Question 1

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

Accepted Answer

A)  $69,000. 
B)  $139,000. 
C)  $148,000. 
D)  $178,000.

Question 2

The IT Corporation produces and markets two types of electronic calculators: Model 11 and Model 12.The following data were gathered on activities last month:
 $\begin{array}{|l|r|r|}
\hline & \text { Model11 } & \text { Model 12 } \
\hline \text { Sales in units } & 5,000 & 3,000 \
\hline \text { Selling price per unit } & \$ 50 & \$ 100 \
\hline \text { Variable production costs per unit } & \$ 10 & \$ 26 \
\hline \text { Traceable fixed production costs } & \$ 100,000 & \$ 150,000 \
\hline \text { Variable selling expenses per unit } & \$ 5 & \$ 6 \
\hline \text { Traceable fixed selling expenses } & \$ 5,000 & \$ 7,500 \
\hline \text { Allocated division administrative expenses } & \$ 50,000 & \$ 60,000 \
\hline
\end{array}$
 
Required:
a.Prepare a segmented income statement in the contribution format for last month,showing both "Amount" and "Percent" columns for the company as a whole and for each model.
b.Why might it be very difficult to calculate separate break-even sales for each model?
c.Refer to the original data and,if necessary,the results of the segmented income statement prepared in part (a)above.Calculate the total break-even sales (in both units AND dollars)for last month,assuming that none of the fixed production costs and fixed selling expenses is traceable.Allocate the total break-even sales between the two models.
d.Again,refer to the original data and,if necessary,the results of the segmented income statement prepared in part (a)above.Calculate the total break-even sales (in both units AND dollars)for last month,assuming that the "allocated" amounts of the company's administrative expenses are actually traceable.Allocate the total break-even sales between the two models.
e.How reasonable are the total break-even sales numbers calculated in parts (c)and (d)given the actual results for last month?

Accepted Answer

The answer of The IT Corporation produces and markets two...

Question 3

Ieso Company has two stores: J and K. During November, Ieso Company reported operating income of $30,000 and sales of $450,000. The contribution margin in Store J was $100,000, or 40% of sales. The segment margin in Store K was $30,000, or 15% of sales. Traceable fixed expenses were $60,000 in Store J, and $40,000 in Store K.
-What was the segment margin ratio in Store J?

Accepted Answer

A)  16%. 
B)  24%. 
C)  40%. 
D)  60%.

Question 4

Canon Company has two sales areas: North and South. During last year, the contribution margin in the North was $50,000, or 20% of sales. The segment margin in the South was $15,000, or 8% of sales. Traceable fixed costs were $15,000 in the North and $10,000 in the South. During last year, the company reported total operating income of $26,000.

-What were the variable costs for the South area for the year?

Accepted Answer

A)  $65,000. 
B)  $162,500. 
C)  $185,000. 
D)  $230,000.

Question 5

Division P of Turbo Corporation has the capacity for making 75,000 wheel sets per year and regularly sells 60,000 each year on the outside market.The regular sales price is $100 per wheel set,and the variable production cost per unit is $65.Division Q of Turbo Corporation currently buys 30,000 wheel sets (of the kind made by Division P)yearly from an outside supplier at a price of $90 per wheel set.Division Q would like to buy the 30,000 wheel sets it needs annually from Division P at $87 per wheel set.What would be the change in annual operating income for the company as a whole,compared to what it is currently?

Accepted Answer

A)  $135,000. 
B)  $225,000. 
C)  $600,000. 
D)  $750,000.

Question 6

Harui Company's quality cost report is to be based on the following data:
 $\begin{array}{|l|r|}
\hline \text { Test and inspection of in-process goods } & \$ 32,000 \
\hline \text { Net cost and spoilage } & \$ 45,000 \
\hline \text { Quality circles } & \$ 33,000 \
\hline \text { Downtime caused by quality problems } & \$ 28,000 \
\hline \text { Final product testing and inspection } & \$ 78,000 \
\hline \text { Rework labour and overhead } & \$ 48,000 \
\hline \text { Quality training } & \$ 93,000 \
\hline \text { Returns arising from quality problems } & \$ 92,000 \
\hline \text { Warranty repair's and replacements } & \$ 67,000 \
\hline
\end{array}$ 
Required:
a)Prepare a quality cost report in good form with separate sections for prevention costs,appraisal costs,internal failure costs,and external failure costs.
b)If Harui's efforts to ensure quality conformance are working,how would you expect the Quality Cost Report next year to compare with this one?

Accepted Answer

The answer of  Harui Company's quality cost report is...

Question 7

An increase in appraisal costs will usually result in an increase in which of the following?

Accepted Answer

A)  Prevention costs. 
B)  Internal failure costs. 
C)  External failure costs. 
D)  Opportunity costs.

Question 8

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 the transfer of posts to the Lamp Division will cut into sales to outside customers by 15,000 units.Further suppose that an outside supplier is willing to provide the Lamp Division with basic posts at $1.45 each.If the Lamp Division chooses to buy all of its posts from the outside supplier instead of the Post Division,what will be the change in operating income for the company as a whole?

