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EXAM 7

A company’s purchasing department negotiates all of the purchasing contracts for raw materials. Which variance is most useful in assessing the performance of the purchasing department?

A. Materials quantity variance

B. Materials price variance

C. Labor rate variance

D. Labor efficiency variance

Myles Company budgeted 10,500 pounds of direct materials costing $23.50 per pound to make 5,300 units of product. The company actually purchased 11,000 pounds of direct materials costing $25 per pound to make the 5,300 units. What is the direct materials price variance?

A. $16,500 favorable

B. $16,500 unfavorable

C. $15,750 unfavorable

D. $15,750 favorable

A company produced 2,200 units of output during a production process that normally requires 2 hours of labor per unit of output. The standard labor rate is $16 per hour, but the company paid $15 per hour. Actual hours needed to complete the production process were 4,600. How much was the labor rate variance?

A. $4,400 favorable

B. $4,400 unfavorable

C. $4,600 favorable

D. $4,600 unfavorable

How is the variable manufacturing overhead efficiency variance calculated?

A. The difference between the actual overhead rate and the standard overhead rate multiplied by the standard overhead rate

B. The difference between the standard hours allowed and the actual hours used multiplied by the standard overhead rate

C. The difference between the standard hours allowed and the actual hours used

D. The difference between the standard hours allowed and the actual hours used multiplied by the actual overhead rate

Kahn Performance Nutrition produces a protein shake that contains whey protein as one of its ingredients. The whey protein (materials) standards for each batch of protein shake produced are 12 pounds of whey protein at a standard cost of $3 per pound. During July, Kahn Performance Nutrition purchased and used 54,000 pounds of whey protein at a total of $170,000 to make a total of 4,300 batches of protein shake. What is the materials quantity variance for whey protein in July?

A. $7,200 unfavorable

B. $7,200 favorable

C. $141,900 favorable

D. $141,900 unfavorable

A(n) ________ is a carefully predetermined cost that is usually expressed on a per unit basis.

A. allocated cost

B. applied cost

C. standard cost

D. flexible cost

The direct labor price variance was unfavorable and much greater than anticipated. Who would be in the best position to explain why the unfavorable variance occurred?

A. Both the production and human resource supervisors

B. The production supervisor

C. The purchasing manager

D. Both the purchasing manager and production supervisor

Capital Manufacturing designs and manufactures bathtubs for home and commercial applications. Capital recorded the following data for its commercial bathtub production line during the month of March.

Standard DL hours per tub 3

Standard overhead rate per DL hour $6.50

Standard overhead cost per unit $19.50

Actual overhead costs $22,750

Actual DL hours 3,250

Actual overhead cost per machine hour $7.00

Actual tubs produced 1,100

What is the variable manufacturing overhead efficiency variance for March?

A. $1,625 unfavorable

B. $325 unfavorable

C. $1,625 favorable

D. $325 favorable

Which of the following formulas is used to compute variable overhead rate (or spending) variance?

A. Actual hours x (actual rate – standard rate)

B. Standard hours allowed x (actual rate – standard rate)

C. Actual rate x (actual hours – standard hours allowed)

D. Standard rate x (actual hours – standard hours allowed)

A manager purchased better quality materials for a slightly higher cost than anticipated. However, as a result, there was less spoilage than normal. What is the effect on the price and quantity variances respectively?

A. Favorable, favorable

B. Favorable, unfavorable

C. Unfavorable, favorable

D. Unfavorable, unfavorable

The two fixed overhead variances are the:

A. budget and volume variances.

B. rate and efficiency variances.

C. price and usage variances.

D. rate and volume variances.

Which of the following is NOT an advantage of using standard costs and variances?

A. Use as a performance benchmark for evaluation of actual costs

B. Use as a basis for components of the master budget

C. Simplification of bookkeeping

D. Change in behavior of managers to obtain desired variances

The following information describes a company’s usage of direct labor in a recent period.

Actual direct labor hours used 34,000

Actual rate per hour $17.00

Standard rate per hour $16.75

Standard hours for units produced 33,500

How much is the direct labor rate variance?

