Nobles Acct10 Tif 21

Horngren's Accounting, 10e, Global Edition (Nobles/Mattison/Matsumura)
Chapter 21 Cost-Volume-Profit Analysis
Learning Objective 21-1
1) Fixed costs per unit is inversely proportional to the volume of units produced.
Answer: TRUE
Diff: 1
LO: 21-1
AACSB: Concept
AICPA Functional: Measurement
2) Total variable costs change in direct proportion to changes in the volume of production.
Answer: TRUE
Diff: 1
LO: 21-1
AACSB: Concept
3) Variable cost per unit is constant throughout various relevant ranges.

Answer: FALSE
Diff: 1
LO: 21-1
AACSB: Concept
4) Fixed costs per unit decrease as production levels decrease.

Answer: FALSE
Diff: 1
LO: 21-1
AACSB: Concept
5) If the volume of activity doubles in the relevant range, total variable costs will also double.
Answer: TRUE
Diff: 1
LO: 21-1
AACSB: Concept
6) Fixed cost per unit is assumed to be constant within a particular relevant range of activity.
Answer: FALSE
Diff: 1
LO: 21-1
AACSB: Concept
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7) Total variable costs change in direct proportion to a change in volume.
Answer: TRUE
Diff: 1
LO: 21-1
AACSB: Concept
8) During the current year, Simpson Inc. incurred $5,000 of fixed and $12,000 variable costs. If the number
of units produced is halved next year, the company will incur $2,500 as fixed and $6,000 as variable costs.
Answer: FALSE
Diff: 1
LO: 21-1
AACSB: Concept
9) Within the relevant range, the total fixed costs and the variable cost per unit remain the same.
Answer: TRUE
Diff: 1
LO: 21-1
AACSB: Concept
10) Total fixed costs can change from one relevant range to another.
Answer: TRUE
Diff: 1
LO: 21-1
AACSB: Concept
11) The high-low method requires the identification of lowest and highest levels of total costs, not
activity, over a period of time.
Answer: FALSE
Diff: 2
LO: 21-1
AACSB: Concept
12) Which of the following is a variable cost?

A) Property taxes
B) Salary of plant manager
C) Direct materials cost
D) Straight-line depreciation expense
Answer: C
Diff: 1
LO: 21-1
AACSB: Concept
2
13) A 15% increase in production volume will result in a:
A) 15% increase in the variable cost per unit.
B) 15% increase in total mixed costs.
C) 15% increase in total administration costs.
D) 15% increase in total variable costs.
Answer: D
Diff: 1
LO: 21-1
AACSB: Application
14) Variable cost per unit, within the relevant range, will:
A) increase as production decreases.
B) decrease as production decreases.
C) remain the same as production levels change.
D) decrease as production increases.
Answer: C
Diff: 1
LO: 21-1
AACSB: Concept
15) Which of the following statements is true of the behavior of total variable costs, within the relevant
range?
A) They will decrease as production increases.
B) They will remain the same as production levels change.
C) They will decrease as production decreases.
D) They will increase as production decreases.
Answer: C
Diff: 1
LO: 21-1
AACSB: Concept
16) Which of the following statements is true of the behavior of total fixed costs, within the relevant
range?
A) They will remain the same as production levels change.
B) They will increase as production decreases.
C) They will decrease as production decreases.
D) They will decrease as production increases.
Answer: A
Diff: 1
LO: 21-1
AACSB: Concept
3
17) The fixed costs per unit will:
A) increase as production decreases.
B) decrease as production decreases.
C) remain the same as production levels change.
D) increase as production increases.
Answer: A
Diff: 2
LO: 21-1
AACSB: Concept
18) Assume that John's cellphone service provider charges $5.00 per month and $0.10 per minute per call.
If John's current bill is $50.00, how many calling minutes did John use?
A) 500 minutes
B) 550 minutes
C) 450 minutes
D) 400 minutes
Answer: C
Explanation: C) Current bill 50.00
Less monthly charges -5.00
Call charges (A) 45.00
Charge per minute per call (B) 0.10
Number of minutes used (A) ÷ (B) 450.00
Diff: 1
LO: 21-1
AACSB: Application
19) Nancy was reviewing the water bill for her dog day care and spa and determined that her highest bill,
$3,800, occurred in May when she washed 400 dogs and her lowest bill, $2,400, occurred in November
when she washed 200 dogs. What was the variable cost per dog associated with Nancy's water bill?
A) $6.00
B) $12.00
C) $9.50
D) $7.00
Answer: D
Explanation: D) Variable cost per unit = Change in total cost ÷ Change in volume of activity
Variable cost per unit = ($3,800 - $2,400) ÷ (400 - 200) = $1,400 ÷ 200
Variable cost per unit = $7 per dog
Diff: 1
LO: 21-1
AACSB: Application
4
20) Nancy was reviewing the water bill for her dog day care and spa and determined that her highest bill,
$3,800, occurred in May when she washed 400 dogs and her lowest bill, $2,400, occurred in November
when she washed 200 dogs. What was the fixed cost associated with Nancy's water bill?
A) $2,400
B) $3,800
C) $1,000
D) $1,400
Answer: C
Explanation: C)
Variable cost per unit = Change in total cost ÷ Change in volume of activity
Variable cost per unit = ($3,800 - $2,400) ÷ (400 - 200) = $1,400 ÷ 200
Variable cost per unit = $7 per dog
Number of dogs washed in May 400

Variable cost incurred in May $2,800
Fixed cost incurred in May $1,000
Diff: 2
LO: 21-1
AACSB: Application
21) Which of the following costs does not change in total despite changes in volume?
A) Fixed cost
B) Variable cost
C) Mixed cost
D) Total production cost
Answer: A
Diff: 1
LO: 21-1
AACSB: Concept
22) Costs that have both variable and fixed components are called:
A) fixed cost.
B) variable cost.
C) mixed cost.
D) contribution cost.
Answer: C
Diff: 1
LO: 21-1
AACSB: Concept
5
23) Which of the following costs changes in total in direct proportion to a change in volume?
A) Fixed cost
B) Variable cost
C) Mixed cost
D) Period cost
Answer: B
Diff: 1
LO: 21-1
AACSB: Concept
24) Jezebel Company incurred fixed costs of $300,000. Total costs, both fixed and variable, are $450,000
when 50,000 units are produced. It sold 35,000 units during the year. Calculate the variable cost per unit.
A) $9
B) $12
C) $6
D) $3
Answer: D
Explanation: D)
Total costs $450,000
Less: fixed costs -300,000
Variable costs (A) 150,000
Number of units (B) 50,000
Variable cost per unit (A) ÷ (B) $3
Diff: 1
LO: 21-1
AACSB: Application
6
25) Venus Inc. has fixed costs of $300,000. Total costs, both fixed and variable, are $450,000 when 30,000
units are produced. Calculate the total costs if the volume increases to 60,000 units.
A) $750,000
B) $1,200,000
C) $600,000
D) $450,000
Answer: C
Explanation: C)
Variable costs (A) $150,000
Variable cost per unit (A) ÷ (B) $5.00
Number of units after increase in production 60,000

Variable costs of production 300,000
Fixed costs 300,000
Total costs after increase in production $600,000
Diff: 2
LO: 21-1
AACSB: Application
26) Anthony Company has fixed costs of $30,000 per month. Highest production volume during the year
was in January when 100,000 units were produced, 75,000 units were sold, and total costs of $630,000
were incurred. In June, the company produced only 55,000 units. What was the total cost incurred in
June?
A) $480,000
B) $360,000
C) $630,000
D) $830,000
Answer: B
Explanation: B)
Variable costs (A) $600,000
Variable cost per unit (A) ÷ (B) $6
Number of units produced in June 55,000

Variable costs incurred in June $330,000
Fixed costs 30,000
Total cost in June $360,000
Diff: 3
LO: 21-1
AACSB: Application
7
27) Anthony Company's highest point of total cost was $75,000 in June. Their point of lowest cost was
$50,000 in December. The company makes a single product. Production volume in June and December
were 13,000 and 8,000 units, respectively. What is the fixed cost per month?
A) $50,000
B) $20,000
C) $10,000
D) $8,000
Answer: C
Explanation: C)
Variable cost per unit = (Highest cost - Lowest cost) ÷ (Highest volume - Lowest volume)
Change in total cost (A) $25,000

Change in volume of activity (B) 5,000
Variable cost per unit (A ÷ B) $5
Total costs for June

Total variable costs for June
(5 × 13,000) 65,000
Fixed costs for June $10,000
Diff: 2
LO: 21-1
AACSB: Application
28) Anthony Company's highest point of total cost was $75,000 in June. Their point of lowest cost was
$50,000 in December. The company makes a single product. Production volume in June was 13,000 units;
production volume in December was 8,000 units. What is the variable cost per unit?
A) $9.38 per unit
B) $6.25 per unit
C) $5.00 per unit
D) $5.77 per unit
Answer: C
Explanation: C)
Variable cost per unit = ($75,000 - $50,000) ÷ (13,000 - 8,000) = $25,000 ÷ 5,000
Variable cost per unit = $5 per unit
Diff: 2
LO: 21-1
AACSB: Application
8
29) The relevant range of Orleans Company is between 100,000 units and 180,000 units per month. If the
company produces beyond 180,000 units per month:
A) the fixed costs will remain the same, but the variable cost per unit may change.
B) the fixed costs may change, but the variable cost per unit will remain the same.
C) the fixed costs and the variable cost per unit will not change.
D) both the fixed costs and the variable cost per unit may change.
Answer: D
Diff: 2
LO: 21-1
AACSB: Application
30) The phone bill for an accounting firm consists of both fixed and variable costs. Refer to the 4-month
data below and apply the high-low method to answer the question. (Round your intermediate
calculations to two decimal places)
Minutes Total Bill

January 460 $3,000
February 200 $2,675
March 160 $2,625
April 300 $2,800
What is the fixed portion of the total cost?

A) $1,850
B) $2,225
C) $2,425
D) $2,625
Answer: C
Explanation: C)
Change in total cost ($3,000 - $2,625) $375.00

Change in minutes (460 - 160) 300.00
Variable cost per minute ($375 ÷ 300) $1.25
Variable cost for January = 460 minutes × $1.25 per minute = $575
Total fixed costs = Total mixed cost - Total variable cost
Total fixed costs = $3,000 - $575 = $2,425
Diff: 2
LO: 21-1
AACSB: Application
9
data below and apply the high-low method to answer the question.
Minutes Total Bill

January 460 $3,000
February 200 $2,675
March 160 $2,625
April 300 $2,800
What is the variable cost per minute?

A) $1.25
B) $0.67
C) $1.08
D) $0.58
Answer: A
Explanation: A)

Variable cost per minute ($375 ÷ 300) 1.25
Diff: 2
LO: 21-1
AACSB: Application
10
data below and apply the high-low method to answer the question.
Minutes Total Bill

January 460 $3,000
February 200 $2,675
March 160 $2,625
April 300 $2,800
If the company uses 380 minutes in May, how much will the total bill be?
A) $2,425
B) $2,478
C) $2,900
D) $3767
Answer: C
Explanation: C)
Variable cost per minute ($375 ÷ 300) 1.25
Variable cost for January = 460 minutes × $1.25 per minute = $575
Total fixed costs = Total mixed cost - Total variable cost
Total fixed costs = $3,000 - $575 = $2,425
For 380 minutes:

Total cost = (380 minutes × 1.25) + $2,425
Total cost = $475 + $2,425= $2,900
Diff: 2
LO: 21-1
AACSB: Application
33) Porterhouse Company incurs both fixed and variable production costs. Assuming the production is
within the relevant range, if volume goes up by 20%, then the total variable costs would:
A) increase by 20%.
B) remain the same.
C) increase by an amount less than 20%.
D) decrease by 20%.
Answer: A
Diff: 2
LO: 21-1
AACSB: Application
11
within the relevant range, if volume goes up by 20%, then the total fixed costs would:
A) increase by 20%.
B) remain the same.
D) decrease by 20%.
Answer: B
Diff: 1
LO: 21-1
AACSB: Application
35) The high-low method is used to:

A) determine the highest price that can be charged for a product.
B) separate mixed costs into their variable and fixed components.
C) identify the relevant and irrelevant costs of a business.
D) determine the sales level at highest capacity.
Answer: B
Diff: 2
LO: 21-1
AACSB: Application
within the relevant range, if volume goes up by 20%, then the total costs would:
A) increase by 20%.
B) remain the same.
D) decrease by 20%.
Answer: C
Diff: 2
LO: 21-1
AACSB: Application
12
37) First Buy Company provided the following manufacturing costs for the month of June.
Direct labor cost $136,000

Direct materials cost 80,000
Equipment depreciation (straight-line) 24,000
Factory insurance 19,000
Factory manager's salary 12,800
Janitor's salary 5,000
Packaging costs 18,800
Property taxes 16,000
From the above information, calculate First Buy's total fixed costs.
A) $311,600
B) $52,800
C) $71,600
D) $76,800
Answer: D
Explanation: D)
Janitor's salary $5,000
Total fixed costs $76,800
Diff: 2
LO: 21-1
AACSB: Application
13
38) First Buy Company provided the following manufacturing costs for the month of June.
Direct labor cost $136,000

Direct materials cost 80,000
Janitor's salary 5,000
From the above information, calculate First Buy's total variable costs.
A) $311,600
B) $62,300
C) $234,800
D) $38,400
Answer: C
Explanation: C)
Direct materials cost $80,000
Direct labor cost 136,000
Total variable costs $234,800
Diff: 2
LO: 21-1
AACSB: Application
39) Williams Company has variable costs of $0.60 per unit of product. In August, the volume of
production was 24,000 units and units sold were 20,000. The total production costs incurred were $31,900.
What are the fixed costs per month?
A) $17,500
B) $19,900
C) $9,600
D) $14,400
Answer: A
Explanation: A)
Total production costs incurred in Aug. $31,900.00
Variable cost per unit $0.60
Number of units produced in Aug. 24,000.00
Total variable costs incurred in Aug. ($24,000 × 0.60) $14,400.00
Total fixed costs($31,900 - $14,400) $17,500.00
Diff: 1
LO: 21-1
AACSB: Application
14
40) Which of the following costs remains the same irrespective of the changes in production?
A) Total mixed costs
B) Total operating costs
C) Total variable costs
D) Total fixed costs
Answer: D
Diff: 1
LO: 21-1
AACSB: Concept
41) From the graph given below, identify the fixed costs line.
A) OB
B) AC
C) AD
D) AE
Answer: C
Diff: 1
LO: 21-1
AACSB: Concept
42) From the graph given below, identify the sales revenue line.
A) OB
B) AC
C) AD
D) AE
Answer: A
Diff: 1
LO: 21-1
AACSB: Concept
15
43) Identify the breakeven point in the graph given below.
A) O
B) E
C) D
D) B
Answer: B
Diff: 1
LO: 21-1
AACSB: Concept
44) In the graph below, the area between the lines AC and OB after point 'E' represents:
A) fixed costs.
B) breakeven point.
C) operating loss.
D) operating income.
Answer: D
Diff: 1
LO: 21-1
AACSB: Concept
45) When the total variable costs are deducted from total mixed costs, we obtain:
A) mixed cost per unit.
B) variable cost per unit.
C) total high-low costs.
D) total fixed costs.
Answer: D
Diff: 1
LO: 21-1
AACSB: Concept
16
46) Which of the following is the right formula for calculating total mixed cost?
A) Total mixed cost = (Variable cost per unit ÷ Number of units) + Total fixed cost
B) Total mixed cost = (Variable cost per unit × Number of units) - Total fixed cost
C) Total mixed cost = (Variable cost per unit × Number of units) + Total fixed cost
D) Total mixed cost = (Variable cost per unit ÷ Number of units) - Total fixed cost
Answer: C
Diff: 1
LO: 21-1
AACSB: Concept
1) If the selling price of Product X is $15.50 per unit and unit fixed cost is $5.50, its contribution margin
per unit is $10.00.
Answer: FALSE
Diff: 1
LO: 21-2
AACSB: Application
2) Contribution margin is the difference between net sales revenue and variable costs.
Answer: TRUE
Diff: 1
LO: 21-2
AACSB: Concept
3) Contribution margin is the amount that contributes to covering variable costs.

Answer: FALSE
Diff: 1
LO: 21-2
AACSB: Concept
4) A contribution margin income statement classifies costs by function; that is, costs are classified as either
product costs or period costs.
Answer: FALSE
Diff: 1
LO: 21-2
AACSB: Concept
17
5) Both the traditional income statement approach and the contribution margin approach will yield the
same answer for calculating breakeven points.
Answer: TRUE
Diff: 1
LO: 21-2
AACSB: Concept
6) Arturo Company's Model A generator sells for $456 and Model B sells for $390. The variable cost of
Model A is $404 and of Model B is $320. If Arturo Company's sales incentives reward sales of the goods
with the highest contribution margin, the sales force will be motivated to push sales of Model A more
aggressively than Model B.
Answer: FALSE
Explanation: Model A Model B
Selling price $456 $390
Less: variable cost -404 -320
Contribution margin $ 52 $ 70
The contribution margin of Model B ($70) is more than that of Model A ($52). The sales team will be
motivated to push sales of Model B more aggressively than Model A.
Diff: 1
LO: 21-2
AACSB: Application
7) Arturo Company's Model A generator sells for $456, and Model B sells for $390. The variable cost of
Model A is $404 and of Model B is $320. If Arturo sells more of Model B than Model A, it will generate
lower revenues, but higher net income.
Answer: TRUE
Explanation: Model A Model B
Selling price $456 $390
Less: variable cost -404 -320
Contribution margin $ 52 $ 70
Diff: 2
LO: 21-2
AACSB: Application
18
8) The dollar amount that provides for covering fixed costs and then provides for operating income is
called:
A) variable cost.
B) total cost.
C) contribution margin.
D) margin of safety.
Answer: C
Diff: 1
LO: 21-2
AACSB: Concept
9) Contribution margin ratio is the ratio of contribution margin to:

A) net sales revenue.
B) cost of goods sold.
C) total variable costs.
D) total fixed costs.
Answer: A
Diff: 1
LO: 21-2
AACSB: Concept
10) Which of the following is a period cost?

A) Manufacturing overhead
B) Direct labor cost
C) Direct materials cost
D) Administrative cost
Answer: D
Diff: 1
LO: 21-2
AACSB: Concept
11) A(n) ________ groups cost by behavior; that is, costs are classified as either variable costs or fixed
costs.
A) balance sheet
B) contribution margin income statement
C) traditional income statement
D) absorption costing income statement
Answer: B
Diff: 1
LO: 21-2
AACSB: Concept
19
12) Contribution margin ratio is equal to:
A) fixed costs divided by contribution margin per unit.
B) net sales revenue per unit minus variable costs per unit.
C) net sales revenue minus variable costs.
D) contribution margin divided by net sales revenue.
Answer: D
Diff: 1
LO: 21-2
AACSB: Concept
13) Which of the following appears as a line item in a contribution margin income statement?
A) Gross profit
B) Cost of goods sold
C) Operating income
D) Selling and administrative expenses
Answer: C
Diff: 1
LO: 21-2
AACSB: Concept
14) Young Company has provided the following information:
Price per unit $40

Variable cost per unit 12
Fixed costs per month $10,000
Calculate the contribution margin per unit.

A) $28
B) $40
C) $52
D) $16
Answer: A
Explanation: A)
Unit contribution margin = Net sales revenue per unit - Variable costs per unit
Selling price $40

Less: variable cost -12
Contribution margin $28
Diff: 1
LO: 21-2
AACSB: Application
20
Price per unit $40

What is the contribution margin ratio?

A) 12%
B) 60%
C) 40%
D) 70%
Answer: D
Explanation: D)
Contribution margin ratio = Contribution margin ÷ Net sales revenue
Selling price $40

Contribution margin ratio = ($28 ÷ $40) × 100 = 70%

Diff: 2
LO: 21-2
AACSB: Application
21
16) Garcia Company provides the following information about its product:
Targeted operating income $50,000

Selling price per unit 6.00
Variable cost per unit 1.50
Total fixed costs 125,000
What is the contribution margin ratio?

A) 75%
B) 100%
C) 125%
D) 25%
Answer: A
Explanation: A)
Net sales revenue per unit $6.00

Less: Variable costs per unit -1.50
Unit contribution margin 4.50
Unit contribution margin $4.50

Divided by net sales revenue per unit 6.00
Contribution margin ratio 75%
Diff: 2
LO: 21-2
AACSB: Application
17) Perfect Fit Company sells hand-sewn shirts for $40 per shirt. It incurs monthly fixed costs of $5,000.
The contribution margin ratio is calculated to be 20%. What is the variable cost per shirt?
A) $32 per shirt
B) $48 per shirt
C) $40 per shirt
D) $38 per shirt
Answer: A
Explanation: A)
Contribution margin 20%
Selling price per shirt $40
Contribution margin = $40 × 20% 8
Variable cost per shirt $32
Diff: 2
LO: 21-2
AACSB: Application
22
18) Pluto Company sold 2,000 units in October at a price of $35 per unit. The variable cost is $20 per unit.
Calculate the total contribution margin.
A) $70,000
B) $30,000
C) $40,000
D) $20,000
Answer: B
Explanation: B)
Selling price per unit $35
Less variable cost per unit -20
Contribution margin per unit (A) $15
Number of units sold (B) 2,000
Total contribution margin (A × B) $30,000
Diff: 1
LO: 21-2
AACSB: Application
19) Pluto Company sold 2,000 units in October at a price of $35 per unit. The variable cost is $20 per unit.
The monthly fixed costs are $10,000. What is the operating income earned in October?
A) $30,000
B) $70,000
C) $20,000
D) $40,000
Answer: C
Explanation: C)
Selling price $70,000
Less variable cost -40,000
Contribution margin 30,000
Operating income $20,000
Diff: 1
LO: 21-2
AACSB: Application
20) Which of the following formulae is the right formula for calculating contribution margin ratio?
A) Contribution margin ratio = Contribution margin + Net sales revenue
B) Contribution margin ratio = Contribution margin ÷ Net sales revenue
C) Contribution margin ratio = Contribution margin × Net sales revenue
D) Contribution margin ratio = Contribution margin - Net sales revenue
Answer: B
Diff: 1
LO: 21-2
AACSB: Concept
23
21) Pluto Company sells a product for $80 per unit. Variable costs are $25 per unit and fixed costs are
$4,000 per month. Pluto sold 2,000 units in October, 2014. Prepare an income statement for October using
the contribution margin format.
Answer: Pluto Company
Contribution Margin Income Statement
Month ended October 31, 2014
Net sales revenue $160,000
Variable costs -50,000
Fixed costs -4,000
Diff: 1
LO: 21-2
AACSB: Application
1) The sales level at which operating income is zero is called breakeven point.
Answer: TRUE
Diff: 1
LO: 21-3
AACSB: Concept
2) The breakeven point represents the sales volume at which the company's net income is zero.
Answer: TRUE
Diff: 1
LO: 21-3
AACSB: Concept
3) If all other factors remain constant, an increase in fixed costs will increase the breakeven point.
Answer: TRUE
Diff: 1
LO: 21-3
AACSB: Concept
4) Fixed costs divided by contribution margin per unit equals breakeven point in unit sales.
Answer: TRUE
Diff: 1
LO: 21-3
AACSB: Concept
24
5) CVP analysis assumes that the selling price per unit does not change as volume changes.
Answer: TRUE
Diff: 1
LO: 21-3
AACSB: Concept
6) Fixed costs divided by the contribution margin ratio equals the breakeven point in sales dollars.
Answer: TRUE
Diff: 1
LO: 21-3
AACSB: Concept
7) The breakeven point is the point where the sales revenues are equal to the fixed costs.
Answer: FALSE
Diff: 1
LO: 21-3
AACSB: Concept
8) The breakeven point is the point where the sales revenues are equal to the total variable costs plus the
total fixed costs.
Answer: TRUE
Diff: 1
LO: 21-3
AACSB: Concept
9) A CVP graph shows how changes in the level of sales will affect profits.
Answer: TRUE
Diff: 1
LO: 21-3
AACSB: Concept
10) The fundamental assumption of cost-volume-profit (CVP) analysis is that in the long-run fixed costs
become variable costs.
Answer: FALSE
Diff: 1
LO: 21-3
AACSB: Concept
25
11) One of the assumptions of cost-volume-profit (CVP) analysis is that there are no changes in the:
A) accounts payable.
B) cash balance.
C) inventory levels.
D) accounts receivables.
Answer: C
Diff: 1
LO: 21-3
AACSB: Concept
12) Margaret sells hand-knit scarves at a flea market. Each scarf sells for $25. Margaret pays $30 to rent a
vending space for one day. The variable costs are $15 per scarf. How many scarves should she sell each
day in order to break even?
A) 4 scarves
B) 3 scarves
C) 5 scarves
D) 2 scarves
Answer: B
Explanation: B) Required sales in units = (Fixed costs + Target profit) ÷ Contribution margin per unit
Unit contribution margin = $25 - $15 = $10 per scarf
Required sales in units = ($30 + 0) ÷ $10 = 3 scarves
Diff: 1
LO: 21-3
AACSB: Application
13) Margaret sells hand-knit scarves at the flea market. Each scarf sells for $25. Margaret pays $30 to rent
a vending space for one day. The variable costs are $15 per scarf. What total revenue amount does she
need to earn to break even?
A) $85
B) $75
C) $50
D) $100
Answer: B
Explanation: B) Required sales in dollars = (Fixed costs + Target profit) ÷ Contribution margin ratio
Unit contribution margin = $25 - $15 = $10 per scarf
Required sales in dollars = ($30 + 0) ÷ 40% = $75