Accepted Answer

A)  $1,000 decrease. 
B)  $1,250 decrease. 
C)  $10,250 increase. 
D)  $13,750 decrease.

Question 9

Grant Company has several service departments that provide services to each other as well as to operating departments within the company.Which method would be least accurate in allocating the company's service department costs?

Accepted Answer

A)  The sequential method. 
B)  The direct method. 
C)  The step-down method. 
D)  The reciprocal method.

Question 10

The Holmes Division recorded operating data as follows for the past year:
$\begin{array}{|r|r|}
\hline \text { Sales } & \$ 200,000 \
\hline \text { Operating Income } & \$ 25,000 \
\hline \text { Average Operating Assets } & \$ 100,000 \
\hline \text { Shareholders' Equity } & \$ 80,000 \
\hline \text { Residual Income } & \$ 13,000 \
\hline
\end{array}$

-For the past year,what was the margin?

Accepted Answer

A)  12.50%. 
B)  13.00%. 
C)  14.75%. 
D)  15.00%.

Question 11

The following selected data pertain to the belt division of Allen Corp. for last year:

$\begin{array} { | l | r | } 
\hline \text { Sales } & \$ 500,000 \
\hline \text { Average Operating Assets } & \$ 200,000 \
\hline \text { Operating Income } & \$ 80,000 \
\hline \text { Turnover } & 2.5 \
\hline \text { Minimum Required Return } & 20 \% \
\hline
\end{array}$

-What was the residual income?

Accepted Answer

A)  $40,000. 
B)  $80,000. 
C)  $100,000. 
D)  $420,000.

Question 12

Russet Company has two Service Departments and two Producing Departments. Budgeted costs and budgeted activity in the various departments for the most recent year are presented below:
$\begin{array} {| l | r | r | r | r | } 
\hline & \begin{array} { r } 
\text { Custodial } \
\text { Services }
\end{array} & \text { Cafeteria } & \begin{array} { r } 
\text { Cutting } \
\text { Department }
\end{array} & \begin{array} { r } 
\text { Assembly } \
\text { Department }
\end{array} \
\hline \text { Overhead Costs } & \$ 252,000 & \$ 140,000 & \$ 600,000 & \$ 900,000 \
\hline \begin{array} { l } 
\text { Square Metres of Space } \
\text { Occupied }
\end{array} & 1,000 & 2,000 & 8,000 & 10,000 \
\hline \text { Number of Employees } & 20 & 30 & 150 & 200 \
\hline \text { Machine Hour } & & & 40,000 & 60,000 \
\hline
\end{array}$Service Department costs are allocated to Producing Departments with the costs of Custodial Services allocated first on the basis of square metres of space occupied. The costs of the Cafeteria are allocated on the basis of number of employees. Predetermined overhead rates in the Cutting and Assembly departments are based on machine hours. Round all calculations to the nearest dollar.

- Under the step-down method of allocation,what would be the amount of Custodial Services cost allocated to the Assembly Department?

Accepted Answer

A)  $0. 
B)  $120,000. 
C)  $126,000. 
D)  $140,000.

Question 13

Westmore Company has two Service Departments and two Operating Departments. Budgeted costs and other data relating to these departments are presented below:$\begin{array} { | l | r | r | r | r | } 
\hline & \begin{array} { r } 
\text { Building \& } \
\text { Grounds }
\end{array} & \text { Personnel } & \text { Operating A} & \text { Operating B } \
\hline \text { Departmental costs } & \$ 54,000 & \$ 200,000 & \$ 650,000 & \$ 800,000 \
\hline \text { Square Metres Occupied } & 1,000 & 3,000 & 12,000 & 15,000 \
\hline \text { Number of Employees } & 10 & 5 & 45 & 55 \
\hline \text { Direct Labour Hours } & & & 76,000 & 92,000 \
\hline
\end{array}$The costs of Building & Grounds are allocated first on the basis of square metres of space occupied. Personnel costs are allocated on the basis of number of employees. The departmental costs for the Operating Departments are overhead costs. Predetermined overhead rates in the Operating Departments are calculated on the basis of direct labour hours.

- Assume that the company uses the direct method of allocating Service Department costs to Operating Departments.How much Building & Grounds cost would be allocated to Operating Department A?

Accepted Answer

A)  $20,903. 
B)  $21,600. 
C)  $24,000. 
D)  $29,700.

Question 14

$\begin{array}{l}
\text { Faust Company's quality cost report is to be based on the following data: }\
\begin{array} { | l | r | } 
\hline \text { Quality engineering } & \$ 68,000 \
\hline \text { Quality circles } & \$ 35,000 \
\hline \text { Supervision of testing and inspection activities } & \$ 72,000 \
\hline \text { Net cost of scrap } & \$ 76,000 \
\hline \text { Test and inspection of in-process goods } & \$ 6,000 \
\hline \text { Liability arising from defective products } & \$ 3,000 \
\hline \text { Warranty repairs and replacements } & \$ 56,000 \
\hline \text { Debugging software errors } & \$ 68,000 \
\hline \text { Rework labour and overhead } & \$ 19,000 \
\hline
\end{array}
\end{array}$
- What will be the total appraisal cost appearing on the quality cost report?

