Question 1

Alpha Company manufactures breadboxes and uses an activity-based costing system. The following information is provided for the month of May: $$\begin{array} { | l | c | c | c | } 
\hline \text { Activity } & \begin{array} { c } 
\text { Estimated Indirect } \
\text { Activity Costs }
\end{array} & \text { Allocation Base } & \begin{array} { c } 
\text { Estimated Quantity of } \
\text { Allocation Base }
\end{array} \
\hline \text { Materials handling } & \$ 3,500 & \text { Number of parts } & 5,000 \text { parts } \
\hline \text { Assembling } & \$ 12,000 & \text { Number of parts } & 5,000 \text { parts } \
\hline \text { Packaging } & \$ 5,750 & \begin{array} { c } 
\text { Number of bread } \
\text { boxes }
\end{array} & 1,250 \text { bread boxes } \
\hline
\end{array}$$ Each breadbox consists of 4 parts, and the direct materials cost per breadbox is $7.00. There is no direct labor. What is the total manufacturing cost per breadbox?

Accepted Answer

A)  $17.40 
B)  $24.00 
C)  $12.40 
D)  $26.00

Question 2

The manager of a profit center is responsible for generating revenues and managing the center's invested capital.

Accepted Answer

A) True 
 B)False

Question 3

The flexible budget uses budgeted costs at the actual level of activity.

Accepted Answer

A) True 
 B)False

Question 4

Long-term investments are made by the manager of an investment division for the purpose of:

Accepted Answer

A)  increasing profits. 
B)  decreasing profits. 
C)  increasing interest liability. 
D)  decreasing debt liability.

Question 5

Pitt Jones Company had the following activities, allocated costs, and allocation bases: $$\begin{array} { | l | r | r | } 
\hline \text { Activities } & \text { Allocated Costs } & \text { Allocation Base } \
\hline \text { Account inquiry (hours) } & \$ 60,000 & 2,000 \text { hours } \
\hline \text { Account billing (lines) } & \$ 30,000 & 20,000 \text { lines } \
\hline \text { Account verification (accounts) } & \$ 15,000 & 20,000 \text { accounts } \
\hline \text { Correspondence (letters) } & \$ 10,000 & 1,000 \text { letters } \
\hline
\end{array}$$ The above activities are carried out at two of their regional offices.
$$\begin{array} { | l | r | r | } 
\hline & \text { Northeast Office } & \text { Midwest Office } \
\hline \text { Account inquiry (hours) } & 100 \text { hours } & 200 \text { hours } \
\hline \text { Account billing (lines) } & 10,000 \text { lines } & 7,000 \text { lines } \
\hline \text { Account verification (accounts) } & 1,000 \text { accounts } & 600 \text { accounts } \
\hline \text { Correspondence (letters) } & 50 \text { letters } & 100 \text { letters } \
\hline
\end{array}$$ What is the cost per hour for the account inquiry activity?

Accepted Answer

A)  $0.75 
B)  $30.00 
C)  $10.00 
D)  $1.50

Question 6

In a balanced scorecard, which of the following is a key performance indicator of the financial perspective?

Accepted Answer

A)  hours of employee training 
B)  number of warranty claims 
C)  percentage of market share 
D)  return on investment

Question 7

The goal of the balanced scorecard is to:

Accepted Answer

A)  maximize profits. 
B)  maximize operational efficiency. 
C)  develop a set of organizational performance measures. 
D)  increase the market share and maximize shareholders' wealth.

Question 8

Which of the following internal business perspective key performance indicators (KPIs) is commonly used to assess the innovation process?

Accepted Answer

A)  number of new products developed 
B)  number of warranty claims 
C)  employee turnover rate 
D)  rate of on-time deliveries

Question 9

The predetermined overhead allocation rate is an estimated overhead cost per unit of the allocation base and is calculated at the beginning of the accounting period.

