Deck 5: Understanding the Management Process

Question 1

The Mason and Dixon Candle Company has assembled the data below regarding two of the raw materials it uses in its candle-making process.
Required:
Compute the price and usage variances for each of the raw materials. Indicate whether each variance is favorable or unfavorable.

Answer 1

Paraffin Wax:
Material price variance = ($0.09 x 21,000) - ($0.10 x 21,000) = $210 F
Material usage variance = ($0.10 x 21,000) - ($0.10 x 20,000) = $100 U
Scent:
Material price variance = ($52 x 110) - ($50x 110) = $220 U
Material usage variance = ($50 x 110) - ($50 x 100) = $500 U

Question 2

Caswell Company employs direct labor in two of its processing departments. Data regarding direct labor usage in the most recent period have been assembled and reported below.
Required:
Compute the rate and efficiency variances for each of the processing departments. Indicate whether each variance is favorable or unfavorable.

Answer 2

Fabricating:
Rate variance = ($28 x 13,000) - ($30 x 13,000) = $26,000 F
Efficiency variance = ($30 x 13,000) - ($30 x 12,000) = $30,000 U
Assembly:
Rate variance = ($29 x 8,400) - ($28 x 8,400) = $8,400 U
Efficiency variance = ($28 x 8,400) - ($28 x 9,000) = $16,800 F

Question 3

Grant Manufacturing uses a standard cost system with overhead applied based on direct labor hours. The manufacturing budget for the production of 5,000 units for the month of May included the following information.
During May, 4,500 units were actually produced and the direct labor efficiency variance was $1,500 unfavorable.
Required:
Compute the actual number of direct labor hours that were used in May.

Answer 3

Since the efficiency variance is $1,500 U, we can write the following equation:
$1,500 = ($15 x AH) - {$15 x [(10,000/5,000) x 4,500]} = ($15 x AH) - ($15 x 9,000)
Solving for AH yields 9,100 actual labor hours.

Question 4

JD's Sporting Products, Inc., is a distributor of both tennis and golf equipment. Currently, the golf equipment takes up 50% of the floor space in the company's distribution center. The CEO is considering whether the company should discontinue the golf equipment line and focus on tennis equipment. The table below contains the most recent income statement by product line. If the golf equipment line is discontinued, all salaries and other direct fixed costs can be avoided. In addition, sales of tennis equipment can be increased by 15% with no impact on direct fixed costs. The common fixed costs have been allocated to the two product lines based on relative sales, and all will continue whether the golf line is dropped or retained, and will continue at their present levels if tennis sales expand by as much as 15%.
Required:
Perform an incremental analysis to determine the financial advantage or disadvantage for dropping the golf equipment line.

Question 5

Transactions Systems Limited develops and leases software systems for community banks that support electronic transactions at automatic teller machines. The company developed quarterly sales goals for the current year and is now trying to assess progress against those goals. The table below contains data on the goal for each quarter and actual sales in that quarter.
Required:
Perform a gap analysis for each month and a trend analysis using a line chart. Which approach to the data is more informative?

Question 6

Look Your Best, Inc., operates 30 dry cleaning stores in a large metropolitan area. Internal benchmarking could be useful in assessing the performance of one of these stores.

Question 7

Best-in-class benchmarks are established with reference to the performance of firms in the same industry as the firm conducting the analysis.

Question 8

Trend analysis improves on gap analysis by examining performance over multiple time periods.

Question 9

A Pareto chart is most appropriate if one wishes to assess performance on multiple dimensions simultaneously.

Question 10

A Pareto chart is useful in identifying the most pressing of a number of performance problems facing an entity.

Question 11

A favorable variance will result in an increase in net income over what was originally planned.

Question 12

The material price variance is always computed based on the standard quantity of material allowed for the actual rate of output achieved.

Question 13

The material usage variance quantifies the difference between the actual quantity of material used and the standard quantity allowed weighted by the standard price of the material.

Question 14

Whitney Company has recorded a total labor variance of $2,000 unfavorable and a labor rate variance of $300 favorable. The labor efficiency variance must have been $1,700 unfavorable.

