determining a competitive selling price   
65) 
 
Absorption costing:   
C) 
 
includes fixed manufacturing overhead as an inventoriable cost   
66) 
 
Variable costing:   
B) 
 
treats direct manufacturing costs as a product cost   
67) 
 
________ method(s) expense(s) variable marketing costs in the period incurred.   
D) 
 
All of these answers are correct.   
68) 
 
________ method(s) include(s) fixed manufacturing overhead costs as inventoriable costs.   
B) 
 
Absorption costing   
69) 
 
________ method(s) expense(s) direct material costs as cost of goods sold.   
D) 
 
All of these answers are correct.   
70) 
 
________ method(s) is required for tax reporting purposes.   
B) 
 
Absorption costing   
71) 
 
________ is a method of inventory costing in which only variable manufacturing costs are included as inventoriable costs.  
B) 
 
Variable costing  
72) 
 
Variable costing regards fixed manufacturing overhead as a(n):   
C) 
 
period cost   
73) 
 
The only difference between variable and absorption costing is the expensing of:   
C) 
 
fixed manufacturing costs   
74) 
 
Marie’s. What is the inventoriable cost per unit using variable costing?   
B) 
 
$35   
75) 
 
What is the inventoriable cost per unit using absorption costing?   
C) 
 
$60   
76) 
 
Gabe’s. What is the inventoriable cost per unit using variable costing?   
B) 
 
$15.00   
77) 
 
What is the inventoriable cost per unit using absorption costing?   
C) 
 
$18.75   
78) 
 
Which of the following inventory costing methods shown below is required by GAAP (Generally Accepted Accounting Principles) for external financial reporting?   
A) 
 
absorption costing   
79) 
 
The contribution-margin format of the income statement:  
D) 
 
is used with variable costing  
80) 
 
The gross-margin format of the income statement:  
B) 
 
is used with absorption costing  
81) 
 
The contribution-margin format of the income statement:   
B) 
 
highlights the lump sum of fixed manufacturing costs   
82) 
 
The gross-margin format of the income statement:   
A) 
 
distinguishes between manufacturing and nonmanufacturing costs   
83) 
 
________ are subtracted from sales to calculate contribution margin.   
D) 
 
Both A and B are correct.   
84) 
 
________ are subtracted from sales to calculate gross margin.   
D) 
 
Both A and C are correct.   
85) 
 
Peggy’s. What is cost of goods sold per unit using variable costing?   
A) 
 
$20   
86) 
 
What is cost of goods sold using variable costing?   
A) 
 
$35,000   
87) 
 
What is contribution margin using variable costing?   
B) 
 
$91,000   
88) 
 
What is operating income using variable costing?   
D) 
 
$47,000   
89) 
 
Andrea’s. What is cost of goods sold per unit when using absorption costing?   
C) 
 
$29   
90) 
 
What is gross margin when using absorption costing?   
D) 
 
$24,750   
91) 
 
What is operating income when using absorption costing?   
B) 
 
$16,500   
92) 
 
An unfavorable production-volume variance occurs when:   
B) 
 
the denominator level exceeds production   
93) 
 
If the unit level of inventory increases during an accounting period, then:   
B) 
 
more operating income will be reported under absorption costing than variable costing   
94) 
 
The difference between operating incomes under variable costing and absorption costing centers on how to account for:   
B) 
 
fixed manufacturing costs   
95) 
 
One possible means of determining the difference between operating incomes for absorption costing and variable costing is by:   
B) 
 
subtracting fixed manufacturing overhead in beginning inventory from fixed manufacturing overhead in ending inventory   
96) 
 
When comparing the operating incomes between absorption costing and variable costing, and beginning finished inventory exceeds ending finished inventory, it may be assumed that:   
D) 
 
variable costing operating income exceeds absorption costing operating income   
97) 
 
Which of the following statements is FALSE?   
B) 
 
Nonmanufacturing costs are expensed in the future under variable costing.   
98) 
 
Helton Company has the following information for the current year: 

  Beginning fixed manufacturing overhead in inventory  $95,000
  Fixed manufacturing overhead in production  375,000
  Ending fixed manufacturing overhead in inventory  25,000

  Beginning variable manufacturing overhead in inventory  $10,000
  Variable manufacturing overhead in production  50,000
  Ending variable manufacturing overhead in inventory  15,000

What is the difference between operating incomes under absorption costing and variable costing?   
A) 
 
$70,000   
99) 
 
The following information pertains to Brian Stone Corporation: 

  Beginning fixed manufacturing overhead in inventory  $60,000
  Ending fixed manufacturing overhead in inventory  45,000
  Beginning variable manufacturing overhead in inventory  $30,000
  Ending variable manufacturing overhead in inventory  14,250

  Fixed selling and administrative costs  $724,000
  Units produced  5,000 units
  Units sold  4,800 units

What is the difference between operating incomes under absorption costing and variable costing?   
C) 
 
$15,000   
100) 
 
Heinrich. Fixed manufacturing costs expensed on the income statement (excluding adjustments for variances) total:   
A) 
 
$3,600   
101) 
 
Fixed manufacturing costs included in ending inventory total:   
C) 
 
$900   
102) 
 
The production-volume variance is:   
B) 
 
$1,500   
103) 
 
Operating income using absorption costing will be ________ than operating income if using variable costing.   
C) 
 
$900 higher   
104) 
 
Veach. Fixed manufacturing costs expensed on the income statement (excluding adjustments for variances) total:   
C) 
 
$6,000   
105) 
 
Fixed manufacturing costs included in ending inventory total:   
D) 
 
0   
106) 
 
The production-volume variance totals:   
D) 
 
0   
107) 
 
Operating income using variable costing will be ________ than operating income if using absorption costing.   
D) 
 
$900 lower   
Answer the following questions using the information below: 

Morse Corporation incurred fixed manufacturing costs of $7,200 during 20X5. Other information for 20X5 includes:
  The budgeted denominator level is 800 units.
  Units produced total 1,000 units.
  Units sold total 950 units.
  Beginning inventory was zero.

The fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold.
  