Diff: 1
LO: 21-3
AACSB: Application
26
Price per unit $40

What are the required sales in units for Young to break even?
A) 252 units
B) 1,050 units
C) 315 units
D) 450 units
Answer: D
Explanation: D)
Required sales in units = (Fixed costs + Target profit) ÷ Contribution margin per unit
Selling price $40

Required sales in units = ($12,600 + 0) ÷ $28 = 450 units

Diff: 2
LO: 21-3
AACSB: Application
27
Price per unit $40

What is the amount of sales in dollars required for Young to break even?
A) $1,050
B) $18,000
C) $5,400
D) $12,600
Answer: B
Explanation: B)
Required sales in dollars = (Fixed costs + Target profit) ÷ Contribution margin ratio
Selling price $40

Required sales in dollars = ($12,600 + 0) ÷ 70% = $18,000

Diff: 2
LO: 21-3
AACSB: Application
16) Roberts Company has fixed costs of $10,000. Their contribution margin ratio is 40% and ratio of
selling expenses to sales is 20%. What is the breakeven point in sales dollars?
A) $50,000
B) $25,000
C) $4,000
D) $2,000
Answer: B
Explanation: B) Required sales in dollars = (Fixed costs + Target profit) ÷ Contribution margin ratio
Diff: 2
LO: 21-3
AACSB: Application
28
17) Perfect Fit Company sells hand-sewn shirts for $40 per shirt. It incurs monthly fixed costs of $5,000.
The contribution margin ratio is calculated to be 20%. What is the breakeven point in units?
A) 950 units
B) 1,750 units
C) 1,125 units
D) 625 units
Answer: D
Explanation: D)
Number of units to be sold to break even = $25,000 ÷ $40 = 625 units
Diff: 3
LO: 21-3
AACSB: Application
18) Jenna Manufacturers produces flooring material. The monthly fixed costs are $10,000 per month. The
unit selling price is $75 and variable cost per unit is $35. If Jenna's managers create a CVP graph from
volume levels of zero to 500 units, at what sales level (in units) will the revenue and total cost lines
intersect?
A) 250 units
B) 190 units
C) 240 units
D) 275 units
Answer: A
Explanation: A)
Selling price $75

Contribution margin 40
Fixed costs 10,000
Required sales in units ($10,000 ÷ $40) $250
Diff: 2
LO: 21-3
AACSB: Application
29
19) Jame Company sells glass vases at a wholesale price of $3 per unit. The variable cost of manufacture is
$1.75 per unit. The fixed costs are $7,500 per month. Jame sold 5,500 units during this month. Calculate
Jame's operating income (loss) for this month.
A) $9,000
B) $625
C) ($625)
D) ($7,500)
Answer: C
Explanation: C)
Fixed costs -7,500
Operating loss $625
Diff: 2
LO: 21-3
AACSB: Application
30
20) James Company sells glass vases at a wholesale price of $2.50 per unit. The variable cost of
manufacture is $1.75 per unit. The monthly fixed costs are $7,500. James's current sales are 25,000 units
per month. If James wants to increase operating income by 20%, how many additional units, must James
sell? (Round your intermediate calculations to two decimal places)
A) 145,000 glass vases
B) 7,500 glass vases
C) 13,500 glass vases
D) 3,000 glass vases
Answer: D
Explanation: D)
- Variable costs -43,750
- Fixed costs -7,500
Target profit = $11,250 × (1 + 20%) = $13,500
Selling price $2.50

Less variable cost -1.75
Contribution margin 0.75
Target profit + Fixed costs 21,000
Total sales required in units (21,000 ÷ 0.75) 28,000 units
Sales Prior to Change 25,000

Additional sales (28,000 - 25,000) 3,000
Diff: 3
LO: 21-3
AACSB: Application
31
21) Colin was a professional classical guitar player until his motorcycle accident that left him disabled.
After long months of therapy, he hired an experienced luthier (maker of stringed instruments) and
started a small shop to make and sell Spanish guitars. The guitars sell for $700 and the fixed monthly
operating costs are as follows:
Rent and utilities $800

Wages and benefits to luthier 2,500
Other expenses 480
Colin's accountant told him about contribution margin ratios and he understood clearly that for every
dollar of sales, $0.60 went to cover his fixed costs, and that anything past that point was pure profit.
How many guitars does Colin have to sell each month to break even?
A) 6 guitars
B) 14 guitars
C) 7 guitars
D) 9 guitars
Answer: D
Explanation: D)
Contribution margin per unit = $700 × 0.60 = $420
Total fixed costs = $800 + $2,500 + $480 = $3,780
Required sales in units = ($3,780 + 0) ÷ $420 = 9 guitars
Diff: 2
LO: 21-3
AACSB: Application
32
Rent and utilities $1,000

Other expenses 481
What is the amount of revenue Colin should earn each month to break even?
A) $9,952
B) $6,635
C) $4,968
D) $5,833
Answer: B
Explanation: B)
Contribution margin ratio = 60%
Total fixed costs = $1,000 + $2,500 + $481 = $3,981
Diff: 2
LO: 21-3
AACSB: Application
33

Other expenses 480
Colin wishes to earn $4,000 of operating profit each month. Calculate the number of guitars Colin will
have to sell to achieve the target profit.
A) 39 guitars
B) 33 guitars
C) 15 guitars
D) 18 guitars
Answer: D
Explanation: D)
Target profit = $4,000
Required sales in units = ($4,190 + $4,000) ÷ $455 = 18 guitars
Diff: 3
LO: 21-3
AACSB: Application
34

Other expenses 481
Colin wishes to earn $5,100 of operating profit each month. Calculate the amount of sales revenue
required to achieve the target profit.
A) $37,164
B) $9,054
C) $12,388
D) $10,133
Answer: C
Explanation: C)
Contribution margin ratio = 75%
Target profit = $5,100
Required sales in dollars = ($4,191 + $5,100) ÷ 75% = $12,388
Diff: 3
LO: 21-3
AACSB: Application
unit selling price is $75 and variable cost per unit is $35. How many units should Jenna sell in order to
earn $10,000 as operating income?
Answer:
Selling price $75

Contribution margin 40
Fixed costs 10,000
Target profit 10,000
Required sales in units ($20,000 ÷ $40) 500 units
Diff: 2
LO: 21-3
AACSB: Application
35
unit selling price is $75 and variable cost per unit is $35. Jenna wishes to earn an operating income of
$25,000. Using the contribution martin ratio, calculate the total revenue. (Round your intermediate
calculations to five decimal places.)
Answer:
Selling price $75.00

Less: variable cost -35.00
Contribution margin 40.00
Contribution margin ratio (A) 0.53333
Target profit + Fixed costs (B) 35,000
Required sales in dollars (B ÷ A) $65,625
Diff: 2
LO: 21-3
AACSB: Application
1) Sensitivity analysis allows managers to see how various business strategies will affect profit levels.
Answer: TRUE
Diff: 1
LO: 21-4
AACSB: Concept
2) Sensitivity analysis empowers managers with better information for decision making by analyzing
how various business strategies will affect profits earned by the company.
Answer: TRUE
Diff: 1
LO: 21-4
AACSB: Concept
3) Managers can use CVP relationships to conduct sensitivity analysis.

Answer: TRUE
Diff: 1
LO: 21-4
AACSB: Concept
36
4) When the variable cost per unit decreases, the contribution margin on each unit sold also decreases.
Answer: FALSE
Diff: 1
LO: 21-4
AACSB: Concept
5) When the variable cost per unit increases, the total number of units required to breakeven also
increases.
Answer: TRUE
Diff: 1
LO: 21-4
AACSB: Concept
6) Higher fixed costs decrease the total contribution margin required to break even.
Answer: FALSE
Diff: 1
LO: 21-4
AACSB: Concept
7) Higher fixed costs increase the total number of units required to break even.
Answer: TRUE
Diff: 1
LO: 21-4
AACSB: Concept
8) When the variable cost per unit increases, the contribution margin on each unit decreases.
Answer: TRUE
Diff: 1
LO: 21-4
AACSB: Concept
9) If the variable cost per unit decreases, the total number of units required to breakeven will increase.
Answer: FALSE
Diff: 1
LO: 21-4
AACSB: Concept
37
10) An increase in selling price per unit decreases the contribution margin per unit.
Answer: FALSE
Diff: 1
LO: 21-4
AACSB: Concept
11) An increase in selling price per unit increases the number of units required to break even.
Answer: FALSE
Diff: 1
LO: 21-4
AACSB: Concept
12) If a company reduces its fixed costs, the operating income will increase by the same amount as the
cost reduction.
Answer: TRUE
Diff: 2
LO: 21-4
AACSB: Application
13) ________ is a "what if" technique that estimates profit or loss results if selling price, costs, volume, or
underlying assumptions change.
A) High-low method of analysis
B) Sensitivity analysis
C) Contribution margin
D) Operating leverage
Answer: B
Diff: 1
LO: 21-4
AACSB: Concept
14) When the total fixed costs increases, the contribution margin per unit:
A) increases.
B) decreases.
C) increases proportionately.
D) remains the same.
Answer: D
Diff: 1
LO: 21-4
AACSB: Concept
38
15) When the total fixed costs increases, the breakeven point:
A) increases.
B) decreases.
C) decreases proportionately.
D) remains the same.
Answer: A
Diff: 1
LO: 21-4
AACSB: Concept
16) When the total fixed costs decreases, the contribution margin per unit:
A) increases.
B) decreases.
C) remains the same.
D) decreases proportionately.
Answer: C
Diff: 1
LO: 21-4
AACSB: Concept
17) When the total fixed costs decreases, the breakeven point:
A) increases.
B) decreases.
D) increases proportionately.
Answer: B
Diff: 1
LO: 21-4
AACSB: Concept
18) When the selling price per unit decreases, the breakeven point:
A) increases.
B) decreases.
D) decreases proportionately.
Answer: A
Diff: 1
LO: 21-4
AACSB: Concept
39
19) When the selling price per unit decreases, the contribution margin per unit:
A) increases proportionately.
B) increases.
D) decreases.
Answer: D
Diff: 1
LO: 21-4
AACSB: Concept
20) Which of the following statements is true if the variable cost per unit increases while the sale price per
unit and total fixed costs remain constant?
A) The breakeven point decreases.
B) The contribution margin increases.
C) The breakeven point remains the same.
D) The breakeven point increases.
Answer: D
Diff: 2
LO: 21-4
AACSB: Application
21) Which of the following statements is true if total fixed costs decreases while the sales price per unit
and variable costs per unit remain constant?
A) The contribution margin increases.
B) The breakeven point increases.
C) The contribution margin decreases.
D) The breakeven point decreases.
Answer: D
Diff: 2
LO: 21-4
AACSB: Application
40

Other expenses 480
Colin is planning to increase the selling price to $750. What impact will the increase in selling price have
on the contribution margin ratio?
A) It will stay the same.
B) It will go up 70% to 75%.
C) It will go up from 60% to approximately 63%.
D) It will go down from 70% to approximately 67%.
Answer: C
Explanation: C)
Revised contribution margin = $420 + ($750 - $700) = $420 + $50 = $470
Contribution margin ratio = ($470 ÷ $750) × 100 = 62.67%
Diff: 3
LO: 21-4
AACSB: Application
41

Other expenses 480
Colin is planning to increase the selling price to $820. What impact will the increase in selling price have
on the breakeven point in units?
A) It will stay the same.
B) It will go down from 11 to 9 units.
C) It will go up from 9 to 12 units.
D) It will go down from 9 to 7 units.
Answer: D
Explanation: D)
Total fixed costs = $800 + $2,500 + $480 = $3,780
Revised contribution margin = $420 + ($820 - $700) = $420 + $120 = $540
Required sales in units (Revised) = ($3,780 + 0) ÷ $540 = 7 units
Diff: 3
LO: 21-4
AACSB: Application
24) Lightfoot Company sells its product for $55 and has variable costs of $30 per unit. The total fixed costs
are $25,000. What will be the effect on the breakeven point in units if variable costs increase by $5 due to
an increase in the cost of direct materials?
A) It will increase by 250 units.
B) It will decrease by 250 units.
C) It will decrease by 167 units.
D) It will increase by 167 units.
Answer: A
Explanation: A)
Breakeven point (before increase in cost of direct materials) = $25,000 ÷ ($55 - $30) = 1,000 units
Breakeven point (after increase in cost of direct materials) = $25,000 ÷ ($55 - $35) = 1,250 units
Increase in breakeven point = 1,250 - 1,000 = 250 units
Diff: 3
LO: 21-4
AACSB: Application
42
25) Which of the following will lower the breakeven point?
A) A decrease in the sales price per unit
B) An increase in total fixed costs
C) An increase in the variable costs per unit
D) An increase in the sales price per unit
Answer: D
Diff: 1
LO: 21-4
AACSB: Application
26) A small business produces a single product and reports the following data:
Price $8.00 per unit

Variable cost $5.00 per unit
Fixed cost $21,000 per month
Volume 10,000 per month
If the company reduces its price to $7.50, it believes that the volume will go up to 11,000 units.
How would this change affect operating income?
A) It will go up by $2,500.
B) It will go up by $9,000.
C) It will go down by $2,500.
D) It will go down by $9,000.
Answer: C
Explanation: C)
Contribution margin (before reduction in selling price) = $8.00 - $5.00 = $3.00
Operating income (before reduction in selling price) = (10,000 × $3.00) - $21,000 = $9,000
Contribution margin (after reduction in selling price) = $7.50 - $5.00 = $2.50

Operating income (after reduction in selling price) = (11,000 × $2.50) - $21,000 = $6,500
Decrease in operating income due to reduction in selling price = $9,000 - $6,500 = $2,500
Diff: 2
LO: 21-4
AACSB: Application
43
27) Evans Company has estimated the following amounts for its next fiscal year:
Total fixed expenses $832,500

Sale price per unit 40
Variable expenses per unit 25
What will happen to the breakeven point (in units) if Evans can reduce fixed expenses by $22,500?
A) The breakeven point will decrease by 1,500 units.
B) The breakeven point will decrease by 562 units.
C) The breakeven point will decrease by 900 units.
D) The breakeven point will increase by 562 units.
Answer: A
Explanation: A)
Contribution margin (before reduction in fixed expenses) = $40 - $25 = $15
Decrease breakeven point due to reduction in fixed expense = $22,500 ÷ $15 = 1,500 units
Diff: 3
LO: 21-4
AACSB: Application
44
28) Moylan Company has provided the following information:
Sales $777,000
Variable expenses 504,000
Fixed expenses 212,000
Which of the following statements is true, if the sales volume increases by 10%?
A) Operating income will increase by $6,100.
B) Operating income will increase by $27,300.
C) Fixed expenses will increase by $21,200.
D) Contribution margin will increase by $77,700.
Answer: B
Explanation: B)
Contribution margin = $777,000 - $504,000 = $273,000
Revised sales:
Sales $777,000
10% of sales 77,700
Total sales $854,700
Revised variable expenses:

Variable expenses $504,000
10% of variable expenses 50,400
Total variable expenses $554,400
Revised contribution margin:

Sales $854,700
Less variable costs -554,400
Contribution margin $300,300
Effect on contribution margin:

Revised contribution margin $300,300
Less old contribution margin -273,000
Increase in contribution margin $27,300
Diff: 3
LO: 21-4
AACSB: Application
1) The amount by which sales can decrease before the company incurs an operating loss is called
breakeven point.
Answer: FALSE
Diff: 1
LO: 21-5
AACSB: Application
45
2) The margin of safety can be used to evaluate a company's plans for the future.
Answer: TRUE
Diff: 1
LO: 21-5
AACSB: Application
3) The margin of safety focuses on how much operating income is left over from sales revenue after
covering all variable and fixed costs.
Answer: FALSE
Diff: 1
LO: 21-5
AACSB: Application
4) The sales mix provides the weights that make up total product sales.
Answer: TRUE
Diff: 1
LO: 21-5
AACSB: Application
5) Sales mix, or product mix, is the combination of products that make up total sales.
Answer: TRUE
Diff: 1
LO: 21-5
AACSB: Application
6) If variable costs go up, and all other factors remain the same, the margin of safety will become smaller.
Answer: TRUE
Diff: 1
LO: 21-5
AACSB: Application
7) If variable costs go down, and all other factors remain the same, the margin of safety will become
larger.
Answer: TRUE
Diff: 1
LO: 21-5
AACSB: Application
46
8) If fixed costs go up, and all other factors remain the same, the margin of safety will become larger.
Answer: FALSE
Diff: 1
LO: 21-5
AACSB: Application
9) Gray Company sells two products, X and Y. For the coming year, Gray predicts the sale of 5,000 units
of X and 10,000 units of Y. The contribution margins of the two products are $5 and $3, respectively. The
weighted-average contribution margin would be $5.50.
Answer: FALSE
Explanation: Total contribution per unit of the X and Y = ($5 × 1) + ($3 × 2) = $11.00
Weighted-average contribution margin per unit = $11 per unit ÷ 3 units = $3.67
Diff: 2
LO: 21-5
AACSB: Application
10) For the next year, Hall Company predicts the sale of 15,000 units of a product with a contribution
margin of $6 per unit and 30,000 units of another product with a contribution margin of $9 per unit. The
weighted-average contribution margin per unit is $8.
Answer: TRUE
Explanation: Total contribution = ($6 × 15,000) + ($9 × 30,000) = $90,000 + $270,000 = $360,000
Weighted-average contribution margin per unit = $360,000 ÷ 45,000 = $8
Diff: 2
LO: 21-5
AACSB: Application
11) A company that sells multiple products will always set selling prices such that all products have the
same contribution margin.
Answer: FALSE
Diff: 1
LO: 21-5
AACSB: Concept
12) Purely Pizza Company sells pizzas in two different sizes—medium and large. The two products sell
in equal numbers. The contribution margin of a medium pizza is $12 and the contribution margin of a
large pizza is $18. The weighted average contribution margin is $15.
Answer: TRUE
Explanation: Total contribution = $12 + $18 = $30
Weighted-average contribution margin per unit = $30 ÷ 2 = $15
Diff: 1
LO: 21-5
AACSB: Application
47
13) Purely Pizza Company sells pizzas in two different sizes—medium and large. The number of medium
pizzas sold is twice the number of large pizzas sold. The contribution margin of a medium pizza is $10
and the contribution margin of a large pizza is $16. The weighted average contribution margin is $15.
Answer: FALSE
Explanation: Contribution margin of medium pizza = $10 × 2 = $20
Contribution margin of large pizza = $16 × 1 = $16
Total contribution = $20 + $16 = $36
Weighted-average contribution margin per unit = ($20 + $16) ÷ 3 = $12
Diff: 1
LO: 21-5
AACSB: Application
14) Operating leverage predicts the effects fixed costs have on changes in operating income when:
A) production is discontinued.
B) there are no sales returns.
C) variable costs change.
D) sales volume changes.
Answer: D
Diff: 1
LO: 21-5
AACSB: Concept
15) The degree of operating leverage can be measured by:

A) dividing the contribution margin by operating income.
B) dividing the fixed costs by the sales price per unit.
C) multiplying the contribution margin to sales revenue.
D) dividing the fixed costs by contribution margin.
Answer: A
Diff: 1
LO: 21-5
AACSB: Concept
16) A company's proportion of fixed costs to variable costs is called its:

A) target profit.
B) relevant range.
C) mixed cost.
D) cost structure.
Answer: D
Diff: 1
LO: 21-5
AACSB: Application
48
17) Evans Company has estimated the following amounts for its next fiscal year:
Total fixed expenses $832,500

Sale price per unit 40
Variable expenses per unit 25
If the company spends an additional $30,000 on advertising, sales volume would increase by 2,500 units.
What effect will this decision have on the operating income of Evans?
A) Operating income will decrease by $62,500.
B) Operating income will increase by $7,500.
C) Operating income will increase by $70,000
D) Operating income will increase by $37,500.
Answer: B
Explanation: B)
Increase in total contribution margin = 2,500 units × ($40 - $25)
= 2,500 units × $15 = $37,500
Increase in operating income = $37,500 - $30,000 (Advertising costs) = $7,500
Diff: 3
LO: 21-5
AACSB: Application
18) Gould Enterprises sells computer disks for $1.50 per disk. Unit variable expenses total $0.90. The
breakeven point in units is 3,000 and expected sales in units are 4,300. What is the margin of safety in
dollars?
A) $4,500
B) $1,950
C) $3,870
D) $6,450
Answer: B
Explanation: B) Margin of safety = (4,300 - 3,000) × $1.50 = $1,950
Diff: 2
LO: 21-5
AACSB: Application
49
19) McPherson Company is facing a $6 increase in the variable cost of producing one of its products for
the upcoming year. Because of this situation, the sales manager has made a proposal to increase the
selling price of the product while increasing the advertising budget at the same time. The price increase
will lower sales volume, but the other changes may help the company maintain its profit margins.
McPherson has provided the following information regarding the current year results and the proposal
made by the sales manager:
Current Year Proposal

Unit sales 27,000 18,000
Sales price per unit $48 $58
Variable cost per unit $30 $36
Fixed cost $76,000 $96,000
Relative to the current year, the sales manager's proposal will:

A) decrease operating income by $90,000.
B) increase contribution margin by $90,000.
C) decrease the unit breakeven point.
D) decrease operating income by $110,000.
Answer: D
Explanation: D)
Evaluation of current year data:
Sales price per unit $48

Contribution margin per unit $18
Number of units sold 27,000
Total contribution ($18 × 27,000) $486,000
Less fixed cost -76,000
Evaluation of proposal made by the sales manager:

Number of units sold 8,000
Total contribution ($22 × 18,000) $396,000
Less fixed cost -96,000
Increase or (decrease) in operating income = $300,000 - $410,000 = ($110,000)

Diff: 3
LO: 21-5
AACSB: Application
50
20) Divine Foods produces a gourmet condiment which sells for $16 per unit. Variable costs are $6 per
unit, and fixed costs are $5,000 per month. If Divine expects to sell 1,500 units, compute the margin of
safety in units.
A) 500 units
B) 1,000 units
C) 1,500 units
D) 8,000 units
Answer: B
Explanation: B)
Expected sales - Breakeven sales = Margin of safety in units