Question 15

A production scheduling error at Vanadium Alloy and Steel Company required two days of overtime to complete an order. This error will most likely be reflected in an unfavorable labor rate variance.

Question 16

THE FOLLOWING QUESTIONS ARE BASED ON THE INFORMATION BELOW.
Reliance Aircraft Corporation currently manufactures a complex hydraulic valve that controls rudder movement in its popular 707 jet aircraft. The unit cost to produce the valve is:
Reliance has an offer from Kennametal Company to supply all 200 of the valves Reliance requires annually for $4,000 per unit. If Reliance accepts the offer and ceases production of the valve, production workers and supervisors will be reassigned to other areas of 707 production. The equipment cannot be used elsewhere and has no market value. The factory floor space devoted to the production of the valves, however, can be used by another division of the company that currently leases space elsewhere at an annual cost of $85,000. Which of the following costs is avoidable if Reliance accepts Kennametal's offer?

-Supervisory salaries are an avoidable cost if Reliance purchases the valves from Kennametal.

Question 17

THE FOLLOWING QUESTIONS ARE BASED ON THE INFORMATION BELOW.
Reliance Aircraft Corporation currently manufactures a complex hydraulic valve that controls rudder movement in its popular 707 jet aircraft. The unit cost to produce the valve is:
Reliance has an offer from Kennametal Company to supply all 200 of the valves Reliance requires annually for $4,000 per unit. If Reliance accepts the offer and ceases production of the valve, production workers and supervisors will be reassigned to other areas of 707 production. The equipment cannot be used elsewhere and has no market value. The factory floor space devoted to the production of the valves, however, can be used by another division of the company that currently leases space elsewhere at an annual cost of $85,000. Which of the following costs is avoidable if Reliance accepts Kennametal's offer?

-The $85,000 leasing cost is an incremental cost of producing the valve internally.

Question 18

THE FOLLOWING QUESTIONS ARE BASED ON THE INFORMATION BELOW.
Reliance Aircraft Corporation currently manufactures a complex hydraulic valve that controls rudder movement in its popular 707 jet aircraft. The unit cost to produce the valve is:
Reliance has an offer from Kennametal Company to supply all 200 of the valves Reliance requires annually for $4,000 per unit. If Reliance accepts the offer and ceases production of the valve, production workers and supervisors will be reassigned to other areas of 707 production. The equipment cannot be used elsewhere and has no market value. The factory floor space devoted to the production of the valves, however, can be used by another division of the company that currently leases space elsewhere at an annual cost of $85,000. Which of the following costs is avoidable if Reliance accepts Kennametal's offer?

-The depreciation of the equipment is a sunk cost that is irrelevant to the make-or-buy decision.

Question 19

THE FOLLOWING QUESTIONS ARE BASED ON THE INFORMATION BELOW.
Reliance Aircraft Corporation currently manufactures a complex hydraulic valve that controls rudder movement in its popular 707 jet aircraft. The unit cost to produce the valve is:
Reliance has an offer from Kennametal Company to supply all 200 of the valves Reliance requires annually for $4,000 per unit. If Reliance accepts the offer and ceases production of the valve, production workers and supervisors will be reassigned to other areas of 707 production. The equipment cannot be used elsewhere and has no market value. The factory floor space devoted to the production of the valves, however, can be used by another division of the company that currently leases space elsewhere at an annual cost of $85,000. Which of the following costs is avoidable if Reliance accepts Kennametal's offer?

-The depreciation on the equipment, the depreciation on the building, and the supervisory salaries are irrelevant to Reliance's decision because they are fixed.

Question 20

Quaker Company refines a single raw material in a process that results in several joint products. The refining costs incurred prior to the split-off point where the joint products appear is irrelevant to the decision to further process any of the joint products.

Question 21

Retail stores often assess performance by comparing sales revenue of one period to sales revenue from the same period a year earlier. Such an appraisal of performance illustrates:

A) Variance analysis.
B) Gap analysis.
C) Trend analysis.
D) Pareto analysis.

