CMA Part I SU 1-5 Review

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  1. A manufacturing company has the opportunity to submit a bid for 20 units of a product on which it has already produced two 10-unit lots.

    The production manager believes that the learning experience observed on the first two lots will continue for at least the next two lots.
    The direct labor required on the first two lots was as follows: 5,000 direct labor hours for the first lot of 10 units 3,000 additional direct labor hours for the second lot of 10 units.

    The learning rate experienced by the company on the first two lots of this product is

    • Answer (D) is correct.
    • Learning curve analysis is used to project productivity gains resulting from the increased rate at which people perform tasks as they gain experience. The underlying assumption of learning curve analysis is that workers gain productivity at a predictable rate as they gain experience with a new process.

    For this company, a total of 8,000 hours was spent to complete two lots of product. The cumulative average spent on the two lots was therefore 4,000 hours per lot (8,000 ÷ 2).

    This cumulative average of 4,000 is 80% of the 5,000 hours that were spent on the first lot. The learning curve is therefore 80%.
  2. Costs are allocated to cost objects in many ways and for many reasons. Which one of the following is a purpose of cost allocation?
    A. Aiding in variable costing for internal reporting.
    B. Measuring income and assets for external reporting.
    C. Budgeting cash and controlling expenditures.
    D. Evaluating revenue center performance.
    • Answer (B) is correct.
    • Cost allocation is the process of assigning and reassigning costs to cost objects. It is used for those costs that cannot be directly associated with a specific cost object. Cost allocation is often used for purposes of measuring income and assets for external reporting purposes. Cost allocation is less meaningful for internal purposes because responsibility accounting systems emphasize controllability, a process often ignored in cost allocation.
  3. The difference between Valyn Corporation’s operating income calculated on the absorption costing basis and calculated on the variable costing basis was

    A. $40,000
    B. $90,000
    C. $65,000
    D. $25,000

    Sales in units 140,000 125,000
    Production in units 140,000 130,000

    Fixed manufacturing overhead 5.00
    • Answer (D) is correct.
    • The difference is caused by the capitalization of some of the fixed manufacturing overhead. When inventories increase during the period, the absorption method capitalizes that overhead and transfers it to future periods. The variable costing method expenses it in the current period.

    Inventories increased by 5,000 units during the period, and each of those units would have included $5 of fixed manufacturing overhead under absorption costing. Accordingly, $25,000 of fixed manufacturing overhead would have been capitalized.

    Recognizing $25,000 of fixed costs in the balance sheet instead of the income statement results in a $25,000 difference in income between the two costing methods.
  4. At LCB, variable overhead is applied on the basis of $1.00 per direct labor dollar. Based on historical costs, LCB knows that the production of 40 engines will incur $100,000 of fixed overhead costs. The bid request is for an additional 40 units; all companies submitting bids are allowed to charge a maximum of 25% above full cost for each order.

    Cumulative                     Total Cumulative  Costs
    Units Produced        Materials  Labor
    10                    $ 60,000    $120,000
    20                    120,000       192,000 40                     240,000      307,200

    In order to ensure that the company would not lose money on the project, LCB’s minimum bid for the 40 units would be

    A. $708,640
    B. $608,640
    C. $885,800
    D. $760,800
    • Answer (B) is correct.
    • The company is permitted to bid 25% above full cost (including fixed overhead). Given a learning curve of 80% and a cumulative average unit labor cost for 40 units of $7,680 ($307,200 ÷ 40), the additional labor costs for the next 40 units can be determined.

    Cumulative average unit labor cost for 80 units is estimated to be $6,144 ($7,680 × 80%).

    Estimated total labor cost for 80 units is $491,520 (80 units × $6,144). Thus, the incremental labor cost of the last 40 units is expected to be $184,320 ($491,520 – $307,200).

    Variable overhead is $1 per direct labor dollar, or $184,320. Adding $240,000 for materials and $100,000 for fixed overhead results in a full cost of $708,640 ($184,320 DL + $184,320 VOH + $240,000 DM + $100,000 FOH).

    However, that amount includes $100,000 of fixed overhead that would presumably not increase as a result of the production. Thus, if the company obtains the contract at a price of $608,640 ($708,640 – $100,000), it will break even.

