Deck 9: Cost Accounting for Service Businesses

Question 1

Lots of Locks is an upscale hair salon with eight stylists.Its budget information follows: Since all of the stylists are paid the same rate,the proprietor allocates overhead to jobs based on direct labor hours.Angela Arnold brought her wedding party to Lots of Locks for styling.It took four designers two hours each and the supplies totaled $50.How much overhead was applied to the Arnold job?

A)$50
B)$80
C)$160
D)$500

Answer 1

B

Question 2

The practice of taking overhead costs previously in a single indirect cost pool and separating them into a number of homogeneous cost pools with separate cost drivers for each pool is:

A)Peanut-butter costing.
B)Process costing.
C)Activity based costing.
D)Job costing.

Answer 2

C

Question 3

There are several advantages to using activity-based costing.Which of the following is one of these advantages?

A)Services not performed in a department are allocated a portion of the cost of operating that department.
B)Each department can choose the activity base that relates best to its cost.
C)Simplified costing is time-consuming and expensive to administer.
D)Activity-based rates are much less time-consuming to prepare.

Answer 3

B

Question 4

An example of a direct cost that can be specifically identified with a job and does not have to be allocated to the job using an overhead rate is:

A)travel expenses.
B)fringe benefits.
C)utilities.
D)office machine lease costs.

Question 5

Examples of service businesses that would use job order costing would include all of the following except:

A)an accounting firm that has audit clients of various sizes and complexities.
B)a "quick oil change" shop that offers only basic maintenance services.
C)an automotive body repair shop specializing in collision repair.
D)a high end salon offering hair,manicure and spa services.

Question 6

Which of the following is generally not considered a service organization?

A)Hair stylists
B)Lawyers
C)Autoparts stores
D)Plumbers

Question 7

Hebert & Co.CPA's anticipates that partners will bill 1,000 professional hours,managers will bill 7,500 professional hours and staff accountants will bill 25,000 professional hours.Billing rates are $250,$150 and $75 for partners,managers and staff accountants,respectively.What is Hebert & Co.'s budgeted revenue?

A)$5,462,500
B)$3,250,000
C)$5,175,000
D)$3,750,000

Question 8

All of the operating expenses in a professional firm are:

A)Overhead costs.
B)Period costs.
C)Labor costs.
D)Product costs.

Question 9

A report that compares the budgeted costs for the job to the actual costs incurred and indicates the variances is a:

A)Budget analysis.
B)Job cost sheet.
C)Cost analysis.
D)Cost performance report.

Question 10

Which of the following should be included in computing a revenue budget for a professional services firm?

A)Wage rates.
B)Predetermined overhead rate.
C)Billing rate.
D)Direct costs.

Question 11

The first budget to be prepared for a professional services firm should be the:

A)Direct expense budget.
B)Labor budget.
C)Overhead budget.
D)Revenue budget.

Question 12

An example of an indirect cost that could be traced directly to individual jobs by examining invoices is:

A)Office rent.
B)Telephone and fax charges.
C)Depreciation expense on office machines.
D)Office supplies.

Question 13

A service firm,such as a law firm,would choose direct labor dollars over direct labor hours as a cost driver for overhead because:

A)Overhead is more related to dollars charged than hours worked.
B)Labor hours are harder to track.
C)Labor rates change and thus overhead is automatically updated.
D)Partners and managers incur overhead equally.

Question 14

Which of the following is a characteristic of a service organization?

A)Provides a tangible product
B)Carries large inventories
C)Receives payments for physical properties
D)Service is consumed at time it is provided

Question 15

Hebert & Co.CPA's anticipates that partners will bill 1,000 professional hours,managers will bill 7,500 professional hours and staff accountants will bill 25,000 professional hours.Billing rates are $250,$150 and $75 for partners,managers and staff accountants,respectively,and salary rates are $100,$60 and $30 for partners,managers and staff accountants,respectively.What is Hebert & Co.'s budgeted professional labor cost?

A)$3,500,000
B)$2,070,000
C)$2,500,000
D)$1,300,000

Question 16

Boyle's Body Shop repairs automobiles that have been involved in collisions.Its budget information follows: Since all of Boyle's technicians are paid the same rate,Boyle allocates overhead to jobs based on direct labor hours.Paul Evans brought his car to Boyle for fender repair.It took 5 hours and the new parts for the job totaled $200.If Evans was charged $500,what was the percentage of profit to the selling price?