Question 22

Trend analysis attempts to provide a better assessment of performance than gap analysis by:

A) Assessing performance on multiple dimensions simultaneously.
B) Adopting an external focus on internal activities.
C) Focusing on how results change over multiple time periods.
D) Assessing performance relative to a previously determined standard.

Question 23

Of the following techniques, which would allow management to assess performance against a number of standards simultaneously?

A) A radar chart.
B) Pareto analysis.
C) Benchmarking.
D) Gap analysis.

Question 24

Standards developed with reference to the performance of external organizations are termed:

A) Ideal standards.
B) Benchmarks.
C) Normal standards.
D) Engineering.

Question 25

Of the four types of benchmarks listed below, which is the most useful when a company has a number of different locations at which the same type of work is performed?

A) Internal benchmarks.
B) Competitive benchmarks.
C) Industry benchmarks.
D) Best-in-class benchmarks.

Question 26

All of the following are examples of benchmarking standards except:

A) The performance of the unit during the previous year.
B) The best performance of the unit in comparable past periods.
C) A comparison with a similar unit within the same company.
D) The best performance of a competitor with a similar operation.

Question 27

Of the following standards, which are developed using data on the performance of the firm's key competitors?

A) Engineering standards.
B) Industry benchmarks.
C) Competitive benchmarks.
D) Historical standards.

Question 28

An unfavorable material price variance indicates that:

A) The actual quantity of output produced required more raw material than allowed for under the standards.
B) The actual price paid for raw material exceeded that budgeted in the standards.
C) The company was unexpectedly efficient in its use of raw material.
D) The materials purchasing manager secured an unexpected quantity discount on the price of material purchased.

Question 29

In the most recently concluded period, a company experienced significantly less machine downtime than would be expected under normal circumstances. This could have produced:

A) An unfavorable labor rate variance.
B) An unfavorable labor efficiency variance.
C) A favorable labor rate variance.
D) A favorable labor efficiency variance.

Question 30

An unexpected disruption in rail service eliminated a company's usual supply of a critical raw material. To avoid a disruption in production, the material needed was obtained from a new vendor with which the company had no prior relationship. This event is likely to have produced:

A) An unfavorable material price variance.
B) A favorable material price variance.
C) An unfavorable material usage variance.
D) A favorable material usage variance.

Question 31

The materials price variance is measured as:

A) (Actual Price X Actual Quantity) - (Standard Price X Actual Quantity)
B) (Actual Price X Standard Quantity) - (Standard Price X Standard Quantity)
C) (Actual Price X Actual Quantity) - (Actual Price X Standard Quantity)
D) (Standard Price X Actual Quantity) - (Standard Price X Standard Quantity)

Question 32

Christopher Akers is the chief executive officer of SBL Inc., a masonry contractor. The financial statements have just arrived showing a $3,000 loss on the new stadium job that was budgeted to show a $6,000 profit. Actual and budget information relating to the materials for the job are as follows.
Which one of the following is a correct statement regarding the stadium job for SBL?

A) The price variance was favorable by $285.
B) The price variance was favorable by $300.
C) The efficiency variance was unfavorable by $1,185.
D) The flexible budget variance was unfavorable by $900.

Question 33

A materials purchasing manager recently generated a favorable materials price variance by taking advantage of a "deal" on a batch of substandard quality raw material in "as is" condition. Much of the material was found to be unusable. The manager's behavior likely resulted in:

A) An unfavorable material usage variance.
B) A favorable material usage variance.
C) An unfavorable labor rate variance.
D) A favorable labor rate variance.

Question 34

Keep It Safe, Inc., manufactures a popular protective case for mobile telephones. Each case requires 0.5 grams of a titanium alloy to provide necessary strength. The standard price of the alloy is $100 per gram. In the most recently concluded month, Keep It Safe purchased and used 2,000 grams of the alloy to produce 3,800 cases. The total cost of the alloy purchased was $210,000. What was the material price variance for the month?

A) $10,000 Unfavorable.
B) $10,000 Favorable.
C) $9,500 Favorable.
D) $9,500 Unfavorable.

