Accounting Exam 2 Review PDF

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Manageial Exam Practice Questions...

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1. Which of the following is NOT a benefit of budgeting- the budgeting process enables managers to uncover bottlenecks as they occur. a. Requires all levels of management to plan ahead and formalize goals on a recurring basis b. Provides definite objectives for evaluating performance at each level of responsibility c. Creates an early warning system for potential problems d. Facilitates coordination of activities within the business e. Results in greater management awareness of the entity’s overall operations and the impact of external f. factors g. Motivates personnel throughout organization to meet planned objectives 2. Budgets are used to accomplish all the following tasks, except recording actual results a. Planning for the future b. Controlling operations c. Directing operations 3. Which of the following budgets or financial statements is part of the operating budget sales budget a. Sales Budget. i. First budget prepared ii. All other budgets depend Sales Budget (Forecast) iii. Derived from the sales forecast, management’s best estimate of sales revenue for the budget period iv. # units expected to be sold and $ Sales Revenues each month or quarter, broken down between cash and v. credit sales. b. Production Budget. i. Shows the units that must be produced to meet anticipated sales ii. Derived from Sales Budget plus the desired change in ending finished goods (ending finished goods less the beginning finished goods units) iii. Safety Stock: extra inventory of finished goods that is kept on hand in case demand is higher than predicted or problems in the factory slow down production. 1. “Stock” is a common phrase for inventory in the UK and Australia, it comes from the common phrase “stocking the shelves” with product c. Direct Materials Budget or Raw Material Budget. i. Shows both the quantity and cost of direct materials to be purchased ii. Derived from Production Budget plus the desired change in ending DM d. Direct Labor Budget. i. Shows both the quantity and cost of direct labor ii. Derived from Production Budget e. Manufacturing Overhead Budget. i. Shows the expected MOH cost for the budget period ii. Derived from Production Budget and splits MOH into variable and fixed costs

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Variable MOH rates are usually per activity not per unit. So we must convert them to a per unit basis. f. Operating Expenses (Selling and Administrative) Budget. i. Shows the budgeted operating expenses ii. Derived from Sales Budget and splits Operating Expense into variable and fixed costs g. Cost of Goods Sold Budget. i. Shows the budgeted manufacturing cost per unit: o DM per unit o DL per unit o MOH per unit h. Budgeted Income Statement. i. Combines the information of all the operating budgets The Company has two products, A and B. March sales forecast projects 15,000 units of A and 20,000 units of B are going to be sold at prices of $13.50 and $19.00 respectively. The desired ending inventory of A is 16% higher than the beginning inventory which was 1000 units. How much are total March sales for A anticipated to be. a. 15,000 x 13.50 = 202,500 The company wants to have an ending inventory of 8000 units. The Company has a beginning inventory of 14,000 units and expects to sell 34,000 units. How many units should the Company produce a. Sales - Beginning Inventory = Needs to Produce + Desired Ending Inventory = Total Production i. 34,000 - 14,000 = 20,000 + 8,000 = 28,000 The company manufactures and sells children’s skateboards. Each skate board requires four bearings. For September, the Company has budgeted skateboarding sales of 540 skateboards, while 600 skateboards are scheduled to be produced. The company will begin September with 200 bearings in it's beginning inventory and estimated ending inventory for September to be 440 bearings. How many bearings should the company purchase in September. a. Each skateboard = 4 bearings b. 600 x 4 = 2,400 production c. The purchase for September can be determined as follows, Purchases = Production + Ending Inventory - Beginning Inventory i. ii. Purchases = 2,400 + 440 - 200 iii. 2,640 bearings should be purchased The Corporation manufactures night stands. The production shows that the corporation plans to produce 1,800 night stands in March and 1400 night stands in April. Each night stand requires .50 direct labor hours in it's production. The corporation has a direct labor rate of $19 per direct labor hour. What is the total combined direct labor cost that the corporation should budget in March and April. a. Total Direct Labor Cost for March = Production Budget x Direct Labor Hrs x Direct Labor Rate i. 1,800 x .50 x 19 = 17,100 b. Total Direct Labor Cost for April = Production Budget x Direct Labor Hrs x Direct Labor Rate