1,500 units - 500 units = 1,000 units
Diff: 2
LO: 21-5
AACSB: Application
21) Divine Foods produces a gourmet condiment which sells for $16.00 per unit. Variable costs are $6 per
unit, and fixed costs are $5,000 per month. If Divine expects to sell 1,500 units, compute the margin of
safety in dollars.
A) $16,000
B) $15,000
C) $10,000
D) $6,000
Answer: A
Explanation: A)
Margin of safety in units × Sales price per unit = Margin of safety in dollars
(1,500 units - 500 units) × $16 per unit = $16,000
Diff: 2
LO: 21-5
AACSB: Application
51
22) Antique Works is owned and operated by a craftsman who makes replicas of historic firearms for
museums, sportsmen, and collectors. The cost data are as follows:
Price per unit $720

Variable costs per unit 470
Fixed costs per month 8,000
If Antique expects to sell 40 units per month, what is his margin of safety expressed in units per month?
A) 8 units
B) 6 units
C) 4 units
D) 2 units
Answer: A
Explanation: A)

40 units - 32 units = 8 units
Diff: 2
LO: 21-5
AACSB: Application
52
23) Antique Works is owned and operated by a craftsman who makes replicas of historic firearms for
museums, sportsmen, and collectors. He is currently producing 40 flintlock muskets per month. Cost data
are as follows:
Price per unit $720

Variable costs per unit 470
Fixed costs per month 8,000
If Antique expects to sell 40 units per month, how much is his margin of safety expressed in sales
revenue?
A) $2,000
B) $3,760
C) $5,760
D) $2,760
Answer: C
Explanation: C)

40 units - 32 units = 8 units
Margin of safety in units × Sales price per unit = Margin of safety in dollars
8 units × $720 per unit = $5,760
Diff: 2
LO: 21-5
AACSB: Application
53
24) Browning Company sells two products—X and Y. Product X is sold for $25 per unit and has a
variable cost per unit of $15. Product Y is sold for $30 per unit and has a unit variable cost of $20. Total
fixed costs for the company are $20,000. Browning Company typically sells three units of Product X for
every unit of Product Y. What is the breakeven point in total units?
A) 2,000 units
B) 1,500 units
C) 1,000 units
D) 500 units
Answer: A
Explanation: A)
Product X Product Y
Sales price per unit $25 $30
Less variable cost per unit -15 -20
Contribution margin per unit $10 $10
Weighted contribution = ($10 × 3) + ($10 × 1) = $40

Weighted-average contribution margin per unit = $40 ÷ 4 = $10
Required sales in units = ($20,000 + 0) ÷ $10 per unit = 2,000 units
Diff: 3
LO: 21-5
AACSB: Application
25) Mist Company sells two products—A and B. Mist predicts that it will sell 2,500 units of A and 1,500
units of B during the next period. The unit contribution margins are $3.50 and $4.80, respectively. What is
the weighted-average unit contribution margin?
A) $3.99 per product
B) $5.18 per product
C) $2.18 per product
D) $3.11 per product
Answer: A
Explanation: A)
Weighted contribution = ($3.50 × 2,500 units) + ($4.80 × 1,500 units) = $8,750 + $7,200 = $15,950
Weighted-average contribution margin per unit = $15,950 ÷ 4,000 units = $3.99 per unit
Diff: 2
LO: 21-5
AACSB: Application
54
26) McDaniel Company sells two products—J and B. McDaniel predicts that it will sell 7,200 units of J and
5,600 units of B in the next period. The unit contribution margins are $2.85 and $6.30, respectively. What
is the weighted-average unit contribution margin?
A) $9.96 per product
B) $4.58 per product
C) $7.75 per product
D) $4.36 per product
Answer: D
Explanation: D)
Weighted contribution = (7,200 × $2.85) + (5,600 × $6.30) = $55,800
Weights = 7,200 units + 5,600 units = 12,800 units
Weighted-average contribution margin per unit = $55,800 ÷ 12,800 = $4.36
Diff: 2
LO: 21-5
AACSB: Application
55
27) Jackson Company has provided the following information regarding the two products that it sells:
Jet Boats Ski Boats

Sales price per unit $8,000 $20,000
Variable cost per unit $4,800 $14,000
Annual fixed costs are $280,000.
How many units must be sold in order for Jackson to breakeven, assuming that Jackson sells five jet boats
for every two ski boats sold?
A) 70 jet boats and 28 ski boats
B) 50 jet boats and 20 ski boats
C) 20 jet boats and 50 ski boats
D) 45 jet boats and 28 ski boats
Answer: B
Explanation: B)
Jet Boats Ski Boats
Sales price per unit $8,000 $20,000
Less variable cost per unit -4,800 -14,000
Contribution margin per unit $3,200 $6,000
Weighted contribution = ($3,200 × 5 jet boats) + ($6,000 × 2 ski boats) = $16,000 + $12,000 = $28,000
Weights = 5 jet boats + 2 ski boats = 7 boats
Weighted-average contribution margin per unit = $28,000 ÷ 7 boats = $4,000 per boat
Required sales in units = ($280,000 + 0) ÷ $4,000 per boat = 70 boats
10 boats in the ratio of 5:2 are 50 jet boats and 20 ski boats.
Diff: 3
LO: 21-5
AACSB: Application
56
28) Becky's Bakery sells three large muffins for every two small ones. A small muffin sells for $3.00, with a
variable cost of $2.00. A large muffin sells for $5.00 with a variable cost of $2.50. What is the weighted-
average contribution margin? (Round your intermediate calculations to one decimal place)
A) $1.93 per muffin
B) $1.75 per muffin
C) $1.25 per muffin
D) $1.90 per muffin
Answer: D
Explanation: D) Large muffin Small muffin
Sales price per unit $5.00 $3.00
Less variable cost per unit (2.50) (2.00)
Contribution margin per unit $2.50 $1.00
Number of units ×3 ×2
Weighted contribution margin $7.50 $2.00
Total weighted contribution = $7.50 + $2.00 = $9.50

Weights = 3 large muffins + 2 small muffins = 5 muffins
Weighted-average contribution margin per unit = $9.50 ÷ 5 muffins = $1.90 per muffin
Diff: 2
LO: 21-5
AACSB: Application
29) Pep Soda, a local convenience store, sells soft drinks. It sells two large drinks for every small drink. A
large drink sells for $1.50 with a variable cost of $0.60. A small drink sells for $1.00 with a variable cost of
$0.50. The weighted average contribution margin is: (Round your intermediate calculations and final
answer to two decimal places)
A) $1.15 per drink.
B) $2.30 per drink.
C) $0.77 per drink.
D) $0.60 per drink.
Answer: C
Explanation: C) Large drink Small drink
Sales price per unit $1.50 $1.00
Less variable cost per unit -0.60 -0.50
Contribution margin per unit 0.90 0.50
Number of units ×2 ×1
Weighted contribution margin $1.80 $0.50
Total weighted contribution = $1.80 + $0.50 = $2.30

Weights = 2 large drinks + 1 small drink = 3 drinks
Weighted-average contribution margin per unit = $2.30 ÷ 3 drinks = $0.77 per drink
Diff: 2
LO: 21-5
AACSB: Application
57
1) The purpose of managerial accounting is to provide managers with information that is useful for
internal decision making.
Answer: TRUE
Diff: 1
LO: 21-6
AACSB: Concept
2) The type of information provided by managerial accounting differs from the information provided by
financial accounting.
Answer: TRUE
Diff: 1
LO: 21-6
AACSB: Concept
3) Under variable costing, fixed manufacturing overhead costs are treated as a product cost.
Answer: FALSE
Diff: 1
LO: 21-6
AACSB: Concept
4) Under variable costing, the fixed manufacturing overhead costs are classified as period costs and are
expensed in the period in which they are incurred.
Answer: TRUE
Diff: 1
LO: 21-6
AACSB: Concept
5) Variable costing cannot be used for preparing financial reports for external users, such as investors and
creditors.
Answer: TRUE
Diff: 1
LO: 21-6
AACSB: Concept
6) The primary focus of a contribution margin income statement is on gross profit.

Answer: FALSE
Diff: 1
LO: 21-6
AACSB: Concept
58
7) The only difference between absorption costing and variable costing in the determination of product
costs is the way fixed manufacturing overhead costs are treated.
Answer: TRUE
Diff: 1
LO: 21-6
AACSB: Concept
8) Which of the following costs is considered a period cost under variable costing?
A) direct labor
B) direct materials
C) fixed manufacturing overhead
D) variable manufacturing overhead
Answer: C
Diff: 1
LO: 21-6
AACSB: Concept
9) Which of the following is true of absorption costing?

A) the variable manufacturing costs are considered period costs
B) the fixed manufacturing costs are considered period costs
C) both variable and fixed manufacturing costs are considered product costs
D) both variable and fixed manufacturing costs are considered period costs
Answer: C
Diff: 1
LO: 21-6
AACSB: Concept
10) Which of the following is true of variable costing?

A) only variable manufacturing costs are assigned to products
B) only fixed manufacturing costs are assigned to products
C) only fixed administration overhead costs are assigned to products
D) only variable selling overhead costs are assigned to products
Answer: A
Diff: 1
LO: 21-6
AACSB: Concept
59
11) Dorothy Products sells its products for $20 per unit. Additional data for the month of April, 2014, are
as follows:
Beginning inventory 0 units

Units produced 8,000
Units sold 7,500
Ending inventory 500
Direct materials $4 per unit
Direct labor $8 per unit
Variable manufacturing overhead $20,000
Fixed manufacturing overhead $14,000
Operating expenses $21,000
Using variable costing, calculate the product cost per unit produced.
A) $12.00 per unit
B) $16.25 per unit
C) $14.50 per unit
D) $13.75 per unit
Answer: C
Explanation: C)
Variable Costing
Direct materials ($4 × 8,000 units) 32,000
Direct labor ($8 × 8,000 units) 64,000
Variable manufacturing overhead 20,000
Total product cost 116,000
Number of units produced 8,000
Cost per unit produced ($116,000 ÷ 8,000) $14.50
Diff: 2
LO: 21-6
AACSB: Application
60
12) Dorothy Products sells its products for $40 per unit. Additional data for the month of April, 2014, are
as follows:

Units produced 10,000
Units sold 8,000
Ending inventory 2,000
Direct materials $5 per unit
Variable manufacturing overhead $15,000
Fixed manufacturing overhead $20,000
Operating expenses $30,000
Calculate the product cost per unit produced using absorption costing.
A) $12.50 per unit
B) $10.50 per unit
C) $ 9.00 per unit
D) $ 11.00 per unit
Answer: A
Explanation: A)
Absorption Costing
Direct materials $50,000
Direct labor 40,000
Variable manufacturing overhead 15,000
Fixed manufacturing overhead 20,000
Total product cost 125,000
Number of units produced 10,000
Cost per unit produced ($125,000 ÷ 10,000 units) $12.50
Diff: 2
LO: 21-6
AACSB: Application
61
13) Ruth Company incurred the following costs in July:
Units produced 1,000 units

Direct materials $ 30 per unit
Variable manufacturing overhead $10 per unit
Fixed manufacturing overhead $7,000 per month
Variable selling and administrative costs $8 per unit
Fixed selling and administrative costs $2,000 per month
Calculate the total product cost using absorption costing and variable costing.
Answer:
Absorption Costing Variable Costing
Direct materials $30,000 $30,000
Direct labor 25,000 25,000
Variable manufacturing overhead 10,000 10,000
Fixed manufacturing overhead 7,000 ______
Total product cost $72,000 $65,000
Diff: 1
LO: 21-6
AACSB: Concept
1) When a company produces more units than it sells, income under absorption costing will exceed
income under variable costing.
Answer: TRUE
Diff: 1
LO: 21-7
AACSB: Concept
2) In absorption costing, all fixed manufacturing costs are expensed in the period incurred.
Answer: FALSE
Diff: 1
LO: 21-7
AACSB: Concept
3) The unit product cost under absorption costing is higher than the unit product cost under variable
costing.
Answer: TRUE
Diff: 1
LO: 21-7
AACSB: Concept
62
4) If the number of units sold is more than number of units produced, the income under both variable
and absorption costing would be the same.
Answer: FALSE
Diff: 1
LO: 21-7
AACSB: Concept
5) The operating income of Jutox Inc. is $40,000 for March using both variable costing and absorption
costing.
Which of the following statements must be true of Jutox for the above statement to be true?
A) The opening inventory of March was higher than the ending inventory.
B) The units produced by Jutox are more than the units sold in March.
C) The company's degree of operating leverage is below 1.
D) The beginning and ending inventories of the company were zero.
Answer: D
Diff: 2
LO: 21-7
AACSB: Concept
6) If a company uses standard absorption costing, how could a business manager exploit that accounting
method in order to boost book income without violating the rules of GAAP?
A) By adopting just-in-time inventory management, the manager could reduce the costs of financing and
storing inventory, which would in turn, help boost book income.
B) By coding administrative costs to inventory, the manager could report lower total expenses and thus
report higher income.
C) By reducing inventory levels, the manager could show higher sales revenues, and thus report higher
book income.
D) By building up inventory levels, fixed manufacturing costs could be "stored up" in ending inventory,
the cost of goods sold would be lower, and book income would be higher.
Answer: D
Diff: 2
LO: 21-7
AACSB: Concept
63
7) Allston Products sells a special kind of effects pedal for musical performers. Each unit sells for $20.00.
Additional data for the month of April, 2014, are as follows:
Direct materials $4.00 per unit

Direct labor $8.00 per unit
Variable manufacturing overhead $20,000 per month
Fixed manufacturing overhead $14,000 per month
Operating expenses $21,000 per month

Units produced 8,000 units
Units sold 7,500 units
Ending inventory 500 units
Using absorption costing, how much is the net operating income for April?
A) $6,900
B) $7,480
C) $7,125
D) $6,250
Answer: C
Explanation: C)
Total overhead costs: $20,000 + $14,000 = $34,000
Overhead cost per unit produced: $34,000 ÷ 8,000 = $4.25
Product cost: $4.00 + $8.00 + $4.25 = $16.25
Cost of Goods Sold: 7,500 × $16.25 = $121,875
Revenues: 7,500 × $20 = $150,000
Operating Income: $150,000 - $121,875 - $21,000 = $7,125
Diff: 3
LO: 21-7
AACSB: Application
64
Direct materials $4.00per unit

Direct labor $8.00per unit
Variable manufacturing overhead $20,000per month
Fixed manufacturing overhead $14,000per month
Operating expenses $21,000per month
Beginning inventory 0units

Units produced 8,000units
Units sold 7,500units
Ending inventory 500units
Using variable costing, how much is the net operating income for April?
A) $6,900
B) $7,480
C) $7,125
D) $6,250
Answer: D
Explanation: D)
Variable manufacturing overhead per unit produced = $20,000/8,000 = $2.50
Total product costs per unit = $4.00 + $8.00 + $2.50 = $14.50
Variable manufacturing cost = 7,500 × $14.50 = $108,750
Sales revenue = 7,500 × $20 = $150,000
Operating income = $150,000 - $108,750 - $14,000 - $21,000 = $6,250
Diff: 3
LO: 21-7
AACSB: Application
65
Direct materials $4.00per unit

Direct labor $8.00per unit
Variable manufacturing overhead $20,000per month
Fixed manufacturing overhead $14,000per month
Operating expenses $21,000per month
Beginning inventory 0units

Units produced 8,000units
Units sold 7,500units
Ending inventory 500units
Which of the following statements is true?

A) Absorption costing produces operating income that is $875 higher than variable costing.
B) Absorption costing produces operating income that is $875 lower than variable costing.
C) Absorption costing produces operating income that is $13,125 higher than variable costing.
D) Absorption costing produces operating income that is $13,125 lower than variable costing.
Answer: A
Explanation: A) Calculations:
Variable manufacturing overhead per unit produced = $20,000 ÷ 8,000 = $2.50
Variable manufacturing cost = 7,500 × $14.50 = $108,750
Sales revenue = 7,500 × $20 = $150,000
Operating income under variable costing = $150,000 - $108,750 - $14,000 - $21,000 = $6,250
Total manufacturing overhead costs = $20,000 + $14,000 = $34,000

Total manufacturing overhead costs per unit produced = $34,000 ÷ 8,000 = $4.25
Cost of goods sold = 7,500 × $16.25 = $121,875
Sales revenue = 7,500 × $20 = $150,000
Operating income under absorption costing = $150,000 - $121,875 - $21,000 = $7,125
Difference in operating incomes under variable and absorption costing = $7,125 - $6,250 = $875
Diff: 3
LO: 21-7
AACSB: Application
66
Chapter 22 Master Budgets
1) A budget is a financial plan that managers use to coordinate a business's activities.

Answer: TRUE
Diff: 1
LO: 22-1
AACSB: Concept
2) Budgeting requires managers to decide upon the course of action and then to plan for the same.
Answer: TRUE
Diff: 1
LO: 22-1
AACSB: Concept
3) Budgets provide a benchmark that motivates employees and helps managers evaluate performance.
Answer: TRUE
Diff: 1
LO: 22-1
AACSB: Concept
4) A goal of the budgeting process is to communicate a consistent set of plans throughout the company.
Answer: TRUE
Diff: 1
LO: 22-1
AACSB: Concept
5) Developing a budget reduces coordination and communication at different levels in an organization.

Answer: FALSE
Diff: 1
LO: 22-1
AACSB: Concept
6) After comparing budgets with actual results, corrective action will be taken based on the differences.
Answer: TRUE
Diff: 1
LO: 22-1
AACSB: Concept
67
7) A budget represents the plans that a company has in place to achieve its goals.
Answer: TRUE
Diff: 1
LO: 22-1
AACSB: Concept
8) All organizations use one standardized budgeting process.

Answer: FALSE
Diff: 1
LO: 22-1
AACSB: Concept
9) Which of the following statements is true of the budgeting process?

A) It includes qualitative targets of the company, not just quantitative.
B) It is a continuous process.
C) It shows the actual performance of the business.
D) Its success is not dependent on human behavior.
Answer: B
Diff: 1
LO: 22-1
AACSB: Concept
10) Which of the following is an example of the planning function of a budget?

A) A budget demands integrated input from different business units and functions.
B) Employees are motivated to achieve the goals set by the budget.
C) Budget figures are used to evaluate the performance of managers.
D) The budget outlines a specific course of action for the coming period.
Answer: D
Diff: 1
LO: 22-1
AACSB: Concept
11) Which of the following is an example of the coordination and communication function of a budget?
B) Employees are motivated to achieve the goals set by the budget.
Answer: A
Diff: 1
LO: 22-1
AACSB: Concept
68
12) Which of the following is an example of the benchmarking function of a budget?
B) Budgeting requires close cooperation between accountants and operational personnel.
Answer: C
Diff: 1
LO: 22-1
AACSB: Concept
13) An intentional understatement of expected revenues or overstatement of expected expenses by

managers in order to have a favorable performance evaluation is known as:
A) benchmarking.
B) appropriation.
C) budgetary slack.
D) variance analysis.
Answer: C
Diff: 1
LO: 22-1
AACSB: Concept
1) A strategic budget is a long-term financial plan used to coordinate the activities needed to achieve the
long-term goals of the company.
Answer: TRUE
Diff: 1
LO: 22-2
AACSB: Concept
2) An operating budget is a short-term financial plan that coordinates activities to achieve short-term
goals.
Answer: TRUE
Diff: 1
LO: 22-2
AACSB: Concept
3) A strategic budget will be as detailed as an operating budget.

Answer: FALSE
Diff: 1
LO: 22-2
AACSB: Concept
69
4) A static budget is a financial plan for a particular level of sales volume.
Answer: TRUE
Diff: 1
LO: 22-2
AACSB: Concept
5) A flexible budget is prepared to represent different levels of sales volume.

Answer: TRUE
Diff: 1
LO: 22-2
AACSB: Concept
6) A master budget is the financial plan for a specific segment of an organization.

Answer: FALSE
Diff: 1
LO: 22-2
AACSB: Concept
7) Budgeted financial statements are financial statements based on budgeted amounts rather than actual
amounts.
Answer: TRUE
Diff: 1
LO: 22-2
AACSB: Concept
8) Components of the master budget are: the operating budget, the capital expenditures budget and the
financial budget.
Answer: TRUE
Diff: 1
LO: 22-2
AACSB: Concept
9) Preparation of the production budget is the first step in the preparation of operating budget.
Answer: FALSE
Diff: 1
LO: 22-2
AACSB: Concept
70
10) The capital expenditures budget represents the company's plan for purchasing the long-term assets.
Answer: TRUE
Diff: 1
LO: 22-2
AACSB: Concept
11) Which of the following budgets focuses on the income statement and its supporting schedules?
A) The operating budget
B) The cash budget
C) The capital expenditures budget
D) The sales budget
Answer: A
Diff: 1
LO: 22-2
AACSB: Concept
12) The starting point in the budgeting process is the preparation of the:
A) cash budget.
B) production budget.
C) sales budget.
D) budgeted income statement.
Answer: C
Diff: 1
LO: 22-2
AACSB: Concept
13) The ________ details how the business expects to go from the beginning cash balance to the desired
ending cash balance.
A) capital expenditures budget
B) budgeted income statement
C) cash flow statement
D) cash budget
Answer: D
Diff: 2
LO: 22-2
AACSB: Concept
71
14) The cash budget and the budgeted financial statements are collectively known as the:
A) operating budget.
B) master budget.
C) financial budget.
D) production budget.
Answer: C
Diff: 2
LO: 22-2
AACSB: Concept
15) Which of the following statements is true of the operating budget?

A) It is a part of the financial budget.
B) It includes the capital expenditures budget.
C) It includes the sales revenue budget.
D) Its final component is the cash budget.
Answer: C
Diff: 1
LO: 22-2
AACSB: Concept
16) Which of the following statements is true of the capital expenditures budget?
A) It is a part of the financial budget.
B) It must be completed after the budgeted income statement is prepared.
C) It includes the sales budget.
D) It must be completed before the cash budget is prepared.
Answer: D
Diff: 1
LO: 22-2
AACSB: Concept
1) The production budget determines the number of units to be produced during the period.
Answer: TRUE
Diff: 1
LO: 22-3
AACSB: Concept
72
2) If the cost of indirect materials needed for production is insignificant, it should not be included in the
budgeting process.
Answer: TRUE
Diff: 1
LO: 22-3
AACSB: Concept
3) A manufacturer has budgeted sales for the first quarter of the next year to be 30,000 units. The
inventory in hand at the beginning of quarter is 5,000 units. The desired ending inventory is 10,000 units.
Calculate the budgeted production for the quarter.
A) 10,000 units
B) 35,000 units
C) 25,000 units
D) 40,000 units
Answer: B
Explanation: B)
Calculation of budgeted production units:
(units)
Sales for the quarter 30,000
Plus: Ending inventory 10,000
Less: Beginning inventory 5,000
Budgeted units to be produced 35,000
Diff: 2
LO: 22-3
AACSB: Application
4) The direct material budget is prepared on the basis of the:

A) cash budget.
B) master budget.
C) capital expenditure budget.
D) production budget.
Answer: D
Diff: 2
LO: 22-3
AACSB: Concept
73
5) The budgeted production of Gunix Inc. is 8,000 units. Each unit requires 40 minutes of direct labor
work to complete. The direct labor rate is $100 per hour. Calculate the budgeted cost of direct labor for
the month.
A) $533,333.33
B) $500,000.00
C) $566,666.66
D) $633,333.33
Answer: A
Explanation: A)
Budgeted production units for the month 8,000.00
Direct labor time required per unit 40 minutes
Direct labor hours for budgeted production 5,333.33
Direct labor rate per hour $100.00
Budgeted direct labor cost $533,333.33
Diff: 2
LO: 22-3
AACSB: Application
6) Caplico Company has prepared the following sales budget:
Month Budgeted Sales

March $200,000
April 180,000
May 220,000
June 260,000
Cost of goods sold is budgeted at 60% of sales and the inventory at the end of February was $36,000.
Desired inventory levels at the end of each month are 20% of the next month's cost of goods sold. What is
the desired beginning inventory on June 1?
A) $52,000
B) $26,400
C) $43,200
D) $31,200
Answer: D
Explanation: D)
Calculation of beginning inventory on June 1:
Sales for the month of June $260,000

Cost of goods sold for the month of June ($260,000 × 60%) 156,000
Beginning inventory on June 1 ($156,000 × 20%) $31,200
Diff: 3
LO: 22-3
AACSB: Application
74
7) Which of the following is true of the sales budget?
A) It provides sales values that are used to prepare financial statements for external reporting purposes.
B) It captures the variable and fixed expenses of the business.
C) It is used in the production budget.
D) It shows the value of expected production in a period.
Answer: C
Diff: 1
LO: 22-3
AACSB: Concept
8) Which of the following describes the cash budget?

