AMIS 212

Module 3

This set of 40 questions, in two parts, some taken from prior examinations, covers
topics in Chapters 10, 11, 12, 13, and 14.
The purpose of sample multiple choice questions is to acquaint you with the style and
substance of typical exam questions on this material. As such, it is an exam
preparation resource not a template for the exam on the third module material.
Please be aware that:
1. multiple choice format questions are only one of many resources available to
prepare for testing events reading textbook chapters and working through
chapter examples, studying the end-of-chapter review problem and
accompanying solution, and reviewing assigned homework items and the
published solutions may be more powerful methods to increase your
understanding of the topics covered in the course.
2. the exam questions used this quarter will be similar but different from these
example questions understanding the main concepts in each chapter is critical
to success on the testing events; remembering a sample question may be of
some help but the format of questions on the same topic often differs rendering
memory a distant second choice to understanding.
3. the answer key is listed on the last page of this document.

The Questions:
Part 1
1.

Fragrance, Inc., has two divisions: the Cologne Division and the Bottle Division. The
Bottle Division produces containers that can be used by the Cologne Division. The
Bottle Division's variable manufacturing cost is $2, shipping cost to external
customers is $0.10, and the external sales price is $3. No shipping costs are incurred
on sales to the Cologne Division and the Cologne Division can purchase similar
containers in the external market for $2.50, which includes shipping costs.
The maximum amount the Cologne Division would be willing to pay for each bottle
transferred would be:
a. $2.90.
b. $2.00.
c. $2.50.
d. $2.10.

Page 1 of 16

12/10/2014

AMIS 212

3.

Module 3

Division A sells soybean paste internally to Division B, which, in turn, produces

soybean burgers that sell for $5 per pound. Division A incurs costs of $0.75 per
pound, while Division B incurs additional variable costs of $2.50 per pound.
What is Division B's contribution margin per pound, assuming the transfer price of the
soybean paste is set at $1.25 per pound?
a. $0.500
b. $0.875
c. $1.250
d. $1.625

4.

The following information pertains to Smith Company:

Average operating assets
$250,000
Net income
50,000
Sales
500,000
Required rate of return
12 percent
The residual income is:
a. $50,000.
b. $30,000.
c. $20,000.
d. $60,000.

5.

The following information is for West Corporation:

Standard price per unit of input

Actual price per unit of input
Standard inputs allowed per unit of output
Actual units of input bought and used
Actual units of output

Direct
Material
$20
$18
2 pounds
7,750 pounds
3,750 units

What is the total direct material variance?

a. $10,500 unfavorable
b. $10,500 favorable
c. $20,500 favorable
d. $20,500 unfavorable

Page 2 of 16

12/10/2014

AMIS 212

Module 3

6. Pepper Industries has three product lines, A, B, and C. The following information is
available:
A
B
C
Sales
$60,000
$90,000 $24,000
Variable costs
36,000
48,000
15,000
Contribution margin $24,000
$42,000
$9,000
Fixed costs:
Avoidable
9,000
18,000
6,000
Unavoidable
6,000
9,000
5,400
Operating income
$9,000
$15,000
$(2,400)
Pepper Industries is thinking of dropping product line C because it is reporting a loss.
Assuming Pepper drops line C and does not replace it, the operating income will
a. increase by $2,400.
b. increase by $3,000.
c. decrease by $3,000.
d. decrease by $5,400.
7.

Which of the following is not a reason to study a simpler model such as the payback
method?
a. Changes in business practice occur slowly; many businesses still use the simpler
models.
b. Simpler models are easier to use.
c. Simpler models might provide some useful information to supplement the
discounted-cash-flows analysis.
d. Simpler models are conceptually superior to discounted-cash-flows analysis.