A. $8,375 favorable

B. $8,500 favorable

C. $8,375 unfavorable

D. $8,500 unfavorable

How is the direct labor efficiency variance calculated?

A. The difference between the standard labor hours allowed and the actual labor hours used multiplied by the actual labor rate

B. The difference between the standard labor hours allowed and the actual labor hours used multiplied by the standard labor rate

C. The difference between the standard labor hours and the actual labor hours used

D. The difference between the standard labor rate and the actual labor rate

A company uses a single raw material in its production process. The standard price for a unit of material is $2. During the month the company purchased and used 600 units of this material at a price of $2.25 per unit. The standard quantity required per finished product is 2 units, and during the month the company produced 310 finished units. How much was the material quantity variance?

A. $40 favorable

B. $40 unfavorable

C. $45 favorable

D. $45 unfavorable

Active Lifestyle Beverages gathered the following information for Job #928.

Standard Total Cost Actual Total Cost

Direct labor:

Standard: 540 hours at $6.75/hr. 3,645

Actual: 500 hours at $6.50/hr. 3,250

What is the direct labor efficiency variance?

A. $260 favorable

B. $260 unfavorable

C. $270 favorable

D. $270 unfavorable

Which term below is best paired with “The difference between the actual overhead cost incurred and the flexible budget amount of overhead cost for actual number of output”?

A. Sales volume variance

B. Flexible budget

C. Overhead flexible budget variance

D. Benchmarking

Jackson Industries has collected the following data for one of its products.

Direct materials standard (6 pounds per unit @ $0.55/lb.) $3.30 per finished good

Direct materials flexible budget variance-unfavorable $12,000

Actual direct materials used 35,000 pounds

Actual finished goods produced 26,000 units

What is the total actual cost of the direct materials used?

A. $19,250

B. $73,800

C. $97,800

D. $85,800

The entry to allocate manufacturing overhead costs to production involves which of the following?

A. Debit to work-in-process inventory for the actual cost of overhead

B. Credit to work-in-process inventory for the standard rate of overhead times the standard quantity of the allocation base allowed for actual output

C. Credit to work-in-process inventory for the actual cost of overhead

D. Debit to work-in-process inventory for the standard rate of overhead times the standard quantity of the allocation base allowed for actual output

All of the following are advantages of using standard costs EXCEPT:

A. managers can evaluate the efficiency of production workers.

B. differences between the static budget and the flexible budget can be broken down into price and quantity components.

C. consumer motivation for purchases can be analyzed.

D. standard costing allows companies to create flexible budgets.

The internal rate of return is:

A. the interest rate at which the net present value of the investment equals the cost of the investment.

B. the interest rate at which the net present value of the investment exceeds the company’s desired rate of return.

C. equal to the accounting rate of return.

D. None of the above

The following are all methods of analyzing capital investments EXCEPT:

A. payback period.

B. regression analysis.

C. net present value (NPV).

D. accounting rate of return (ARR).

The Warren Company is considering investing in two alternative projects.

Project 1 Project 2

Investment $400,000 $250,000

Useful life (years) 5 6

Estimated annual net cash inflows for useful life $100,000 $45,000

Residual value $25,000 $15,000

Depreciation method Straight-line Straight-line

Required rate of return 12% 8%

What is the accounting rate of return for Project 2?

A. 33.67%

B. 3%

C. 18%

D. 2.33%

Mulheim Corporation is deciding whether to automate one phase of its production process. The equipment has a 6-year life and will cost $410,000. Projected net cash inflows from the equipment are as follows.

Year 1 $120,000

Year 2 $100,000

Year 3 $110,000

Year 4 $100,000

Year 5 $95,000

Year 6 $90,000

Mulheim Corporation’s hurdle rate is 12%. Assume the residual value is zero.

What is the net present value of the equipment?

A. $(18,275)

B. $3,046

C. $20,000

D. $18,275

All else being equal, a company would choose to invest in a capital asset if which of the following is true?