A) It aids in planning to ensure the company has adequate inventory and cash on hand.
B) It captures the variable and fixed expenses of the business.
C) It depicts the breakdown of sales based on terms of collection.
D) It helps in planning to ensure the business has adequate cash.
Answer: D
Diff: 1
LO: 22-3
AACSB: Concept
9) Which of the following describes the selling and administrative expenses budget?
A) It aids in planning to ensure the company has adequate inventory on hand.
B) It captures the variable and fixed components of selling and administrative expenses of the business.
C) It depicts the breakdown of sales based on terms of collection.
Answer: B
Diff: 1
LO: 22-3
AACSB: Concept
10) Which of the following describes the production budget?

A) It aids in planning to ensure the company has adequate inventory and cash on hand.
B) It gives the quantity of finished goods to be manufactured during a budget period.
C) It depicts the breakdown of sales on the basis of terms and conditions of collection of sales revenue.
Answer: B
Diff: 1
LO: 22-3
AACSB: Concept
75
11) Kapital Inc. has prepared the operating budget for the first quarter of 2015. They forecast sales of
$50,000 in January, $60,000 in February, and $70,000 in March. Variable and fixed expenses are as follows:
Variable: Power cost (40% of Sales)

Miscellaneous expenses: (5% of Sales)
Fixed: Salary expense: $8,000 per month
Rent expense: $5,000 per month
Depreciation expense: $1,200 per month
Power cost/fixed portion: $800 per month
Miscellaneous expenses/fixed portion: $1,000 per month
Calculate total selling and administrative expenses for the month of January.
A) $38,500
B) $47,500
C) $41,700
D) $43,000
Answer: A
Explanation: A) Calculation of total selling and administrative expenses for the month of January:
Jan Feb Mar

Sales budget $50,000 $60,000 $70,000
Selling and Administrative Expenses

budget Jan Feb Mar
Variable S & A expense
Power cost (40% of sales) $20,000 $24,000 $28,000
Misc. expenses (5% of sales) 2,500 3,000 3,500
Fixed S & A expenses
Salary expense 8,000 8,000 8,000
Rent expense 5,000 5,000 5,000
Depreciation expense 1,200 1,200 1,200
Power cost (fixed portion) 800 800 800
Misc. expenses (fixed portion) 1,000 1,000 1,000
Total selling and administrative
expenses $38,500 $43,000 $47,500
Diff: 1
LO: 22-3
AACSB: Application
76
12) Kapital Inc. has prepared the operating budget for the first quarter of 2015. They forecast sales of
$50,000 in January, $60,000 in February, and $70,000 in March. Variable and fixed expenses are as follows:
Variable: Power cost (40% of Sales)

Miscellaneous expenses: (5% of Sales)
Fixed: Salary expense: $8,000 per month
Rent expense: $5,000 per month
Depreciation expense: $1,200 per month
Power cost/fixed portion: $800 per month
Miscellaneous expenses/fixed portion: $1,000 per month
Using the information above, calculate the amount of selling and administrative expenses for the month
of February.
A) $38,500
B) $47,500
C) $41,700
D) $43,000
Answer: D
Explanation: D) Calculation of total selling and administrative expenses for the month of February:
Selling and Administrative Expenses

budget Jan Feb Mar
Variable S & A expense
Power cost (40% of sales) $20,000 $24,000 $28,000
Misc. expenses (5% of sales) 2,500 3,000 3,500
Fixed S & A expenses
Salary expense 8,000 8,000 8,000
Rent expense 5,000 5,000 5,000
Depreciation expense 1,200 1,200 1,200
Power cost (fixed portion) 800 800 800
Misc. expenses (fixed portion) 1,000 1,000 1,000
Total selling and administrative
expenses $38,500 $43,000 $47,500
Diff: 1
LO: 22-3
AACSB: Application
77
13) Fly GenX Inc. has the following budgeted sales for the next quarter.
Month: 1 2 3
Units 10,000 11,000 12,000
Inventory of finished goods on hand at the beginning of the quarter is 4,000 units. The company desires
to maintain ending inventory equal to beginning inventory plus 1,000 units every month.
Calculate the quantity to be produced during the quarter.
Answer: Calculation of budgeted production units:
1 2 3
Sales units 10,000 11,000 12,000
Plus: Ending inventory
(4,000 + 1,000; 5,000+1,000; 6,000+1,000) 5,000 6,000 7,000
Total requirement in units 15,000 17,000 19,000
Less: Beginning inventory
(ending inventory of previous month) 4,000 5,000 6,000
Budgeted production units 11,000 12,000 13,000
Diff: 2
LO: 22-3
AACSB: Application
78
14) From the following details provided by NutShell Inc., prepare the manufacturing overhead budget for
the year 2015.
First Second Third Fourth

Quarter Quarter Quarter Quarter
Budgeted production units 15,000 18,000 21,000 24,000
Variable overhead cost per unit $45 $45 $45 $45
Fixed overhead costs:
Depreciation $3,000 $3,000 $3,000 $3,000
Supplies, insurance 5,000 5,750 6,250 7,250
Direct labor hours 12,500 7,500 17,200 12,800
Prepare the manufacturing overhead budget for the year 2015. Also, calculate the overhead allocation
rate, using direct labor hours as the allocation base.
Answer:
NutShell Inc.
Manufacturing Overhead Budget
For the Year Ended December 31, 2015

Quarter Quarter Quarter Quarter Total
Budgeted units to be
produced 15,000 18,000 21,000 24,000 78,000
VOH* cost per unit $45 $45 $45 $45 $45
Budgeted VOH $675,000 $810,000 $945,000 $1,080,000 $3,510,000
Budgeted FOH**
Depreciation $3,000 $3,000 $3,000 $3,000 $12,000
Supplies, insurance 5,000 5,750 6,250 7,250 24,250
Total budgeted FOH $8,000 $8,750 $9,250 $10,250 $36,250
Budgeted manufacturing
overhead costs $683,000 $818,750 $954,250 $1,090,250 $3,546,250
Direct labor hours (DLHr) 12,500 7,500 17,200 12,800 50,000
Budgeted manufacturing
overhead costs $3,546,250
Predetermined overhead
allocation rate $70.9250
*VOH - Variable Manufacturing Overhead

**FOH - Fixed Manufacturing Overhead
Diff: 3
LO: 22-3
AACSB: Application
79
15) From the following details provided by NutShell Inc., prepare the cost of goods sold budget for the
year 2015.
Direct material per unit $65

Direct labor hours per unit 2 hours
Direct labor rate per hour $50
Manufacturing overhead cost per direct labor hour $20
Beginning inventory units 1,000
Selling price per unit $250

Budgeted units to be produced 15,000 18,000 21,000 24,000
Assume that Nutshell Inc. has no closing stock at the end of each month.
Answer:
NutShell Inc.
Cost of Goods Sold Budget

Beginning inventory (1,000 units)* $205,000
Units produced and sold in 2015
@ $205 each 3,075,000 $3,690,000 $4,305,000 $4,920,000
(15,000, 18,000, 21,000, 24,000
units per quarter) _________ _________ _________ _________
Total budgeted cost of goods sold $3,280,000 $3,690,000 $4,305,000 $4,920,000
*Calculation of cost of beginning inventory:
Direct materials cost per unit $65

Direct labor cost per unit (2 DLHr per unit × $50) $100
Manufacturing overhead cost per tablet (2 DLHr per unit × $20 per DLHr) $40
Total projected manufacturing cost per unit for 2015 $205
Beginning inventory units 1,000
Cost of beginning inventory ($205 × 1,000) $205,000
Diff: 3
LO: 22-3
AACSB: Concept
80
1) The capital expenditures budget is prepared before the preparation of the cash budget.
Answer: TRUE
Diff: 1
LO: 22-4
AACSB: Application
2) For any organization, the primary source of cash is from its customers.
Answer: TRUE
Diff: 1
LO: 22-4
AACSB: Concept
3) The cash budget is the prerequisite for the master budget.

Answer: FALSE
Diff: 1
LO: 22-4
AACSB: Application
4) The output of a cash budget is input for an operating budget.

Answer: FALSE
Diff: 1
LO: 22-4
AACSB: Concept
81
5) Delleate Inc. has prepared the following purchases budget:
Month Budgeted Purchases

June $67,000
July 72,500
August 76,300
September 73,700
October 69,200
All purchases are paid for as follows: 10% in the month of purchase, 50% in the following month, and
40% two months after purchase. Calculate total cash payments made in October for purchases.
A) $72,630
B) $70,680
C) $70,520
D) $74,290
Answer: D
Explanation:
D) Payment in October:
For Oct purchases
(10% × $69,200) $6,920
For Sep purchases
(50% × $73,700) 36,850
For Aug purchases
(40% × $76,300) 30,520
Total cash paid $74,290
Diff: 2
LO: 22-4
AACSB: Application
82
6) Delleate Inc. has prepared the following purchases budget:
Month Budgeted Purchases

June $67,000
July 72,500
August 76,300
September 73,700
October 69,200
All purchases are paid for as follows: 10% in the month of purchase, 50% in the following month, and
40% two months after purchase. Calculate balance of Accounts payable at the end of October.
A) $77,680
B) $91,760
C) $69,330
D) $74,290
Answer: B
Explanation: B)
Accounts Payable balance at the end of October:
For October purchases (90% × $69,200) $62,280
For September purchases (40% × $73,700) 29,480
Balance at the end: $91,760
Diff: 2
LO: 22-4
AACSB: Application
7) Junk Fries has budgeted sales for June and July at $680,000 and $720,000, respectively. Sales are 80%
credit, of which 70% is collected in the month of sale and 30% is collected in the following month. What is
the accounts receivable balance on July 31?
A) $200,500
B) $172,800
C) $158,200
D) $225,320
Answer: B
Explanation: B)
Balance of accounts receivable on July 31st:
For July sales ($720,000 × 80% × 30%) $172,800
Diff: 2
LO: 22-4
AACSB: Application
83
8) Dry Fruit Grocers a local grocer has budgeted inventory purchases as follows:
October: $300,000
November: $350,000
December: $390,000
Dry Fruit Grocers pays for 20% of their purchases during the month of purchase, 70% during the month
following the purchase, and the remaining 10% two months after the month of purchase. What is the
budgeted accounts payable balance on December 31?
A) $312,000
B) $347,000
C) $390,000
D) $425,000
Answer: B
Explanation: B)
Budgeted Accounts Payable balance on Dec31st
For October purchases 0

For November purchases
(10% × $350,000) $35,000
For December purchases
(80% × $390,000) 312,000
Balance at the end $347,000
Diff: 2
LO: 22-4
AACSB: Application
84
9) A manufacturing company's budgeted income statement includes the following data:
Data extracted from budgeted

income statement Mar Apr May Jun
Sales $120,000 $90,000 $95,000 $100,000
Commission expense (15% of sales) 18,000 13,500 14,250 15,000
Salaries expense 30,000 30,000 30,000 30,000
Miscellaneous expense—4% of sales 4,800 3,600 3,800 4,000
Rent expense 3,600 3,600 3,600 3,600
Utility expense 1,900 1,900 1,900 1,900
Insurance expense 2,100 2,100 2,100 2,100
Depreciation expense 4,400 4,400 4,400 4,400
The budget assumes that 60% of commission expenses are paid in the month they are incurred and the
remaining 40% are paid one month later. In addition, 50% of salary expenses are paid in the same month
and the remaining 50% are paid one month later. Miscellaneous expenses, rent expense and utility
expenses are assumed to be paid in the same month in which they are incurred. Insurance has been paid
in advance for the year on January 1st.
Calculate total budgeted cash payments for selling and administrative expenses for the month of April.
A) $54,200
B) $53,250
C) $54,400
D) $53,900
Answer: C
Explanation: C)
Payment for selling and administrative expenses for the month of April:
Commission expense (15% of sales)
For April $8,100
For March 7,200
Total $15,300
Salaries expense
For April $15,000
For March 15,000
Total Salaries expense 30,000
Misc. expense (4% of sales) 3,600
Rent expense 3,600
Utility 1,900
Insurance (already paid in advance) 0
Depreciation 0
$54,400
Diff: 2
LO: 22-4
AACSB: Application
85
10) A manufacturing company's budgeted income statement includes the following data:
Data extracted from budgeted

income statement Mar Apr May Jun
Sales $120,000 $90,000 $95,000 $100,000
Commission expense (15% of sales) 18,000 13,500 14,250 15,000
Miscellaneous expense—4% of sales 4,800 3,600 3,800 4,000
Rent expense 3,600 3,600 3,600 3,600
Utility expense 1,900 1,900 1,900 1,900
The budget assumes that 60% of commission expenses are paid in the month they were incurred and the
remaining 40% are paid one month later. In addition, 50% of salary expenses are paid in the month
incurred and the remaining 50% are paid one month later. Miscellaneous expenses, rent expense and
utility expenses are assumed to be paid in the same month in which they are incurred. Insurance was
prepaid for the year on January 1.
How much is the total of the budgeted cash payments for selling and administrative expenses for the
month of May?
A) $54,200
B) $53,250
C) $54,400
D) $53,900
Answer: B
Explanation: B)
Payment for selling and administrative expenses for the month of May:
Commission expense (15% of sales)
For April $5,400
For May 8,550
Total $13,950
Salaries expense
For April $15,000
For May 15,000
Total Salaries expense 30,000
Misc. expense (4% of sales) 3,800
Rent expense 3,600
Utility 1,900
Insurance 0
Depreciation 0
Total cash paid $53,250
Diff: 3
LO: 22-4
AACSB: Application
86
11) Diemans Corp. has provided a part of its budget for the 2nd quarter:
Apr May June

Cash collections $40,000 $45,000 $52,000
Cash payments:
Purchases of inventory 4,500 7,200 4,500
Operating expenses 7,900 5,600 9,000
Capital expenditures 0 20,000 4,600
The cash balance on April 1 is $12,000. Assume that there will be no financing transactions or costs during
the quarter. Calculate the cash balance at the end of April.
A) $50,000
B) $40,200
C) $39,600
D) $51,800
Answer: C
Explanation: C)
April May June
Cash balance at the beginning $12,000 $39,600 $51,800
Plus: Receipts from customers 40,000 45,000 52,000
Total cash available $52,000 $84,600 $103,800
Less: Payment for purchase of
inventory 4,500 7,200 4,500
Balance at the end $39,600 $51,800 $85,700
Diff: 2
LO: 22-4
AACSB: Application
87
12) Diemans Corp. has provided a part of its budget for the 2nd quarter:
Apr May June

Cash payments:
the quarter. Calculate the cash balance at the end of May.
A) $51,800
B) $40,800
C) $33,900
D) $21,800
Answer: A
Explanation: A)
April May June
inventory 4,500 7,200 4,500
Diff: 2
LO: 22-4
AACSB: Application
88
13) Diemans Corp .has provided a part of its budget for the 2nd quarter:
Apr May June

Cash payments:
the quarter. Calculate the cash balance at the end of June.
A) $26,500
B) $40,800
C) $85,700
D) $21,800
Answer: C
Explanation: C) April May June
inventory 4,500 7,200 4,500
Diff: 2
LO: 22-4
AACSB: Application
89
14) Nobell Inc. has a cash balance of $20,000 on April 1, 2015. They are now preparing the cash budget for
the second quarter. Budgeted cash collections and payments are as follows:
Apr May June

Cash payments:
There are no budgeted capital expenditures or financing transactions during the quarter. Based on the
above data, calculate the projected cash balance at the end of April.
A) $22,000
B) $35,700
C) $23,700
D) $22,400
Answer: B
Explanation: B) April May June
Beginning cash balance $20,000 $35,700 $46,100
Plus: Cash receipts 25,000 22,000 20,000
Cash available $45,000 $57,700 $66,100
Less Cash payments:
Ending cash balance $35,700 $46,100 $54,600
Diff: 2
LO: 22-4
AACSB: Application
90
Apr May June

Cash payments:
above data, calculate the projected cash balance at the end of May.
A) $22,000
B) $21,900
C) $23,700
D) $46,100
Answer: D
Explanation: D) April May June
Cash available $45,000 $57,700 $66,100
Less: Cash payments:
Diff: 2
LO: 22-4
AACSB: Application
91
Apr May June

Cash payments:
above data, calculate the projected cash balance at the end of June.
A) $35,700
B) $21,900
C) $46,100
D) $54,600
Answer: D
Explanation: D) April May June
Cash available $45,000 $57,700 $66,100
Diff: 2
LO: 22-4
AACSB: Application
92
17) Fulkron Manufacturing provides the following data excerpted from its 3rd quarter budget:
Jul Aug Sep

Cash payments:
The cash balance on June 30 is projected to be $10,000. Based on the above data, calculate the shortfall the
company is projected to have at the end of August.
A) $32,000
B) $43,000
C) $37,000
D) $16,000
Answer: C
Explanation: C) July Aug Sep
Beginning cash balance $10,000 $16,000 -$37,000
Cash available $76,000 $58,000 $8,000
Ending cash balance $16,000 -$37,000 -$43,000
Diff: 2
LO: 22-4
AACSB: Application
93
18) Fulkron Manufacturing provides the following data excerpted from its 3rd quarter budget:
Jul Aug Sep

Cash payments:
The cash balance on June 30 is projected to be $10,000. Based on the above data, calculate the shortfall the
company is projected to have at the end of September.
A) $43,000
B) $28,000
C) $35,000
D) $40,000
Answer: A
Explanation: A) July Aug Sep
Beginning cash balance $10,000 $16,000 -$37,000
Cash available $76,000 $58,000 $8,000
Ending cash balance $16,000 -$37,000 -$43,000
Diff: 1
LO: 22-4
AACSB: Application
94
19) A3+ has prepared its 3rd quarter budget and provided the following data:
Jul Aug Sep

Cash payments:
Capital expenditures 13,000 25,000 0
The cash balance on June 30 is projected to be $4,000. The company has to maintain a minimum cash
balance of $5,000 and is authorized to borrow at the end of each month to make up any shortfalls. It may
borrow in increments of $5,000 and has to pay interest every month at an annual rate of 5%. All financing
transactions are assumed to take place at the end of the month. The loan balance should be repaid in
increments of $5,000 whenever there is surplus cash.
How much will the company have to borrow at the end of July?
A) $0
B) $5,000
C) $15,000
D) $10,000
Answer: D
Explanation: D)
Cash budget Jul Aug Sep
Plus: Cash collections 50,000 40,000 48,000
Cash available $54,000 $48,000 $54,958
Cash payments:
Less: Total cash payments $56,000 $56,000 $29,600
Ending cash balance before financing -$2,000 -$8,000 $25,358
Minimum cash balance required -5,000 -5,000 -5,000
Cash excess/(deficiency) -$7,000 -$13,000 $20,358
Financing
Borrowing at end of month 10,000 15,000
Principal payments at end of month -20,000
Interest expense at 5% _____ -42 -104
Total effects of financing 10,000 14,958 -20,104
Diff: 1
LO: 22-4
AACSB: Application
95
Jul Aug Sep

Cash payments:
increments of $5,000 whenever there is surplus cash.
How much will the company have to borrow at the end of August?
A) $15,000
B) $5,000
C) $10,000
D) $20,000
Answer: A
Explanation: A)
Cash available $54,000 $48,000 $54,958
Cash payments:
Purchases of inventory $31,000 $22,000 $18,000
Financing
Borrowing at end of month $10,000 $15,000
Principal payments at end of month -$20,000
Interest expense at 5% ______ -42 -104
Total effects of financing $10,000 $14,958 -$20,104
Diff: 2
LO: 22-4
AACSB: Application
96
Jul Aug Sep

Cash payments:
increments of $5,000 whenever there is surplus cash. Calculate the ending cash balance before financing
for August.
A) $9,000
B) $5,000
C) $3,000
D) ($8,000)
Answer: D
Explanation: D)
Cash available $54,000 $48,000 $54,958
Cash payments:
Financing
Diff: 3
LO: 22-4
AACSB: Application
97
Jul Aug Sep

Cash payments:
increments of $5,000 whenever there is surplus cash. Calculate the final cash balance at the end of August
taking into consideration all the financing transactions.
A) $6,958
B) $5,254
C) $7,100
D) $4,320
Answer: A
Explanation: A)
Cash available $54,000 $48,000 $54,958
Cash payments:
Financing
Ending cash balance
(including minimum balance, $5,000) $8,000 $6,958 $5,254
Diff: 3
LO: 22-4
AACSB: Application
98
Jul Aug Sep

Cash payments:
increments of $5,000 whenever there is surplus cash. Calculate the amount of principal repayment at the
end of September.
A) $5,000
B) $10,000
C) $15,000
D) $20,000
Answer: D
Explanation: D)
Cash available $54,000 $48,000 $54,958
Cash payments:
Financing
Interest expense at 5% _______ -42 -104
Ending cash balance
Diff: 3
LO: 22-4
AACSB: Application
99
Jul Aug Sep

Cash payments:
increments of $5,000 whenever there is surplus cash. Calculate the final projected cash balance at the end
of September.
A) $6,000
B) $5,254
C) $6,133
D) $7,200
Answer: B
Explanation: B)
Cash available $54,000 $48,000 $54,958
Cash payments:
Financing
Ending cash balance
Diff: 3
LO: 22-4
AACSB: Application
100
25) June sales were $40,000 while projected sales for July and August were $50,000 and $60,000,
respectively. Sales are 40% cash and 60% credit. All credit sales are collected in the month following the
sale. Calculate expected collections for July.
A) $36,000
B) $44,000
C) $50,000
D) $54,000
Answer: B
Explanation: B)
Calculation of expected collections for the month of July:
June sales (60% × $40,000) $24,000

July sales (40% × $50,000) 20,000
Total expected collections for July $44,000
Diff: 1
LO: 22-4
AACSB: Application
26) Purchases for May were $100,000, while expected purchases for June and July are $110,000 and
$125,000, respectively. All purchases are paid 25% in the month of purchase and 75% the following
month. Calculate the budgeted payments for the month of June.
A) $102,500
B) $107,500
C) $110,000
D) $121,250
Answer: A
Explanation: A)
Calculation of budgeted payment for the month of June:
Payment for June purchases

(25% × $110,000) $27,500
Payment for May purchases
(75% × $100,000) 75,000
Total budgeted payments $102,500
Diff: 2
LO: 22-4
AACSB: Application
101
27) Farmerlands Enterprises has budgeted sales for the months of September and October at $300,000 and
$280,000, respectively. Monthly sales are 80% credit and 20% cash. Of the credit sales, 50% are collected in
the month of sale and 50% are collected in the following month. Calculate cash collections for the month
of October.
A) $168,000
B) $232,000
C) $288,000
D) $290,000
Answer: C
Explanation: C)
Calculations of collections for the month of October:
Collections for October sales