Question 35

Keep It Safe, Inc., manufactures a popular protective case for mobile telephones. Each case requires 0.5 grams of a titanium alloy to provide necessary strength. The standard price of the alloy is $100 per gram. In the most recently concluded month, Keep It Safe purchased and used 2,000 grams of the alloy to produce 3,800 cases. The total cost of the alloy purchased was $210,000. What was the material usage variance for the month?

A) $10,500 Favorable.
B) $10,500 Unfavorable.
C) $10,000 Unfavorable.
D) $10,000 Favorable.

Question 36

Varney Corporation uses a solvent in its manufacturing process. The standard price established for the solvent is $2 per liter. A variance analysis for last month revealed an unfavorable price variance of $8,000 related to the purchase of 40,000 liters of this particular solvent. What actual price per liter did Varney pay for its purchases of the solvent last month?

A) $1.80
B) $0.20
C) $2.20
D) $2.00

Question 37

LaBelle Corporation has assembled the data below regarding one of the raw materials used in its manufacturing process. Based on the data provided, compute the material price variance for the period.

A) $192 Favorable.
B) $192 Unfavorable.
C) $200 Favorable.
D) $200 Unfavorable.

Question 38

LaBelle Corporation has assembled the data below regarding one of the raw materials used in its manufacturing process. Based on the data provided, compute the material usage variance for the period.

A) $200 Favorable.
B) $200 Unfavorable.
C) $208 Unfavorable.
D) $208 Favorable.

Question 39

The Vulcan Mold and Iron Company has assembled the following data regarding the use of direct labor in its fabricating department. Based on the data provided, compute the labor rate variance for the period.

A) $26,000 Favorable.
B) $26,000 Unfavorable.
C) $24,000 Unfavorable.
D) $24,000 Favorable.

Question 40

The Vulcan Mold and Iron Company has assembled the following data regarding the use of direct labor in its fabricating department. Based on the data provided, compute the labor efficiency variance for the period.

A) $30,000 Favorable.
B) $30,000 Unfavorable.
C) $28,000 Favorable.
D) $28,000 Unfavorable.

Question 41

MinnOil performs oil changes and other minor maintenance services (e.g., tire pressure checks) for cars. The company advertises that all services are completed within 15 minutes for each service. On a recent Saturday, 160 cars were serviced resulting in the following labor variances: rate: $19 unfavorable; efficiency: $14 favorable. If MinnOil's standard labor rate is $7 per hour, determine the actual wage rate per hour and the actual hours worked.

A)
B)
C)
D)

Question 42

Bowser Corporation produces compressors for automobile air conditioning units. The standard quantity of labor allowed per compressor is 10 minutes and the standard wage rate is $30 per hour. In March, the company produced 20,000 compressor units using 3,200 hours of labor at a total wage cost of $102,400. What was the labor efficiency variance for March?

A) $6,400 Favorable.
B) $4,000 Unfavorable.
C) $4,000 Favorable.
D) $2,400 Unfavorable.

Question 43

Lee Manufacturing uses a standard cost system with overhead applied based on direct labor hours. The manufacturing budget for the production of 5,000 units for the month of May included the following information.
During May, 6,000 units were produced and the direct labor efficiency variance was $1,500 unfavorable. Based on this information, the actual number of direct labor hours used in May was:

A) 9,900 hours.
B) 10,100 hours.
C) 11,900 hours.
D) 12,100 hours.

Question 44

Racemark Corporation produces taillight lenses for a number of automobile manufacturers. A production scheduling problem in April required the use of 500 hours of labor on an overtime basis in addition to the 14,000 standard hours allowed for the number of lenses actually produced in April. As a result of the overtime premium, the actual average wage rate for April was $32 compared to the standard rate of $25. What was the labor rate variance for April?

A) $3,500 Unfavorable.
B) $98,000 Unfavorable.
C) $101,500 Unfavorable.
D) $7.00 per hour.

Question 45

A company had a total labor variance of $15,000 favorable and a labor efficiency variance of $18,000 unfavorable. The labor price variance was:

A) $3,000 Favorable.
B) $3,000 Unfavorable.
C) $33,000 Favorable.
D) $33,000 Unfavorable.