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i. 1,400 x .50 x 19 = 13,000 c. Combined Direct Labor Costs i. 17,100 + 13,000 = 30,400 Which of the following is an example of a financial budget cash, budgeted balance sheet, capital expenditure a. Cash Budget i. Cash collections budget ii. Cash payment budget iii. Combined cash payment b. Capital Expenditure Budget - shows the company’s intentions to invest in new property, plant, or equipment (capital investments). c. Budgeted Balance Sheets The company had budgeted sales for the mohs of September and October at 170,000 and 140,000, respectively. Monthly sales are 60% credit and 40% cash. Of the 30% are collected in the monthly sales and 70% are collected in the following month. What are the October cash collections for customers? a. October monthly credit sales = budgeted sales x monthly sales percentage for credit i. 140,000 x .60 = 84,000 b. October monthly cash sales = budgeted sales x monthly sales percentage for cash i. 140,000 x .40 = 56,000 c. September Month credit sales collections in October = budgeted sales x credit sales in monthly sales x cash sales in following month i. 170,000 x .30 x .70 = 35,700 d. Total cash collections for customers in October i. 84,000 + 56,000 + 35,700 = 175,700 The Company has budgeted the following credit sales during the last four months of the year: September $14,000: October $20,000: November $16,000: December $33,000. Experience has shown that patent for the credit sales is received as follows: 30% in the month of sales, 55% in the first month after sales, 10% in the second month after sales, and 5% uncollectible. How much cash can the Company expect to collect in November as a result of credit sale? a. September: 14,000 x .10 = 1,400 b. October: 20,000 x .55 = 11,000 c. November: 16,000 x .30 = 4,800 d. Amount of cash the Company can expect to collect in November as a result of credit sales i. (1400 + 11,000 + 4,800) = 17,200 Expected purchases for June and July are $76,000 and $90,000 respectively. Purchases for May were 56,000. All purchases are paid 40% in the month of purchase and 60% the following month. At what amount are June payments for purchase budgeted. a. June: 76,000 x .40 = 30,400 b. May: 56,000 x .60 = 33,600 c. June payments for purchase are budgeted at $64,000 The company is preparing its cash budget for the upcoming month. The budgeted beginning cash balance is expected to be $37,000. Budget cash receipts are $101,000, while budgeted

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cash disbursements are $129,000. The Company wants to have an ending cash balance $40,000. How much would the Company need to borrow to achieve its desired ending cash balance? a. Budgeted Cash Balance = Budgeted beginning Cash Balance + Budgeted Cash Receipts Budgeted Cash Disbursements i. 37,000 + 101,000 - 129,000 = 9,000 b. Amount to be borrowed = Budgeted ending cash balance - Budgeted cash available i. 40,000 - 9,000 = 31,000 In which of the following company types would the manager combine cost of goods sold, inventory and purchases into one budget - Manufacturing All are the following are responsibility centers except equity center a. Cost Center - division that incurs costs but does not directly generate revenue i. Examples: 1. Production departments: mixing, packaging, distribution 2. Service/support departments: maintenance, cafeteria, human resources, accounting departments b. Revenue Center - division that generates revenues i. Examples: 1. Tele-marketing departments and Internet Sales division c. Profit Center - division that generates revenues and incurs costs (Profit = Revenues – Costs) i. Examples: 1. Store, district, region, division, or other business segment. 2. Individual departments of a retail store such as clothing, furniture 3. Branch office of a bank d. Investment Centers - division that generates revenues, incurs costs, and controls the investment of funds available for use i. Examples: 1. Subsidiary company or Stand-alone division of the company. The Frito-Lay, a stand - alone division of PepsiCo may be classified as a(n) Investment Center With management by exception, managers look at the size of the variances between actual results and budget amount to determine which variances a manager should investigate. a. Management by exception - only investigate those variances that are material (relatively large) b. Variance - difference between the actual and budgeted amounts c. Favorable Variance - difference that causes operating income to be higher than budgeted d. Unfavorable Variance - difference that causes operating income to be lower than budgeted If a company must decrease its sales price of a product while all of the company’s expenses remain constant, what will happen to return of investment (RIO) - RIO will decrease a. RIO - measures the amount of income an investment center earns relative to the size of its assets i. When expanded, ROI can separately measure 2 things:

1. Sales Margin: the amount of each dollar of net sales that is profit. 2. Capital Turnover: compares a division’s investment in operating assets with the ability of those assets to generate revenues. ii. How can ROI be improved? 1. Increasing Operating Income a. Increase sales, decreasing variable costs, or decreasing controllable fixed costs 2. Reducing average operating assets (this action may not be prudent) iii. Advantages of ROI: 1. Encourages Managers to focus on: a. The relationship among sales, expenses, and investments b. Cost efficiency c. Operating asset efficiency 2. Helps management decide how to invest excess funds a. A division with a higher ROI is more likely to receive extra funds because it has a record of producing a higher return on investment 3. ROI can be used to compare performance across divisions and over time to see if the division is becoming more/less profitable. o iv. Disadvantages of ROI: 1. Myopic Behavior: Focus on the short-run at the expense of the long-term benefit. a. For example, a manager might cut research and development expenses in the short run to improve ROI, but the cuts may not be in the best long-term interests of the division. 2. Sub-optimization: when the responsibility center manager makes decisions best for their responsibility center, but perhaps to the detriment of the whole firm. a. For example, projects with an ROI less than a division’s current ROI would be rejected by the division manager. Although the project would increase the profitability of the firm as a whole, this project would decrease the division’s ROI, which would reflect poorly on the manager. 18. Which of the following causes the master budget variance between the amount in the market budget and the flexible budget of a revenue center - The number of units sold differs from planned sales levels 19. The difference between the actual revenues and expenses and the master budgets is know as a master budget variance a. Master Budget Variance: the difference between the actual revenues and costs (based on actual sales volume) and the master budget revenues and costs (based on budgeted/planned sales volume). i. “Apples-to-oranges” comparison, since the sales volumes are different. This is not useful for evaluation because we are unable to determine the cause of variance.