108) 
 
Under absorption costing, fixed manufacturing costs expensed on the income statement (excluding adjustments for variances) total:   
A) 
 
$8,550   
109) 
 
Under absorption costing, the production-volume variance is:   
C) 
 
$1,800   
110) 
 
Under variable costing, the fixed manufacturing costs expensed on the income statement (excluding adjustments for variances) total:   
B) 
 
$7,200   
111) 
 
Operating income using absorption costing will be ________ operating income if using variable costing.   
A) 
 
$450 higher than   
112) 
 
At the end of the accounting period Susan Corporation reports operating income of $30,000 and the fixed overhead cost rate is $20 per unit. Under absorption costing, if this company now produces an additional 100 units of inventory, then operating income:   
A) 
 
will increase by $2,000   
113) 
 
At the end of the accounting period Bumsted Corporation reports operating income of $30,000 and the fixed overhead cost rate is $20 per unit. Under variable costing, if this company produces 100 more units of inventory, then operating income:   
C) 
 
will not be affected   
114) 
 
Given a constant contribution margin per unit and constant fixed costs, the period-to-period change in operating income under variable costing is driven solely by:  
A) 
 
changes in the quantity of units actually sold  
115) 
 
Companies have recently been able to reduce inventory levels because:   
D) 
 
Both A and B are correct.   
116) 
 
Many companies have switched from absorption costing to variable costing for internal reporting:   
C) 
 
to reduce the undesirable incentive to build up inventories   
117) 
 
Ways to "produce for inventory" that result in increasing operating income include:   
C) 
 
deferring maintenance to accelerate production   
118) 
 
Switching production to products that absorb the highest amount of fixed manufacturing costs is also called:  
B) 
 
cherry picking  
119) 
 
To discourage producing for inventory, management can:  
D)
 
evaluate nonfinancial measures such as units in ending inventory compared to units in sales   
D)
 
evaluate performance over a three- to five-year period rather than a single year   
D)
 
incorporate a carrying charge for inventory in the internal accounting system   
120) 
 
Which method is NOT a way to discourage producing for inventory?  
D) 
 
evaluate performance on a quarterly basis only  
121) 
 
Under absorption costing, if a manager's bonus is tied to operating income, then increasing inventory levels compared to last year would result in:   
A) 
 
increasing the manager's bonus   
122) 
 
Under variable costing, if a manager's bonus is tied to operating income, then increasing inventory levels compared to last year would result in:   
C) 
 
not affecting the manager's bonus   
123) 
 
Critics of absorption costing suggest to evaluate management on their ability to:   
C) 
 
decrease inventory costs   
124) 
 
Differences between absorption costing and variable costing are much smaller when a:   
A) 
 
large part of the manufacturing process is subcontracted out   
B) 
 
just-in-time inventory strategy is implemented   
125) 
 
All of the following are examples of drawbacks of using absorption costing EXCEPT:   
C) 
 
operating income solely reflects income from the sale of units and excludes the effects of manipulating production schedules   
126) 
 
Which of the following inventory costing methods shown below is MOST likely to cause undesirable incentives for managers to build up finished goods inventory?   
A) 
 
absorption costing   
127) 
 
Throughput costing is also called:  
B) 
 
super-variable costing  
128) 
 
Advocates of throughput costing argue that:   
D) 
 
All of these answers are correct.   
129) 
 
Variable and absorption costing may be combined with all costing systems EXCEPT:  
A) 
 
mixed costing  
130) 
 
Throughput contribution equals:  
C) 
 
revenues minus all direct material cost of goods sold  
131) 
 
If 600 units are produced and only 400 units are sold, ________ results in the greatest amount of expense reported on the income statement.   
A) 
 
throughput costing   
132) 
 
If 400 units are produced and 600 units are sold, ________ results in the greatest amount of operating income.   
A) 
 
throughput costing   
133) 
 
Advocates of throughput costing maintain that:   
C) 
 
fixed manufacturing costs are related to the capacity to produce rather than to the actual production of specific units   
Answer the following questions using the information below: 

Reusser Company produces wood statues. Management has provided the following information:

  Actual sales  80,000 statues
  Budgeted production  100,000 statues
  Selling price  $20.00 per statue

  Direct material costs  $5.00 per statue
  Variable manufacturing costs  $1.50 per statue
  Variable administrative costs  $2.50 per statue
  Fixed manufacturing overhead  $2.00 per statue
  
134) 
 
What is the cost per statue if throughput costing is used?   
D) 
 
$5.00   
135) 
 
What is the total throughput contribution?   
D) 
 
$1,200,000   
Answer the following questions using the information below: 

Stober Company produces a specialty item. Management has provided the following information:

  Actual sales  60,000 units
  Budgeted production  50,000 units
  Selling price  $40.00 per unit

  Direct material costs  $10.00 per unit
  Variable manufacturing overhead  $3.00 per unit
  Variable administrative costs  $5.00 per unit
  Fixed manufacturing overhead  $4.00 per unit
  
136) 
 
What is the cost per statue if throughput costing is used?   
D) 
 
$10.00   
137) 
 
What is the total throughput contribution?   
D) 
 
$1,800,000   
138) 
 
Which of the following inventory costing methods results in the least amount of costs being inventoried?   
C) 
 
throughput costing   
139) 
 
Which of the following inventory costing methods shown below is LEAST likely to cause undesirable incentives for managers to build up finished goods inventory?   
C) 
 
throughput costing   
140) 
 
Practical capacity is the denominator-level concept that:   
A) 
 
reduces theoretical capacity for unavoidable operating interruptions   
141) 
 
________ reduces theoretical capacity for unavoidable operating interruptions.   
A) 
 
Practical capacity   
142) 
 
________ is based on the level of capacity utilization that satisfies average customer demand over periods generally longer than one year.   
D) 
 
Normal capacity utilization   
143) 
 
________ is (are) based on the demand for the output of the plant.   
B) 
 
Master-budget capacity utilization   
C) 
 
Normal capacity utilization   
144) 
 
________ is the level of capacity based on producing at full efficiency all the time.  
B) 
 
Theoretical capacity  
145) 
 
Theoretical capacity allows for:   
D)
 
preventive machine maintenance   
D)
 
interruptions due to uncontrollable power failures   
D)
 
rework of the expected number of defective units   
146) 
 
Theoretical capacity:  
A) 
 
is unattainable in the real world   
B) 
 
represents an ideal goal of capacity usage   
C) 
 
is based on engineering studies that provide information about the technical capabilities of machines used in production   
147) 
 
The budgeted fixed manufacturing cost rate is the lowest for:   
B) 
 
theoretical capacity   
148) 
 
________ provides the lowest estimate of denominator-level capacity.   
C) 
 
Master-budget capacity utilization   
149) 
 
________ is the level of capacity utilization that satisfies average customer demand over a period that includes seasonal, cyclical, and trend factors.  
A) 
 
Normal capacity utilization  
Answer the following questions using the information below: 

A manufacturing firm is able to produce 1,000 pairs of shoes per hour, at maximum efficiency. There are three eight-hour shifts each day. Due to unavoidable operating interruptions, production averages 800 units per hour. The plant actually operates only 27 days per month.
  