(20% × $280,000) + (50% × 80% × $280,000) $168,000
Collections for September sales
(50% × 80% × $300,000) 120,000
Total collections for the month of October $288,000
Diff: 3
LO: 22-4
AACSB: Application
28) A company has prepared the operating budget and the cash budget and is now preparing the
budgeted balance sheet. While doing so, the cash balance can be taken from:
A) the operational budget.
B) the budgeted income statement.
C) the cash budget.
D) the sales budget.
Answer: C
Diff: 1
LO: 22-4
AACSB: Concept
budgeted balance sheet. The balance of Accounts Receivable can be obtained from:
A) the inventory, purchases and cost of goods sold budget.
B) cash receipts from customers.
C) the capital expenditures budget.
D) the selling and administrative expenses budget.
Answer: B
Diff: 1
LO: 22-4
AACSB: Concept
102
budgeted balance sheet. The balance of Inventory can be taken from:
A) production budget and cost of goods sold budget.
B) the financial budget.
C) the cash budget.
Answer: A
Diff: 1
LO: 22-4
AACSB: Concept
budgeted balance sheet. The balance of Accounts Payable can be taken from:
B) the budgeted cash payments for purchases.
C) the cash budget.
Answer: B
Diff: 1
LO: 22-4
AACSB: Application
budgeted balance sheet. The balance of retained earnings can be taken from:
B) the operating budget.
C) the cash budget.
D) the budgeted income statement plus the balance sheet from the prior year.
Answer: D
Diff: 1
LO: 22-4
AACSB: Concept
103
33) On June 30, 2015, Alpha Company's cash balance is $4,000. Alpha is now preparing their cash budget
for the third quarter of 2015. The following data is provided:

Cash available $54,000 $48,000 $54,958
Cash payments:
Purchase of inventory 31,000 22,000 18,000
Minimum cash balance desired -5,000 -5,000 -5,000
Financing
Borrowing at end of month 10,000 15,000
Principal repayments at end of month -$20,000
Interest expense at 5% -42 -104
Total effects of financing 10,000 14,958 -20,104
The amount of cash that should be shown in the budgeted balance sheet as on September 30th would be:
A) $6,958.
B) $8,000.
C) $5,254.
D) $4,297.
Answer: C
Diff: 3
LO: 22-4
AACSB: Application
104
34) Nobula Corp. is preparing their budget for the 2nd quarter and provides the following data:
Apr May Jun

Budgeted purchases $20,000 $24,000 $18,000
Budgeted Cash Payments for Inventory
Purchases Apr May Jun
60% of previous month purchases $6,000 $12,000 $14,400
40% of current month purchases 8,000 9,600 7,200
Total cash payments $14,000 $21,600 $21,600
Assume that accounts payable pertains only to suppliers of inventory. Based on the above data, the
amount of Accounts Payable that should be shown in the budgeted balance sheet as on June 30th is:
A) $12,000.
B) $3,600.
C) $10,800.
D) $5,400.
Answer: C
Explanation: C) Account Payable = $18,000 × 60% = $10,800
Diff: 1
LO: 22-4
AACSB: Concept
35) When a company is preparing a budgeted statement of cash flows, the payments to suppliers for
purchases of inventory can be obtained from:
A) the cash budget.
B) the sales budget.
C) budgeted cash collections.
D) the budgeted balance sheet.
Answer: A
Diff: 1
LO: 22-4
AACSB: Concept
36) When a company is preparing a budgeted statement of cash flows, the payments for selling and
administrative expenses can be obtained from:
A) budgeted payments for purchases.
B) the sales budget.
C) the cash budget.
D) the budgeted balance sheet.
Answer: C
Diff: 1
LO: 22-4
AACSB: Concept
105
37) Chaterlain Company is preparing its budget for the 3rd quarter. The cash balance on June 30 was
$30,000. Additional budgeted data is provided here:
Jul Aug Sep

Cash payments:
Capital expenditures 5,000 9,000 16,000
What amount should be shown in the cash budget for the cash balance at the end of July?
A) $19,100
B) $30,000
C) $29,050
D) $42,200
Answer: B
Explanation: B)
Balance at the beginning $30,000
Plus: Cash collections 50,000
Cash available $80,000
Less: Payments for:
Purchase of inventory 20,000
Operating expenses 25,000
Capital expenditures 5,000
Diff: 1
LO: 22-4
AACSB: Application
106
38) Chaterlain Company is preparing its budget for the 3rd quarter. Cash balance on July 31 was $30,000.
Assume there is no minimum balance of cash required and no borrowing is undertaken. Additional
budgeted data is provided here:
Jul Aug Sep

Cash payments:
Capital expenditures 5,000 9,000 16,000
Calculate the balance of cash at the end of August.

A) $19,100
B) $28,800
C) $29,050
D) $32,000
Answer: D
Explanation: D)
Balance at the beginning $30,000
Plus: Cash collections 51,000
Less: Payments for:
Operating expenses 21,000
Diff: 1
LO: 22-4
AACSB: Application
107
39) Gamma Corp. has prepared a preliminary cash budget for the 3rd quarter as shown below:
Cash Budget Jul Aug Sep

Cash available $81,400 $55,400 $51,500
Subsequently, the marketing department revised its figures for cash collections. New data are as follows:
$52,000 in July, $50,000 in August, and $42,000 in September. Based on the new data, calculate the new
projected cash balance at the end of July.
A) $8,500
B) $2,400
C) $7,000
D) $900
Answer: C
Explanation: C)
Cash available $84,000 $57,000 $50,500
Ending cash balance $7,000 $8,500 $900
Diff: 1
LO: 22-4
AACSB: Application
108

Cash available $81,400 $55,400 $51,500
projected cash balance at the end of August.
A) $8,500
B) $2,400
C) $7,000
D) $900
Answer: A
Explanation: A)
Cash available $84,000 $57,000 $50,500
Diff: 2
LO: 22-4
AACSB: Application
109

Cash available $81,400 $55,400 $51,500
projected cash balance at the end of September.
A) $8,500
B) $2,400
C) $7,000
D) $900
Answer: D
Explanation: D)
Cash available $84,000 $57,000 $50,500
Diff: 2
LO: 22-4
AACSB: Application
110
42) Cirag Manufacturing Company's budgeted income statement includes the following data:
Mar Apr May Jun

Sales $320,000 $340,000 $360,000 $380,000
Commission expense:15% of sales 48,000 51,000 54,000 57,000
Miscellaneous expense: 4% of sales 12,800 13,600 14,400 15,200
Rent expense 4,000 4,000 4,000 4,000
Utility expense 2,000 2,000 2,000 2,000
The budget assumes that 60% of commission expenses are paid in the month in which they are incurred
and the remaining 40% are paid one month later. In addition, 50% of salaries expenses are paid in the
month in which they are incurred and the remaining 50% are paid one month later. Miscellaneous
expenses, rent expense and utility expenses are assumed to be paid in the same month in which they are
incurred. Insurance was prepaid for the year on January 1. Calculate the budgeted cash payments for
selling and administrative expenses for the quarter ending June 30.
Answer:
Budget of Cash Payments for Selling and
Administrative Expenses April May June
Variable expenses
40% of last month's commission expenses $19,200 $20,400 $21,600
60% of this month's commission expenses 30,600 32,400 34,200
Misc. expenses - 4% of sales 13,600 14,400 15,200
Total variable operating expenses $63,400 $67,200 $71,000
Fixed expenses
50% of last month's salary expense $25,000 $25,000 $25,000
50% of this month's salary expense 25,000 25,000 25,000
Rent expense 4,000 4,000 4,000
Utility expense 2,000 2,000 2,000
Total payments for fixed operating. expenses $56,000 $56,000 $56,000
Total payments for operating expenses $119,400 $123,200 $127,000
*Insurance has already been paid for and hence will not affect cash.
Diff: 3
LO: 22-4
AACSB: Application
111
43) Search Engine Corp. has provided the following details concerning budgeted sales.
Budgeted Sales
Jan $75,000
Feb 69,000
March 80,000
April 82,000
May 80,500
June 92,000
The collection policy of the company is to collect 20% in the month of sale, 40% in the following month,
and remaining 40% in the second month after the month of sale. All sales are made on account.
Calculate the cash receipts from customers for the first six months.
Answer: Calculation of cash receipts for the first six months:
Jan Feb March April May June

Budgeted sales $75,000 $69,000 $80,000 $82,000 $80,500 $92,000
Cash Receipts from

customers:
Month of sale (20%) $15,000 $13,800 $16,000 $16,400 $16,100 $18,400
First month after sale (40%) 30,000 27,600 32,000 32,800 $32,200
Second month after sale (40%) 30,000 27,600 32,000 32,800
Total collection from
customers $15,000 $43,800 $73,600 $76,000 $80,900 $83,400
Diff: 3
LO: 22-4
AACSB: Application
112
44) A manufacturer has provided the following details for goods purchased on account in different
months.
Jan $35,000
Feb 28,000
March 34,000
April 39,000
May 32,000
June 29,000
The terms of payment offered by the suppliers are to pay 70% in the month of purchase and 30% in the
following month. Calculate the payments on account made during the first six months.
Answer:
Jan Feb March April May June
Purchases on account: $35,000 $28,000 $34,000 $39,000 $32,000 $29,000
Cash payments to
suppliers:
In the month of purchase
(70%) 24,500 19,600 23,800 27,300 22,400 20,300
In the next month: (30%) 10,500 8,400 10,200 11,700 9,600
Total payments to
suppliers $24,500 $30,100 $32,200 $37,500 $34,100 $29,900
Diff: 3
LO: 22-4
AACSB: Application
1) Use of advanced technology makes it more cost effective for managers to conduct sensitivity analysis.
Answer: TRUE
Diff: 1
LO: 22-5
AACSB: Concept
2) Sensitivity analysis is a what-if technique.

Answer: TRUE
Diff: 1
LO: 22-5
AACSB: Concept
113
3) A company with different segments using different software configurations can easily combine budget
data of different segments to create the master budget.
Answer: FALSE
Diff: 1
LO: 22-5
AACSB: Concept
4) Which of the following best describes the term sensitivity analysis?

A) It is a testing technique to determine how results would differ if key assumptions are changed.
B) It is an analysis of the emotional sensitivity of a company's employees.
C) It is an evaluation of the accuracy of the assumptions.
D) It evaluates a company's financial condition by doing financial statement analysis.
Answer: A
Diff: 2
LO: 22-5
AACSB: Concept
5) At a company with different business units, individual managers make decisions by changing various
assumptions of their budget in order to determine how the modifications would affect the operational
and financial results. This is an example of:
A) financial statement analysis.
B) responsibility accounting.
C) sensitivity analysis.
D) zero-based budgeting.
Answer: C
Diff: 1
LO: 22-5
AACSB: Concept
6) Which of the following is useful to combine the data of different segments using different software, for
the purpose of creating companywide budgets?
A) Accounting development manual
B) Budgeting software
C) Financial analysis software
D) Budget creation manual
Answer: B
Diff: 1
LO: 22-5
AACSB: Concept
114
1) Unlike a manufacturing company, the cash budget is the cornerstone for the master budget of a
merchandiser.
Answer: FALSE
Diff: 1
LO: 22-6
AACSB: Concept
2) For a merchandiser, the budgeted sales equals the number of units budgeted for sale multiplied by the
budgeted selling price per unit.
Answer: TRUE
Diff: 1
LO: 22-6
AACSB: Concept
3) While preparing the budgeted balance sheet of a merchandiser, the amount of merchandise inventory
can be obtained from:
A) the merchandise inventory account.
B) the inventory, purchases and cost of goods sold budget.
C) the production budget
D) the capital expenditure budget and cash budget.
Answer: B
Diff: 1
LO: 22-6
AACSB: Concept
115
4) Freighters Inc. has the following budgeted figures:
Calculate the budgeted purchases for the month of January.

A) $40,250
B) $52,000
C) $33,750
D) $51,750
Answer: C
Explanation: C) Jan Feb Mar
Cost of goods sold $30,000 $39,000 $48,000
Plus: Ending merchandise inventory 31,250 35,000 38,750
Total merchandise inventory required $61,250 $74,000 $86,750
Less: Beginning merchandise inventory 27,500 31,250 35,000
Budgeted purchases $33,750 $42,750 $51,750
Diff: 2
LO: 22-6
AACSB: Application
Calculate cost of goods sold for the month of February.

A) $40,250
B) $52,000
C) $33,750
D) $39,000
Answer: D
Explanation: D) COGS = $65,000 × 60% = $39,000.
Diff: 1
LO: 22-6
AACSB: Application
116
Calculate the ending merchandise inventory for the month of March.

A) $38,750
B) $52,000
C) $33,750
D) $39,000
Answer: A
Explanation: A) Ending merchandise inventory for March = $15,000 + ($95,000 × 25%) = $38,750.
Diff: 1
LO: 22-6
AACSB: Application
7) Gamma Corp. is preparing their budget for the 1st quarter of 2015. The following data is provided:
Inventory, Purchases and COGS Budget Jan Feb Mar

Cost of goods sold (a) $30,000 $28,500 $22,500
Desired ending inventory(b) 10,700 9,500 9,800
Total inventory required 40,700 38,000 32,300
less Beginning inventory -11,000 -10,700 -9,500
Purchases 29,700 27,300 22,800
(a) COGS = 75% of sales
(b) $5,000 + 20% of COGS for next month
The amount of Merchandise Inventory to be shown on the budgeted balance sheet at March 31 would be:
A) $9,500.
B) $10,700.
C) $8,750.
D) $9,800.
Answer: D
Diff: 1
LO: 22-6
AACSB: Application
117
8) From the following details, provided by a merchandiser, prepare the selling and administrative
expenses budget for the first quarter of the next year.
Rent Expense $8,000 per month

Depreciation Expense $ 3,500 per month
Insurance Expense $1,250 per month
Miscellaneous Expense 2% of sales, paid as incurred
Commissions Expense 10% of sales
Salaries Expense $7,000 per month
Jan Feb March

Sales $50,000 $65,000 $80,000
Answer:
Selling and Administrative Expenses Budget
For First Quarter
Jan Feb March
Variable expenses:
Commissions Expense (10% of sales) $5,000 $6,500 $8,000
Miscellaneous Expenses (2% of sales) 1,000 1,300 1,600
Total variable expenses $6,000 $7,800 $9,600
Fixed expenses:
Salaries Expense $7,000 $7,000 $7,000
Rent Expense 8,000 8,000 8,000
Depreciation Expense 3,500 3,500 3,500
Insurance Expense 1,250 1,250 1,250
Total fixed expenses $19,750 $19,750 $19,750
Total selling and administrative expenses $25,750 $27,550 $29,350
Diff: 1
LO: 22-6
AACSB: Application
1) The financial budget of a merchandiser is similar to that of a manufacturer.

Answer: TRUE
Diff: 1
LO: 22-7
AACSB: Application
118
2) The budgeted income statements of both manufacturing and merchandising companies include a
calculation of gross profit.
Answer: TRUE
Diff: 1
LO: 22-7
AACSB: Application
3) While calculating the cash payments for budgeted selling and administrative expenses, non-cash
expenses like depreciation are also considered.
Answer: FALSE
Diff: 1
LO: 22-7
AACSB: Application
4) Freightcan Holders has provided the following extracts from their budget for the first quarter of the
forthcoming year:
Jan Feb March

Sales (30% cash) $500,000 $750,000 $1,000,000
The company collects 60% of credit sales in the same month and the balance in the next month. Calculate
the collections from the customers for the month of February.
A) $ 580,000
B) $720,000
C) $680,000
D) $490,000
Answer: C
Explanation: C) Feb
Collection for cash sale ($750,000 × 30%) $225,000
Collection for credit sale:
For Feb sales ($750,000 × 70% × 60%) 315,000
For Jan sales ($500,000 × 70% × 40%) 140,000
Total cash collection $680,000
Diff: 1
LO: 22-7
AACSB: Application
119
5) Freightcan Holders has provided the following extracts from their budget for the first quarter of the
forthcoming year:
Jan Feb March

Purchases on account $280,000 $295,000 $310,000
The vendors allowed terms of payment as follows:
Month of purchase 25%

First month after the purchase 50% of the balance
Second month after the purchase balance 50%
Calculate the total payment on account for the month of March.

A) $259,625
B) $563,245
C) $325,643
D) $293,125
Answer: D
Explanation: D) March
For March purchases
(25% × $310,000) $77,500
For Feb purchases
(50% × 75% × $295,000) 110,625
For Jan purchases
(50% × 75% × $280,000) 105,000
Total payment on account $293,125
Diff: 1
LO: 22-7
AACSB: Application
120
6) The following details have been extracted from the budget of a merchandiser.
Rent Expense $8,000 per month

Depreciation Expense $ 3,500 per month
Insurance Expense $1,250 per month
Miscellaneous Expense 2% of sales, paid as incurred
Commissions Expense 10% of sales
Salaries Expense $7,000 per month
Dec Jan Feb March

Sales $45,000 $50,000 $65,000 $80,000
Commission and salaries expenses are paid 50% in the month to which they relate and the balance in the
next month.
Rent and miscellaneous expenses are paid as and when they occur. Insurance is prepaid at the beginning
of the quarter. Calculate cash payments for the selling and administrative expenses for the first quarter of
the next year.
A) $70,400
B) $50,500
C) $75,000
D) $62,750
Answer: A
Explanation: A) Budgeted Cash Payments for Selling and Administrative Expenses
For First Quarter
Jan Feb March Total
Variable expenses:
50% of last month's Commissions Expense $2,250 $2,500 $3,250 $8,000
50% of this month's Commission Expense 2,500 3,250 4,000 9,750
Miscellaneous Expenses 1,000 1,300 1,600 3,900
Total payments for variable expenses $5,750 $7,050 $8,850 $21,650
Fixed expenses:
50% of last month's Salaries Expense $3,500 $3,500 $3,500 $10,500
50% of this month's Salaries Expense 3,500 3,500 3,500 10,500
Rent Expense 8,000 8,000 8,000 24,000
Insurance paid in advance ($1,250 × 3) 3,750 0 0 3,750
Total payments for fixed expenses $18,750 $15,000 $15,000 $48,750
Total payments for S&A expenses $24,500 $22,050 $23,850 $70,400
Diff: 3
LO: 22-7
AACSB: Application
121
7) Uncle's Caps, a merchandiser, has provided the following budgeted amounts for the next budget
period.
Balance of cash at the beginning $30,000

Cash collections 680,000
Payments for:
Selling and administrative expenses 70,400
A minimum cash balance of $250,000 is required to be maintained. The company can borrow in
increments of $10,000 as and when required. Assume the company can borrow the needed funds at the
end of the period. Calculate the ending cash balance for the budget period.
A) $320,300
B) $250,600
C) $300,000
D) $540,230
Answer: B
Explanation: B) Budget period
Beginning cash balance $30,000
Cash receipts 680,000
Cash payments:
Purchases of merchandise inventory 350,000
Selling and administrative expenses 70,400
Total cash payments $509,400
Ending cash balance before financing $200,600
Minimum cash balance desired $250,000
Projected cash excess (deficiency) $49,400
Financing:
Borrowing $50,000
Principal repayments 0
Total effects of financing $50,000
Ending cash balance $250,600
Diff: 3
LO: 22-7
AACSB: Application
122
8) While preparing the budgeted income statement of a merchandiser, the amount of cost of goods sold
can be taken from:
A) the budgeted balance sheet.
B) the budgeted cash flow statement.
C) the inventory, purchases and COGS budget.
D) the payment for cost of goods sold.
Answer: C
Diff: 1
LO: 22-7
AACSB: Concept
9) Uncle's Caps, a merchandiser, wants to prepare the budgeted balance sheet for the next budget period.
For this purpose the amount of ending cash balance can be retrieved from:
A) the sales budget.
B) the budgeted funds flow statement.
C) the cash budget.
D) the Cost of Goods Sold budget.
Answer: C
Diff: 1
LO: 22-7
AACSB: Concept
10) The amount of accumulated depreciation for the budgeted balance sheet can be obtained from:
A) the selling and administrative expenses budget.
B) the selling and administrative expenses budget and the prior balance sheet.
C) the cash payments for S&A expenses budget.
D) the financial budget.
Answer: B
Diff: 1
LO: 22-7
AACSB: Concept
11) The final step in the process of creating the master budget is the preparation of:
A) the operating budget
B) the budgeted balance sheet.
C) the budgeted cash flow statement.
D) the cash payments for expenses.
Answer: C
Diff: 1
LO: 22-7
AACSB: Concept
123
12) In the cash flow statement, all cash receipts and payments are categorized into: Operating activities,
Financing activities and:
A) Investing activities.
B) Merchandising activities.
C) Budgeting activities.
D) Controlling activities.
Answer: A
Diff: 1
LO: 22-7
AACSB: Concept
124
Chapter 23 Flexible Budgets and Standard Cost Systems
1) A static budget is prepared for only one level of sales volume.

Answer: TRUE
Diff: 1
LO: 23-1
AACSB: Concept
2) A favorable variance reflects a decrease in operating income.

Answer: FALSE
Diff: 1
LO: 23-1
AACSB: Concept
3) A variance is the difference between an actual amount and a budgeted amount.

Answer: TRUE
Diff: 1
LO: 23-1
AACSB: Concept
4) A flexible budget summarizes revenues and expenses for various levels of sales volume within a
relevant range.
Answer: TRUE
Diff: 1
LO: 23-1
AACSB: Concept
5) The difference between the expected results in the flexible budget for the actual units sold and the
static budget is called the sales volume variance.
Answer: TRUE
Diff: 1
LO: 23-1
AACSB: Concept
125
6) The sales volume variance is a result of the difference between the actual selling price and the
budgeted selling price.
Answer: FALSE
Diff: 1
LO: 23-1
AACSB: Concept
7) Flexible budget variance is the difference between expected results in the flexible budget for the actual
units sold and the static budget.
Answer: FALSE
Diff: 1
LO: 23-1
AACSB: Concept
8) The flexible budget variance is the difference between the actual results and the expected results in the
flexible budget for the actual units sold.
Answer: TRUE
Diff: 1
LO: 23-1
AACSB: Concept
9) A static budget presents financial data at multiple levels of sales volume.

Answer: FALSE
Diff: 1
LO: 23-1
AACSB: Concept
126
10) Kevin Company prepared the following static budget for the year 2015:
Static Budget
Units/volume 5,000
Per Unit
Sales revenue $3.00 $15,000
Variable expenses $1.50 7,500
Operating income/(loss) $3,500
If a flexible budget was prepared at a volume of 6,000, calculate the amount of operating income.
A) $5,000
B) $3,500
C) $9,000
D) $4,000
Answer: A
Explanation:
A) Kevin Company
Flexible Budget
Budgeted Amounts
Per Unit
Units 6,000
Sales Revenue $3.00 $18,000
Manufacturing:
Variable expenses 1.50 9,000
Contribution Margin 9,000
Operating Income $5,000
Diff: 2
LO: 23-1
AACSB: Application
127
11) Kevin Company prepared the following static budget for the year 2015:
Static Budget
Units/volume 5,000
Per Unit
Sales revenue $3.00 $15,000
Variable expenses $1.50 7,500
If a flexible budget was prepared at a volume of 7,000, calculate the amount of operating income.
A) $3,500
B) $10,500
C) $6,500
D) $4,000
Answer: C
Explanation:
C) Kevin Company
Flexible Budget
Budgeted Amounts
Per Unit
Units 7,000
Sales Revenue $3.00 $21,000
Manufacturing:
Variable expenses 1.50 10,500
Diff: 2
LO: 23-1
AACSB: Application
128
12) Ibis Company prepared the following static budget for the month of November, 2015:
Static Budget
Units/volume 12,000
Per Unit
Sales revenue $20 $240,000
Variable expenses $8 -96,000
Fixed expenses -130,000
If a flexible budget was prepared at a volume of 13,000 units, calculate the operating income at 13,000
units of production.
A) $22,000
B) $17,500
C) $14,000
D) $26,000
Answer: D
Explanation:
D) Ibis Company
Flexible Budget
For the Month Ended November 30, 2015
Budgeted Amounts
Per Unit
Units 13,000
Sales Revenue $20 $260,000
Manufacturing:
Variable expenses 8 -104,000
Fixed expenses -130,000
Diff: 2
LO: 23-1
AACSB: Application
13) Which of the following amounts of a flexible budget remain constant when the sales volume changes?
A) total contribution margin
B) total fixed costs
C) total variable expenses
D) total sales revenue
Answer: B
Diff: 1
LO: 23-1
AACSB: Concept
129
14) Which of the following amounts of a flexible budget change with changes in sales volume?
A) selling price per unit
B) total fixed costs
C) variable expense per unit
D) total contribution margin
Answer: D
Diff: 1
LO: 23-1
AACSB: Application
15) Allen Manufacturing makes staplers. The budgeted selling price is $12 per stapler, the variable costs
are $4 per stapler, and budgeted fixed costs are $12,000. What is the budgeted operating income for 5,000
staplers?
A) $40,000
B) $28,000
C) $60,000
D) $68,000
Answer: B
Explanation: B) Sales $60,000
Fixed costs -12,000
Diff: 1
LO: 23-1
AACSB: Application
16) Sales volume variance is the difference between the:

A) actual amounts and the flexible budget due to differences in price and costs.
B) expected results in the flexible budget for the actual units sold and the static budget.
C) static budget and actual amounts due to differences in selling price.
D) flexible budget and static budget due to differences in fixed costs.
Answer: B
Diff: 1
LO: 23-1
AACSB: Concept
130
17) Flexible budget variance is the difference between the:
A) actual results and the expected results in the flexible budget for the actual units sold.
B) expected results in the flexible budget for the units expected to be sold and the static budget.
C) flexible budget and actual amounts due to differences in volumes.
D) flexible budget and static budget due to differences in fixed costs.
Answer: A
Diff: 1
LO: 23-1
AACSB: Concept
18) Onyx Company has prepared a static budget at the beginning of the month. At the end of the month,
the following information has been retrieved from the records.
Static budget:
Sales volume: 1,000 units: Price: $70 per unit
Variable expense: $32 per unit: Fixed expenses: $37,500 per month
Operating income: $500
Actual results:
Sales volume: 990 units: Price: $74 per unit
Operating income: $5,610
Calculate the flexible budget variance for Sales Revenue.