    The minimum bid is therefore $608,640: the incremental cost of labor, variable overhead, and raw materials.
  5. Which of the following statements is true for a firm that uses variable costing?

    A. The cost of a unit of product changes because of changes in number of units manufactured.
    B. An idle facility variation is calculated.
    C. Profits fluctuate with sales.
    D. Product costs include variable administrative costs.
    • Answer (C) is correct.
    • In a variable costing system, only the variable costs are recorded as product costs. All fixed costs are expensed in the period incurred.

    Because changes in the relationship between production levels and sales levels do not cause changes in the amount of fixed manufacturing cost expensed, profits more directly follow the trends in sales.
  6. Which of the following is not a benefit of lean production?

    A. Improved on-time delivery.
    B. Lower training costs.
    C. Lower central support costs.
    D. Reduced setup time.
    • Answer (B) is correct.
    • Since every worker in a manufacturing cell must be able to operate every piece of machinery in the cell, reduced training costs do not necessarily accompany the deployment of lean production.
  7. Under the FIFO method, Albany Mining’s total cost of units in the ending work-in-process inventory at May 31 is

    A. $154,800
    B. $153,264
    C. $155,424
    D. $156,960

    BWIP on May 132,000 60% 20%
    Started in production 200,000
    Completed production(184,000)
    EWIP on May 3148,00090%40%

    Direct materials $54,560 $   468,000
    Direct labor 20,320 182,880
    Factory overhead 15,240 391,160
    • Answer (B) is correct.
    • Under FIFO, the equivalent-unit materials cost is $2.25, and the EWIP contains 43,200 equivalent units of materials. The equivalent-unit conversion cost is $2.92, and the EWIP contains 19,200 equivalent units of conversion cost. Consequently, EWIP equals $153,264 [(43,200 × $2.25) + (19,200 × $2.92)].
  8. Which method of measuring the costs to be assigned to products or services uses budgeted rates for direct costs but applies those rates to the actual quantities of the inputs?

    A. Extended normal costing.
    B. Actual costing.
    C. Normal costing.
    D. Standard costing.
    • Answer (A) is correct.
    • Extended normal costing assigns both direct costs (such as labor and materials) and overhead to cost objects by using budgeted rates.

    The direct cost assigned equals the budgeted rate times the actual amount of the direct-cost input. The overhead assigned equals the budgeted rate times the actual amount of whichever driver or other base is used for cost assignment purposes.

    The use of budgeted rates for overhead as well as direct costs may be helpful to avoid fluctuations during the year. It is also helpful when some direct costs, such as direct labor, may not be known until year end.
  9. The appropriate method for the disposition of underapplied or overapplied overhead of a manufacturer
    A. Depends on the significance of the amount.
    B. Is to finished goods inventory only.
    C. Is apportioned to cost of goods sold and finished goods inventory.
    D. Is to cost of goods sold only.
    • Answer (A) is correct.
    • Overapplied or underapplied overhead should be disposed of at the end of an accounting period by transferring the balance either to cost of goods sold (if the amount is not material) or to cost of goods sold, finished goods inventory, and work-in-process inventory.

    Theoretically, the allocation is preferred, but, because the amount is usually immaterial, the entire balance is often transferred directly to cost of goods sold. Thus, the entry depends upon the significance of the amount.
  10. The four categories of costs associated with product quality costs are

    A. Warranty, product liability, training, and appraisal.
    B. External failure, internal failure, training, and appraisal.
    C. External failure, internal failure, prevention, and appraisal.
    D. External failure, internal failure, prevention, and carrying.
    • Answer (C) is correct.
    • IMA’s Management Accounting Glossary lists four categories of quality costs:  prevention, appraisal, internal failure, and external failure (lost opportunity).

    Costs of prevention include attempts to avoid defective output, including employee training, review of equipment design, preventive maintenance, and evaluation of suppliers.

    Appraisal costs include quality control programs, inspection, and testing.

    Internal failure costs are incurred when detection of defective products occurs before shipment, including scrap, rework, tooling changes, and downtime.