150) 
 
What is the theoretical capacity for the month of April?   
B) 
 
720,000 units   
151) 
 
What is the practical capacity for the month of April?   
C) 
 
518,400 units   
152) 
 
Theoretical capacity:   
C) 
 
when used for product costing results in the lowest cost estimate of the four capacity options   
153) 
 
The use of theoretical capacity  results in an unrealistically low fixed manufacturing cost per unit because it is based on:  
B) 
 
an unattainable level of capacity  
154) 
 
Budgeted fixed manufacturing costs of a product using practical capacity:   
A) 
 
represents the cost per unit of supplying capacity   
155) 
 
Normal capacity utilization:   
B) 
 
can result in setting selling prices that are not competitive   
156) 
 
Master-budget capacity utilization:   
A) 
 
hides the amount of unused capacity   
157) 
 
From the perspective of long-run product costing it is best to use:   
C) 
 
practical capacity for pricing decisions   
158) 
 
Customers expect to pay a price that includes:   
B) 
 
the cost of actual capacity used   
159) 
 
The marketing manager's performance evaluation is most fair when based on a denominator level using:   
C) 
 
master-budget capacity utilization   
160) 
 
________ is the continuing reduction in the demand for a company's products that occurs when competitor prices are not met.  
A) 
 
Downward demand spiral  
161) 
 
Using master-budget capacity to set selling prices:   
C) 
 
can result in a downward demand spiral   
162) 
 
When large differences exist between practical capacity and master-budget capacity utilization, companies may:   
A) 
 
classify the difference as planned unused capacity   
163) 
 
The effect of spreading fixed manufacturing costs over a shrinking master-budget capacity utilization amount results in:   
B) 
 
increased unit costs   
164) 
 
The higher the denominator level, the:   
B) 
 
lower the amount of fixed manufacturing costs allocated to each unit produced   
165) 
 
Operating income reported on the end-of-period financial statements is changed when ________ is (are) used to handle the production-volume variance at the end of the accounting period.   
C) 
 
the write-off variances to cost of goods sold approach   
166) 
 
Practical capacity may:   
A) 
 
increase over time due to improvements in plant layout   
167) 
 
The Internal Revenue Service requires the use of ________ for calculating fixed manufacturing costs per unit.   
A) 
 
practical capacity   
168) 
 
It is most difficult to estimate ________ because of the need to predict demand for the next few years.   
D) 
 
normal capacity utilization   
169) 
 
Managers face uncertainty when estimating:   
D) 
 
All of these answers are correct.   
170) 
 
Unused capacity:   
B) 
 
is intended for future use   
C) 
 
provides capacity for potential demand surges   
171) 
 
Capacity costs:   
A) 
 
are difficult to estimate   
172) 
 
The breakeven point using absorption costing depends on all of the following factors, EXCEPT:   
B) 
 
the budgeted level of production   
173) 
 
There is not an output-level variance for variable costing, because:   
D) 
 
fixed manufacturing overhead is not allocated to work in process   
Answer the following questions using the information below: 

Ms. Andrea Chadwick, the company president, has heard that there are multiple breakeven points for every product. She does not believe this and has asked you to provide the evidence of such a possibility. Some information about the company for 20X5 is as follows:

  Total fixed manufacturing overhead  $180,000
  Total other fixed expenses  $200,000
  Total variable manufacturing expenses  $120,000
  Total other variable expenses  $120,000
  Units produced  30,000  units
  Budgeted production  30,000  units
  Units sold  25,000  units
  Selling price  $40
  
174) 
 
What are breakeven sales in units using variable costing?   
C) 
 
11,875 units   
175) 
 
What are breakeven sales in units using absorption costing?   
C) 
 
7,692 units   
176) 
 
What are breakeven sales in units using absorption costing if the production units are actually 25,000?   
D) 
 
8,847 units   
Answer the following questions using the information below: 

The following information pertains to the Bean Company:

  Selling price per unit  $123
  Standard fixed manufacturing costs per unit  $60
  Variable selling and administrative costs per unit  $12
  Standard variable manufacturing costs per unit  $3
  Fixed selling and administrative costs  $48,000
  Units produced  10,000  units
  Units sold  9,600  units
  
177) 
 
What is the variable costing breakeven point in units?   
D) 
 
6,000 units   
178) 
 
What is the absorption costing breakeven point in units?   
B) 
 
1,000 units   
Answer the following questions using the information below: 

Greene Manufacturing incurred the following expenses during 20X5:

  Fixed manufacturing costs  $45,000
  Fixed nonmanufacturing costs  $35,000
  Unit selling price  $100
  Total unit cost  $40
  Variable manufacturing cost rate  $20
  Units produced  1,340  units
  
179) 
 
What will be the breakeven point if variable costing is used?   
C) 
 
1,000 units   
180) 
 
What will be the breakeven point in units if absorption costing is used?   
C) 
 
887 units   
181) 
 
What is the breakeven point in units using absorption costing if the units produced are actually 2,250?   
D) 
 
584 units   
182) 
 
The formula for computing the breakeven point in units under variable costing includes all of the following EXCEPT:  
B) 
 
contribution margin percentage  
183) 
 
Bosely Corporation is in the business of selling computers.  The following expenses were incurred in March 20X8:

    Fixed manufacturing costs      $75,000
    Fixed nonmanufacturing costs    $35,000
    Unit selling price            $1,200
    Variable manufacturing cost           $700
    Units produced                1,500

What will be the breakeven point if variable costing is used?  
B) 
 
220 units 



























Chapter 11   
 
Decision Making and Relevant Information
 
1) 
 
A decision model is a formal method for making a choice, frequently involving both quantitative and qualitative analyses..   
2) 
 
Feedback from previous decisions uses historical information and, therefore, is irrelevant for making future predictions.   
3) 
 
Relevant costs are expected future costs that differ among alternatives..  
4) 
 
Relevant revenues are expected future revenues that do not differ among alternatives.  
5) 
 
The amount paid to purchase tools last month is an example of a sunk cost..   
6) 
 
For decision making, differential costs assist in choosing between alternatives..   
7) 
 
For a particular decision, differential revenues and differential costs are always relevant..   
8) 
 