13. Which of the following changes would increase return on investment?

a. an increase in expenses and a decrease in sales at the same time
b. an increase in assets
c. a decrease in sales revenue
d. a decrease in expenses
14. The higher the minimum desired rate of return,
a. the higher the net present value of a project
b. the higher the initial investment
c. the lower the annual cash savings
d. the lower the net present value of a project

Page 3 of 16

12/10/2014

AMIS 212

Module 3

15. The following information is available for the Cantrill Company:

Sales
Average operating assets
ROI

$1,000,000
312,500
10 percent

What is the turnover ratio?

a. 3.2000
b. 0.1000
c. 0.3125
d. none of the above
17. Junior Corporation has a joint process which produces three products, X, Y and Z.
Each product may be sold at split-off or processed further and then sold. Joint
processing costs for a year amount to $100,000. Other relevant data are as follows:
Product

Sales Value
at Split-off

Costs after
Split-off

Sales Value
at Completion

$128,000

$16,000

$160,000

50,000

26,000

76,000

25,600

20,000

40,000

To maximize profits, which products should Junior process further?

a. Product Z only
b. Product X and Z
c. Product X only
d. Products X, Y and Z

Page 4 of 16

12/10/2014

AMIS 212

Module 3

19. The following information pertains to Lincoln Company:

Standard price per unit of input

Actual price per unit of input
Standard inputs allowed per unit of output
Actual units of input

Direct
Labor
$10
$11
2 hours
4,750 hours

Actual units of output

2,500 units

What is the direct labor efficiency variance?

a. $2,750 favorable
b. $2,750 unfavorable
c. $2,500 favorable
d. $2,500 unfavorable
20. Below is a potential investment alternative:
Initial capital investment
Estimated useful life
Estimated terminal salvage value
Estimated annual savings in cash
operating costs
Minimum desired rate of return

$270,000
3 yrs.
-0$120,000
12 percent

Assume straight-line depreciation in all computations, and ignore income taxes.

The simple rate of return based on initial investment is
a. 11.11 percent.
b. 44.44 percent.
c. 33.33 percent.
d. 22.22 percent.
21. _______________ are costs that continue even if an operation is halted.
a. Avoidable costs
b. Opportunity costs
c. Unavoidable costs
d. Variable costs

Page 5 of 16

12/10/2014

AMIS 212

Module 3

25. Below is a potential investment project:

Initial capital investment
$180,000
Estimated useful life
3 yrs.
Estimated terminal salvage value
-0Estimated annual savings in cash
operating costs
$ 75,000
Minimum desired rate of return 10 percent
Assume straight-line depreciation in all computations and ignore income taxes.
The net present value of the project is:
a. $6,518.
b. $(123,652).
c. $75,000.
d. $186,518.
26. Wadell Company has the following information about a potential investment:
Number of years
Amount of annual cash inflow
Required initial investment
Simple rate of return
Minimum desired rate of return
Net present value

5
$12,000
?
5 percent
10 percent
($2,508)

What is the required initial investment?

a. $48,000
b. $45,492
c. $9,600
d. $2,400
27. If the direct-labor price variance is $500 favorable, and the direct-labor usage
variance is $300 unfavorable, which of the following must be true?
a. The total direct-labor variance is $200 favorable.
b. Actual total wages paid were $500 more than expected.
c. The use of labor was extremely efficient.
d. The total master-budget variance is $200 favorable.

Page 6 of 16

12/10/2014

AMIS 212

Module 3

28. The Wright Company has a standard costing system. The following data are
available for September:
Actual quantity of direct materials purchased ........
Standard price of direct materials...........................
Material price variance ...........................................

25,000 pounds
$2 per pound
$2,500 unfavorable

The actual price per pound of direct materials purchased in September is:
A) $1.85.
B) $2.00.
C) $2.10.
D) $2.15.
29. Garner Corporation produces two products Hats and Caps. The following information
is available for these two products:
Hats
Caps
Selling price per unit
$21.00
$15.00
Variable cost per unit
18.00
9.00
Total fixed costs
$15,000
Total production capacity
10,000 units
If a maximum of 6,000 units of each product can be sold, it would be best to:
a. discontinue Hats as it results in a net loss of $3.00 per unit, and continue
producing Caps.
b. produce only 4,000 units of Hats and 6,000 units of Caps to maximize profits.
c. produce 5,000 units of Hats and 5,000 units of Caps.
d. discontinue the production of both Hats and Caps.

