Question 1

The accounting rate of return method of evaluating capital investments explicitly considers the time value of money.

Accepted Answer

The accounting rate of return method does not explicitly consider the time value of money. It only looks at the expected income and expenses of an investment to determine its profitability.

Question 2

The Xu Corp. is considering making an investment that costs $10 million. It expects to receive cash inflows of $3 million per year for eight years. The interest rates right now in the market are 5%. If interest rates rise to 6%, then:

Accepted Answer

The answer of The Xu Corp. is considering making an...

Question 3

Let AP = actual price of raw materials, SP = the standard price, AQ = the actual quantity of materials used, and SQ = the standard quantity of materials for a given level of production. The raw materials usage variance equals

Accepted Answer

The raw materials usage variance is calculated as the difference between the actual quantity and the standard quantity of materials used, multiplied by the standard price per unit. This is represented by the formula SP × (AQ - SQ).

Question 4

Let AP = actual price of raw materials, SP = the standard price, AQ = the actual quantity of materials used, and SQ = the standard quantity of materials for a given level of production. The raw materials price variance equals

Accepted Answer

The raw materials price variance is the difference between the actual cost of the materials used and the expected cost. This can be calculated as AQ × (AP - SP), where AQ is the actual quantity of materials used, AP is the actual price paid for those materials, and SP is the standard price for those materials. This formula measures the impact of changes in the price of raw materials on the cost of production.

Question 5

The type of budget that adjusts the budgeted costs as levels of revenue and output vary is called a

Accepted Answer

A flexible budget adjusts the budgeted costs based on changes in levels of revenue and output, making it the best fit for this description. A static budget does not change and is not adjusted for varying levels of revenue and output. A participatory budget involves input from various departments or individuals within an organization, but does not necessarily adjust for changes in revenue or output. A zero-based budget requires all expenses to be justified from scratch each budget period, but may not necessarily be adjusted for changes in revenue or output.

Question 6

In most companies, the starting point of setting a budget is typically

Accepted Answer

Sales is usually the starting point of setting a budget as it provides an estimate of the company's revenue for the upcoming period, based on historical data, industry trends, and market conditions. The budget is then built around the expected sales figure, with expenses and investments allocated accordingly.

Question 7

A likely disadvantage of a top-down budgetary process, as compared to a participatory process, is

Accepted Answer

A top-down budgetary process involves decision-making by upper management without input from lower-level managers. This can result in reduced utilization of information possessed by lower-level managers, as their insights and perspectives may not be considered in the budget-setting process. In a participatory process, however, lower-level managers are involved in the decision-making process, allowing for greater utilization of their knowledge and expertise.

Question 8

The fixed overhead volume spending variance = budgeted fixed overhead - applied fixed overhead.

Accepted Answer

The fixed overhead volume spending variance is calculated by comparing the budgeted fixed overhead to the applied fixed overhead. If the applied fixed overhead is less than the budgeted fixed overhead, then the variance is unfavorable. If the applied fixed overhead is greater than the budgeted fixed overhead, then the variance is favorable.

Question 9

The fixed volume spending variance = actual fixed overhead - budgeted fixed overhead.

Accepted Answer

The fixed volume spending variance actually compares the budgeted fixed overhead to the fixed overhead that was applied to the products, not the actual fixed overhead.

Question 10

The fixed overhead spending variance = actual fixed overhead - budgeted fixed overhead.

Accepted Answer

The formula for fixed overhead spending variance is correct, therefore the answer is A.

Question 11

The variable overhead efficiency variance = actual price × (actual labor hours - standard labor hours)

Accepted Answer

The formula for variable overhead efficiency variance is actually calculated as follows: standard price × (actual labor hours - standard labor hours). The difference in the formula is that it uses the standard price instead of the actual price.

Question 12

The variable overhead spending variance = standard price × (actual labor hours - standard labor hours)

Accepted Answer

The variable overhead spending variance is calculated as the difference between the actual variable overhead costs incurred and the standard variable overhead costs that should have been incurred for the actual production level, not based on labor hours difference. It is typically calculated as (Actual Variable Overhead Rate - Standard Variable Overhead Rate) × Actual Activity Level.

Question 13

The variable overhead spending variance = actual labor hours × (actual price - standard price)

Accepted Answer

This formula is correct and represents the calculation for the variable overhead spending variance.

Question 14

Let AR = actual hourly rate for direct labor, SR = the standard hourly rate, AH = the actual direct labor hours used, and SH = the standard direct labor hours for a given level of production. The direct labor efficiency variance equals

Accepted Answer

The direct labor efficiency variance measures the difference between the actual amount of labor hours used and the standard amount of labor hours that should have been used, multiplied by the standard hourly rate. This is represented by the formula:
Direct labor efficiency variance = SR × (AH - SH)

Choice B is incorrect because it uses the actual hourly rate instead of the standard hourly rate. 
Choice C is incorrect because it multiplies the actual hours used by the difference between the actual and standard hourly rates, which is not a correct formula for calculating the efficiency variance. 
Choice D is incorrect because it multiplies the standard hours by the difference between the actual and standard hourly rates, which is not a correct formula for calculating the efficiency variance.

Question 15

Let AR = actual hourly rate for direct labor, SR = the standard hourly rate, AH = the actual direct labor hours used, and SH = the standard direct labor hours for a given level of production. The direct labor rate variance equals

Accepted Answer

The direct labor rate variance is calculated as the difference between the actual hourly rate and the standard hourly rate, multiplied by the actual hours worked, which is represented by AH × (AR - SR).

Question 16

A company is considering whether to continue to make a product itself, or whether to buy it from another company. If it stops making the product, it will sell its existing factory and fire the workers who now make the product. Which of the following is usually not a "relevant" factor in making this decision?

Accepted Answer

The original cost of the factory is a sunk cost and therefore not relevant to the decision at hand. The decision should be based on future costs and benefits, such as the price per unit from the other company, severance costs, and cash received from selling the old factory.

Question 17

The Liu Company is trying to decide whether to accept a special order of 1,000 items from a new customer. It has limited capacity. If it accepts this order, it will not be able to produce 200 units for one of its existing customers. The loss of revenue from the 200 units is best described as which of the following?

Accepted Answer

The loss of revenue from not being able to produce 200 units for an existing customer is an opportunity cost, as it represents the potential revenue that could have been earned if the company had not accepted the new customer's special order.

Question 18

Which of the following is usually not a "relevant" factor in making short-term decisions?

Accepted Answer

Past costs that are not affected by the decision are typically not relevant factors in making short-term decisions. Short-term decisions are usually made to maximize immediate profitability and involve only costs and revenues that are directly affected by the decision.

Question 19

Assume that the standard cost to make one unit of product includes 10 units of raw materials at a standard price of $3 per unit. In July, 20,800 units of raw materials that cost $2.96 each were used to produce 2,000 units of finished product. What is the materials quantity variance?

Accepted Answer

The materials quantity variance is calculated as (Actual quantity used - Standard quantity allowed) x Standard price. In this case, the actual quantity used is 20,800 units, the standard quantity allowed is 2,000 units x 10 units per unit = 20,000 units, and the standard price is $3 per unit. Therefore, the materials quantity variance is (20,800 - 20,000) x $3 = $2,400 unfavorable.

Question 20

Assume that the standard cost to make one finished unit includes two hours of direct labor at $9 per hour. During May, 25,000 direct labor hours were worked, 12,000 units of product were manufactured, and total direct labor cost was $219,000. What is the (approximate) labor efficiency variance for May?

Accepted Answer

The answer of Assume that the standard cost to make...

Quiz 5: Accounting for Inventory