A cost may be relevant for one decision, but not relevant for a different decision..   
9) 
 
Revenues that remain the same for two alternatives being examined are relevant revenues.   
10) 
 
Sunk costs are past costs that are unavoidable..   
11) 
 
The cost of a machine purchased last year will be irrelevant in a decision for next year..   
12) 
 
A sunk cost can never be relevant..   
13) 
 
Quantitative factors are always expressed in numerical terms..   
14) 
 
Qualitative factors are outcomes that are measured in numerical terms, such as the costs of direct labor.   
15) 
 
If a manufacturer chooses to continue purchasing direct materials from a supplier because of the ongoing relationship that has developed over the years, the decision is based on qualitative factors..   
16) 
 
Relevant revenues and relevant costs are the only information managers need to select among alternatives.   
17) 
 
Full costs of a product are relevant for one-time-only special order pricing decisions.  
18) 
 
Full costs of a product include variable costs, but not fixed costs.   
19) 
 
For one-time-only special orders, variable costs may be relevant but not fixed costs..   
20) 
 
The price quoted for a one-time-only special order may be less than the price for a long-term customer..   
21) 
 
Bid prices and costs that are relevant for regular orders are the same costs that are relevant for one-time-only special orders.   
22) 
 
Qualitative factors, because they are not measured numerically, are unimportant in the decision-making process.   
23) 
 
In a one-time special order situation, if the price offered by the potential buyer is less than the absorption cost per unit, then the producer should not accept the special offer.   
24) 
 
In relevant cost analysis, managers should avoid incorrect general assumptions and beware of misleading unit cost information..  
25) 
 
An incremental product cost is generally a fixed cost.   
26) 
 
If Option 1 costs $100 and Option 2 costs $80, then the differential cost is $180.   
27) 
 
Producing another 10,000 units may increase the fixed cost of rent..   
28) 
 
Absorption cost per unit is the best product cost to use for one-time-only special order decisions.   
29) 
 
Sometimes qualitative factors are the most important factors in make-or-buy decisions..   
30) 
 
If a company is deciding whether to outsource a part, the reliability of the supplier is an important factor to consider..   
31) 
 
Outsourcing is risk free to the manufacturer because the supplier now has the responsibility of producing the part.   
32) 
 
Opportunity cost is the contribution to operating income that is forgone by not using a limited resource in its next-best alternative use..  
33) 
 
When a firm maximizes profits it will simultaneously minimize opportunity costs..   
34) 
 
In a make-or-buy decision when there are alternative uses for capacity, the opportunity cost of idle capacity is relevant..   
35) 
 
When opportunity costs exist, they are always relevant..   
36) 
 
When capacity is constrained, relevant costs equal incremental costs plus opportunity costs..   
37) 
 
If the $17,000 spent to purchase inventory could be invested and earn interest of $1,000, then the opportunity cost of holding inventory is $17,000.   
38) 
 
The choice is not really whether to make or buy, but rather how to best use available production capacity..   
39) 
 
Opportunity costs never appear in a company's accounting records since they are foregone costs and not actual costs..   
40) 
 
Product-mix decisions are typically long-run decisions.  
41) 
 
For short-run product-mix decisions, managers should focus on minimizing total fixed costs.   
42) 
 
For short-run product-mix decisions, maximizing contribution margin will also result in maximizing operating income..   
43) 
 
Regardless of the restraining resource, managers should produce more of the product with the greatest contribution margin per unit to maximize profits.   
44) 
 
When there are scarce resources, the firm should attempt to maximize the contribution margin per unit of the scarce resource..   
45) 
 
Management should focus on per unit costs when deciding whether to discontinue a product or not.   
46) 
 
Avoidable variable and fixed costs should be evaluated when deciding whether to discontinue a product, product line, business segment, or customer..   
47) 
 
All corporate-office allocated costs should be included in relevant-cost analysis.  
48) 
 
Depreciation allocated to a product line is a relevant cost when deciding to discontinue that product.   
49) 
 
A company is considering adding a fourth product to use available capacity. A relevant factor to consider is that corporate costs can now be allocated over four products rather than only three.   
50) 
 
All variable costs are relevant and all fixed costs are irrelevant.   
51) 
 
In a decision as to whether or not to drop a product, fixed costs that have been allocated to that product are always relevant.   
52) 
 
When replacing an old machine with a new machine, the purchase price of the new machine is a relevant cost..   
53) 
 
When replacing an old machine with a new machine, the purchase price of the old machine is a relevant cost.  
54) 
 
When replacing an old machine with a new machine, the book value of the old machine is a relevant cost.   
55) 
 
Replacing an old machine will increase operating income in the long run, but not for this year. A manager may choose not to replace the machine if performance evaluations are based on performance over a single year..   
56) 
 
Managers tend to favor alternatives that make their own performance look better..   
57) 
 
Linear programming is a tool that maximizes total contribution margin of a mix of products with multiple constraints..   
58) 
 
A decision model involves:  
B) 
 
both quantitative and qualitative analyses  
59) 
 
Feedback regarding previous actions may affect:   
A) 
 
future predictions   
B) 
 
implementation of the decision   
C) 
 
the decision model   
60) 
 
Place the following steps from the five-step decision process in order:
  A = Make predictions about future costs
  B = Evaluate performance to provide feedback
  C = Implement the decision
  D = Choose an alternative   
C) 
 
A D C B   
61) 
 
The formal process of choosing between alternatives is known as a(n):   
B) 
 
decision model 
 
62) 
 
Ruggles Circuit Company manufactures circuit boards for other firms. Management is attempting to search for ways to reduce manufacturing labor costs and has received a proposal from a consulting company to rearrange the production floor next year. Using the information below regarding current operations and the new proposal, which of the following decisions should management accept? 

  Currently  Proposed
Required machine operators  5  4.5
Materials-handling workers  1.25  1.25
Employee average pay  $8 per hour  $9 per hour
Hours worked per employee  2,100  2,000
  
B) 
 
Rearrange the production floor.   
Answer the following questions using the information below:

LeBlanc Lighting manufactures small flashlights and is considering raising the price by 50 cents a unit for the coming year. With a 50-cent price increase, demand is expected to fall by 3,000 units.