    External failure costs are incurred after the product has been shipped, including the costs associated with warranties, product liability, and customer ill will.
  11. Valyn Corporation’s total fixed costs expensed this year on the absorption costing basis were

    A. $2,055,000
    B. $2,120,000
    C. $2,095,000
    D. $2,030,000

    Fixed selling expenses 7.00 980,000 980,000
    Fixed administrative expenses 3.00 420,000 425,000
    Sales in units 140,000 125,000
    Production in units 140,000 130,000
    Fixed manufacturing overhead 5.00
    Fixed manufacturing overhead 700,000 715,000
    Beginning finished goods inventory in units 35,000
    • Answer (C) is correct.
    • Under the absorption method, all selling and administrative fixed costs are charged to the current period. Accordingly, $980,000 of selling expenses and $425,000 of actual fixed administrative expenses were expensed during the year.

    The fixed manufacturing costs must be calculated after giving consideration to the increase in inventory during the period (some fixed costs were capitalized) and to the underapplied overhead. The beginning finished goods inventory included 35,000 units, each of which had absorbed $5 of fixed manufacturing overhead. Each unit produced during the year also absorbed $5 of fixed manufacturing overhead. Given that 125,000 of those units were sold, cost of goods sold was debited for $625,000 of fixed overhead (125,000 units × $5).

    At year end, the underapplied overhead was also added to cost of goods sold. Because production was expected to be 140,000 units, the overhead application rate for the $700,000 of planned fixed manufacturing overhead was $5 per unit. Only 130,000 units were manufactured. Hence, $650,000 (130,000 units × $5) of overhead was applied to units in process. Because inventory increased from 35,000 to 40,000 units (35,000 BI + 130,000 produced – 125,000 sold), $25,000 (5,000-unit increase × $5) of the applied fixed manufacturing overhead for the period was inventoried, not expensed.

    Actual overhead was $715,000, so the underapplied overhead was $65,000 ($715,000 – $650,000). This amount was charged to cost of goods sold at year end.

    The total of the fixed costs expensed was therefore $2,095,000 ($980,000 selling expenses + $425,000 administrative expenses + $625,000 standard manufacturing overhead costs of units sold + $65,000 underapplied overhead).
  12. Activities, their drivers, and their costs may be classified as unit-level, batch-level, product-level, and facility-level. If activity-based costing (ABC) information is prepared for internal purposes, which costs are most likely to be treated as period costs?

    A. Unit-level.
    B. Facility-level.
    C. Product-level.
    D. Batch-level.
    • Answer (B) is correct.
    • A difficulty in applying ABC is that, although the first three levels of activities pertain to specific products or services, facility-level activities do not. Thus, facility-level costs are not accurately assignable to products.

    The theoretically sound solution may be to treat these costs as period costs. Nevertheless, organizations that apply ABC ordinarily assign them to products to obtain a full absorption cost suitable for external financial reporting in accordance with GAAP.

    However, for internal purposes, facility-level costs should be treated as period costs to avoid distorting decisions about cost efficiency, pricing, and profitability.
  13. Conversion costs are

    A. The sum of raw materials costs and direct labor costs.
    B. All costs associated with manufacturing other than direct labor costs and raw material costs.
    C. The sum of direct labor costs and all factory overhead costs.
    D. Manufacturing costs incurred to produce units of output.
    • Answer (C) is correct.
    • Conversion costs are the direct labor, indirect materials, and factory overhead incurred to convert raw materials and transferred-in goods in a cost center to finished goods.
  14. A major advantage of the first-in, first-out (FIFO) process-costing method over the weighted-average process-costing method is

    A. That current-period cost per unit is highlighted under the FIFO method.
    B. That inventories are eliminated from consideration in the FIFO method.
    C. The simplicity of the FIFO method.
    D. That only ending inventory costs need to be separately computed when using the FIFO method.
    • Answer (A) is correct.
    • First-in, first-out (FIFO) process costing involves backing out beginning inventory costs when computing work performed. This has the effect of highlighting the most recent costs.
  15. The Chocolate Baker specializes in chocolate baked goods. The firm has long assessed the profitability of a product line by comparing revenues to the cost of goods sold.

     However, Barry White, the firm’s new accountant, wants to use an activity-based costing system that takes into consideration the cost of the delivery person.

    Listed below are activity and cost information relating to two of Chocolate Baker’s major products.

                              Muffins Cheesecake
    Revenue              $53,000 $46,000
    Cgs                       26,000 21,000
    Delivery Activity:
    Number of deliveries 150 85
    Average length of delivery 10 minutes 15 minutes
    Cost per hour for delivery $20.00 $20.00

    Using activity-based costing, which one of the following statements is correct?

