Question 1

The James Company has four departments with data as follows:
$\begin{array} { | l | r | r | r | r | } 
\hline & { \text { Service Departments } } && \text { Operating Departments } \
\hline & \text { Cafeteria } & \text { Maintenance } & \text { Milling } & \text { Finishing } \
\hline \text { Budgeted Costs } & \$ 12,000 & \$ 10,000 & \$ 42,000 & \$ 38,000 \
\hline \text { Number of Employees } & 12 & 10 & 84 & 66 \
\hline \text { Labour Hours } & 1,500 & 1,250 & 5,250 & 4,750 \
\hline
\end{array}$

- Suppose Cafeteria Department costs are allocated on the basis of number of employees and that the step-down method is used with costs of the Cafeteria Department allocated first.What would be the amount of cost allocated from the Cafeteria Department to Maintenance Department?

Accepted Answer

A)  $0. 
B)  $625. 
C)  $698. 
D)  $750.

Question 2

Division X of Charter Corporation makes and sells a single product that is used by manufacturers of forklift trucks.Presently,it sells 12,000 units per year to outside customers at $24 per unit.The annual capacity is 20,000 units,and the variable cost to make each unit is $16.Division Y of Charter Corporation would like to buy 10,000 units a year from Division X to use in its products.There would be no cost savings from transferring the units within the company rather than selling them on the outside market.What should be the lowest acceptable transfer price from the perspective of Division X?

Accepted Answer

A)  $16.00. 
B)  $17.60. 
C)  $21.40. 
D)  $24.00.

Question 3

An increase in appraisal costs will usually result in an increase in internal failure costs.

Accepted Answer

A) True 
 B)False

Question 4

To minimize its total quality costs,a company should usually try to redistribute its quality costs more toward prevention and appraisal.

Accepted Answer

A) True 
 B)False

Question 5

The Millard Division's operating data for the past two years are provided below:
$\begin{array}{l}
\begin{array} { | l | r | r | } 
\hline & \text { Year 1 } & \text { Year 2 } \
\hline \text { Return on Investment } & 12 \% & 36 \% \
\hline \text { Shareholders' Equity } & \$ 800,000 & \$ 500,000 \
\hline \text { Operating Income } & ? & \$ 360,000 \
\hline \text { Turnover } & ? & 3 \
\hline \text { Margin } & ? & ? \
\hline \text { Sales } & \$ 3,200,000 & ? \
\hline
\end{array}\
\text { Millard Division's margin in Year } 2 \text { was } 150 \% \text { of the margin in Year } 1 .
\end{array}$

-What was the turnover for Year 1?

Accepted Answer

A)  1.2. 
B)  1.5. 
C)  3.0. 
D)  4.0.

Question 6

The Post Division of the M.T. Woodhead Company produces basic posts that can be sold t outside customers or sold to the Lamp Division of the M.T. Woodhead Company. Last year the Lamp Division bought all of its 25,000 posts from the Post Division at $ \$ 1.50 $ each. The following data are available for last year's activities of the Post Division:
$\begin{array}{|l|r|}
\hline \text { Capacity in Units } & 300,000 \text { posts } \
\hline \text { Selling Price per Post to Outside Customers } & \$ 1.75 \
\hline \text { Variable Costs per Post } & \$ 0.90 \
\hline \text { Fixed Costs, Total } & \$ 150,000 \
\hline
\end{array}$
$\text { The total fixed costs would be the same for all the alternatives considered below. }$
- Suppose there is ample capacity so that transfers of the posts to the Lamp Division do not cut into sales to outside customers.What is the lowest transfer price that would not reduce the operating income of the Post Division?

Accepted Answer

A)  $0.90. 
B)  $1.35. 
C)  $1.41. 
D)  $1.75.

Question 7

$\begin{array}{l}
\text { Fabri Company's quality cost report is to be based on the following data: }\
\begin{array} { | l | r | } 
\hline \text { Liability arising from defective products } & \$ 56,000 \
\hline \text { Lost sales due to poor quality } & \$ 51,000 \
\hline \text { Test and inspection of in-process goods } & \$ 47,000 \
\hline \text { Quality circles } & \$ 17,000 \
\hline \text { Net cost of spoilage } & \$ 93,000 \
\hline \text { Debugging software errors } & \$ 29,000 \
\hline \text { Rework labour and overhead } & \$ 95,000 \
\hline \text { Final product testing and inspection } & \$ 32,000 \
\hline \text { Statistical process control activities } & \$ 61,000 \
\hline
\end{array}
\end{array}$
- What will be the total external failure cost appearing on the quality cost report?