  Currently  Projected
  Demand  20,000 units  17,000 units
  Selling price  $4.50  $5.00
  Incremental cost per unit  $3.00  $3.00
  
63) 
 
If the price increase is implemented, operating profit is projected to:   
A) 
 
increase by $4,000   
64) 
 
Would you recommend the 50-cent price increase?   
D) 
 
Yes, because operating profits increase.   
65) 
 
When using the five-step decision process, which one of the following steps should be done last?   
C) 
 
Evaluation and feedback   
66) 
 
When using the five-step decision process, which one of the following steps should be done first?   
A) 
 
Obtain information   
67) 
 
For decision making, a listing of the relevant costs:   
A) 
 
will help the decision maker concentrate on the pertinent data   
B) 
 
will only include future costs   
C) 
 
will only include costs that differ among alternatives   
68) 
 
Sunk costs:  
B) 
 
are past costs  
69) 
 
Sunk costs:   
D) 
 
are ignored when evaluating alternatives   
70) 
 
A computer system installed last year is an example of a(n):   
A) 
 
sunk cost   
71) 
 
Costs that CANNOT be changed by any decision made now or in the future are:   
D) 
 
sunk costs   
72) 
 
In evaluating different alternatives, it is useful to concentrate on:   
D) 
 
relevant costs   
73) 
 
Which of the following costs always differ among future alternatives?   
C) 
 
relevant costs   
74) 
 
Which of the following costs are never relevant in the decision-making process?   
B) 
 
historical costs   
 
Answer the following questions using the information below:

Jim's 5-year-old Geo Prizm requires repairs estimated at $3,000 to make it roadworthy again. His friend, Julie, suggested that he should buy a 5-year-old used Honda Civic instead for $3,000 cash. Julie estimated the following costs for the two cars:

  Geo Prizm  Honda Civic
  Acquisition cost  $15,000  $3,000
  Repairs  $ 3,000  
  Annual operating costs
  (Gas, maintenance, insurance)  $ 2,280  $2,100
  
75) 
 
The cost NOT relevant for this decision is the:   
A) 
 
acquisition cost of the Geo Prizm   
76) 
 
What should Jim do? What are his savings in the first year?   
C) 
 
Buy the Honda Civic; $180   
77) 
 
A relevant revenue is a revenue that is a(n):   
B) 
 
future revenue   
78) 
 
A relevant cost is a cost that is a (n):  
A) 
 
future cost  
79) 
 
Relevant information has all of these characteristics EXCEPT:  
B) 
 
all future revenues and expenses are relevant  
80) 
 
Quantitative factors:   
B) 
 
can be expressed in monetary terms   
81) 
 
Qualitative factors:   
D) 
 
include customer satisfaction   
82) 
 
Historical costs are helpful:   
A) 
 
for making future predictions   
83) 
 
When making decisions:   
C) 
 
appropriate weight must be given to both quantitative and qualitative factors   
84) 
 
Employee morale at Dos Santos, Inc., is very high. This type of information is known as a:   
A) 
 
qualitative factor   
85) 
 
Roberto owns a small body shop. His major costs include labor, parts, and rent. In the decision-making process, these costs are considered to be:   
C) 
 
quantitative factors   
86) 
 
One-time-only special orders should only be accepted if:   
A) 
 
incremental revenues exceed incremental costs   
87) 
 
When deciding to accept a one-time-only special order from a wholesaler, management should do all of the following EXCEPT:   
D) 
 
verify past design costs for the product   
88) 
 
When there is excess capacity, it makes sense to accept a one-time-only special order for less than the current selling price when:   
A) 
 
incremental revenues exceed incremental costs   
89) 
 
Full cost of the product is:  
C) 
 
the sum of all variable and fixed costs in all the business functions of the value chain  
Answer the following questions using the information below:

Welch Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. Welch Manufacturing has excess capacity. The following per unit data apply for sales to regular customers:

  Variable costs:
  Direct materials  $40
  Direct labor  20
  Manufacturing support  35
  Marketing costs  15
  Fixed costs:
  Manufacturing support  45
  Marketing costs  15
  Total costs  170
  Markup (50%)  85
  Targeted selling price  $255

 
90) 
 
What is the full cost of the product per unit?   
B) 
 
$170   
91) 
 
What is the contribution margin per unit?   
C) 
 
$145   
92) 
 
For Welch Manufacturing, what is the minimum acceptable price of this special order?   
A) 
 
$110   
93) 
 
What is the change in operating profits if the one-time-only special order for 1,000 units is accepted for $180 a unit by Welch?   
A) 
 
$70,000 increase in operating profits   
94) 
 
Ratzlaff Company has a current production level of 20,000 units per month. Unit costs at this level are: 

Direct materials  $0.25
Direct labor  0.40
Variable overhead  0.15
Fixed overhead  0.20
Marketing - fixed  0.20
Marketing/distribution - variable  0.40

Current monthly sales are 18,000 units. Jim Company has contacted Ratzlaff Company about purchasing 1,500 units at $2.00 each. Current sales would not be affected by the one-time-only special order, and variable marketing/distribution costs would not be incurred on the special order. What is Ratzlaff Company's change in operating profits if the special order is accepted?   
C) 
 
$1,800 increase in operating profits   
95) 
 
Black Tool Company has a production capacity of 1,500 units per month, but current production is only 1,250 units. The manufacturing costs are $60 per unit and marketing costs are $16 per unit. Doug Hall offers to purchase 250 units at $76 each for the next five months. Should Black accept the one-time-only special order if only absorption-costing data are available?   
D) 
 
Yes, since operating profits will most likely increase.   
Answer the following questions using the information below:

Grant's Kitchens is approached by Ms. Tammy Wang, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers:

  Direct materials  $455
  Direct labor  300
  Variable manufacturing support  45
  Fixed manufacturing support  100
  Total manufacturing costs  900
  Markup (60%)  540
  Targeted selling price  $1440

Grant's Kitchens has excess capacity. Ms. Wang wants the cabinets in cherry rather than oak, so direct material costs will increase by $30 per unit.
  
96) 
 
For Grant's Kitchens, what is the minimum acceptable price of this one-time-only special order?   
A) 
 
$830   
97) 
 
Other than price, what other items should Grant's Kitchens consider before accepting this one-time-only special order?   
B) 
 
reaction of existing customers to the lower price offered to Ms. Wang   
98) 
 
If Ms. Wang wanted a long-term commitment for supplying this product, this analysis:   
A) 
 
would definitely be different   
99) 
 
An example of a quantitative factor for the decision-making process is:   
D) 
 
manufacturing overhead   
100) 
 
If there was limited capacity, all of the following amounts would change EXCEPT:   
C) 
 
variable costs   
Answer the following questions using the information below:

Northwoods manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $90 per table, consisting of 80% variable costs and 20% fixed costs. The company has surplus capacity available. It is Northwoods' policy to add a 50% markup to full costs.
  