A)35%
B)60%
C)50%
D)25%

Question 17

Boyle's Body Shop repairs automobiles that have been involved in collisions.Its budget information follows: Since all of Boyle's technicians are paid the same rate,Boyle allocates overhead to jobs based on direct labor hours.Paul Evans brought his car to Boyle for fender repair.It took 6 hours and the new parts for the job totaled $200.What was the total cost of the Evans job?

A)$410
B)$200
C)$260
D)$325

Question 18

Items that should be considered in developing a revenue budget for a professional firm include all of the following except:

A)Expected new business.
B)Expected mix of professional labor hours.
C)Expected mix of work.
D)All of these should be considered in preparing a revenue budget for a professional firm.

Question 19

A professional firm's budgeted income statement would include all of the following lines except:

A)Cost of Goods Sold.
B)Overhead.
C)Revenue.
D)Labor.

Question 20

In a professional services firm,the term "overhead" refers to:

A)Expenses other than professional labor that can be traced to specific jobs.
B)Indirect labor costs.
C)Indirect expenses incurred to support the activities of the firm.
D)Indirect expenses incurred in the factory.

Question 21

Which of the following is the best example of a non-financial performance measure for the learning and growth perspective of a college's balanced scorecard?

A)Size of endowment.
B)Number of degrees awarded.
C)Number of conferences attended by faculty members.
D)Percentage of students retained from freshman to sophomore year.

Question 22

Natasha's Interior Designs has support staff for its professional designers.The two professionals work a total of 1,800 hours each and make $45,000 each per year.The total support budget is $90,000,of which $60,000 is professional support,and $30,000 is general office overhead.A job requiring 30 professional hours should be billed how much for overhead if a simplified costing approach is used and hours is the cost driver?

A)$25
B)$30
C)$600
D)$750

Question 23

The practice of assigning costs evenly to jobs using a single overhead rate when different jobs actually consume resources in different proportions is sometimes called:

A)Smooth costing.
B)Process costing.
C)Activity-based costing.
D)Peanut-butter costing.

Question 24

Which of the following is the best example of a financial performance measure for a hotel's balanced scorecard?

A)Number of frequent-customer points awarded.
B)Time taken to register a guest.
C)Number of employee suggestions.
D)Revenue per available room.

Question 25

Which of the following is the best example of a non-financial performance measure for the customer perspective of an airline's balanced scorecard?

A)Percentage of seats filled.
B)Pilot flight hours.
C)Percentage of on-time arrivals.
D)Revenue per flight.

Question 26

Determining whether the benefit received from more refined information exceeds the cost of obtaining the information is a(n):

A)Pricing decision.
B)Activity-based cost model.
C)Cost/benefit decision.
D)Cost performance report.

Question 27

In creating a balanced scorecard,the number of quality defects would belong to which category of performance measures?

A)Learning and Growth
B)Internal Business Processes
C)Customer
D)Financial

Question 28

In creating a balanced scorecard,increasing operating income through cost reduction would belong to which category of performance measures?

A)Learning and Growth
B)Internal Business Processes
C)Customer
D)Financial

Question 29

Consider the budget information for Bert and Ernie Design firm: Bert and Ernie decide there are two cost pools,design support,which is assigned to jobs based on the number of rooms redone,and facilities costs,which is assigned to jobs based on the number of professional labor hours.The design support cost pool includes design equipment depreciation and samples and books.The lease expense and utilities are considered facilities costs. What is the budgeted rate per cost driver for facilities costs?

A)$17.50
B)$1.05
C)$.70
D)$37.50

Question 30

Shepherd and Ford,a CPA firm uses activity-based costing to determine the costs of its cases.Information about costs follow: The Harrison audit required 80 professional hours,20 of which were partner hours,and labor costs totaled $20,000.How much overhead was assigned to the Harrison audit?

A)$12,400
B)$14,000
C)$6,000
D)$13,600

Question 31

Sanborn Architectural Designs Inc.has three partners that each earn $80,000 per year,and three associates that earn $58,000 per year.Each partner and associate has 2,000 billable hours per year.Using a simplified approach,if a partner worked 10 hours on a project,the amount of labor cost that should be billed to the project is:

A)$350.
B)$200.
C)$320.
D)$345.

Question 32

In creating a balanced scorecard,the extent of employee training on new processes would belong to which category of performance measures?

