3. The distinction between variable costs and fixed costs is:

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1 Practice Exam # 2 Dr. Bailey ACCT3310, Spring 2014, Chapters 4, 5, & 6 There are 25 questions, each worth 4 points. Please see my earlier advice on the appropriate use of this exam. Its purpose is to give you a rough idea of your preparedness, and to indicate area where you should review. It is not intended to be exhaustive (i.e., to include all topics) but is just a sampling. 1. Which cost estimation method does not use the company records as its primary source of information about the relationship between total costs and activity levels? A) scattergraph B) high-low C) account analysis D) regression analysis E) engineering estimates 2. Which of the following is/are true concerning ordinary least-squares regression? A) It is difficult to use because it requires special computer software. B) The least-squares criterion was originated at the University of Memphis. C) One of its weaknesses or pitfalls is that it is sensitive to outliers. D) It avoids any need to plot data and view them graphically. E) All of the above 3. The distinction between variable costs and fixed costs is: A) variable costs per unit fluctuate and fixed costs per unit remain constant. B) variable costs per unit are fixed over the relevant range and fixed costs per unit are variable. C) total variable costs are variable over the relevant range and fixed in the long term, while fixed costs never change. D) variable costs per unit change in varying increments, while fixed costs per unit change in equal units. E) total variable costs can be varied by management, while fixed costs are uncontrollable. 4. The AZ Company manufactures kitchen utensils. The company is currently producing well below its full capacity. The BV Company has approached AZ with an offer to buy 20,000 utensils at $0.75 each. AZ sells its utensils wholesale for $0.85 each; the average cost per unit is $0.83, of which $0.12 is fixed costs. If AZ were to accept BV's offer, what would be the increase in AZ's operating profits? A) $400 B) $800 C) $1,600 D) $2,000 E) AZ's operating profits will not increase as a result of accepting the special order.

2 5. The following information has been gathered for the GHI Manufacturing Company for its fiscal year ending December 31, 2005: Actual manufacturing overhead costs $212,500 Actual direct labor hours 54,900 Actual direct labor costs $445,000 Estimated manufacturing overhead costs $210,000 Estimated direct labor $434,000 Estimated direct labor hours 56,000 What is the predetermined manufacturing overhead rate assuming direct labor cost is used as the activity base? A) 48.4% B) 47.2% C) 49.0% D) 47.8% E) Some other answer 6. The Regal Baking Company is considering the expansion of its business into door-to-door delivery service. This would require an additional $12,500 in labor costs per month. Company-owned vehicles now used to make morning deliveries to restaurants could be used in the afternoons to make the home deliveries. However, it is estimated that an additional $5,000 would be required per month for gas, oil, and maintenance. It is further estimated that the home delivery use of the trucks would be allocated 45% of the existing $6,500 fixed vehicle costs. What is the differential delivery cost per month for expanding into the home delivery market? A) $12,500. B) $17,500. C) $19,750. D) $20, The practice of setting price below cost with the intent to drive competitors out of business is called: A) predatory pricing. B) target pricing. C) target costing. D) peak-load pricing.

8. The CJP Company produces 10,000 units of item S10 annually at a total cost of $190,000. The XYZ Company has offered to supply 10,000 units of S10 per year for $18 per unit.

3 8. The CJP Company produces 10,000 units of item S10 annually at a total cost of $190,000. The XYZ Company has offered to supply 10,000 units of S10 per year for $18 per unit. If CJP accepts the offer, $4 per unit of the fixed overhead would be saved. In addition, some of CJP's facilities could be rented to a third party for $15,000 per year. At what price would CJP be indifferent to XYZ's offer? A) $17.00 B) $17.50 C) $18.50 D) $ The operations of Blink Corporation are divided into the Adams Division and the Carter Division. Projections for the next year are as follows: Operating income for Blink Corporation as a whole if the Carter Division were dropped would be: A) $133,000. B) $112,000. C) $91,000. D) $49,000.