Accepted Answer

A)  $80,000. 
B)  $107,000. 
C)  $324,000. 
D)  $481,000.

Question 8

External failure costs result when a defective product is shipped to a customer.

Accepted Answer

A) True 
 B)False

Question 9

Consider the following three statements:
I.A profit centre has control over both cost and revenue.
II.An investment centre has control over invested funds,but not over costs and revenue.
III.A cost centre has no control over sales.
Which statement(s)is/are correct?

Accepted Answer

A)  I only. 
B)  II only. 
C)  I and III only. 
D)  I and II only.

Question 10

The following data have been extracted from the year-end reports of two companies: Company X and Company Y:
 $\begin{array}{|l|r|r|}
\hline & \text { Company X } & \text { Company Y } \
\hline \text { Sales } & \$ 2,700,00 & ? \
\hline \text { Operating Income } & \$ 256,000 & ? \
\hline \text { Average Operating Assets } & ? & \$ 1,725,000 \
\hline \text { Margin } & ? & 8.0 \% \
\hline \text { Turnover } & ? & 2.0 \
\hline \text { Return on Investment } & 16 \% & ? \
\hline
\end{array}$ Required:
Fill in the missing data on the above table.

Accepted Answer

The answer of  The following data have been extracted...

Question 11

All other things being equal,which of the following is a consequence of an increase in a division's traceable fixed expenses?

Accepted Answer

A)  The division's contribution margin ratio will decrease. 
B)  The division's segment margin ratio will remain the same. 
C)  The division's segment margin will decrease. 
D)  The overall company operating income will remain the same.

Question 12

What allocation method recognizes that service departments often provide each other with interdepartmental services,and it is therefore considered to be the most accurate method for allocating service department costs to operating departments?

Accepted Answer

A)  The direct method. 
B)  The step-down method. 
C)  The reciprocal method. 
D)  The allocation by cost behaviour method.

Question 13

$\begin{array}{l}
\text { Faast Company's quality cost report is to be based on the following data: }\
\begin{array} { | l | r | } 
\hline \text { Quality engineering } & \$ 86,000 \
\hline \text { Quality circles } & \$ 53,000 \
\hline \text { Supervision of testing and inspection activities } & \$ 92,000 \
\hline \text { Net cost of scrap } & \$ 96,000 \
\hline \text { Test and inspection of in-process goods } & \$ 16,000 \
\hline \text { Liability arising from defective products } & \$ 13,000 \
\hline \text { Warranty repairs and replacements } & \$ 62,000 \
\hline \text { Debugging software errors } & \$ 86,000 \
\hline \text { Rework labour and overhead } & \$ 29,000 \
\hline
\end{array}
\end{array}$
- What will be the total appraisal cost appearing on the quality cost report?

Accepted Answer

A)  $102,000. 
B)  $108,000. 
C)  $121,000. 
D)  $247,000.

Question 14

Which of the following statements about reciprocal service department costs is correct?

Accepted Answer

A)  They are allocated to producing departments under the direct method but not allocated to producing departments at all under the step-down method. 
B)  They are allocated to producing departments under the step-down method but not allocated to producing departments at all under the direct method. 
C)  They are not allocated to producing departments under either the direct or the step-down methods. 
D)  They are allocated to producing departments under both the direct and step-down methods.

Question 15

Division A makes a part with the following characteristics:
$\begin{array}{|l|r|}
\hline \text { Production Capacity in Units } & 15,000 \text { units } \
\hline \text { Selling Price to Outside Customers } & \$ 25 \
\hline \text { Variable Cost per Unit } & \$ 18 \
\hline \text { Total Fixed Costs } & \$ 60,000 \
\hline
\end{array}$
Division B, another division of the same company, would like to purchase 5,000 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of \$24 each.

- Suppose that Division A is operating at capacity and can sell all of its output to outside customers at its usual selling price.If Division A sells the parts to Division B at $24 per unit (Division B's outside price),what will be the effect on the operating income of company as a whole?

Accepted Answer

A)  Higher by $5,000 each period. 
B)  Lower by $15,000 each period. 
C)  Lower by $5,000 each period. 
D)  There will be no change in the status of the company as a whole.