Question 46

Bella Corporation produces a varied line of high-quality cabinets widely used by custom builders and kitchen designers. Bella currently produces all of the hardware used in the cabinets including hinges, drawer mechanisms, etc. The company has been approached by an outside vendor, which has offered to sell these items to Bella. If the vendor's proposal is accepted, the machinery currently used to produce the hardware will be of no further use and will be sold. The company controller is studying the vendor's proposal and has assembled data on the costs listed below. Which of the costs listed is relevant to the make-or-buy decision?

A) The original cost of the equipment currently used to make the hardware.
B) The salary of the president of Bella.
C) The depreciation on the equipment currently used to make the hardware (ignore tax effects).
D) The market value of the equipment currently used to make the hardware.

Question 47

Aril Industries is a multiproduct company that currently manufactures 30,000 units of Part 730 each month for use in production. The facilities now being used to produce Part 730 have fixed monthly overhead costs of $150,000, and a theoretical capacity to produce 60,000 units per month. If Aril were to buy Part 730 from an outside supplier, the facilities would be idle and 40% of fixed costs would continue to be incurred. There are no alternative uses for the facilities. The variable production costs of Part 730 are $11 per unit. Fixed overhead is allocated based on planned production levels.
If Aril Industries continues to use 30,000 units of Part 730 each month, it would realize a net benefit by purchasing Part 730 from an outside supplier only if the supplier's unit price is less than:

A) $12.00
B) $12.50
C) $13.00
D) $14.00

Question 48

Fitzpatrick Corporation makes a product sold to garden centers. It recently has discovered it could sell this product, Xylo, at an earlier stage in the production process to another manufacturer. Current costs to complete 2,000 pounds of Xylo are $10 per pound. Xylo sells for $12 per pound. It could sell AlmostXylo when it is only 75% complete as to total cost for $8.50 per pound. If AlmostXylo is processed into Xylo, operating income would:

A) Increase by $2,000.
B) Be unchanged.
C) Increase by $7,000.
D) Decrease by $5,000.

Question 49

Van Dusen Corporation produces several products from processing one ton of a mineral called Gummo. The material and processing costs for one ton of Gummo total $90,000, 30% of which is allocated to product Zeppo. One ton of Gummo yields 5,000 units of Zeppo, which can be sold at this point for $15 per unit. Alternatively, Zeppo can be further processed into a product called Chico at a total cost of $15,000 and then sold for $20 per unit. Of the cost and price information, which is irrelevant to the decision to sell Zeppo or further process it into Chico?

A) The $15 sales price of Zeppo.
B) The $20 sales price of Chico.
C) The $90,000 processing cost of Gummo.
D) The $15,000 additional processing cost of Chico.

Question 50

Van Dusen Corporation produces several products from processing one ton of a mineral called Gummo. The material and processing costs for one ton of Gummo total $90,000, 10% of which is allocated to product Zeppo. One ton of Gummo yields 5,000 units of Zeppo which can be sold at this point for $15 per unit. Alternatively, Zeppo can be further processed into 5,000 units of a product called Chico at a total cost of $15,000 and then sold for $20 per unit. What is the financial advantage (or disadvantage) of further processing Zeppo into Chico?

A) A financial advantage of $1,000.
B) A financial advantage of $10,000.
C) A financial advantage of $25,000.
D) A financial disadvantage of $15,000.

Question 51

Jones Enterprises manufactures three products, A, B, and C. During the month of May, Jones's production, costs, and sales data were as follows. Based on the above information, which one of the following alternatives should be recommended to Jones's management?

A) Sell both Product B and Product C at the split-off point.
B) Process Product B further but sell Product C at the split-off point.
C) Process Product C further but sell Product B at the split-off point.
D) Process both Products B and C further.

Question 52

Hyde Products, Inc., produces three grades of leather fabric: economy, standard, and luxury, which are used in automobile seating. Based on the following report of profitability in the past year, the company is considering eliminating its economy line. All fixed costs in the report are common and have been allocated based on yards of fabric sold.
If the economy grade of leather is dropped, how would the profitability of the standard grade be affected?