4 10. The process of first allocating costs to intermediate cost pools and then to the individual cost objects using different allocation bases is a(n): A) continuous flow process. B) cost management system. C) two-stage allocation system. D) operations costing system. 11. Bryon Industries manufactures 20,000 components per year. The manufacturing cost of the components was determined as follows: An outside supplier has offered to sell the component for $17. If Bryon purchases the component from the outside supplier, the manufacturing facilities would be unused and could be rented out for $10,000. If Bryon purchases the component from the supplier instead of manufacturing it, the effect on income would be A) a $70,000 increase. B) a $50,000 decrease. C) a $10,000 decrease. D) a $30,000 increase. 12. Which of the following is the correct formula to compute the predetermined overhead rate? A) Estimated total units in the allocation base divided by estimated total manufacturing overhead costs. B) Estimated total manufacturing overhead costs divided by estimated total units in the allocation base. C) Actual total manufacturing overhead costs divided by estimated total units in the allocation base. D) Estimated total manufacturing overhead costs divided by actual total units in the allocation base. 13. A costing system appropriate for a plant that continuously mass-produces a single product is called: A) flow processing. B) process costing. C) two-stage allocation system. D) operations costing.

5 14. In the cost equation TC = F + VX, V is best described as the: A) costs that do not vary with changes in the activity level. B) intercept of the cost equation. C) slope of the cost equation. D) activity level used to estimate the dependent variable. 15. The Armer Company is accumulating data to be used in preparing its annual profit plan for the coming year. The cost behavior pattern of the maintenance costs must be determined. The accounting staff has suggested that linear regression be employed to derive an equation in the form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for last year and the results of the regression analysis are as follows: (CMA adapted) Based upon the data derived from the regression analysis, 420 maintenance hours in a month would mean the maintenance costs would be budgeted at: (rounded to the nearest whole dollar) A) $3,797. B) $3,780. C) $3,746. D) $3,600. E) $3, Using the same data from The Armer Company above, what is the variable cost per hour using the high-low method to estimate the cost equation? A) $9.00. B) $7.50. C) $ D) $

6 17. Which of the following statements regarding the learning phenomenon is true? A) The more units that are produced, the greater the average time to produce a single unit. B) The relationship between number of units produced and the marginal time to produce the latest unit is linear. C) Total labor cost is a linear function of the total units produced. D) As production doubles, the time to produce the latest unit decreases. 18. Hawkins Products, Inc., has found that new products follow a learning curve. The first two units have been completed with the following results: How much time will be needed to complete the 4th unit? A) hours. B) hours. C) hours. D) hours. 19. In the learning curve equation Y = ax b, the b term represents: A) the labor time required to produce the first unit. B) the labor time required to produce the last single unit. C) the cumulative number of units. D) the index of learning. 20. The Work in Process inventory account of a manufacturing firm shows a balance of $3,000 at the end of an accounting period. The job cost sheets of two uncompleted jobs show charges of $500 and $300 for materials, and charges of $400 and $600 for direct labor. From this information, it appears that the company is using a predetermined overhead rate, as a percentage of direct labor costs, of: A) 83%. B) 120%. C) 40%. D) 300%.

7 Part B: Problems. Be sure to write your answers in the spaces provided and show supporting work, no matter how simple the work may be. 21. The Shapely Company uses the high-low method to determine its cost equation. The following information was gathered for 2006: Machine Hours Direct Labor Costs Busiest month (June) 14,000 $200,000 Slowest month (December) 6,000 $120,000 If Shapely expects to use 10,000 machine hours next month, what are the estimated direct labor costs? Answer: $ Supporting work: 22. What is the Beginning Balance (BB) of Work in Process? Beginning Balance (BB)? Ending Balance (EB) $ 67,000 Transferred In (TI) 149,600 Transferred Out (TO) 164,600 Answer: $ Supporting work: Use the following to answer the next three questions: The Business School at Eastern College has accumulated data for the preparation of next year's budget development. One of the costs that is being looked at closely is administrative staff as a function of student credit hours. Data on administrative costs and credit hours for the most recent academic year yielded the following regression analysis: SUMMARY OU TPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 13 ANOVA df SS MS F Significance F Regression E E-06 Residual Total Lower Upper Coefficients Standard Error t-stat P-value Lower 95% Upper 95% 95.0% 95.0% Intercept $96, E Credit Hours $ E

8 23. Based on the results of this regression analysis, what is the estimate of administrative costs in a month with 1,000 credit hours? Answer: $ Supporting work: 24. What is the percent of the total cost variance explained by the regression? % 25. The Credit Hours coefficient of $ has a related t value of 8.63, p value = This means (choose one): We can be confident that the true coefficient is not zero. The true coefficient is exactly $ The data is error-free. Most of the cost is variable.

HIGH-LOW METHOD. Key Terms and Concepts to Know

HIGH-LOW METHOD. Key Terms and Concepts to Know HIGH-LOW METHOD Key Terms and Concepts to Know Variable, Fixed and Mixed Costs Many costs are clearly variable, such as direct labor and direct materials, or clearly fixed, such as rent and salaries. Other