A)Learning and Growth
B)Internal Business Processes
C)Customer
D)Financial

Question 33

Sanborn Architectural Designs Inc.has three partners that each earn $80,000 per year,and three associates that earn $58,000 per year.Each partner and associate has 2,000 billable hours per year.Using an activity-based costing approach,if a partner worked 10 hours on a project,the amount of labor cost that should be billed to the project is:

A)$200.
B)$320.
C)$400.
D)$500.

Question 34

Hunter and Quinn Collision Repair uses activity-based costing to determine the costs of its cases.Information about costs follow: Seth's car was repaired after he was involved in a rear-end collision.The repair involved 3 hours of machine time,5 hours of labor at $30 per hour,and the rear of the car was repainted.How much overhead was assigned to Seth's repair job?

A)$2,000
B)$941
C)$990
D)$840

Question 35

Lawrence and Louis Law Firm uses activity-based costing to determine the costs of its cases.Information about costs follow: The Laurel case required 60 professional hours,20 of which were partner hours,and labor costs totaled $10,000.If direct costs relating to the case were $1,000,what were the total costs of the Laurel case?

A)$23,000
B)$25,500
C)$21,500
D)$15,500

Question 36

Which of the following is the best example of a non-financial performance measure for the internal business process perspective of a fast food restaurant's balanced scorecard?

A)Number of repeat customers
B)Drive-through response times.
C)Monthly revenue growth.
D)Employee retention percentage.

Question 37

Which of the following is not one of the categories of a balanced scorecard?

A)Customer
B)Financial
C)Learning and Growth
D)Quality

Question 38

In creating a balanced scorecard,industry market share would belong to which category of performance measures?

A)Learning and Growth
B)Internal Business Processes
C)Customer
D)Financial

Question 39

Consider the budget information for Bert and Ernie Design firm: Bert and Ernie decide there are two cost pools,design support,which is assigned to jobs based on the number of rooms redone,and facilities costs,which is assigned to jobs based on the number of professional labor hours.The design support cost pool includes design equipment depreciation and samples and books.The lease expense and utilities are considered facilities costs. What is the budgeted rate per cost driver for design support?

A)$17.50
B)$35.00
C)$ 0.35
D)$ 0.70

Question 40

Thomas and James,a law firm,has support staff for its attorneys.The two attorneys work a total of 2,000 hours each and make $80,000 each per year.The total support budget is $200,000,of which $160,000 is professional support,and $40,000 is general office overhead.A job requiring 50 professional hours should be billed how much for overhead if a simplified costing approach is used and labor cost is the cost driver?

A)$625
B)$2,000
C)$2,500
D)$1,000

Question 41

Hicks and Greene,a CPA firm that uses job order costing,is analyzing the profitability of its audits.During the year,the firm audited the Esterline Company,for which it charged $20,000.Budget information for the firm follows: Partner,associates and paralegal hourly salary rates are $100,$60 and $20,respectively.
Budgeted and actual time for the Esterline audit follows: In addition,the firm incurred $2,320 in travel costs related to Esterline,but the firm had budgeted for $2,500 of direct costs.
(a)Assuming that Hicks and Greene allocates overhead to jobs using direct labor cost as the cost driver,compute the predetermined overhead rate.
(b)Compute the cost of the Esterline audit.
(c)Prepare a cost performance report for the Esterline audit.
(d)Compute the profit that Hicks and Greene had on the Esterline audit.

Question 42

Cost of activities incurred to remedy shipment of defective products to customers are classified as:

A)prevention costs.
B)appraisal costs.
C)internal failure costs.
D)external failure costs.

Question 43

Design quality measures:

A)how many products are manufactured without defects.
B)how well the product or service performs relative to its intended design.
C)how much quality processes are improved.
D)how well the product or service satisfies customer needs.

Question 44

Product testing is an example of which type of cost on a cost of quality report?

A)Prevention.
B)Appraisal.
C)Internal failure.
D)External failure.

Question 45

Walters and Witt,a law firm,is analyzing the profitability of its cases.During the year,the firm represented the Umberg Company in numerous routine legal issues,for which it charged a monthly retainer fee of $2,500.Budget information for the firm follows: Partner,associates and paralegal hourly salary rates are $100,$60 and $20,respectively.
Actual time spent for the Umberg cases follows: Walters and Witt uses activity-based costing to determine the cost of its cases.With a consultant's help,the firm has developed the following information about cost pools: (a)Compute the budgeted rate per unit of cost driver for each cost pool.
(b)Using activity-based costing,compute the cost of the Umberg work this year.
(c)Compute the profit that Walters and Witt had on the Umberg work this year.