A. If the payback period equals the amount invested

B. If the expected accounting rate of return is less than the required rate of return

C. If the expected accounting rate of return is greater than the required rate of return

D. If the average amount invested is equal to the net cash inflows

Which of the following areas does NOT make significant use of time value of money concepts?

A. Capital investment analysis

B. Lending and borrowing

C. Personal finance planning

D. Marketing research

Which of the following decision rules is a correct statement?

A. If the net present value is positive, do not invest in the capital asset.

B. If the internal rate of return is less than the required rate of return, invest in the asset.

C. Investments with longer payback periods are more desirable, all else being equal.

D. If the net present value is positive, invest in the capital asset.

Smith & Cramer Computer Repair is considering an investment in computer and network equipment costing $254,000. This equipment would allow them to offer new programming services to clients. The equipment will be depreciated on the straight-line basis over an 8-year period with an estimated residual value of $60,000. Using the accounting rate of return model, what is the minimum average annual operating income that must be generated from this investment in order to achieve an 11% accounting rate of return?

A. $6,600

B. $21,340

C. $31,750

D. $27,940

Siesta Manufacturing has asked you to evaluate a capital investment project. The project will require an initial investment of $88,000. The life of the investment is 7 years with a residual value of $4,000. If the project produces net annual cash inflows of $16,000, what is the accounting rate of return?

A. 3.90%

B. 4.55%

C. 550%

D. 18.18%

“Management’s minimum desired rate of return on an investment” is best described by which of the following terms?

A. Payback return

B. Internal rate of return

C. Discount rate

D. Net present value

Assuming an interest rate of 6%, the present value of $22,000 to be received 9 years from now would be closest to:

A. $16,434.

B. $13,024.

C. $37,162.

D. $35,068.

A manager wants to know which investment decision will affect the bottom line of the financial statements according to Generally Accepted Accounting Principles. Which capital budgeting method would he choose?

A. Payback method

B. Accounting rate of return method

C. Net present value method

D. Profitability index

Mantua Motors is evaluating a capital investment opportunity. This project would require an initial investment of $38,000 to purchase equipment. The equipment will have a residual value at the end of its life of $3,000. The useful life of the equipment is 5 years. The new project is expected to generate additional net cash inflows of $12,000 per year for each of the 5 years. Mantua Motors’ required rate of return is 14%. The net present value of this project is closest to:

A. ($1,994).

B. $4,753.

C. $3,196.

D. $28,386.

Which of the following is NOT a factor when considering the time value of money?

A. The interest rate

B. The principal amount

C. The payback period

D. The number of periods

You win the lottery and must decide how to take the payout. Use an 8% discount rate. What is the present value of $15,000 a year received at the end of each of the next 6 years?

A. $9,450

B. $90,000

C. $74,893

D. $69,345

The term ________ is best described as “a stream of equal periodic payments.”

A. “time value of money”

B. “capital budgeting”

C. “annuity”

D. “payback period”

Hincapie Manufacturing is evaluating investing in a new metal stamping machine costing $30,924. Hincapie estimates that it will realize $12,000 in annual cash inflows for each year of the machine’s 3-year useful life. The internal rate of return (IRR) for the machine is approximately:

A. 8%.

B. 10%.

C. 5%.

D. 6%.

What is an attribute of the internal rate of return?

A. It is the interest rate that makes the NPV of the investment equal to zero.

B. It is the interest rate that makes the cost of the investment equal to the present value of the investment’s net cash inflows.

C. It is used in the capital rationing process.

D. All of the above are attributes of the internal rate of return.

Eagle Corporation is considering the purchase of a new machine. The machine costs $550,000 and will generate an annual net cash inflow of $100,000. What is the payback period?

A. 4 years and 6 months

B. 5 years

C. 5 years and 6 months

D. 6 years and 1 month

Which of the following capital decision methods uses accrual accounting, rather than net cash flows, as a basis for calculations?

A. Payback method

B. Internal rate of return

C. Net present value

D. Accounting rate of return

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