A) Profitability of the standard grade would remain as $12,000.
B) Profitability of the standard grade would be $108,000.
C) Profitability of the standard grade would become a loss of $25,500.
D) Profitability of the standard grade would become a loss of $88,000.

Question 53

Current business segment operations for Whitman, a mass retailer, are presented below.
Management is contemplating the discontinuance of the restaurant segment since "it is losing money." If this segment is discontinued, $30,000 of its fixed costs will be eliminated. In addition, Merchandise and Automotive sales will decrease 5% from their current levels. What will Whitman's total contribution margin be if the restaurant segment is discontinued?

A) $160,000
B) $220,000
C) $367,650
D) $380,000

Question 54

Backyard Environments produces a water fountain for use in residential gardens. It currently purchases the small water pump used in the fountain from an outside supplier at a cost of $2 per pump. The company makes and sells 2 million of the fountains per year. The company's vice president of manufacturing has been considering a proposal to produce the pumps internally. The machinery needed to produce the pumps could be purchased for $20,000. The machine would have a useful life of four years. It would require two workers paid $20 per hour to operate it for 2,000 hours per year. The factory space needed to accommodate the new machine would displace another production department that would be required to lease outside space at an annual cost of $195,000. Materials would cost $1.75 per pump. Additional overhead would amount to 25% of labor cost. For the purpose of the make-or-buy decision, what is the relevant unit cost to produce the pumps internally?

A) $1.90 per pump.
B) $1.80 per pump.
C) $1.8025 per pump.
D) $1.79 per pump.

Question 55

Blue Ridge Company currently manufactures 40,000 valves each year for use in one of its products. At this 40,000-unit level, the cost per unit for one of these valves is:
An outside vendor has offered to sell 40,000 of the valves to Blue Ridge for $31 per valve. If Blue Ridge accepts this offer, the factory space being used to produce the valves could be leased to another company at an annual rental of $144,000. However, Blue Ridge has determined that 60% of the fixed overhead applied to the valves would continue to be incurred even if the valves were purchased from the outside vendor. What is the amount of financial advantage or disadvantage of accepting the offer from the outside vendor?

A) $404,000 advantage.
B) $260,000 advantage.
C) $64,000 disadvantage.
D) $80,000 advantage.

Question 56

Reliance Aircraft Corporation currently manufactures a complex hydraulic valve that controls rudder movement in its popular 707 jet aircraft. The unit cost to produce the valve is:
Reliance has an offer from Kennametal Company to supply all 200 of the valves Reliance requires annually for $4,000 per unit. If the Reliance accepts the offer and ceases production of the valve, production workers and supervisors will be reassigned to other areas of 707 production. The equipment can't be used elsewhere and has no market value. The factory floor space devoted to the production of the valves, however, can be used by another division of the company that currently leases space elsewhere at an annual cost of $85,000. Which of the following costs is avoidable if Reliance accepts Kennametal's offer?

A) Supervisory salaries.
B) Depreciation of equipment (ignore taxes).
C) Depreciation of the building (ignore taxes).
D) The $85,000 cost of leasing space.

Question 57

Reliance Aircraft Corporation currently manufactures a complex hydraulic valve that controls rudder movement in its popular 707 jet aircraft. The unit cost to produce the valve is:
Reliance has an offer from Kennametal Company to supply all 200 of the valves Reliance requires annually for $4,000 per unit. If Reliance accepts the offer and ceases production of the valve, production workers and supervisors will be reassigned to other areas of 707 production. The equipment can't be used elsewhere and has no market value. The factory floor space devoted to the production of the valves, however, can be used by another division of the company that currently leases space elsewhere at an annual cost of $85,000. What is the financial advantage (or disadvantage) to Reliance of accepting Kennametal's offer?

A) $320,000 advantage.
B) $80,000 disadvantage.
C) $235,000 disadvantage.
D) $405,000 advantage.

Question 58

A Pareto analysis will indicate:

A) Which of several factors is most critical for improved performance.
B) How performance against one standard compares to performance against that standard last year.
C) How performance against one standard compares to best-in-the-industry.
D) How performance against one standard has improved over time.