Accepted Answer

A)  $74,000. 
B)  $78,000. 
C)  $81,000. 
D)  $181,000.

Question 15

Financial Services Company has two Service Departments and two Operating Departments. Budgeted costs and other data relating to these departments are presented below:
$\begin{array}{|l|r|r|r|r|}\hline & \begin{array}{r}
\text { Building \& } \
\text { Grounds }
\end{array} & \text { Personnel } & \text { Operating } A& \text { Operating B } \
\hline \text { Departmental costs } & \$ 64,000 & \$ 200,000 & \$ 650,000 & \$ 800,000 \
\hline \text { Square Metres Occupied } & 1,000 & 3,000 & 12,000 & 18,000 \
\hline \text { Number of Employees } & 10 & 5 & 45 & 55 \
\hline \text { Professional Hours } & & & 76,000 & 92,000 \
\hline
\end{array}$
 
The costs of Building & Grounds are allocated first on the basis of square metres of space occupied. Personnel costs are allocated on the basis of number of employees. The departmental costs for the Operating Departments are overhead costs. Predetermined overhead rates in the Operating Departments are calculated on the basis of professional hours.

- Assume that the company uses the step-down method of allocating Service Department costs to Operating Departments,and Building and Grounds costs are allocated first.How much Personnel Department cost would be allocated to Operating Department B?

Accepted Answer

A)  $0. 
B)  $107,368. 
C)  $107,590. 
D)  $113,520.

Question 16

$\begin{array}{l}
\text { Thais Company's quality cost report is to be based on the following data: }\
\begin{array} { | l | r | } 
\hline \text { Liability arising from defective products } & \$ 65,000 \
\hline \text { Lost sales due to poor quality } & \$ 61,000 \
\hline \text { Test and inspection of in-process goods } & \$ 57,000 \
\hline \text { Quality circles } & \$ 27,000 \
\hline \text { Net cost of spoilage } & \$ 103,000 \
\hline \text { Debugging software errors } & \$ 39,000 \
\hline \text { Rework labour and overhead } & \$ 105,000 \
\hline \text { Final product testing and inspection } & \$ 42,000 \
\hline \text { Statistical process control activities } & \$ 71,000 \
\hline
\end{array}
\end{array}$
- What will be the total external failure cost appearing on the quality cost report?

Accepted Answer

A)  $100,000. 
B)  $126,000. 
C)  $373,000. 
D)  $570,000.

Question 17

Which of the following would be classified as an appraisal cost on a quality cost report?

Accepted Answer

A)  Quality circles. 
B)  Downtime caused by quality problems. 
C)  Supplies used in testing and inspection. 
D)  Quality engineering.

Question 18

Service departments,such as accounting,finance,general administration,legal,and personnel,are usually considered to be cost centres.In addition,manufacturing facilities are often considered to be cost centres.

Accepted Answer

A) True 
 B)False

Question 19

Falstaff Company's quality cost report is to be based on the following data:
 $\begin{array}{|l|r|}
\hline \text { Quality data gathering, analysis, and reporting } & \$ 49,000 \
\hline \text { Supervision of testing and inspection activities } & \$ 46,000 \
\hline \text { Liability arising from defective products } & \$ 35,000 \
\hline \text { Technical support provided to suppliers } & \$ 50,000 \
\hline \text { Disposal of defective products } & \$ 75,000 \
\hline \text { Amortization of test equipment } & \$ 56,000 \
\hline \text { Downtime caused by quality problems } & \$ 99,000 \
\hline \text { Test and inspection of in-process goods } & \$ 70,000 \
\hline \text { Cost of field servicing and handling complaints } & \$ 54,000 \
\hline
\end{array}$ Required:
Prepare a quality cost report in good form with separate sections for prevention costs,appraisal costs,internal failure costs,and external failure costs.

Accepted Answer

The answer of  Falstaff Company's quality cost report is...

Question 20

The following selected data pertain to the belt division of Allen Corp. for last year:

$\begin{array} { | l | r | } 
\hline \text { Sales } & \$ 500,000 \
\hline \text { Average Operating Assets } & \$ 200,000 \
\hline \text { Operating Income } & \$ 80,000 \
\hline \text { Turnover } & 2.5 \
\hline \text { Minimum Required Return } & 20 \% \
\hline
\end{array}$

-What was the return on investment?

Accepted Answer

A)  15%. 
B)  16%. 
C)  20%. 
D)  40%.

Exam 11: Reporting for Control

An increase in appraisal costs will usually result in an increase in which of the following?

Grant Company has several service departments that provide services to each other as well as to operating departments within the company.Which method would be least accurate in allocating the company's service department costs?

Which of the following would be classified as an appraisal cost on a quality cost report?

Service departments,such as accounting,finance,general administration,legal,and personnel,are usually considered to be cost centres.In addition,manufacturing facilities are often considered to be cost centres.