    A. The muffins have a higher profitability as a percentage of sales and therefore are more advantageous.
    B. The cheesecakes are $75 more profitable.
    C. The muffins are $2,000 more profitable.
    D. The muffins are $1,925 more profitable.
    • Answer (D) is correct.
    • White’s first step is to calculate the gross margin on the two products:MuffinsCheesecakeRevenues$53,000$46,000Cost of goods sold(26,000)(21,000)Gross margin$27,000$25,000The next step is to calculate total delivery cost for each product:MuffinsCheesecakeNumber of deliveries15085Times:  minutes per delivery×   10×   15Total delivery minutes1,5001,275Divided by:  minutes per hour÷   60÷   60Total delivery hours25.0021.25Times:  delivery cost per hour× $20× $20Total delivery cost$500$425The operating profits on these two products, and the difference between them, can now be determined:Muffins:$27,000 – $500 =$26,500Cheesecake:$25,000 – $425 =$24,575Excess$  1,925
  16. Martin Fabricating uses a cumulative average-time learning curve model to monitor labor costs. Data regarding two recently completed batches of a part that is used in tractor-trailer rigs is as follows:

    Batch Number    Cumulative Average Number of Units       Hours Per Unit
    1                 50                     20
    2                 50                     16

    If the same rate of learning continues for the next several batches produced, which of the following best describes
    (1) the type (i.e., degree) of learning curve that the firm is experiencing and
    (2) the average hours per unit for units included in the 201-400 range of units produced (i.e., the last 200 units)?
    Type (Degree) ofAverage Hours PerLearning CurveUnit for Units 201-400

    A.       80%     10.24
    B.       80%       7.68
    C.       20%      10.24
    D.       20%       3.84
    • Answer B is correct.
    • The learning curve percentage is determined by noting the hours used in producing the first doubling of output as a percentage of the hours used in the original batch.

    Since 16 is 80% of 20, Martin is experiencing an 80% learning curve. The average hours used to produce the 4th batch of output (units 201 – 400) can be calculated as follows: Units Cumulative Cumulative Cumulative Time Spent Time Spent in Units Average Total on on Units Batch Batch Produced Labor Hours Time Batch in Batch 15050 201,000 1,000 20250 100161,60060012310020012.82,5609609.6420040010.244,0961,5367.68
  17. IMA's overarching ethical principles include:
    Honesty, Fairness, Objectivity, and Responsibility.

    Members shall act in accordance with these principles and shall encourage others within their organizations to adhere to them.
  18. IMA's:standards that guide our conduct.
    • III. INTEGRITY    
  19. IMA COMPETENCE Standard (4):
    Each member has a responsibility to:

    • Maintain an appropriate level of professional expertise by continually developing
    • knowledge and skills.

    • Perform professional duties in accordance with relevant laws, regulations, and technical
    • standards.

    • Provide decision support information and recommendations that are accurate, clear,
    • concise, and timely.

    • Recognize and communicate professional limitations or other constraints that would
    • preclude responsible judgment or successful performance of an activity.
  20. IMA CONFIDENTIALITY Standard (3):
    Each member has a responsibility to:

    Keep information confidential except when disclosure is authorized or legally required.

    Inform all relevant parties regarding appropriate use of confidential information. Monitor subordinates' activities to ensure compliance.

    Refrain from using confidential information for unethical or illegal advantage.
  21. IMA INTEGRITY Standard (3):
    Each member has a responsibility to:

    • Mitigate actual conflicts of interest, regularly communicate with business associates to
    • avoid apparent conflicts of interest. Advise all parties of any potential conflicts.

    Refrain from engaging in any conduct that would prejudice carrying out duties ethically.

    Abstain from engaging in or supporting any activity that might discredit the profession.
  22. IMA CREDIBILITY Standard (3):
    Each member has a responsibility to:

    Communicate information fairly and objectively.

    • Disclose all relevant information that could reasonably be expected to influence an
    • intended user's understanding of the reports, analyses, or recommendations.

    • Disclose delays or deficiencies in information, timeliness, processing, or internal controls
    • in conformance with organization policy and/or applicable law.
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CMA Part I SU 1-5 Review
2014-02-25 22:29:07

CMA Part 1 SU 1-5
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