A) $5,490 U
B) $5,490 F
C) $3,960 U
D) $3,960 F
Answer: D
Explanation: D)
Flexible Sales
Actual Budget Flexible Volume Static
Results Variance Budget Variance Budget
Units/Volume 990 0 990 10 U 1,000
Sales Revenue * $73,260 $3,960 F $69,300 $700 U $70,000
Variable Expenses** 34,650 2,970 U 31,680 320 F 32,000
Contribution Margin $38,610 $990 F $37,620 $380 U $38,000
Fixed Expenses 33,000 4,500 F 37,500 0 37,500
Operating Income/
(loss) $5,610 $5,490 F $120 $380 U $500
* Price/Unit
**Variable Cost/Unit
Diff: 2
LO: 23-1
AACSB: Application
131
Static budget:
Actual results:
Calculate the flexible budget variance for variable expenses.

A) $5,490 U
B) $2,970 U
C) $7,200 U
D) $3,960 F
Answer: C
Explanation: C)
Flexible Sales
Units/Volume 1,800 0 F 1,800 200 U 2,000
Sales Revenue * $104,400 $14,400 F $90,000 $10,000 U $100,000
Variable Expenses** 28,800 7,200 U 21,600 2,400 F 24,000
Contribution Margin $75,600 $7,200 F $68,400 $7,600 U $76,000
Fixed Expenses 35,000 10,000 U 25,000 0 25,000
Operating
Income/(loss) $40,600 $2,800 U $43,400 $7,600 U $51,000
* Price/Unit
Diff: 2
LO: 23-1
AACSB: Application
132
Static budget:
Actual results:
Calculate the flexible budget variance for fixed expenses.

A) $4,500 U
B) $4,500 F
C) $0
D) $5,490 F
Answer: B
Explanation: B)
Flexible Sales
Units/Volume 990 0 990 10 U 1,000
Sales Revenue * $73,260 $3,960 F $69,300 $700 U $70,000
Fixed Expenses 33,000 4,500 F 37,500 0 37,500
Operating
Income/(loss) $5,610 $5,490 F $120 $380 U $500
* Price/Unit
Diff: 2
LO: 23-1
AACSB: Application
133
following information has been retrieved from the records.
Static budget:
Actual results:
Calculate the flexible budget variance for operating income.

A) $4,500 U
B) $7,600 U
C) $2,800 U
D) $5,490 F
Answer: C
Explanation: C)
Flexible Sales
Units/Volume 1,800 0 F 1,800 200 U 2,000
Sales Revenue * $104,400 $14,400 F $90,000 $10,000 U $100,000
Fixed Expenses 35,000 10,000 U 25,000 0 25,000
Operating
Income/(loss) $40,600 $2,800 U $43,400 $7,600 U $51,000
* Price/Unit
Diff: 2
LO: 23-1
AACSB: Application
134
Static budget:
Actual results:
Calculate the sales volume variance for revenues.
A) $4,500 U
B) $700 U
C) $380 U
D) $3,960 F
Answer: B
Explanation: B)
Flexible Sales
Units/Volume 990 0 990 10 U 1,000
Sales Revenue * $73,260 $3,960 F $69,300 $700 U $70,000
Fixed Expenses 33,000 4,500 F 37,500 0 37,500
Operating
Income/(loss) $5,610 $5,490 F $120 $380 U $500
* Price/Unit
Diff: 2
LO: 23-1
AACSB: Application
135
Static budget:
Actual results:
Calculate the sales volume variance for variable expenses.

A) $2,970 U
B) $2,400 F
C) $3,800 U
D) $3,960 F
Answer: B
Explanation: B)
Flexible Sales
Units/Volume 1,800 0 F 1,800 200 U 2,000
Sales Revenue * $104,400 $14,400 F $90,000 $10,000 U $100,000
Fixed Expenses 35,000 10,000 U 25,000 0 25,000
Operating
Income/(loss) $40,600 $2,800 U $43,400 $7,600 U $51,000
* Price/Unit
Diff: 2
LO: 23-1
AACSB: Application
136
Static budget:
Actual results:
Calculate the sales volume variance for fixed expenses.
A) $2,970 U
B) $4,500 F
C) $380 U
D) $0
Answer: D
Explanation: D)
Flexible Sales
Units/Volume 990 0 990 10 U 1,000
Sales Revenue * $73,260 $3,960 F $69,300 $700 U $70,000
Fixed Expenses 33,000 4,500 F 37,500 0 37,500
Operating
Income/(loss) $5,610 $5,490 F $120 $380 U $500
* Price/Unit
Diff: 2
LO: 23-1
AACSB: Application
137
Static budget:
Actual results:
Calculate the sales volume variance for operating income.

A) $2,970 U
B) $5,490 F
C) $7,600 U
D) $5,110 F
Answer: C
Explanation: C)
Flexible Sales
Units/Volume 1,800 0 F 1,800 200 U 2,000
Sales Revenue * $104,400 $14,400 F $90,000 $10,000 U $100,000
Fixed Expenses 35,000 10,000 U 25,000 0 25,000
Operating
Income/(loss) $40,600 $2,800 U $43,400 $7,600 U $51,000
* Price/Unit
Diff: 2
LO: 23-1
AACSB: Application
138
26) The Carolina Products Company has completed the flexible budget analysis for the 2nd quarter,
which is as given below.
Flexible Sales
Units/Volume 12,800 0 12,800 800 F 12,000
Sales Revenue $62,720 $1,280 U $64,000 $4,000 F $60,000
Variable Expenses 27,520 640 U 26,880 1,680 U 25,200
Contribution Margin $35,200 $1,920 U $37,120 $2,320 F $34,800
Fixed Expenses 34,100 100 U 34,000 0 34,000
Operating Income/(loss) $1,100 $2,020 U $3,120 $2,320 F $800
Which of the following would be a correct interpretation of the sales volume variance for sales revenues?
A) increase in price per unit
B) increase in sales volume
C) increase in variable expense per unit
D) increase in fixed costs
Answer: B
Diff: 2
LO: 23-1
AACSB: Application
139
Flexible Sales
Units/Volume 12,800 0 12,800 800 F 12,000
Sales Revenue $62,720 $1,280 U $64,000 $4,000 F $60,000
Fixed Expenses 34,100 100 U 34,000 0 34,000
Which of the following would be a correct interpretation of the sales volume variance for variable
expenses?
A) decrease in price per unit
B) increase in variable cost per unit
C) increase in sales volume
Answer: C
Diff: 2
LO: 23-1
AACSB: Application
140
Flexible Sales
Units/Volume 12,800 0 12,800 800 F 12,000
Sales Revenue $62,720 $1,280 U $64,000 $4,000 F $60,000
Fixed Expenses 34,100 100 U 34,000 0 34,000
Which of the following statements would be a correct interpretation of the sales volume variance for
operating income?
Answer: C
Diff: 2
LO: 23-1
AACSB: Application
141
Flexible Sales
Units/Volume 12,800 0 12,800 800 F 12,000
Sales Revenue $62,720 $1,280 U $64,000 $4,000 F $60,000
Fixed Expenses 34,100 100 U 34,000 0 34,000
Which of the following statements would be a correct interpretation of the flexible budget variance for
sales revenue?
Answer: A
Diff: 2
LO: 23-1
AACSB: Application
142
Flexible Sales
Units/Volume 12,800 0 12,800 800 F 12,000
Sales Revenue $62,720 $1,280 U $64,000 $4,000 F $60,000
Fixed Expenses 34,100 100 U 34,000 0 34,000
variable expenses?
Answer: B
Diff: 2
LO: 23-1
AACSB: Application
143
Flexible Sales
Units/Volume 12,800 0 12,800 800 F 12,000
Sales Revenue $62,720 $1,280 U $64,000 $4,000 F $60,000
Fixed Expenses 34,100 100 U 34,000 0 34,000
fixed expenses?
Answer: D
Diff: 2
LO: 23-1
AACSB: Application
32) A company is analyzing its month-end results by comparing it to both static and flexible budgets.
During the previous month, the actual selling price was higher than the expected price as per the static
budget. This difference results in a(n):
A) favorable flexible budget variance for sales revenues.
B) favorable sales volume variance for sales revenues.
C) unfavorable flexible budget variance for sales revenues.
D) unfavorable sales volume variance for sales revenues.
Answer: A
Diff: 2
LO: 23-1
AACSB: Concept
144
During the previous month, the actual variable expenses per unit were lower than the expected variable
costs per unit as per the static budget. This difference results in a(n):
A) favorable flexible budget variance for variable expenses.
B) favorable sales volume variance for variable expenses.
C) unfavorable flexible budget variance for variable expenses.
D) unfavorable sales volume variance for variable expenses.
Answer: A
Diff: 2
LO: 23-1
AACSB: Concept
During the previous month, the actual fixed costs were lower than the expected fixed costs as per the
static budget. This difference results in a(n):
A) unfavorable flexible budget variance for fixed costs.
B) favorable sales volume variance for fixed costs.
C) favorable flexible budget variance for fixed costs.
D) unfavorable sales volume variance for fixed costs.
Answer: C
Diff: 2
LO: 23-1
AACSB: Concept
During the previous month, the actual sales volume was lower than the expected sales volume as per the
static budget. This difference results in an unfavorable:
A) flexible budget variance for variable expenses.
B) sales volume variance for variable expenses.
C) flexible budget variance for sales revenues.
D) sales volume variance for sales revenues.
Answer: D
Diff: 2
LO: 23-1
AACSB: Application
145
36) A favorable flexible budget variance in sales revenues suggests a(n):
A) increase in selling price.
B) increase in volume.
C) decrease in variable costs per unit.
D) decrease in fixed costs.
Answer: A
Diff: 2
LO: 23-1
AACSB: Application
37) An unfavorable flexible budget variance in variable expenses suggests a(n):

A) increase in price.
B) decrease in volume.
C) increase in variable expenses per unit.
Answer: C
Diff: 2
LO: 23-1
AACSB: Application
38) An unfavorable flexible budget variance in operating income might be due to a(n):
B) decrease in volume.
Answer: C
Diff: 2
LO: 23-1
AACSB: Application
39) A favorable sales volume variance in sales revenue suggests a(n):

B) increase in number of actual units sold when compared to the expected number of units sold.
Answer: B
Diff: 2
LO: 23-1
AACSB: Application
146
40) A favorable sales volume variance in variable expenses suggests a(n):
A) increase in number of actual units sold.
B) decrease in number of actual units sold when compared to the expected number of units sold.
Answer: B
Diff: 2
LO: 23-1
AACSB: Application
41) An unfavorable sales volume variance in operating income suggests a(n):

A) increase in number of actual units sold.
B) decrease in number of actual units sold when compared to the expected number of units sold.
Answer: B
Diff: 2
LO: 23-1
AACSB: Application
42) Global Engineering's actual operating income for the current year is $55,000. The flexible budget
operating income for actual sales volume is $48,000, while the static budget operating income is $53,000.
What is the sales volume variance for operating income?
A) $5,000 favorable
B) $2,000 unfavorable
C) $5,000 unfavorable
D) $2,000 favorable
Answer: C
Explanation: C)
Sales volume variance for operating income = Flexible budget operating income - Static budget operating
income
Sales volume variance for operating income = $48,000 - $53,000 = $5,000 unfavorable
Diff: 2
LO: 23-1
AACSB: Application
147
43) City Golf Center reported actual operating income for the current year of $65,000. The flexible budget
operating income for actual volume is $55,000, while the static budget operating income is $58,000. What
is the flexible budget variance for operating income?
A) $10,000 favorable
D) $3,000 favorable
Answer: A
Explanation: A)
Flexible budget variance for operating income = Actual operating income - Expected operating income in
the flexible budget = $65,000 - $55,000 = $10,000 favorable
Diff: 2
LO: 23-1
AACSB: Application
44) Mountain Sports Equipment Company projected sales of 78,000 units at a unit sale price of $12 for the
year 2015. Actual sales of 2015 were 75,000 units at $14.00 per unit. Variable costs were budgeted at $3 per
unit; actual amount was $4 per unit. Budgeted fixed costs totaled $375,000, while actual fixed costs
amounted to $400,000. What is the sales volume variance for total revenue?
A) $23,000 favorable
D) $36,000 favorable
Answer: C
Explanation: C)
Flexible budget sales = 75,000 × $12 = $900,000
Static budget sales = 78,000 × $12 = $936,000
Sales volume variance for sales = $900,000 - $936,000 = $36,000 Unfavorable
Diff: 2
LO: 23-1
AACSB: Application
148
45) Western Outfitters projected sales of 75,000 units for the year 2015 at a unit sale price of $12.00. Actual
sales in 2015 was 72,000 units, at $14.00 per unit. Variable costs were budgeted at $4.00 per unit; actual
variable cost was $4.75 per unit. Budgeted fixed costs totaled $375,000 while actual fixed costs amounted
to $400,000. What is the flexible budget variance for operating income?
A) $48,000 unfavorable
B) $65,000 favorable
Answer: B
Explanation: B)
Flexible
Actual Budget Static
Results Variance Budget
Units/Volume 72,000 0 72,000
Sales Revenue $1,008,000 $144,000 F $864,000
Variable Expenses 342,000 54,000 U 288,000
Contribution Margin $666,000 $90,000 F $576,000
Fixed Expenses 400,000 25,000 U 375,000
Operating Income/(loss) $266,000 $65,000 F $201,000
Diff: 2
LO: 23-1
AACSB: Application
149
46) Western Outfitters projected sales of 75,000 units for the year 2015 at a unit sale price of $12.00. Actual
sales in 2015: 72,000 units, at $14.00 per unit. Variable costs were budgeted at $4.00 per unit; actual
variable cost was $4.75 per unit. Budgeted fixed costs totaled $375,000 while actual fixed costs amounted
to $400,000. What is the sales volume variance for operating income?
C) $24,000 favorable
D) $65,000 unfavorable
Answer: B
Explanation: B)
Flexible Sales
Units/Volume 72,000 0 72,000 3,000 U 75,000
Sales Revenue $1,008,000 $144,000 F $864,000 $36,000 U $900,000
Variable Expenses 342,000 54,000 U 288,000 12,000 F 300,000
Contribution
Margin $666,000 $90,000 F $576,000 $24,000 U $600,000
Fixed Expenses 400,000 25,000 U 375,000 0 F 375,000
Operating Income/
(loss) $266,000 $65,000 F $201,000 $24,000 U $225,000
Diff: 2
LO: 23-1
AACSB: Application
47) Mountain Sports Equipment Company projected sales of 78,000 units at a unit sale price of $12 for the
year 2015. Actual sales of 2015 were 75,000 units at $14 per unit. Variable costs were budgeted at $3 per
unit; actual amount was $4 per unit. Budgeted fixed costs totaled $375,000, while actual fixed costs
amounted to $400,000. What is the flexible budget variance for variable expenses?
C) $75,000 favorable
Answer: B
Explanation: B) Flexible budget variance for variable expenses = 75,000 × ($4 - $3) = $75,000 unfavorable
Diff: 2
LO: 23-1
AACSB: Application
150
48) Shirt Fantasy produces and sells two types of tee shirts Fancy and Plain. Shirt Fantasy provides the
following data:
Budget Actual
Unit sales price- Fancy $24 $25
Unit sales price-Plain $18 $17
Unit sales-Fancy 1,300 1,250
Unit sales-Plain 900 875
Compute the flexible budget variance for Fancy tee shirts for sales revenue..
Answer: Explanation:
Flexible Sales
Units/Volume 1,250 1,250 1,300
Sales Revenue $31,250 $1,250 F $30,000 $1,200 U $31,200
Diff: 2
LO: 23-1
AACSB: Application
1) A standard is a price, cost, or quantity that is expected under normal conditions.

Answer: TRUE
Diff: 2
LO: 23-2
AACSB: Concept
2) A standard cost system is an accounting system that uses standards for product costs.
Answer: TRUE
Diff: 1
LO: 23-2
AACSB: Concept
3) Standard costs help motivate employees by serving as benchmarks against which their performance is
measured.
Answer: TRUE
Diff: 1
LO: 23-2
AACSB: Concept
151
4) A standard cost system helps management set performance standards.
Answer: TRUE
Diff: 1
LO: 23-2
AACSB: Concept
5) An efficiency variance measures how well a company keeps unit prices of material and labor inputs
within standards.
Answer: FALSE
Diff: 1
LO: 23-2
AACSB: Concept
6) An efficiency variance measures how well the business uses its materials or human resources.
Answer: TRUE
Diff: 1
LO: 23-2
AACSB: Concept
7) A material cost variance measures the difference in quantities of actual input used and the standard
quantity of input allowed for the actual number of units produced.
Answer: FALSE
Diff: 1
LO: 23-2
AACSB: Concept
8) In a standard costing system, each item has a cost standard and a quantity standard.
Answer: TRUE
Diff: 1
LO: 23-2
AACSB: Concept
9) Setting standard costs is a function done within a company's production department and does not
require any input from other departments.
Answer: FALSE
Diff: 1
LO: 23-2
AACSB: Concept
152
10) Standard costs are developed by the cooperative effort of procurement, production, human resources,
and accounting personnel.
Answer: TRUE
Diff: 1
LO: 23-2
AACSB: Concept
11) Companies use techniques like time-and-motion studies, and consult industry "best practices" when
developing standards. This is referred to as benchmarking.
Answer: TRUE
Diff: 1
LO: 23-2
AACSB: Concept
12) The static budget is used to compute flexible budget variance or price and efficiency variances.
Answer: FALSE
Diff: 2
LO: 23-2
AACSB: Concept
13) Which of the following is the correct formula to measure cost variance?
A) Cost Variance = (Actual Cost + Standard Cost) ÷ Actual Quantity
B) Cost Variance = (Actual Cost - Standard Cost) × Actual Quantity
C) Cost Variance = (Actual Cost + Standard Cost) + Actual Quantity
D) Cost Variance = (Actual Cost - Standard Cost) - Actual Quantity
Answer: B
Diff: 1
LO: 23-2
AACSB: Concept
14) Which of the following formulae is the correct formula to measure the efficiency variance?
A) Efficiency Variance = (Actual Quantity + Standard Quantity) - Standard Cost
B) Efficiency Variance = (Actual Quantity × Standard Quantity) ÷ Standard Cost
C) Efficiency Variance = (Actual Quantity ÷ Standard Quantity) × Standard Cost
D) Efficiency Variance = (Actual Quantity - Standard Quantity) × Standard Cost
Answer: D
Diff: 1
LO: 23-2
AACSB: Concept
153
15) Which of the following will result in an unfavorable direct labor cost variance?
A) when actual direct labor hours exceed standard direct labor hours
B) when actual direct labor hours are less than standard direct labor hours
C) when the actual direct labor rate exceeds the standard direct labor rate
D) when the actual direct labor rate is less than the standard direct labor rate
Answer: C
Diff: 2
LO: 23-2
AACSB: Application
16) Which of the following will result in an unfavorable direct materials efficiency variance?
A) The actual cost per unit of direct materials exceeded the standard cost of direct materials.
B) The actual cost per unit of direct materials was less than the standard cost of direct materials.
C) The actual quantity of direct materials used per unit exceeded the standard quantity of direct materials
allowed per unit.
D) The actual quantity of direct materials used per unit was less than the standard quantity of direct
materials allowed per unit.
Answer: C
Diff: 2
LO: 23-2
AACSB: Application
17) Which of the following best describes standard costs?

A) costs used as a budget for a single unit of product
B) costs incurred to produce a product
C) costs based on the average of current market values
D) costs used to compare with competitors' prices
Answer: A
Diff: 1
LO: 23-2
AACSB: Concept
154
18) A company is setting its direct materials and direct labor standards for its leading product. Materials
cost from the supplier are $5 per square foot, net of purchase discount. Freight-in amounts to $0.10 per
square foot. Basic wages of the assembly line personnel are $10 per hour. Payroll taxes are approximately
20% of wages. Benefits amount to $2 per hour. How much is the direct material cost standard (per square
foot)?
A) $5.10 per square foot
B) $5.00 per square foot
C) $12.00 per square foot
D) $17.10 per square foot
Answer: A
Explanation: A)
Direct material cost standard (per square foot) = Cost per square foot + Freight-in cost
Direct material cost standard (per square foot) = $5 + $0.10 = $5.10
Diff: 1
LO: 23-2
AACSB: Application
19) A company is setting its direct materials and direct labor standards for its leading product. Materials
cost from the supplier are $5 per square foot, net of purchase discount. Freight-in amounts to $0.10 per
square foot. Basic wages of the assembly line personnel are $10 per hour. Payroll taxes are approximately
20% of wages. How much is the direct labor cost standard (per hour)?
A) $2 per hour
B) $10 per hour
C) $12 per hour
D) $17 per hour
Answer: C
Explanation: C)
Direct labor cost standard = Basic wages + Payroll taxes
Direct labor cost standard = $10 + ($10 × 20%) = $10 + $2 = $12
Diff: 1
LO: 23-2
AACSB: Application
155
20) Wood Designs Company, a custom cabinet manufacturing company, is setting standard costs for one
of its products. The main material is cedar wood, sold by the square foot. The current cost of cedar wood
is $4.00 per square foot from the supplier. Delivery costs are $0.25 per board foot. Carpenters' wages are
$25.00 per hour. Payroll costs are $3.60 per hour and benefits are $5.00 per hour. How much is the direct
materials cost standard (per square foot)?
A) $9.25 per square foot
B) $7.85 per square foot
D) $4.00 per square foot
Answer: C
Explanation: C)
Direct material cost standard (per square foot) = Cost per square foot + Delivery costs
Direct material cost standard (per square foot) = $4 + $0.25 = $4.25
Diff: 1
LO: 23-2
AACSB: Application
21) Wood Designs Company, a custom cabinet manufacturing company, is setting standard costs for one
of its products. The main material is cedar wood, sold by the square foot. The current cost of cedar wood
is $4.00 per square foot from the supplier. Delivery costs are $0.25 per board foot. Carpenters' wages are
$25.00 per hour. Payroll costs are $3.60 per hour and benefits are $5.00 per hour. How much is the direct
labor cost standard (per hour)?
A) $25.00 per hour
B) $25.60 per hour
C) $28.00 per hour
D) $33.60 per hour
Answer: D
Explanation: D)
Direct labor cost standard = Wages per hour + Payroll costs per hour + Benefits per hour
Direct labor cost standard = $25 + $3.60 + $5 = $33.60 per hour
Diff: 1
LO: 23-2
AACSB: Application
22) Which of the following is one of the reasons why companies use standard costs?
A) to enhance customer loyalty
B) to set performance targets
C) to share best practices with other companies
D) to ensure the accuracy of the financial records
Answer: B
Diff: 1
LO: 23-2
AACSB: Application
156
23) Which of the following is one of the reasons why companies use standard costs?
A) to enhance customer loyalty
B) to ensure the accuracy of the financial records
C) to share best practices with other companies
D) to make budgeting easier and more efficient
Answer: D
Diff: 1
LO: 23-2
AACSB: Concept
24) Which of the following is an example of a materials cost standard?