Question 16

When the selling division in an internal transfer has unsatisfied demand from outside customers for the product that is being transferred,what is the lowest acceptable transfer price as far as the selling division is concerned?

Accepted Answer

A)  Variable cost of producing a unit of product. 
B)  The full absorption cost of producing a unit of product. 
C)  The market price charged to outside customers, less any costs saved by transferring internally. 
D)  The amount that the purchasing division would have to pay an outside seller to acquire a similar product for its use.

Question 17

Only those costs that would disappear over time if a segment were eliminated should be considered traceable costs of the segment.

Accepted Answer

A) True 
 B)False

Question 18

$\text { Estes Company has assembled the following data for its divisions for the past year: }$
$\begin{array}{l|r|r|}
\hline & \text { Division A } & \text { Division B } \
\hline \text { Average Operating Assets } & \$ 500,000 & ? \
\hline \text { Sales } & ? & \$ 520,000 \
\hline \text { Operating Income } & \$ 100,000 & \$ 20,300 \
\hline \text { Turnover } & 1.25 & 4 \
\hline \text { Margin } & ? & 3.9 \% \
\hline \text { Minimum Required Rate of Return } & 14 \% & ? \
\hline \text { Residual Income } & ? & \$ 6,000 \
\hline
\end{array}$
-What was Division A's residual income?

Accepted Answer

A)  $20,000. 
B)  $30,000. 
C)  $35,000. 
D)  $45,000.

Question 19

$\begin{array}{l}
\text { Eagan Company's quality cost report is to be based on the following data: }\
\begin{array} { | l | r | } 
\hline \text { Quality training } & \$ 75,000 \
\hline \text { Lost sales due to poor quality } & \$ 94,000 \
\hline \text { Test and inspection of in-process goods } & \$ 37,000 \
\hline \text { Test and inspection of incoming materials } & \$ 65,000 \
\hline \text { Disposal of defective products } & \$ 86,000 \
\hline \text { Quality data gathering, analysis, and reporting } & \$ 92,000 \
\hline \text { Net cost of spoilage } & \$ 27,000 \
\hline \text { Supervision of testing and inspection activities } & \$ 10,000 \
\hline \text { Product recalls } & \$ 38,000 \
\hline
\end{array}
\end{array}$
- What will be the total external failure cost appearing on the quality cost report?

Accepted Answer

A)  $124,000. 
B)  $132,000. 
C)  $245,000. 
D)  $524,000.

Question 20

$\text { Eacker Company's quality cost report is to be based on the following data: }$
$\begin{array}{|l|r|}
\hline \text { Quality engineering } & \$ 72,000 \
\hline \text { Net cost of spoilage } & \$ 70,000 \
\hline \text { Re-entering data because of keying errors } & \$ 88,000 \
\hline \text { Test and inspection of incoming materials } & \$ 68,000 \
\hline \text { Test and inspection of in-process goods } & \$ 97,000 \
\hline \text { Technical support provided to suppliers } & \$ 83,000 \
\hline \text { Maintenance of test equipment } & \$ 31,000 \
\hline \text { Product recalls } & \$ 73,000 \
\hline \text { Warranty repairs and replacements } & \$ 46,000 \
\hline
\end{array}$
- What will be the total appraisal cost appearing on the quality cost report?

Accepted Answer

A)  $128,000. 
B)  $165,000. 
C)  $185,000. 
D)  $196,000.

Exam 11: Reporting for Control

An increase in appraisal costs will usually result in an increase in internal failure costs.

To minimize its total quality costs,a company should usually try to redistribute its quality costs more toward prevention and appraisal.

External failure costs result when a defective product is shipped to a customer.

Consider the following three statements: I.A profit centre has control over both cost and revenue. II.An investment centre has control over invested funds,but not over costs and revenue. III.A cost centre has no control over sales. Which statement(s) is/are correct?

All other things being equal,which of the following is a consequence of an increase in a division's traceable fixed expenses?

What allocation method recognizes that service departments often provide each other with interdepartmental services,and it is therefore considered to be the most accurate method for allocating service department costs to operating departments?

Which of the following statements about reciprocal service department costs is correct?

When the selling division in an internal transfer has unsatisfied demand from outside customers for the product that is being transferred,what is the lowest acceptable transfer price as far as the selling division is concerned?

Only those costs that would disappear over time if a segment were eliminated should be considered traceable costs of the segment.