Accepted Answer

A) True 
 B)False

Question 10

Activity-based costing refines the cost allocation process even more than the traditional allocation costing.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements most accurately describes residual income?

Accepted Answer

A)  how efficiently a division uses its average assets to generate sales there by profits 
B)  how much operating income the division earns on every dollar of sales 
C)  how much return a division generates on average assets 
D)  how much extra income a division generates above the minimum acceptable level

Question 12

Archid, a manufacturer of spare parts, has two production departments: Assembling and Packaging. The Assembling department is machine oriented, while the Packaging department is labor oriented. Estimated manufacturing overhead costs for the year 2015 were $15,000,000 for Assembling and $10,000,000 for Packaging. Calculate departmental wide allocation rates if total estimated machine hours were 30,000 and labor hours were 20,000 for the year.

Accepted Answer

A)  $250, $300 
B)  $500, $500 
C)  $300, $300 
D)  $450, $540

Question 13

Which of the following is the correct formula for asset turnover ratio?

Accepted Answer

A)  Net sales ÷ Average total assets 
B)  Net sales ÷ Cost of goods sold 
C)  Net Sales ÷ Net assets 
D)  Net profit ÷ Net sales

Question 14

Pitt Jones Company had the following activities, allocated costs, and allocation bases: $$\begin{array} { | l | r | r | } 
\hline \text { Activities } & \text { Allocated Costs } & \text { Allocation Base } \
\hline \text { Account inquiry (hours) } & \$ 60,000 & 2,000 \text { hours } \
\hline \text { Account billing (lines) } & \$ 30,000 & 20,000 \text { lines } \
\hline \text { Account verification (accounts) } & \$ 15,000 & 20,000 \text { accounts } \
\hline \text { Correspondence (letters) } & \$ 10,000 & 1,000 \text { letters } \
\hline
\end{array}$$ The above activities are carried out at two of their regional offices.
$$\begin{array} { | l | r | r | } 
\hline & \text { Northeast Office } & \text { Midwest Office } \
\hline \text { Account inquiry (hours) } & 100 \text { hours } & 200 \text { hours } \
\hline \text { Account billing (lines) } & 10,000 \text { lines } & 7,000 \text { lines } \
\hline \text { Account verification (accounts) } & 1,000 \text { accounts } & 600 \text { accounts } \
\hline \text { Correspondence (letters) } & 50 \text { letters } & 100 \text { letters } \
\hline
\end{array}$$ How much of the correspondence cost will be assigned to the Northeast Office?

Accepted Answer

A)  $500 
B)  $1,200 
C)  $2,500 
D)  $800

Question 15

If a company allows division managers to negotiate a cost-based transfer price, it is better to use actual costs rather than standard costs. Otherwise, the selling division has no motivation to control costs.

Accepted Answer

A) True 
 B)False

Question 16

Recreation Equipment Company has several divisions that are investment centers. Data for the Boat Division and the Trailer Division are shown here:
 $$\begin{array} { | l | c | c | } 
\hline & \text { Boat Division } & \text { Trailer Division } \
\hline \text { Operating income } & \$ 90,000 & \$ 36,000 \
\hline \text { Total assets at Jan 1 } & \$ 670,000 & \$ 230,000 \
\hline \text { Total assets at Dec } 31 & \$ 710,000 & \$ 220,000 \
\hline
\end{array}$$ With regard to the efficient use of assets, the Boat Division has a higher ROI (Return on Investment) because it has the highest operating income.

Accepted Answer

A) True 
 B)False

Question 17

The manager of a cost center is responsible for controlling costs and generating revenues of the company.