A) $40 per direct labor hour
B) 50 square feet per unit
D) 6 direct labor hours per unit
Answer: C
Diff: 1
LO: 23-2
AACSB: Application
25) Which of the following is an example of a materials efficiency standard?

Answer: B
Diff: 1
LO: 23-2
AACSB: Application
26) Which of the following is an example of a labor cost standard?

D) 0.5 direct labor hours per unit
Answer: A
Diff: 1
LO: 23-2
AACSB: Application
157
27) Which of the following is an example of a labor efficiency standard?
Answer: D
Diff: 1
LO: 23-2
AACSB: Application
28) What do cost variances measure?

A) the difference between the price the company pays and the price its competitors pay
B) the change in costs over time
C) the difference between actual and standard cost
D) the volume discounts companies receive when ordering materials in large quantities
Answer: C
Diff: 2
LO: 23-2
AACSB: Concept
29) Which of the following does the efficiency variance measure?

A) the difference between the quantity used by the company and the quantity used by its competitors
B) the change in quantities used over time
C) the difference between actual and standard quantity used
D) how quickly materials are processed into finished goods
Answer: C
Diff: 2
LO: 23-2
AACSB: Concept
30) Which of the following statements is true of cost variances and efficiency variances?
A) They pertain to the difference between the static budget and actual results.
B) They pertain to the difference between the flexible budget and actual results.
C) They pertain to the difference between the flexible budget and the static budget.
D) They pertain to the difference between the static budget and the previous year's actual results.
Answer: B
Diff: 1
LO: 23-2
AACSB: Application
158
1) Only unfavorable variances should be investigated, if substantial, to determine their causes.

Answer: FALSE
Diff: 1
LO: 23-3
AACSB: Concept
2) A favorable direct materials cost variance occurs when the actual direct materials costs incurred is less
than the standard direct materials cost.
Answer: TRUE
Diff: 1
LO: 23-3
AACSB: Concept
3) A favorable variance of direct materials cost occurs when the actual direct materials cost incurred is
more than the standard direct materials cost determined.
Answer: FALSE
Diff: 1
LO: 23-3
AACSB: Concept
4) Favorable and unfavorable variances are netted together in the same way debits and credits are.
Answer: TRUE
Diff: 1
LO: 23-3
AACSB: Concept
5) Favorable variances are added to unfavorable variances to create a total favorable variance.
Answer: FALSE
Diff: 1
LO: 23-3
AACSB: Concept
6) Favorable and unfavorable variances are subtracted from each other to arrive at a net favorable or
unfavorable variance.
Answer: TRUE
Diff: 1
LO: 23-3
AACSB: Concept
159
7) Unfavorable variances are subtracted from each other to arrive at a favorable variance.
Answer: FALSE
Diff: 1
LO: 23-3
AACSB: Concept
8) If both favorable and unfavorable variances exist, then the variance is determined to be favorable or
unfavorable based on which one is the larger amount.
Answer: TRUE
Diff: 1
LO: 23-3
AACSB: Concept
9) If both favorable and unfavorable variances exist, then the variance obtained by netting them is always
a favorable variance.
Answer: FALSE
Diff: 1
LO: 23-3
AACSB: Concept
160
10) Emerald Marine Stores Company manufactures decorative fittings for luxury yachts that require
highly skilled labor, and special metallic materials. Emerald uses standard costs to prepare its flexible
budget. For the first quarter of 2015, direct material and direct labor standards for one of their popular
products were as follows:
Direct materials: 3 pounds per unit; $4 per pound

Direct labor: 4 hours per unit; $15 per hour
During the first quarter, Emerald produced 5,000 units of this product. Actual direct materials and direct
labor costs were $65,000 and $325,000, respectively.
For the purposes of preparing the flexible budget, calculate the total standard direct materials cost at a
production volume of 5,000 units.
A) $60,000
B) $65,000
C) $15,000
D) $30,000
Answer: A
Explanation: A)
Production volume as per budget 5,000 units
Materials required per unit × 3 pounds
Total material required 15,000 pounds
Material cost per pound × $4
Total standard direct materials cost $60,000
Diff: 2
LO: 23-3
AACSB: Application
161

During the first quarter, Emerald produced 5,000 units of this product. Actual direct materials and direct
labor costs were $65,000 and $325,000, respectively.
For the purposes of preparing the flexible budget, what is the total standard direct labor cost at a
production volume of 5,000 units?
A) $75,000
B) $150,000
C) $300,000
D) $325,000
Answer: C
Explanation: C)
Production volume as per budget 5,000 units
Direct labor hours required per unit × 4 hours
Total direct labor hours required 20,000 hours
Direct labor cost per hour × $15
Total standard direct labor cost $300,000
Diff: 2
LO: 23-3
AACSB: Application
162
Direct materials: 1 pound per unit; $12 per pound

Emerald produced 5,000 units during the quarter. At the end of the quarter, an examination of the
materials records showed that the company used 7,000 pounds of materials and actual total material costs
were $98,000.
Calculate the direct materials cost variance.

A) $38,000 Unfavorable
B) $38,000 Favorable
C) $14,000 Unfavorable
D) $14,000 Favorable
Answer: C
Explanation: C)
Direct Materials Cost Variance = (Actual Cost - Standard Cost) × Actual Quantity
Actual direct materials cost per unit = $98,000 ÷ 7,000 pounds = $14 per pound
Direct Materials Cost Variance = ($14 - $12) × 7,000 units = $14,000 Unfavorable
Diff: 2
LO: 23-3
AACSB: Application
163
Direct materials: 1 pound per unit; $4 per pound

Emerald produced 5,000 units during the quarter. At the end of the quarter, an examination of the
materials records showed that the company used 7,000 pounds of materials and actual total material costs
were $98,000.
Calculate the direct materials efficiency variance.

A) $2,000 U
B) $8,000 U
C) $2,000 F
D) $8,000 F
Answer: B
Explanation: B)
Direct Materials Efficiency Variance = (Actual Quantity - Standard Quantity) × Standard Cost
Direct Materials Efficiency Variance = (7,000 pounds - 5,000 pounds) × $4 per pound = $8,000 Unfavorable
Diff: 2
LO: 23-3
AACSB: Application
164

Emerald produced 5,000 units during the quarter. At the end of the quarter, an examination of the labor
costs records showed that the company used 25,000 direct labor hours and actual total direct labor costs
were $375,000. Calculate the direct labor cost variance.
A) $125,000 Favorable
B) $300,000 Favorable
C) $300,000 Unfavorable
D) $125,000 Unfavorable
Answer: A
Explanation: A)
Direct Labor Cost Variance = (Actual Cost - Standard Cost) × Actual Quantity
Actual direct labor cost per unit = $375,000 ÷ 25,000 per hour = $15 per unit
Direct Labor Cost Variance = ($15 - $20) × 25,000 hours = $125,000 Favorable
Diff: 2
LO: 23-3
AACSB: Application
165

were $375,000. How much is the direct labor efficiency variance?
A) $75,000 U
B) $75,000 F
C) $300,000 F
D) $300,000 U
Answer: A
Explanation: A)
Direct Labor Efficiency Variance = (Actual Quantity - Standard Quantity) × Standard Cost
Standard quantity = 4 direct labor hours × 5,000 units = 20,000 direct labor hours
Direct Labor Efficiency Variance = (25,000 direct labor hours - 20,000 direct labor hours) × $15 per direct
labor hour
Direct Labor Efficiency Variance = $75,000 Unfavorable
Diff: 2
LO: 23-3
AACSB: Application
16) Faas Marine Stores Company manufactures decorative fittings for luxury yachts that require highly
skilled labor, and special metallic materials. Faas uses standard costs to prepare its flexible budget. For
the first quarter of 2011, direct material and direct labor standards for one of their popular products were
as follows:
Materials: 1.5 pounds per unit; $4.00 per pound

Labor: 2.0 hours per unit; $18.00 per hour
During the first quarter, Faas produced 5,000 units of this product. At the end of the quarter, an
examination of the materials records showed that the company used 7,000 pounds of materials and the
direct materials cost variance was $1,750 U. Which of the following would be a logical explanation for this
variance?
A) The company used more labor hours than allowed by the standards.
B) The company paid a higher rate for labor than allowed by the standards.
C) The company used greater quantity of materials than allowed by the standards.
D) The company paid a higher price for the materials than allowed by the standards.
Answer: D
Diff: 2
LO: 23-3
AACSB: Application
166

costs records showed that the direct labor cost variance was $75,000 F. Which of the following would be a
logical explanation for this variance?
A) The company used fewer labor hours than allowed by the standards.
B) The company paid a lower rate for labor than allowed by the standards.
C) The company used a lower quantity of materials than allowed by the standards.
D) The company paid a lower price for the materials than allowed by the standards.
Answer: B
Diff: 2
LO: 23-3
AACSB: Application

were $375,000. The direct labor efficiency variance was $75,000 U. Which of the following would be a
logical explanation for this variance?
A) The company used more labor hours than allowed by the standards.
B) The company paid a higher rate for labor than allowed by the standards.
C) The company used a higher quantity of materials than allowed by the standards.
D) The company paid a higher price for the materials than allowed by the standards.
Answer: A
Diff: 2
LO: 23-3
AACSB: Application
167
19) Melissa Company has collected the following data for one of its products:
Direct materials standard (5 pounds @ $1/lb.) $5 per finished good

Direct materials flexible budget variance-unfavorable $14,000
Actual direct materials used 100,000 pounds
Actual finished goods produced 18,000 units
How much is the direct materials efficiency variance?

A) $18,000 U
B) $10,000 F
C) $10,000 U
D) $18,000 F
Answer: C
Explanation: C)
Direct Materials Efficiency Variance = (Actual Quantity - Standard Quantity) × Standard Cost
Direct Materials Efficiency Variance = [100,000 pounds - (5 pounds × 18,000 units)] × $1 per pound =
(100,000 pounds - 90,000 pounds) × $1 per pound
Direct Materials Efficiency Variance = $10,000 Unfavorable
Diff: 2
LO: 23-3
AACSB: Application
20) Accurate Tax Returns budgets 2 direct labor hours for every tax return that it prepares, at a standard
cost of $32 an hour. During the most recent year, 500 returns were completed with the labor cost totaling
$18,000. The actual labor cost was $36 per hour during that period. The actual number of labor hours was
1,000. What was the direct labor cost variance?
A) $2,000 F
B) $32,000 U
C) $4,000 U
D) $32,000 F
Answer: C
Explanation: C)
Direct Labor Cost Variance = (Actual Cost - Standard Cost) × Actual Quantity
Standard direct labor cost per return = $32 per hour × 2 hours per return = $64 per return
Direct Labor Cost Variance = ($36 - $32) × 1,000 hours = $4,000 Unfavorable
Diff: 2
LO: 23-3
AACSB: Application
168
21) What does a favorable direct materials cost variance indicate?
A) The actual quantity of materials used was less than the standard quantity.
B) The actual cost of materials purchased was less than the standard cost of materials purchased.
C) The actual cost of materials purchased was greater than the standard cost of materials purchased.
D) The actual quantity of materials used was greater than the standard quantity.
Answer: B
Diff: 2
LO: 23-3
AACSB: Concept
22) Delicious Food Products is famous for their specialty fruit cake. The main ingredient of the cake is
dried fruit, which Delicious purchases by the pound. In addition, the production requires a certain
amount of direct labor. Delicious uses a standard cost system, and at the end of the first quarter, there
was a favorable materials cost variance. Which of the following would be a logical explanation for that
variance?
A) The production manager negotiated a lower wage package for production staff, bringing direct labor
costs down.
B) The factory lost two experienced workers at the beginning of the quarter, and their replacements
worked at a much slower rate during their training period.
C) The procurement manager was able to secure a volume discount on dried fruit, purchasing the fruit
for less than the amount set by standard.
D) The production staff changed the work flow process so that there was less wastage of direct materials
during production.
Answer: C
Diff: 2
LO: 23-3
AACSB: Application
was an unfavorable materials efficiency variance. Which of the following would be a logical explanation
for that variance?
A) The production manager negotiated a lower wage package for production staff, bringing direct labor
costs down.
wasted a large amount of materials during their training period.
D) The production staff changed the work flow process so that production required fewer direct labor
hours.
Answer: B
Diff: 2
LO: 23-3
AACSB: Application
169
was an unfavorable labor cost variance. Which of the following would be a logical explanation for that
variance?
A) The cost of workers' medical insurance plans jumped up dramatically during the quarter.
hours.
Answer: A
Diff: 2
LO: 23-3
AACSB: Application
was a favorable labor efficiency variance. Which of the following would be a logical explanation for that
variance?
A) The cost of workers' medical insurance plans jumped up dramatically during the quarter.
hours.
Answer: D
Diff: 2
LO: 23-3
AACSB: Application
170
26) The procurement manager was able to bring down the cost of direct materials by purchasing
materials of a slightly lower grade quality than the company had used previously. The lower grade of
materials, however, meant a higher defect rate on the assembly line, and higher wastage of materials
during production, which in turn lowered operating income. This situation would have led to a(n):
A) favorable direct materials cost variance.
B) unfavorable direct labor cost variance.
C) unfavorable direct labor efficiency variance.
D) favorable direct materials efficiency variance.
Answer: A
Diff: 2
LO: 23-3
AACSB: Application
27) The procurement manager was able to bring down the cost of direct materials by purchasing
materials of a slightly lower grade quality than the company had used previously. The lower grade of
materials, however, meant a higher defect rate on the assembly line, and higher wastage of materials
during production, which in turn lowered operating income. This situation would have led to a(n):
A) unfavorable direct materials cost variance.
B) favorable direct labor cost variance.
D) unfavorable direct materials efficiency variance.
Answer: D
Diff: 2
LO: 23-3
AACSB: Application
28) The production manager of a company, in an effort to gain a promotion, negotiated a new labor
contract with her factory employees that required them to bear a greater percentage of benefit costs than
before, thus bringing down the cost of direct labor to the company. Shortly afterward, several
experienced and highly skilled workers resigned, and were replaced by new employees whose work was
very slow during their training period. At the end of the quarter, the company's profits fell 10%. This
situation would have produced a(n):
C) favorable direct labor efficiency variance.
Answer: B
Diff: 2
LO: 23-3
AACSB: Application
171
29) The production manager of a company, in an effort to gain a promotion, negotiated a new labor
contract with her factory employees that required them to bear a greater percentage of benefit costs than
before, thus bringing down the cost of direct labor to the company. Shortly afterward, several
experienced and highly skilled workers resigned, and were replaced by new employees whose work was
very slow during their training period. At the end of the quarter, the company's profits fell 10%. This
situation would have produced a(n):
Answer: C
Diff: 2
LO: 23-3
AACSB: Application
30) The production manager of a company was experiencing a high defect rate on the assembly line,
which was slowing production and causing wastage of valuable materials. He decided to purchase a
higher grade of material that would be more reliable, but he was worried that the cost of the new material
might negatively affect operating income. This situation would have produced a(n):
Answer: A
Diff: 2
LO: 23-3
AACSB: Application
which was slowing production and causing wastage of valuable materials. He decided to purchase a
higher grade of material that would be more reliable, but he was worried that the cost of the new material
might negatively affect operating income. This situation would have produced a(n):
Answer: D
Diff: 2
LO: 23-3
AACSB: Application
172
which was slowing production and causing wastage of valuable materials. He decided to recruit some
highly skilled production workers from another company to bring down the defect rate, but was worried
that the higher wages of these workers might negatively affect operating income. This situation would
have produced a(n):
Answer: B
Diff: 2
LO: 23-3
AACSB: Application
which was slowing production and causing wastage of valuable materials. He decided to recruit some
highly skilled production workers from another company to bring down the defect rate, but was worried
that the higher wages of these workers might negatively affect operating income. This situation would
have produced a(n):
Answer: C
Diff: 2
LO: 23-3
AACSB: Application
34) A company was experiencing slow production rates, and lower production volumes than demanded
by management, so a new factory manager was hired. Upon investigation, she found that the workers
were poorly motivated and not closely supervised. Midway through the quarter, she started an incentive
program and paid out cash bonuses when workers hit their production targets. Within a short time,
production output increased, but the bonuses had to be charged to the direct labor budget, and she was
worried about the impact of these costs on operating income. This situation would have produced a(n):
B) unfavorable direct materials efficiency variance.
D) unfavorable direct labor cost variance.
Answer: D
Diff: 2
LO: 23-3
AACSB: Application
173
35) A company was experiencing slow production rates, and lower production volumes than demanded
by management, so a new factory manager was hired. Upon investigation, she found that the workers
were poorly motivated and not closely supervised. Midway through the quarter, she started an incentive
program and paid out cash bonuses when workers hit their production targets. Within a short time,
production output increased, but the bonuses had to be charged to the direct labor budget, and she was
worried about the impact of these costs on operating income. This situation could have produced a(n):
B) unfavorable direct materials efficiency variance.
D) favorable direct labor cost variance.
Answer: C
Diff: 2
LO: 23-3
AACSB: Application
36) Faas Marine Stores Company manufactures decorative fittings for luxury yachts, which require highly
skilled labor, and special metallic materials. Faas uses standard costs to prepare its flexible budget. For
the first quarter of 2014, direct material and direct labor standards for one of their popular products were
as follows:
Materials: 1.5 pounds per unit; $4.00 per pound

Labor: 2.0 hours per unit; $18.00 per hour
During the first quarter, Faas produced 5,000 units of this product. At the end of the quarter, an
examination of the materials records showed that the company used 7,000 pounds of materials. The direct
materials efficiency variance was $2,000 F. Which of the following would be a logical explanation for this
variance?
A) The company used fewer labor hours than allowed by the standards.
B) The company paid a lower rate for labor than allowed by the standards.
C) The company used a lower quantity of materials than was allowed by the standards.
D) The company paid a lower price for the materials than allowed by the standards.
Answer: C
Diff: 2
LO: 23-3
AACSB: Application
174
37) Grace Company is a manufacturer of candles. The standard direct materials quantity required to
produce one large candle is 1 pound at a cost of $5 per pound. During November, 2015, 7,200 large
candles were produced using 7,500 pounds of direct materials which cost $45,000.
Using the format below, prepare an analysis of the direct materials variances.
Answer:
Note:
Actual price = $45,000 ÷ 7,500 pounds = $6 per pound
Diff: 3
LO: 23-3
AACSB: Application
175
38) Grace Company is a manufacturer of candles. The standard direct materials quantity required to
produce one large candle is 1 pound at a cost of $5 per pound. Every candle requires 2 direct labor hours
at a standard cost of $3 per direct labor hour.
During November, 2015, 7,200 large candles were produced using 7,500 pounds costing $45,000. At the
end of November, an examination of the labor cost records showed that the company used 15,000 direct
labor hours (DLHr) at a cost of $4 per hour.
Using the format below, prepare an analysis of the direct labor cost variances.
Answer:
Note:
Standard quantity = 7,200 candles × 2 DLHr = 14,400 DLHr
Diff: 3
LO: 23-3
AACSB: Application
176
1) When management is investigating overhead variances, they need to further determine whether cost
increases were controllable or if the cost standard needs to be updated.
Answer: TRUE
Diff: 1
LO: 23-4
AACSB: Concept
2) The fixed overhead cost variance measures the difference between actual fixed overhead and budgeted
fixed overhead to determine the controllable portion of total fixed overhead variance.
Answer: TRUE
Diff: 1
LO: 23-4
AACSB: Concept
3) The fixed overhead cost variance measures the difference between actual fixed overhead and allocated
fixed overhead.
Answer: FALSE
Diff: 1
LO: 23-4
AACSB: Concept
4) The fixed overhead volume variance is essentially a cost variance.

Answer: FALSE
Diff: 1
LO: 23-4
AACSB: Concept
5) The fixed overhead volume variance is a volume variance, not a cost variance.
Answer: TRUE
Diff: 1
LO: 23-4
AACSB: Concept
6) The fixed overhead volume variance always shows underallocated fixed overhead costs.
Answer: FALSE
Diff: 1
LO: 23-4
AACSB: Concept
177
7) The fixed overhead volume variance shows why the fixed overhead is underallocated or overallocated
because it is a cost variance.
Answer: FALSE
Diff: 1
LO: 23-4
AACSB: Concept
8) The fixed overhead volume variance shows why the fixed overhead is underallocated or overallocated
because it is a volume variance.
Answer: TRUE
Diff: 1
LO: 23-4
AACSB: Concept
9) Elite Brands Company uses standard costs for their manufacturing division. Standards specify 0.1
direct labor hours per unit of product. At the beginning of the year, the static budget for variable
overhead costs included the following data:
Production volume 6,000 units

Estimated variable overhead costs $13,500
Estimated direct labor hours 600 hours
At the end of the year, actual data were as follows:

Actual variable overhead costs $15,000
Actual direct labor hours 480 hours
How much is the standard cost per direct labor hour for variable overhead?
A) $22.50 per direct labor hour
B) $33.75 per direct labor hour
C) $28.12 per direct labor hour
D) $25.00 per direct labor hour
Answer: A
Explanation: A)
Standard direct labor cost per hour = $13,500 ÷ 600 hours = $22.50 per direct labor hour
Diff: 2
LO: 23-4
AACSB: Application
178
10) Elite Brand Company uses standard costs for their manufacturing division. Standards specify 0.1

Estimated direct labor hours 600 hours

Actual direct labor hours 480 hours
Calculate the variable overhead cost variance.

A) $13,500 U
B) $15,000 F
C) $35,000 U
D) $4,200 F
Answer: C
Explanation: C)
Variable Overhead Cost Variance = (Actual Cost - Standard Cost) × Actual Quantity
Standard cost per direct labor hour = Estimated variable overhead costs ÷ Estimated direct labor hours =
$13,500 ÷ 600 direct labor hours = $22.50 per direct labor hour
Actual cost = Actual variable overhead costs ÷ Actual direct labor hours = $15,000 ÷ 480 direct labor hours
= $31.25 per direct labor hour
Variable Overhead Cost Variance = ($31.25 - $22.50) × 4,000 units = $35,000 Unfavorable
Diff: 3
LO: 23-4
AACSB: Application
179
11) Elite Brands Company uses standard costs for their manufacturing division. Standards specify 0.1

Estimated direct labor hours (DLHr) 600 hours

Actual direct labor hours (DLHr) 480 hours
Calculate the variable overhead efficiency variance.

