ACCT434 Advanced Cost Management: Week 4 Midterm Exam (Version 1)

Reminder: There are several versions of this week’s questions, please make sure you have reviewed and compared our questions with your questions.

ACCT434 Advanced Cost Management
Week 4 Cost Allocation - Midterm Exam (Version 1)

1. (TCO1) ABC systems create
one large cost pool .
homogenous activity-related cost pools.
activity-cost pools with a broad focus.
activity-cost pools containing many direct costs.

2. (TCO 1) Merriam Company provides the following ABC costing information:
Activities Total Costs Activity-cost drivers
Account inquiry hours $400,000 10,000 hours
Account billing lines $280,000 4,000,000 lines
Account verification accounts $150,000 40,000 accounts
Correspondence letters $ 50,000 4,000 letters
Total costs $880,000

The above activities are used by Department A and B as follows:
Department A Department B
Account inquiry hours 2,000 hours 4,000 hours
Account billing lines 400,000 lines 200,000 lines
Account verification accounts 10,000 accounts 8,000 accounts
Correspondence letters 1,000 letters 1,600 letters

How much of the account billing cost will be assigned to Department B?
None of the above

3. (TCO 2) A master budget
a. includes only financial aspects of a plan and excludes nonfinancial aspects.
b. is an aid to coordinating what needs to be done to implement a plan.
c. includes broad expectations and visionary results.
d. should not be altered after it has been agreed upon

4. (TCO 2) Dalyrymple Company produces a special spray nozzle. The budgeted indirect total cost of inserting the spray nozzle is $80,000. The budgeted number of nozzles to be inserted is 40,000. What is the budgeted indirect cost allocation rate for this activity?

5. TCO 3) Which cost estimation method analyzes accounts in the subsidiary ledger as variable, fixed, or mixed using qualitative methods?
a. The account analysis method
b. The conference method
c. The industrial engineering method
d. The quantitative analysis method

6. TCO 4) In evaluating different alternatives, it is useful to concentrate on
a. variable costs.
b. fixed costs.
c. total costs.
d. relevant costs.

7. (TCO 5) The theory of constraints is used for cost analysis when
a manufacturing company produces multiple products and uses multiple manufacturing facilities and /or machines.
using a long-term time horizon.
operating costs are assumed fixed.
all of the above are correct.

8. (TCO 5) Schmidt Corporation produces a part that is used in the manufacture of one of its products. The costs associated with the production of 10,000 units of this part are as follows:
Direct materials $45,000
Direct labor 65,000
Variable factory overhead 30,000
Fixed factory overhead 70,000
Total costs $210,000
Of the fixed factory overhead costs, $30,000 is avoidable.

Phil Company has offered to sell 10,000 units of the same part to Schmidt Corporation for $18 per unit. Assuming there is no other use for the facilities, Schmidt should
a. make the part as this would save $3 per unit.
b. buy the part as this would save $3 per unit.
c. buy the part as this would save the company $30,000.
d. make the part as this would save $1 per unit.

9. (TCO 3) The cost function y = 100 + 10X
has a slope coefficient of 100.
is a nonlinear.
has an intercept of 100.
represents a fixed cost.

10. (TCO 4) Sunk costs
have future implications.
are ignored when evaluating alternatives.
are differential.
are relevant.


1. (TCO 1) For each of the following drivers, identify an appropriate activity.
a. # of machines
b. # of setups
c. # of inspections
d. # of orders
e. # of runs
f. # of bins or aisles
g. # of engineers

2. (TCO 2) Favata Company has the following information:
Month Budgeted Sales
June $60,000
July 51,000
August 40,000
September 70,000
October 72,000
In addition, the cost of goods sold rate is 70% and the desired inventory level is 30% of next month's cost of sales.

Prepare a purchases budget for July through September.

3. (TCO 3) Patrick Ross, the president of Ross's Wild Game Company, has asked for information about the cost behavior of manufacturing overhead costs. Specifically, he wants to know how much overhead cost is fixed and how much is variable. The following data are the only records available:
Month Machine-hours Overhead Costs
February 1,700 $20,500
March 2,800 22,250
April 1,000 19,950
May 2,500 21,500
June 3,500 23,950

Required: Using the high-low method, determine the overhead cost equation. Use machine-hours as your cost driver.

4. (TCO 5) Kirkland Company manufactures a part for use in its production of hats. When 10,000 items are produced, the costs per unit are:
Direct materials 0.60
Direct manufacturing labor 3.00
Variable manufacturing overhead 1.20
Fixed manufacturing overhead 1.60
Total $6.40
Mike Company has offered to sell to Kirkland Company 10,000 units of the part for $6.00 per unit. The plant facilities could be used to manufacture another item at a savings of $9,000 if Kirkland accepts the offer. In addition, $1.00 per unit of fixed manufacturing overhead on the original item would be eliminated.
a. What is the relevant per unit cost for the original part?
b. Which alternative is best for Kirkland Company? By how much?
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