Question 46

Which of the following is not true about quality costs?

A)Lost sales resulting from quality problems would be classified as external failure costs.
B)If a company is doing a good job in prevention activities,appraisal costs should be minimal.
C)It is generally less expensive if a defective good is shipped to a customer than if the defect is detected prior to shipment.
D)Generally,if a company devotes resources to prevention,its appraisal,internal failure and external failure costs should decline.

Question 47

Kelley and Wright,Attorneys,have the following budgeted items for the month of May: Prepare a budgeted income statement for the month of May.

Question 48

When creating a balanced scorecard,the following guidelines should be followed in choosing performance measures except:

A)There should not be too many performance measures.
B)There should be more financial measures than any of the other categories.
C)The measures should be consistent with company strategy.
D)Employees should be able to understand and have control over the performance measures on which they are evaluated.

Question 49

On a cost of quality report,scrap and spoilage are repairs on defective equipment are examples of:

A)appraisal costs.
B)external failure costs.
C)internal failure costs.
D)prevention costs.

Question 50

On a cost of quality report,appraisal costs:

A)include the cost of quality circles where employees meet to discuss how they can improve processes.
B)are incurred to determine the value of a damaged product.
C)are incurred to identify which products do not conform to specification before they are shipped.
D)include the cost to correct defective units before they are shipped.

Question 51

The cost of activities that are incurred to correct defective products before they are shipped are:

A)prevention costs.
B)appraisal costs.
C)internal failure costs.
D)external failure costs.

Question 52

The degree to which a product or service performs relative to its intended design is:

A)conformance quality.
B)service quality.
C)design quality.
D)process quality.

Question 53

Dye and Dye,Attorneys-at-Law,each bill 1,500 hours per year and receive pay of $100,000 each.Four paralegals work for the firm and each receives pay of $40,000 and works 2,000 hours per year.Overhead of $396,000 is anticipated,of which $300,000 is attorney support,and the rest is paralegal support.Determine overhead under each of the following circumstances:
a.A simplified cost approach is used based on hours.
b.A simplified cost approach is used based on payroll dollars.
c.An activity-based costing approach is used.Attorney support is based on labor costs,and paralegal support is based on hours worked.

Question 54

Listed below are various costs from the Cost of Quality reports from various companies: Identify each cost as a prevention cost,appraisal cost,internal failure cost or external failure cost.

Question 55

Which of the following would not be classified as an external failure cost on a cost of quality report?

A)customer support representatives.
B)labor costs to replace recalled brake parts on automobiles.
C)the cost of a batch of chemicals that was scrapped when too much acid was added.
D)a coupon for a free meal given to a customer because his steak was too well done.

Question 56

Listed below are balanced scorecard measure for various companies.Label each as either Learning and Growth,Internal Business Processes,Customer or Financial.

Question 57

On a cost of quality report,employee training and supplier evaluation are examples of:

A)appraisal costs.
B)external failure costs.
C)internal failure costs.
D)prevention costs.

Question 58

On a cost of quality report,the cost of activities that are incurred to preclude the production of a product or the execution of a service that does not conform to its design specifications is classified as a(n):

A)prevention cost.
B)appraisal cost.
C)internal failure cost.
D)external failure cost.

Question 59

Domino Consulting has two departments,Information Technology Consulting and General Business Consulting.The firm has Partners,Senior Consultants and Junior Consultants in each department.The firm is preparing its budgets for the upcoming year.
The controller received the following information from the marketing department about anticipated demand for the firm's products in the upcoming year: The controller then worked with the human resources department to determine the following information about staffing and salary rates for each department: The controller has also determined that in order to be profitable,billing rates should be three times the amount paid to employees.The marketing department has determined that billing rates computed on that basis are comparable to what other consulting firms charge.
(a)Prepare a revenue budget for Domino Consulting Company.
(b)Prepare a labor budget for Domino Consulting Company.

Question 60

Joleen Harmon,CPA,has two clients and uses a job order cost system.Client A requires 20 hours of partner time and 100 hours of staff time.Client B will use 12 hours of partner time and 75 hours of staff time.Partners are paid $85 an hour and bill support time at 50% of their hourly rate.Staff are paid $25 an hour and bill support time at $20 per billable hour.What is the total charge to each of these clients if profit is added at 20% over cost?