Accepted Answer

A) True 
 B)False

Question 18

AAA Metal Bearings produces two sizes of metal bearings (sold by the crate)-standard and heavy. The standard bearings require $200 of direct materials per unit (per crate) and the heavy bearings require $245 of direct materials per unit. The operation is mechanized and there is no direct labor. Previously AAA used a single plant-wide allocation rate for manufacturing overhead, which was $1.55 per machine hour. Based on the single rate, gross profit was as follows:
 $\begin{array} { l r r } \text { Per unit } & \text { Standard } & \text { Heavy } \ \text { Direct material cost } & \$ 200.00 & \$ 245.00 \ \text { Manufacturing overhead cost } & 124.00 & 93.00 \ \text { Total manufacturing cost } & \$ 324.00 & \$ 338.00 \end{array}$
$\begin{array}{lll}
\text { Price per unit }\quad\quad\quad\quad\quad\quad\quad & &\underline{350.00} & \underline{\$ 70.00} \
\text { Gross profit per unit } && \underline{\$ 26.00} & \underline{\$ 32.00}
\end{array}$
 Although the data showed that the heavy bearings were more profitable than the standard bearings, the plant manager knew that the heavy bearings required much more processing in the metal fabrication phase than the standard bearings, and that this factor was not adequately reflected in the single allocation rate. He suspected that it was distorting the profit data. He suggested adopting an activity-based costing approach.
Working together, the engineers and accountants identified the following three manufacturing activities, and broke down the annual overhead costs as shown below:
 $$\begin{array} { l c } 
\text { Activities: } & \text { Estimated Cost } \
\text { Metal fabrication } & \$ 420,000 \
\text { Machine processing } & \$ 152,000 \
\text { Packaging } & \underline{\$ 17,000} \
\text { Total overhead costs } & \$ 589,000
\end{array}$$ Engineers believed that metal fabrication costs should be allocated by weight, and estimated that the plant processed 12,000 kilos of metal per year. Machine processing costs were correlated to machine hours, and the engineers estimated a total of 380,000 machine hours for the year. Packaging costs were the same for both types of products, and so they could be allocated simply by the number of units produced. The production plan provided for 4,000 units of standard and 1,000 units of heavy bearings to be produced during the year. Additional data on a per unit basis was as given below:
 $\begin{array}{lcr} 
& \text { Standard } & \text { Heavy } \
\text { Kilos per unit } & 2.00 & 4.00 \
\text { Machine hours per unit } & 80.00 & 60.00
\end{array}$
 Using the data above, calculate activity rates. Then, following the ABC methodology, calculate the production cost and gross profit for one unit of standard bearings. (Round your intermediate calculations to two decimal places).

Accepted Answer

The answer of AAA Metal Bearings produces two sizes of...

Question 19

Which of the following is the correct formula for profit margin ratio?

Accepted Answer

A)  Net profit ÷ Sales 
B)  Net sales ÷ Average total assets 
C)  Net profit × Capital invested 
D)  Operating income ÷ Net sales

Question 20

Activity-based management focuses on making decisions that improve customers' satisfaction while also increasing profits.

Accepted Answer

A) True 
 B)False

Exam 24: Cost Allocation and Responsibility Accounting

The manager of a profit center is responsible for generating revenues and managing the center's invested capital.

The flexible budget uses budgeted costs at the actual level of activity.

Long-term investments are made by the manager of an investment division for the purpose of:

In a balanced scorecard, which of the following is a key performance indicator of the financial perspective?

The goal of the balanced scorecard is to:

Which of the following internal business perspective key performance indicators (KPIs) is commonly used to assess the innovation process?

The predetermined overhead allocation rate is an estimated overhead cost per unit of the allocation base and is calculated at the beginning of the accounting period.

Activity-based costing refines the cost allocation process even more than the traditional allocation costing.

Which of the following statements most accurately describes residual income?

Which of the following is the correct formula for asset turnover ratio?

If a company allows division managers to negotiate a cost-based transfer price, it is better to use actual costs rather than standard costs. Otherwise, the selling division has no motivation to control costs.

The manager of a cost center is responsible for controlling costs and generating revenues of the company.

Which of the following is the correct formula for profit margin ratio?

Activity-based management focuses on making decisions that improve customers' satisfaction while also increasing profits.