101) 
 
Northwoods is invited to bid on a one-time-only special order to supply 100 rustic tables. What is the lowest price Northwoods should bid on this special order?   
B) 
 
$7,200   
102) 
 
A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style. Northwoods Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per unit Northwoods should bid on this long-term order?   
D) 
 
$135   
103) 
 
Cochran Corporation has a plant capacity of 100,000 units per month. Unit costs at capacity are:

Direct materials  $4.00
Direct labor  6.00
Variable overhead  3.00
Fixed overhead  1.00
Marketingfixed  7.00
Marketing/distributionvariable  3.60

Current monthly sales are 95,000 units at $30.00 each. Suzie, Inc., has contacted Cochran Corporation about purchasing 2,000 units at $24.00 each. Current sales would not be affected by the one-time-only special order. What is Cochran's change in operating profits if the one-time-only special order is accepted?   
A) 
 
$14,800 increase   
104) 
 
The sum of all the costs incurred in a particular business function (for example, marketing) is called the:   
A) 
 
business function cost   
105) 
 
The sum of all costs incurred in all business functions in the value chain (product design, manufacturing, marketing, and customer service, for example) is known as the:   
B) 
 
full product cost   
106) 
 
An example of a qualitative factor for the decision-making process is:   
A) 
 
customer satisfaction   
107) 
 
Outsourcing is:  
D) 
 
purchasing goods and services from outside vendors  
108) 
 
Insourcing is:  
A) 
 
purchasing goods and services internally  
109) 
 
Problems that should be avoided when identifying relevant costs include all of the following EXCEPT:   
D) 
 
using total costs that separate variable and fixed components   
110) 
 
The BEST way to avoid misidentification of relevant costs is to focus on:   
A) 
 
expected future costs that differ among the alternatives   
111) 
 
Factors used to decide whether to outsource a part include:   
B) 
 
if the supplier is reliable   
112) 
 
Relevant costs of a make-or-buy decision include all of the following EXCEPT:   
C) 
 
special machinery for the part that has no resale value   
113) 
 
Which of following are risks of outsourcing the production of a part?   
D) 
 
All of these answers are correct.   
114) 
 
Which of the following minimize the risks of outsourcing?   
C) 
 
building close relationships with the supplier   
115) 
 
The cost to produce Part A was $10 per unit in 20X3 and in 20X4 it has increased to $11 per unit. In 20X4, Supplier XYZ has offered to supply Part A for $9 per unit. For the make-or-buy decision:   
D) 
 
differential costs are $2 per unit   
116) 
 
When evaluating a make-or-buy decision, which of the following does NOT need to be considered?   
B) 
 
the original cost of the production equipment   
117) 
 
For make-or-buy decisions, a supplier's ability to deliver the item on a timely basis is considered a(n):   
A) 
 
qualitative factor   
118) 
 
The incremental costs of producing one more unit of product include all of the following EXCEPT:   
D) 
 
fixed overhead costs   
119) 
 
Direct materials $40, direct labor $10, variable overhead costs $30, and fixed overhead costs $20. In the short term, the incremental cost of one unit is:   
C) 
 
$80   
120) 
 
Unit cost data can MOST mislead decisions by:   
D) 
 
not computing unit costs at the same output level   
121) 
 
Schmidt Sewing Company incorporates the services of Deb's Sewing. Schmidt purchases pre-cut dresses from Deb's. This is primarily known as:   
B) 
 
outsourcing   
122) 
 
Pearce Sign Company manufactures signs from direct materials to the finished product. This is considered:   
A) 
 
insourcing   
123) 
 
Which of the following would NOT be considered in a make-or-buy decision?   
D) 
 
unchanged supervisory costs   
Answer the following questions using the information below:

Konrade's Engine Company manufactures part TE456 used in several of its engine models. Monthly production costs for 1,000 units are as follows:

  Direct materials  $ 40,000
  Direct labor  10,000
  Variable overhead costs  30,000
  Fixed overhead costs  20,000
  Total costs  $100,000

It is estimated that 10% of the fixed overhead costs assigned to TE456 will no longer be incurred if the company purchases TE456 from the outside supplier. Konrade's Engine Company has the option of purchasing the part from an outside supplier at $85 per unit.
  
124) 
 
If Konrade's Engine Company accepts the offer from the outside supplier, the monthly avoidable costs (costs that will no longer be incurred) total:   
A) 
 
$ 82,000   
125) 
 
If Konrade's Engine Company purchases 1,000 TE456 parts from the outside supplier per month, then its monthly operating income will:   
C) 
 
decrease by $3,000   
126) 
 
The maximum price that Konrade's Engine Company should be willing to pay the outside supplier is:   
B) 
 
$82 per TE456 part   
Answer the following questions using the information below:

Schmidt Corporation produces a part that is used in the manufacture of one of its products. The costs associated with the production of 10,000 units of this part are as follows:

  Direct materials  $ 45,000
  Direct labor  65,000
  Variable factory overhead  30,000
  Fixed factory overhead  70,000
  Total costs  $210,000

Of the fixed factory overhead costs, $30,000 is avoidable.
  
127) 
 
Phil Company has offered to sell 10,000 units of the same part to Schmidt Corporation for $18 per unit. Assuming there is no other use for the facilities, Schmidt should:   
D) 
 
make the part, as this would save $1 per unit   
128) 
 
Assuming no other use of their facilities, the highest price that Schmidt should be willing to pay for 10,000 units of the part is:   
C) 
 
$170,000   
129) 
 
Relevant costs in a make-or-buy decision of a part include:   
B) 
 
currently used manufacturing capacity that has alternative uses   
130) 
 
If Horsley Corporation doesn't use one of its limited resources in the best possible way, the lost contribution to income could be called a(n):   
C) 
 
opportunity cost   
131) 
 
When a firm has constrained capacity as opposed to surplus capacity, opportunity costs will be:   
C) 
 
greater   
132) 
 
Opportunity costs:   
B) 
 
only are considered when selecting among alternatives   
133) 
 
Opportunity cost(s):   
A) 
 
of a resource with excess capacity is zero   
134) 
 
________ would be a consideration in a make-or-buy decision.  
A) 
 
Excess capacity  
B) 
 
Rental income from unused facilities  
C) 
 
Variable factory overhead  
135) 
 
If a company has excess capacity, the most it would pay for buying a product that it currently makes would be the:  
A) 
 
total variable cost of producing the product  
136) 
 
For make-or-buy decisions, relevant costs include:   
B) 
 
incremental costs plus opportunity costs   
137) 
 
The opportunity cost of holding significant inventory includes:   
A) 
 
the interest forgone on an alternative investment   
Answer the following questions using the information below:

Stephans Corporation currently manufactures a subassembly for its main product. The costs per unit are as follows:

  Direct materials  $ 1.00
  Direct labor  10.00
  Variable overhead  5.00
  Fixed overhead  8.00
  Total  $24.00

Bill Company has contacted Stephans with an offer to sell them 5,000 of the subassemblies for $22.00 each. Stephans will eliminate $25,000 of fixed overhead if it accepts the proposal.
  