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Master Budget Variance has two components: 1. Flexible Budget Variance: the difference between the flexible budget and the actual results, based on actual volume of activity a. the portion that is due to factors other than volume. 2. Volume Variance: the difference between the flexible budget and the master budget a. the portion that is due to changes in volume b. Measures how effective management is at meeting the sales goals. 20. The standard cost of direct labor per unit is calculated by multiplying the standard quantity of direct labor by the standard price of direct labor. i. Standard Cost per unit = Quantity standard * Price standard ii. Standard Cost of DL per unit = DL Quantity standard * DL Price standard 21. A company uses sugar in producing its product. It the price of sugar double, which variance is directly impacted direct materials price variance a. Direct materials price variance - the difference between the actual price and standard price for direct materials multiplied by the actual quantity of direct materials purchased. i. The direct materials purchasing manager is responsible for the direct materials price variance. b. Direct Materials Quantity (Usage) Variance - the difference between the actual quantity and standard quantity for direct materials multiplied by the standard price of direct materials. i. The production manager is responsible for the direct materials quantity variance. 22. A favorable direct labor efficiency variance and an unfavorable direct labor rate variance might indicate which of the following - Favorable Variance a. higher skilled workers were used that performed the task faster than expected. i. Favorable Variance: difference that causes operating income to be higher than budgeted. ii. Efficiencies in using materials and labor or incurring costs iii. A variance is not favorable if quality control standards are sacrificed. 1. Using lower quality material to decrease costs might decrease product quality. iv. Examples: 1. Paying a lower price than expected for direct materials. 2. Using less direct materials than expected. 3. Paying a lower rate than expected for direct labor. 4. Taking less time to produce a unit than expected. 5. Paying less than expected for manufacturing overhead costs. 6. Using less variable overhead sources than expected. 7. Using less of a fixed overhead source than expected. v. Unfavorable Variance: difference that causes operating income to be lower than budgeted. vi. Inefficiencies in using materials and labor or paying too much for materials and labor.

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Examples: 1. Paying a higher price than expected for direct materials. 2. Using more direct materials than expected. 3. Paying a higher rate than expected for direct labor. 4. Taking more time to produce a unit than expected. 5. Paying more than expected for manufacturing overhead costs. 6. Using more variable overhead sources than expected. 7. Using more fixed overhead sources than expected. 23. All of the following are advantages of using standard costs and variance except - the timeliness that occurs when variances are computed once each month a. standard costs establish benchmarks managers use to judge actual costs. b. standard costing systems simplify the bookkeeping process. c. standard costs and benchmarks are useful tools that managers use as a basis for creating the master budget. 24. The fixed overhead volume variance is the difference between the budgeted fixed overhead and the standard fixed overhead cost allocated to production. a. If production volume is less than anticipated, then fixed overhead has been underallocated, and the fixed overhead volume variance is unfavorable. 25. The company’s managerial account computes the May totla variance report. The budgeted fixed overhead was $46,140 and the standard fixed overhead cost allocated to production was $45,910. The actual fixed overhead totlated $45,490. Computed the fixed overhead budget variance and the fixed overhead volume variance a. Fixed overhead budget variance = actual fixed overhead - budgeted fixed overhead i. = 45,490 - 46,140 ii. = -650 Favorable b. Fixed overhead volume variance = budgeted fixed overhead - standard fixed overhead cost allocated i. = 46,140 - 45,910 ii. = 230 Unfavorable 26. Which of the following items would be considered a capital asset a. Capital Assets: assets used for long periods of time, greater than one year. New equipment, factory, vehicles, information technology, intangibles i. (patents) b. Capital Investments: when firms acquire capital assets o The costs of acquiring long-lived assets said to be “capitalized.” i. Capitalized: means firms recorded the expenditure as an asset not an expense 27. Your grandfather has promised to give you $1300 a year at the end of each of the next four years if you can earns Cs or better in all of your courses each year, Using a discount rate of 3% which of the following is correct for determining the present value of the gift a. PV = $1300 × (Annuity PV factor, i = 3%, n = 4) 28. Simple interest means that interest is calculated on price only a. Simple Interest - Interest computed only on the principal amount.

29. The net present value with equal annual net cash inflows is calculated by multiplying the amount of all the cash inflow by the annuity present value factor for a given discount rate and given number of payments a. Net Present Value (NPV): uses a standard discount rate (hurdle rate) to restate cash flows in terms of present values and then makes comparisons 30. ‘Management's minimum desired rate of return on an investment is best described by which of the following terms - Discount rate a. Discount rate i. Also known as: Required Rate of Return, Minimum Rate of Return, or Hurdle Rate. ii. Conceptually, the discount rate should reflect the firm’s cost of capital, which is a function of its after tax cost of debt and equity financing. iii. Discount rates matter….. as the discount rate increases the NPV decreases!...