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20. In generating cost information for determining whether or not to delete a product line, the most important distinction to identify is: A) direct versus indirect costs B) fixed versus variable costs C) manufacturing versus nonmanufacturing costs D) avoidable versus unavoidable costs 21. When there is a production constraint, a company should emphasize the products with: A) the highest unit contribution margins. B) the highest contribution margin ratios. C) the highest contribution margin per unit of the constrained resource. D) the highest contribution margins and contribution margin ratios. 22. Which of the following are valid reasons for eliminating a product line? I. The product line's contribution margin is negative. II. The product line's traceable fixed costs plus its allocated common corporate costs are less than its contribution margin. A) B) C) D) Only I Only II Both I and II Neither I nor II 2 23. Vanikoro Corporation currently has two divisions which had the following operating results for last year: Since the Rubber Division sustained a loss, the president of Vanikoro is considering the elimination of this division. All of the fixed costs for the division could be eliminated if the division was dropped - except of the allocated corporate fixed costs. If the Rubber Division was dropped at the beginning of last year, how much higher or lower would Vanikoro's total net operating income have been for the year? A) B) C) D) $10,000 higher $40,000 lower $50,000 higher $100,000 lower 3 24. Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below: Division B of the same company would like to use the part manufactured by Division A in one of its products. Division B currently purchases a similar part made by an outside company for $38 per unit and would substitute the part made by Division A. Division B requires 5,000 units of the part each period. Division A has ample capacity to produce the units for Division B without any increase in fixed costs and without cutting into sales to outside customers. If Division A sells to Division B rather than to outside customers, the variable cost be unit would be $1 lower. What should be the lowest acceptable transfer price from the perspective of Division A? A) $40 B) $38 C) $30 D) $29 25. Division X makes a part with the following characteristics: Division Y of the same company would like to purchase 10,000 units each period from Division X. Division Y now purchases the part from an outside supplier at a price of $17 each. Suppose Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into sales to outside customers. If Division X refuses to accept the $17 price internally and Division Y continues to buy from the outside supplier, the company as a whole will be: A) worse off by $70,000 each period. B) better off by $10,000 each period. C) worse off by $60,000 each period. D) worse off by $20,000 each period. 26. Media, Inc., an advertising agency, applies overhead to jobs based on direct professional labor hours. Overhead was estimated to be $150,000, direct professional labor hours were estimated to be 15,000, and direct professional labor cost was projected to be $225,000. During the year, Media incurred actual overhead costs of $146,000, actual direct 4 professional labor hours of 14,500, and actual direct labor cost of $222,000. By year-end, the firm's overhead was: A) $1,000 underapplied B) $1,000 overapplied C) $4,000 underapplied D) $4,000 overapplied E) $5,000 underapplied 27. Which of the following is the proper sequence in an activity-based costing system? A) Identification of cost drivers, identification of cost pools, calculation of cost application rates, assignment of cost to products. B) Identification of cost pools, identification of cost drivers, calculation of cost application rates, assignment of cost to products. C) Assignment of cost to products, identification of cost pools, identification of cost drivers, calculation of cost application rates,. D) Calculation of cost application rates, identification of cost drivers, identification of cost pools, assignment of cost to products. 28. Which of the following statements is true? A) A traditional volume-based system based on direct labor generally undercosts high volume product lines. B) In a traditional volume-based costing system based on direct labor, low volume products generally subsidize high volume products. C) An activity-based costing system generally undercosts low-volume, complex product lines. D) A traditional volume-based costing system based on direct labor generally undercosts low-volume, complex product lines. 29. Hamilton Company applies overhead based on direct labor hours. At the beginning of 2005, the company estimated that manufacturing overhead would be $700,000, and direct labor hours would be 10,000. Actual overhead by the conclusion of 2005 amounted to $800,000 and actual direct labor hours were 14,000. On the basis of this information, Horton's 2005 predetermined overhead rate is: A) $50.00 B) $70.00 C) $80.00 D) $57.14 5 You MUST show your work to receive credit for your answers and to receive partial credit. Please try to be as neat and organized as possible. Problem 1 The Koski Company has established standards as follows: Actual production figures for the past year were as follows: Direct material purchased (1,600 pounds) $6,560 Required: A. What is the materials price variance (amount and favorable or unfavorable)? 6 B. What is materials quantity variance (amount and favorable or unfavorable)? C. What is the labor rate variance (amount and favorable or unfavorable)? D. What is the labor efficiency variance (amount and favorable or unfavorable)? Problem 2 7 The constraint at Bulman Corporation is time on a particular machine. The company makes three products that use this machine. Data concerning those products appear below: Assume that sufficient time is available on the constrained machine to satisfy demand for all but the least profitable product. Required A) What is the contribution margin per constrained resource for each product? B) In what order should the company produce the three products in case of a machine breakdown that limits the available processing time on the machine? Problem 3 Ryland, Inc., manufactures two products, Regular and Deluxe. Ryland uses a traditional costing system and applies overhead on the basis of direct labor hours (cost driver). Anticipated overhead and direct labor time for the upcoming accounting period are $1,600,000 and 25,000 hours, respectively. Information about the company's products follows. Estimated total production volume Direct materials cost (per unit) Direct labor cost (per unit) REGULAR 3,000 units $28 $45 (3 hrs @ $15/hr) DELUXE 4,000 units $42 $60 (4 hrs @ $15/hr) Recently, the controller of Ryland, Inc. began to wonder whether the company was accurately 8 costing its products, so she decided to try-out activity based costing (ABC). The controller identified three major activities: order processing, machine processing, and product inspection. These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively. Ryland's budgeted total overhead of $1,600,000 is subdivided as follows: order processing, $250,000; machine processing, $1,200,000; and product inspection, $150,000. Data relevant to these activities follow. Regular Deluxe Total Orders Processed 320 180 500 Machine Hours Worked 16,000 24,000 40,000 Inspection Hours 4,000 6,000 10,000 Required: A. What is the unit cost of REGULAR under both the current costing system and ABC costing system? 9 B. Is the DELUXE product line under or over costed by the traditional costing system? Explain