138) 
 
What are the relevant costs for Stephans?   
C) 
 
$105,000   
139) 
 
Should Stephans make or buy the subassemblies? What is the difference between the two alternatives?   
D) 
 
Make; savings = $5,000   
140) 
 
A recent college graduate has the choice of buying a new auto for $20,000 or investing the money for four years with a 6% expected annual rate of return. If the graduate decides to purchase the auto, the BEST estimate of the opportunity cost of that decision is:   
B) 
 
$4,800   
141) 
 
A supplier offers to make Part A for $70. Jansen Company has relevant costs of $80 a unit to manufacture Part A. If there is excess capacity, the opportunity cost of buying Part A from the supplier is:   
A) 
 
0   
142) 
 
Jensen Company has relevant costs of $80 per unit to manufacture Part A. A current supplier offers to make Part A for $70 per unit. If capacity is constrained, the opportunity cost of buying Part A from the supplier is:   
D) 
 
indeterminable   
143) 
 
Determining which products should be produced when the plant is operating at full capacity is referred to as:   
C) 
 
a product-mix decision   
144) 
 
Product mix decisions:   
B) 
 
help determine how to maximize operating profits   
145) 
 
Constraints may include:   
A) 
 
the availability of direct materials in manufacturing   
B) 
 
linear square feet of display space for a retailer   
C) 
 
direct labor in the service industry   
146) 
 
With a constraining resource, managers should choose the product with the:  
C) 
 
highest contribution margin per unit of the constraining resource  
147) 
 
For determining the best mix of products, the one with the LEAST amount of influence is:   
B) 
 
corporate office costs allocated to each product   
148) 
 
In product-mix decisions:   
A) 
 
always focus on maximizing total contribution margin   
Answer the following questions using the information below:

Braun's Brakes manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply:

  Model X  Model Y  Model Z
  Selling price  $50  $60  $70
  Direct materials  6  6  6
  Direct labor ($12 per hour)  12  12  24
  Variable support costs ($4 per machine-hour)  4  8  8
  Fixed support costs  10  10  10
  
149) 
 
Which model has the greatest contribution margin per unit?   
B) 
 
Model Y   
150) 
 
Which model has the greatest contribution margin per machine-hour?   
A) 
 
Model X   
151) 
 
If there is excess capacity, which model is the most profitable to produce?   
B) 
 
Model Y   
152) 
 
If there is a machine breakdown, which model is the most profitable to produce?   
A) 
 
Model X   
153) 
 
How can Lisa Braun encourage her salespeople to promote the more profitable model?   
C) 
 
Provide higher sales commissions for items with the greatest contribution margin per constrained resource.   
Answer the following questions using the information below:

Helmer's Rockers manufactures two models, Standard and Premium. Weekly demand is estimated to be 100 units of the Standard Model and 70 units of the Premium Model. The following per unit data apply:

  Standard  Premium
  Contribution margin per unit  $18  $20
  Number of machine-hours required  3  4
  
154) 
 
The contribution per machine-hour is:   
D) 
 
$6 for Standard, $5 for Premium   
155) 
 
If there are 496 machine-hours available per week, how many rockers of each model should Jim Helmer produce to maximize profits?   
A) 
 
100 units of Standard and 49 units of Premium   
156) 
 
If there are 600 machine-hours available per week, how many rockers of each model should Jim Helmer produce to maximize profits?   
C) 
 
100 units of Standard and 70 units of Premium   
Answer the following questions using the information below:

Raines Company manufactures three sizes of kitchen appliances: small, medium, and large. Product information is provided below.
  Small  Medium  Large
  Unit selling price  $150  $250  $500
  Unit costs:
  Variable manufacturing  (60)  (120)  (200)
  Fixed manufacturing  (40)  (50)  (120)
  Variable selling and administrative  (30)  (30)  (30)
  Unit profit  $ 20  $ 50  $150

  Demand in units  100  120  100
  Machine-hours per unit  20  40  100

The maximum machine-hours available are 6,000 per week.
  
157) 
 
What is the contribution margin per machine-hour for a large chair?   
C) 
 
$2.70   
158) 
 
Which of the three product models should be produced first if management incorporates a short-run profit maximizing strategy?   
A) 
 
small chairs   
159) 
 
How many of each product should be produced per month using the short-run profit maximizing strategy?
  Small  Medium  Large 
 
B) 
 
  100  0  40 

 
 
160) 
 
Favata Corporation manufactures two products, AA and CC.  The following information was available:

  AA  CC
Selling price per unit                             $37                 $26
Variable cost per unit                              32                   22

Total fixed costs                                              $18,000

If Favata Corporation could produce and sell either 10,000 units of AA or 5,000 units of CC at full capacity, it should produce and sell:  
A) 
 
10,000 units of AA and none of CC  
161) 
 
When deciding whether to discontinue a segment of a business, managers should focus on:   
C) 
 
how total costs differ among alternatives   
162) 
 
When deciding whether to discontinue a segment of a business, relevant costs include all of the following EXCEPT:   
D) 
 
future administrative costs that will continue   
163) 
 
Molly, Inc. is considering eliminating one of its product lines.  The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance.  What financial effects occur if the product line is discontinued?  
A) 
 
net income will decrease by the amount of the contribution margin of the product line being discontinued  
164) 
 
Discontinuing unprofitable products will increase profitability:   
A) 
 
if the resources no longer required by the discontinued product can be eliminated   
165) 
 
A segment has the following data:

Sales        $600,000
Variable costs               320,000
Fixed costs                    310,000

What will be the incremental effect on net income if this segment is eliminated, assuming the fixed costs will be allocated to profitable segments?  
C) 
 
$280,000 decrease  
166) 
 
Camera Corner is considering eliminating Model AE2 from its camera line because of losses over the past quarter. The past three months of information for Model AE2 are summarized below: 

  Sales (1,000 units)  $300,000
  Manufacturing costs:
  Direct materials  150,000
  Direct labor ($15 per hour)  60,000
  Overhead  100,000
  Operating loss  ($10,000)

Overhead costs are 70% variable and the remaining 30% is depreciation of special equipment for model AE2 that has no resale value. 