A) $1,800 F
B) $1,800 U
C) $4,200 F
D) $4,200 U
Answer: B
Explanation: B)
Variable Overhead Efficiency Variance = (Actual Quantity - Standard Quantity) × Standard Cost
Variable Overhead Cost Variance = (480 DLHr - 400 DLHr) × $22.50 per direct labor hour = $1,800
Unfavorable
Notes:
Standard quantity or standard direct labor hours for 4,000 units = 4,000 units × 0.10 direct labor hour per
unit = 400 direct labor hours
Standard cost per direct labor hour = Estimated variable overhead costs ÷ Estimated direct labor hours =
$13,500 ÷ 600 direct labor hours = $22.50 per direct labor hour
Diff: 3
LO: 23-4
AACSB: Application
12) Which of the following is a key point to investigate while analyzing overhead costs?
A) whether costs incurred are product costs or period costs
B) whether direct materials prices are higher than standards
C) whether certain overhead costs are controllable or not
D) whether labor costs can be reduced
Answer: C
Diff: 1
LO: 23-4
AACSB: Concept
180
13) Zenith Fashions uses standard costs for their manufacturing division. From the following data,
calculate the fixed overhead cost variance.
Actual fixed overhead $30,000

Budgeted fixed overhead $25,000
Standard overhead allocation rate $7
Standard direct labor hours per unit 2 DLHr
Actual output 2,000 units
A) $3,000 F
B) $3,000 U
C) $5,000 F
D) $5,000 U
Answer: D
Explanation: D)
Fixed overhead cost variance = Actual fixed overhead - Budgeted fixed overhead
Fixed overhead cost variance = $30,000 - $25,000 = $5,000 Unfavorable
Diff: 2
LO: 23-4
AACSB: Application
calculate the fixed overhead allocated to production based on direct labor hours (DLHr).

Standard overhead allocation rate $7
A) $25,000
B) $28,000
C) $30,000
D) $14,000
Answer: B
Explanation: B)
Overhead allocated to production = Standard overhead allocation rate × Standard quantity of the
allocation base allowed for actual output
Overhead allocated to production = $7 × (2 DLHr × 2,000 units) = $28,000
Diff: 2
LO: 23-4
AACSB: Application
181
calculate the fixed overhead volume variance.

Allocated fixed overhead $28,000
Standard overhead allocation rate $7 per unit
A) $14,000 F
B) $3,000 U
C) $3,000 F
D) $14,000 U
Answer: C
Explanation: C)
Fixed Overhead Volume Variance = Budgeted fixed overhead - Allocated fixed overhead
Fixed Overhead Volume Variance = $25,000 - $28,000 = $3,000 Favorable
Note:
Diff: 3
LO: 23-4
AACSB: Application
182
calculate the total fixed overhead variance.

Allocated fixed overhead $28,000
Standard overhead allocation rate $7 per unit
A) $2,000 U
B) $2,000 F
C) $14,000 U
D) $14,000 F
Answer: A
Explanation: A)
Total fixed overhead variance = Fixed overhead cost variance + Fixed overhead volume variance
Total fixed overhead variance = $5,000 U + $3,000 F = $2,000 U
Notes:
Fixed overhead cost variance = Actual fixed overhead - Budgeted fixed overhead
Fixed overhead cost variance = $30,000 - $25,000 = $5,000 Unfavorable
Fixed Overhead Volume Variance = Budgeted fixed overhead - Allocated fixed overhead
Fixed Overhead Volume Variance = $25,000 - $28,000 = $3,000 Favorable
Diff: 3
LO: 23-4
AACSB: Application
17) Discount Sales Company uses standard costing to manage their direct costs and overhead costs.
Overhead costs are allocated based on direct labor hours. In the first quarter, Discount Sales had a
favorable cost variance for their variable overhead costs. Which of the following scenarios would be a
reasonable explanation for that variance?
A) The actual number of direct labor hours was lower than the budgeted hours.
B) The actual variable overhead costs were higher than the budgeted costs.
C) The actual variable overhead costs were lower than the budgeted costs.
D) The actual number of direct labor hours was higher than the budgeted hours.
Answer: C
Diff: 2
LO: 23-4
AACSB: Application
183
18) Discount Sales Company uses standard costing to manage their direct costs and their overhead costs.
Overhead costs are allocated based on direct labor hours. In the first quarter, Discount Sales had a
favorable efficiency variance for their variable overhead costs. Which of the following scenarios would be
a reasonable explanation for that variance?
Answer: A
Diff: 2
LO: 23-4
AACSB: Application
19) Quality Brand Products uses standard costing to manage their direct costs and their overhead costs.
Overhead costs are allocated based on direct labor hours. In the first quarter, Quality Brand had an
unfavorable cost variance for their variable overhead costs. Which of the following scenarios would be a
reasonable explanation for that variance?
Answer: B
Diff: 2
LO: 23-4
AACSB: Application
20) Quality Brand Products uses standard costing to manage their direct costs and their overhead costs.
Overhead costs are allocated based on direct labor hours. In the first quarter, Quality Brand had an
unfavorable efficiency variance for their variable overhead costs. Which of the following scenarios would
be a reasonable explanation for that variance?
Answer: D
Diff: 2
LO: 23-4
AACSB: Application
184
1) Fixed overhead volume variance is a flexible budget variance.

Answer: FALSE
Diff: 1
LO: 23-5
AACSB: Concept
2) The aggregate of direct materials cost and efficiency variances results in total direct materials variance.
Answer: TRUE
Diff: 1
LO: 23-5
AACSB: Concept
3) The total production cost flexible budget variance is obtained by adding direct labor efficiency variance
and fixed overhead volume variance.
Answer: FALSE
Diff: 1
LO: 23-5
AACSB: Concept
4) The total fixed overhead variance is obtained by summing up variable overhead cost variance and
fixed overhead volume variance.
Answer: FALSE
Diff: 1
LO: 23-5
AACSB: Concept
5) The exceptions under management by exception can be expressed as a percentage of a budgeted

amount or a dollar amount.
Answer: TRUE
Diff: 1
LO: 23-5
AACSB: Concept
6) Managers who follow the management by exception principle investigate only those variances that are
unfavorable.
Answer: FALSE
Diff: 1
LO: 23-5
AACSB: Concept
185
7) The management technique whereby managers concentrate on results that are outside the accepted
parameters is called management by:
A) variance.
B) standard.
C) exception.
D) budget.
Answer: C
Diff: 1
LO: 23-5
AACSB: Concept
8) Which of the following variances considers only the cost variance to be included in the calculation of
the total production cost flexible budget variance?
A) total fixed overhead variance
B) total variable overhead variance
C) total direct materials variance
D) total direct labor variance
Answer: A
Diff: 1
LO: 23-5
AACSB: Concept
9) The total variable overhead variance is obtained by adding variable overhead cost variance and:
A) total manufacturing overhead variance.
B) total direct labor variance.
C) fixed overhead cost variance.
D) variable overhead efficiency variance.
Answer: D
Diff: 1
LO: 23-5
AACSB: Concept
186
10) The management of Zeta Company has calculated the following variances:
Direct materials cost variance $8,000 U

Direct materials efficiency variance 35,000 F
Direct labor cost variance 15,000 F
Direct labor efficiency variance 12,000 U
Total variable overhead variance 7,000 F
Total fixed overhead variance 3,050 F
Calculate the total direct materials variance of Zeta Company.

A) $3,000 F
B) $27,000 F
C) $10,050 F
D) $7,000 F
Answer: B
Explanation: B)
Total direct materials variance $27,000 F
Diff: 1
LO: 23-5
AACSB: Application
11) The management of Zeta Company has calculated the following variances:

Calculate the total direct labor variance of Zeta Company.

A) $15,000 F
B) $10,050 F
C) $27,000 F
D) $3,000 F
Answer: D
Explanation: D)
Direct labor cost variance $15,000 F
Total direct labor variance $3,000 F
Diff: 1
LO: 23-5
AACSB: Application
187
12) The management of Delta Company has calculated the following variances:

When determining the total production cost flexible budget variance, calculate the fixed overhead cost
variance of Delta Company.
A) $3,050 F
B) $12,000 U
C) $8,000 U
D) $10,050 F
Answer: A
Diff: 1
LO: 23-5
AACSB: Application
13) The management of Alpha Company has calculated the following variances:

Variable overhead cost variance 2,000 F
Variable overhead efficiency variance 5,000 F
Fixed overhead cost variance 3,050 F
Calculate the total variable overhead variance of Alpha Company.

A) $3,000 F
B) $10,050 F
C) $7,000 F
D) $3,050 F
Answer: C
Explanation: C)
Variable overhead cost variance $2,000 F
Total variable overhead variance $7,000 F
Diff: 1
LO: 23-5
AACSB: Application
188

When determining the total production cost flexible budget variance, calculate the total fixed overhead
variance of Alpha Company.
A) $5,000 F
B) $3,050 F
C) $8,050 F
D) $7,000 F
Answer: B
Explanation: B)
Total fixed overhead variance = Fixed overhead cost variance = $3,050 F
Diff: 1
LO: 23-5
AACSB: Application
189

When determining the total production cost flexible budget variance, calculate the total manufacturing
overhead variance of Alpha Company.
A) $5,000 F
B) $7,000 F
C) $3,050 F
D) $10,050 F
Answer: D
Explanation: D)
Variable overhead cost variance $ 2,000 F
Add fixed overhead cost variance 3,050 F
Total manufacturing overhead variance $10,050 F
Diff: 1
LO: 23-5
AACSB: Application
190
16) From the following particulars of Rose Mary Company, calculate the total direct materials variance.
A) $150 U
B) $300 F
C) $150 F
D) $300 U
Answer: C
Explanation: C)
Direct materials cost variance $300 F
Direct materials efficiency variance 150 U
Total direct materials variance $150 F
Diff: 1
LO: 23-5
AACSB: Application
191
17) From the following particulars of Rose Mary Company, calculate the total direct labor variance.
A) $50 F
B) $450 U
C) $500 F
D) $50 U
Answer: A
Explanation: A)
Direct labor cost variance $450 U
Direct labor efficiency variance 500 F
Total direct labor variance $50 F
Diff: 1
LO: 23-5
AACSB: Application
192
18) From the following particulars of Rose Mary Company, calculate the total manufacturing overhead
variance for the total production cost flexible budget variance.
A) $725 F
B) $350 U
C) $725 U
D) $425 F
Answer: A
Explanation: A)
Variable overhead cost variance $350 U
Variable overhead efficiency variance 425 F
Total variable overhead variance 75 F
Add fixed overhead cost variance 650 F
Total manufacturing overhead variance $725 F
Diff: 1
LO: 23-5
AACSB: Application
193
19) From the following particulars of Rose Mary Company, calculate the total fixed overhead variance for
the total production cost flexible budget variance.
A) $650 F
B) $425 F
C) $350 U
D) $725 U
Answer: A
Explanation: A)
Total fixed overhead variance = Fixed overhead cost variance = $650 F
Diff: 1
LO: 23-5
AACSB: Application
194
20) From the following particulars of Rose Mary Company, calculate the total production cost flexible
budget variance.
A) $925 F
B) $450 U
C) $725 F
D) $725 U
Answer: A
Explanation: A) Total production cost flexible budget variance = Total direct materials variance + Total
direct labor variance + Total manufacturing overhead variance = $150 F + $50 F + $725 F = $925 F
Notes:
Direct materials cost variance $300 F
Direct materials efficiency variance 150 U
Total direct materials variance $150 F
Direct labor cost variance $450 U

Direct labor efficiency variance 500 F
Total direct labor variance $50 F
Variable overhead cost variance $350 U

Variable overhead efficiency variance 425 F
Total variable overhead variance 75 F
Add fixed overhead cost variance 650 F
Total manufacturing overhead variance $725 F
Diff: 2
LO: 23-5
AACSB: Application
195
1) A favorable variance has a debit balance and is a contra-revenue.

Answer: FALSE
Diff: 1
LO: 23-6
AACSB: Concept
2) An unfavorable variance for an expense means more expense has been incurred than planned.
Answer: TRUE
Diff: 1
LO: 23-6
AACSB: Concept
3) The favorable variances have credit balances. They are contra-expenses and therefore decrease the
expense Cost of Goods Sold.
Answer: TRUE
Diff: 1
LO: 23-6
AACSB: Concept
4) When a manufacturing company uses standard costing system, the direct material cost variance will be
recorded at the time of issue of raw material for production.
Answer: FALSE
Diff: 1
LO: 23-6
AACSB: Concept
5) When a manufacturing company uses standard costing system the Work-in-Process account records all
transactions at standard cost amounts.
Answer: TRUE
Diff: 1
LO: 23-6
AACSB: Concept
6) When a manufacturing company uses standard costing system, an unfavorable variance has the effect
of being a contra expense.
Answer: FALSE
Diff: 1
LO: 23-6
AACSB: Concept
196
7) Atlace Manufacturers uses standard costing system. Standards for direct materials are as follows:
Raw material pounds per unit of output 2

Cost per pound of raw material $5
The company plans to produce 3,000 units of product, and has purchased 10,000 pounds of raw materials
for a net cost of $48,000. Give the journal entry to record this transaction.
A)
Raw Materials Inventory (10,000 pounds × $5/pound) 50,000
Direct Materials Cost Variance 2,000
Accounts Payable (10,000 pounds × $4.8/pound) 48,000
B)
Raw Materials Inventory (10,000 pounds × $5/pound) 50,000
Accounts Payable (10,000 pounds × $4.8/pound) 48,000
C)
Raw Materials Inventory (10,000 pounds × $4.8/pound) 48,000
Accounts Payable (10,000 pounds × $5/pound) 50,000
D)
Raw Materials Inventory (10,000 pounds × $4.8/pound) 48,000
Accounts Payable (10,000 pounds × $5/pound) 50,000
Answer: A
Diff: 2
LO: 23-6
AACSB: Application
197
8) Atlace Manufacturers uses standard costing system. Standards for direct materials are as follows:
Raw material pounds per unit of output 2

Cost per pound of raw material $5
Actual purchases of materials for the current month are 10,000 pounds for $48,000. Planned and actual
production for the month is 3,000 units. Atlace has issued 10,000 pounds of raw materials to production.
The journal entry to record this transaction would be to:
A) a debit to Work-in-Process Inventory for $28,800, a credit to Raw Materials Inventory for $30,000, a
debit to Direct Materials Efficiency Variance for $1,200.
B) a debit to Work-in-Process Inventory for $28,800, a credit to Raw Materials Inventory for $50,000, a
C) a debit to Work-in-Process Inventory for $30,000, a credit to Raw Materials Inventory for $50,000, a
D) a debit to Work-in-Process Inventory for $50,000, a credit to Raw Materials Inventory for $48,000, a
credit to Direct Materials Efficiency Variance for $50,000.
Answer: C
Explanation: C)
Planned production units 3,000
Standard cost per pound $5
Pounds of raw material per unit 2
Standard cost or WIP(2 × $5 × 3,000) $30,000
Diff: 3
LO: 23-6
AACSB: Application
9) Under a standard costing system, while recording the use of direct materials in the production process,
Work-in-Process Inventory is debited with:
A) standard quantity for actual production times standard cost per unit of raw material.
B) standard quantity for actual production times actual cost per unit of raw material.
C) actual quantity times standard cost per unit of raw material.
D) actual quantity times actual cost per unit of raw material.
Answer: A
Diff: 1
LO: 23-6
AACSB: Concept
198
10) Which of the following is used to charge the cost of direct labor to the production?
A) Debit for standard quantity for actual production times standard cost per hour
B) Credit for standard quantity usage for actual production times actual cost per hour
C) Debit for actual quantity times standard cost per hour
D) Credit for standard quantity for actual production times standard cost per hour
Answer: A
Diff: 1
LO: 23-6
AACSB: Concept
199
11) Atlas Inc. uses a standard costing system. Atlas's year ending balances at December 31, 2015 are
shown here:
Calculate standard net operating income of the company for the year ended.
A) $8,780
B) $6,290
C) $8,470
D) $7,530
Answer: D
Explanation: D)
Standard Cost Income Statement
Sales Revenue at standard $150,000
Sales Revenue Variance -4,000
Sales Revenue at actual $146,000
Cost of Goods Sold at standard $78,000
Manufacturing Cost Variances:
Direct Materials Cost Variance $300
Direct Materials Efficiency Variance -25
Direct Labor Cost Variance 800
Direct Labor Efficiency Variance 70
Variable Overhead Cost Variance 200
Variable Overhead Efficiency Variance -800
Fixed Overhead Cost Variance -90
Fixed Overhead Volume Variance 15
Total Manufacturing Variances 470
Cost of Goods Sold at actual -78,470
Gross Profit $67,530
Selling and Administrative Expenses -60,000
Diff: 3
LO: 23-6
AACSB: Application
200
12) Alpine Productions uses a standard costing system for recording transactions. Alpine reported the
following data for the year ended December 31, 2015:
Sales revenues: $500,000
Cost of goods sold (standard costing): $382,500
Marketing & admin expenses: $105,000
Variances:
Sales Revenue $4,000 F

Direct Materials Cost Variance 20 U
Direct Materials Efficiency Variance 300 F
Direct Labor Cost Variance 75 U
Direct Labor Efficiency Variance 10 F
Variable Overhead Cost Variance 225 U
Variable Overhead Efficiency Variance 80 F
Fixed Overhead Cost Variance 420 U
Fixed Overhead Volume Variance 110 F
Calculate standard net operating income.

A) $14,990
B) $16,260
C) $13,975
D) $87,740
Answer: B
Explanation: B) Standard Cost Income Statement
Sales Revenue Variance $4,000
Direct Labor Efficiency Variance -10
Fixed Overhead Cost Variance 420
Fixed Overhead Volume Variance -110
Diff: 3
LO: 23-6
AACSB: Application
201
13) A manufacturer using standard costing system has purchased raw material of 250 units at the actual
cost of $2 per unit. The standard cost per unit of raw material is $1.85. Give journal entry to record the
material cost variance at the time of purchase.
Answer:
Raw Materials Inventory (250 units × $1.85/unit) 462.5
Direct Materials Cost Variance 37.5
Accounts Payable (250 units × $2/unit) 500
Diff: 2
LO: 23-6
AACSB: Concept
14) Atlace Manufacturers uses a standard costing system. The T-account for overhead is shown below:
In addition to the above, Atlace calculated the following overhead variances:
Variable overhead Cost variance: $5,000 F

Variable overhead Efficiency variance: $4,850 U
Fixed overhead Cost variance: $1,200 F
Fixed overhead Volume variance: $3,350 U
Give journal entry to close the overhead account and record the overhead variances.
Answer:
Fixed Overhead Volume Variance 3,350
Variable Overhead Efficiency Variance 4,850
Variable Overhead Cost Variance 5,000
Fixed Overhead Cost Variance 1,200
Manufacturing Overhead 2,000
Diff: 3
LO: 23-6
AACSB: Application
202
15) Caterlebe Productions uses a standard costing system. At the end of 2015, the following details are
found in their books.
Sales Revenues: $750,000
Cost of Goods Sold (standard costing): $400,500
Marketing & Admin expenses: $150,000
Variances:
Sales Revenue $6,000 F

Direct Materials Cost Variance 400 U
Direct Materials Efficiency Variance 375 F
Direct Labor Cost Variance 675 U
Direct Labor Efficiency Variance 150 F
Variable Overhead Cost Variance 250 U
Variable Overhead Efficiency Variance 800 F
Fixed Overhead Cost Variance 420 U
Fixed Overhead Volume Variance 100 F
Calculate the standard net operating income.

Answer: Standard Cost Income Statement
Sales Revenue Variance $6,000
Direct Labor Efficiency Variance -150
Fixed Overhead Cost Variance 420
Fixed Overhead Volume Variance -100
Diff: 3
LO: 23-6
AACSB: Application
203
16) Atlace Manufacturers uses a standard costing system. Data on standard costs and actual costs are as
follows:
Direct materials: Standard Actual

Raw material units per unit of output 2.0 3.3
Price per unit of raw material $5.00 $4.80
Materials cost per unit $10.00 $16.00
Number of units 3,000 3,000
Direct materials cost $30,000 $48,000
Direct labor: Standard Actual

Hours per unit 0.5 0.4
Cost per hour $18.00 $20.00
Labor cost per unit $9.00 $8.00
Direct labor cost $27,000 $24,000
Variable overhead* Standard Actual

Variable overhead cost per unit $15.00 $11.60
Variable overhead cost $45,000 $34,800
*allocated based on direct labor hours
Fixed overhead* Standard Actual

Fixed overhead cost per unit $5.00 $3.60
Fixed overhead cost $15,000 $10,800
*allocated on the basis of direct labor hours
Give journal entry to transfer the cost of units from Work-in-Process Inventory to Finished Goods
Inventory.
Answer:
Finished Goods Inventory 117,000
Work-in-Process Inventory 117,000
Explanation:
Direct material cost 30,000
Direct labor cost 27,000
Variable overhead cost 45,000
Fixed overhead cost 15,000
Total cost of production $117,000
Diff: 3
LO: 23-6
AACSB: Application
204
17) Atlace Manufacturers uses standard costing system Standards direct labor hours per unit are 0.5 hour.
Standard price per hour is $18.00. Actual direct labor for the month is 1,200 hours for a total cost of
$24,000.
Planned production for the month: 3,000 units. The journal entry to record the payment of direct labor
wages would be:
Answer:
(0.5 DLHr/unit × $18/DLHr × 3,000 units)
Direct Labor Cost Variance 2,400
Direct Labor Efficiency Variance 5,400
Wages Payable (1,200 DLHr × $20/DLHr) 24,000
Diff: 3
LO: 23-6
AACSB: Application
18) Atlace Manufacturers uses standard costing system. Standards for manufacturing overhead are as
follows:
Variable overhead: $30 per direct labor hour
Fixed overhead: $10 per direct labor hour
Actual overhead incurred (variable and fixed): $45,600
Standards for direct labor are as follows:
Hours per unit 0.5, Direct labor cost per hour $18.00
Actual direct labor for the month: 1,200 hours for a total cost of $24,000
Actual and planned production for the month: 3,000 units
The journal entry to allocate overhead cost (both variable and fixed) to production would be:
Answer:
(($30.00+$10.00)/DLHr × 1,500 hours)
Manufacturing Overhead 60,000
Explanation:
3,000 × 0.5 = 1,500
1,500 × ($30 + $10) = $60,000
Diff: 3
LO: 23-6
AACSB: Application
205

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Horngren's Accounting, 10e, Global Edition (Nobles/Mattison/Matsumura)

Chapter 21 Cost-Volume-Profit Analysis

Learning Objective 21-1

3) Variable cost per unit is constant throughout various relevant ranges.

4) Fixed costs per unit decrease as production levels decrease.

12) Which of the following is a variable cost?

Number of dogs washed in May 400

Number of units after increase in production 60,000

Number of units produced in June 55,000

Change in total cost (A) $25,000

Total costs for June

Minutes Total Bill

What is the fixed portion of the total cost?

Change in total cost ($3,000 - $2,625) $375.00

Minutes Total Bill

What is the variable cost per minute?

Change in total cost ($3,000 - $2,625) $375.00

Minutes Total Bill

For 380 minutes:

35) The high-low method is used to:

Direct labor cost $136,000

Direct labor cost $136,000

Learning Objective 21-2

3) Contribution margin is the amount that contributes to covering variable costs.

9) Contribution margin ratio is the ratio of contribution margin to:

10) Which of the following is a period cost?

14) Young Company has provided the following information:

Price per unit $40

Calculate the contribution margin per unit.

Selling price $40

Price per unit $40

What is the contribution margin ratio?

Selling price $40

Contribution margin ratio = ($28 ÷ $40) × 100 = 70%

Targeted operating income $50,000

What is the contribution margin ratio?

Net sales revenue per unit $6.00

Contribution margin ratio = Contribution margin ÷ Net sales revenue

Unit contribution margin $4.50

Learning Objective 21-3

Required sales in dollars = ($30 + 0) ÷ 40% = $75

Price per unit $40

Selling price $40

Required sales in units = ($12,600 + 0) ÷ $28 = 450 units

Price per unit $40

Selling price $40

Contribution margin ratio = ($28 ÷ $40) × 100 = 70%

Required sales in dollars = ($12,600 + 0) ÷ 70% = $18,000

Selling price $75

Target profit = $11,250 × (1 + 20%) = $13,500

Selling price $2.50

Sales Prior to Change 25,000

Rent and utilities $800

Rent and utilities $1,000

Rent and utilities $1,210

Rent and utilities $1,210

Selling price $75

Selling price $75.00

Learning Objective 21-4