If Model AE2 is dropped from the product line, operating income will:   
B) 
 
decrease by $20,000   
Answer the following questions using the information below:

The management accountant for Martha's Book Store has prepared the following income statement for the most current year:
  Cookbook  Travel Book  Classics  Total
  Sales  $60,000  $100,000  $40,000  $200,000
  Cost of goods sold  36,000  65,000  20,000  121,000
  Contribution margin  24,000  35,000  20,000  79,000
  Order and delivery processing  18,000  21,000  8,000  47,000
  Rent (per sq. foot used)  2,000  1,000  3,000  6,000
  Allocated corporate costs  7,000  7,000  7,000  21,000
  Corporate profit  $ (3,000)  $ 6,000  $ 2,000  $ 5,000
  
167) 
 
If the cookbook product line had been discontinued prior to this year, the company would have reported:   
C) 
 
less corporate profits   
168) 
 
If the travel book line had been discontinued, corporate profits for the current year would have decreased by:   
C) 
 
$13,000   
Answer the following questions using the information below:

Denly Company has three products, A, B, and C. The following information is available:

  Product A  Product B  Product C
  Sales  $60,000  $90,000  $24,000
  Variable costs  36,000  48,000  15,000
  Contribution margin  24,000  42,000  9,000
  Fixed costs:
  Avoidable  9,000  18,000  6,000
  Unavoidable  6,000  9,000  5,400
  Operating income  $ 9,000  $15,000  $ (2,400)

 
169) 
 
Denly Company is thinking of dropping Product C because it is reporting a loss. Assuming Denly drops Product C and does not replace it, operating income will:   
C) 
 
decrease by $3,000   
170) 
 
Assuming Product C is discontinued and the space formerly used to produce Product C is rented for $12,000 per year, operating income will:   
B) 
 
increase by $9,000   
Answer the following questions using the information below:

Melodee's Preserves currently makes jams and jellies and a variety of decorative jars used for packaging. An outside supplier has offered to supply all of the needed decorative jars. For this make-or-buy decision, a cost analysis revealed the following avoidable unit costs for the decorative jars:

  Direct materials  $0.25
  Direct labor  0.03
  Unit-related support costs  0.10
  Batch-related support costs  0.12
  Product-sustaining support costs  0.22
  Facility-sustaining support costs  0.28
  Total cost per jar  $1.00

 
171) 
 
The relevant cost per jar is:   
D) 
 
$1.00 per jar   
172) 
 
The maximum price that Melodee's Preserves should be willing to pay for the decorative jars is:   
D) 
 
$1.00 per jar   
173) 
 
Costs are relevant to a particular decision if they:   
C) 
 
differ across the alternatives being considered   
174) 
 
When deciding to lease a new cutting machine or continue using the old machine, the following costs are relevant EXCEPT the:   
A) 
 
$50,000 cost of the old machine   
175) 
 
For machine-replacement decisions, depreciation is a cost that is:   
A) 
 
not relevant  
176) 
 
________ is relevant in a decision to replace equipment.  
D) 
 
Future maintenance costs of old equipment  
177) 
 
In a decision to keep or replace existing equipment, ________ is a false statement.  
B) 
 
the disposal value of the old equipment is irrelevant  
178) 
 
A company decided to replace an old machine with a new machine.  Which of the following is considered a relevant cost?  
D) 
 
the current disposal price of the old equipment  
179) 
 
What role does a trade-in allowance on old equipment play in a decision to retain or replace equipment?  
D) 
 
it is relevant since it reduces the cost of the new equipment  
Answer the following questions using the information below:

Flowers For Everyone is considering replacing its existing delivery van with a new one. The new van can offer considerable savings in operating costs. Information about the existing van and the new van follow:

  Existing van  New van
  Original cost  $100,000  $180,000
  Annual operating cost  $ 35,000  $ 20,000
  Accumulated depreciation  $ 60,000  
  Current salvage value of the existing van  $ 45,000  
  Remaining life  10 years  10 years
  Salvage value in 10 years  $ 0  $ 0
  Annual depreciation  $ 4,000  $ 18,000
  
180) 
 
Sunk costs include:   
A) 
 
the original cost of the existing van   
181) 
 
Relevant costs for this decision include:   
C) 
 
the current salvage value   
182) 
 
If Flowers For Everyone replaces the existing delivery van with the new one, over the next 10 years operating income will:   
B) 
 
increase by $150,000   
Answer the following questions using the information below:

Frederick, Inc., is considering replacing a machine. The following data are available:

  Replacement
  Old Machine  Machine
  Original cost  $45,000  $35,000
  Useful life in years  10  5
  Current age in years  5  0
  Book value  $25,000  
  Disposal value now  $8,000  
  Disposal value in 5 years  0  0
  Annual cash operating costs  $7,000  $4,000
  
183) 
 
Which of the data provided in the table is a sunk cost?   
D) 
 
the original cost of the old machine   
184) 
 
For the decision to keep the old machine, the relevant costs of keeping the old machine total:   
B) 
 
$35,000   
185) 
 
The difference between keeping the old machine and replacing the old machine is:   
B) 
 
$12,000 in favor of keeping the old machine   
186) 
 
The difference between the original cost of an asset and the accumulated depreciation is known as the:   
C) 
 
book value   
187) 
 
Managers tend to favor the alternative that makes their performance look best. Therefore, they tend to focus on:   
C) 
 
the measures used in the performance evaluation model   
188) 
 
If management takes a multiple-year view in the decision model and judges success according to the current year's results, a problem will occur in the:   
B) 
 
performance evaluation model   
189) 
 
Top management faces a persistent challenge to make sure that the performance evaluation model of lower level managers is:   
D) 
 
not consistent with the decision model   
190) 
 
The three steps involved in linear programming include all of the following EXCEPT:   
D) 
 
determining the relevant and irrelevant costs   
191) 
 
In linear programming, the goals of management are expressed in:   
A) 
 
an objective function   
192) 
 
A mathematical inequality or equality that must be appeased is known as a(n):   
B) 
 
constraint