Page 7 of 16

12/10/2014

AMIS 212

Module 3

31. Gordon Company records reveal the following:

Division X
Market price of finished component to outsiders
$25
Variable costs per component
$17
Contribution margin per component
$8
Total contribution for 20,000 components
$160,000
Division Y
Sales price of finished product
Variable costs:
Division X (1 component @ $17)
Division Y
Assembly
$9
Packaging
4
Contribution margin per unit
Total contribution for 20,000 units

$35
$17

$5
$100,000

The variable costs of Division Y will be incurred whether it buys from Division X or
from an outside supplier.
If Division X is working at full capacity, the lowest transfer price it would be willing
to accept from Division Y would be
a. $17.
b. $25.
c. $8.
d. $22.
32. A static budget:
A) should be compared to actual costs to assess how well costs were controlled.
B) should be compared to a flexible budget to assess how well costs were
controlled.
C) is valid for only one level of activity.
D) represents the best way to set spending targets for managers.

Page 8 of 16

12/10/2014

AMIS 212

Module 3

33. Thames Company is considering replacing a machine that is presently used in the
production of its product. The following data are available:
Old Machine
Original cost
Useful life in years
Current age in years
Book value
Disposal value now
Disposal value in 5 years
Annual cash operating costs

$180,000
10
5
$100,000
$32,000
0
$28,000

Replacement
Machine
$140,000
5
0
----0
$16,000

Which of the data provided in the table is a sunk cost?

a. the disposal value of the old machine
b. the original cost of the old machine
c. the annual cash operating costs of the old machine
d. the annual cash operating costs of the replacement machine
35. Gil Corporation is considering the purchase of an asset for $300,000. The asset will
have a 10-year life, no terminal salvage value, and straight-line depreciation will be
used for tax purposes.
It is expected that the product manufactured by the equipment can be sold for
$150,000 and that there will be annual production costs, exclusive of depreciation,
equal to $90,000. The tax rate applicable to the company is 30 percent.
What is the annual net after-tax effect of depreciation?
a. $9,000 inflow
b. $21,000 inflow
c. $21,000 outflow
d. $9,000 outflow
38. Which of the following is not a problem with decentralization?
a. Managers may make decisions that are not in the organization's best interests.
b. Managers tend to duplicate services that might be less expensive if centralized.
c. Costs of accumulating and processing information are frequently reduced.
d. Managers may waste time dickering with other segment managers about transfer
prices.

Page 9 of 16

12/10/2014

AMIS 212

Module 3

Use the following to answer questions 41, 42, 43, and 44

The Phelps Company uses a flexible budget to plan and control manufacturing overhead
costs. Overhead costs are applied to products on the basis of direct labor-hours.
The standard cost card shows that 5 direct labor-hours are required per unit of
product. Phelps Company had the following budgeted and actual data for March:
U n its p r o d u c e d .......................
D ir e c t la b o r - h o u r s ..................
V a r ia b le o v e r h e a d c o s ts .........
F ix e d o v e r h e a d c o s ts ..............

A c tu a l
2 2 ,0 0 0
1 0 5 ,0 0 0
$ 9 1 ,0 0 0
$ 5 2 ,0 0 0

B u d g e te d
2 0 ,0 0 0
1 0 0 ,0 0 0
$ 8 0 ,0 0 0
$ 5 0 ,0 0 0

* R e p re s e n ts th e d e n o m in a to r a c tiv ity fo r th e m o n th .

41.The variable overhead spending variance for March is:

A) $ 7,000 unfavorable.
B) $ 9,000 unfavorable.
C) $13,000 unfavorable.
D) $11,000 unfavorable.
42.The variable overhead efficiency variance for March is:
A) $8,000 unfavorable.
B) $4,000 favorable.
C) $8,000 unfavorable.
D) $4,000 unfavorable.
43.The fixed overhead budget variance for March is:
A) $2,000 favorable.
B) $ 500 favorable.
C) $2,000 unfavorable.
D) $2,500 favorable.
44.The fixed overhead volume variance for March is:
A) $1,000 favorable.
B) $5,000 favorable.
C) $2,500 unfavorable.
D) $5,000 unfavorable.

Page 10 of 16

12/10/2014

AMIS 212

Module 3

Part 2
1.

Which of the following correctly lists all the information needed to calculate a labor
rate variance?
A. Standard labor rate and actual hours worked.
B. Actual hours worked and actual units produced.
C. Standard labor rate, actual labor rate, and actual units produced.
D. Actual labor rate and actual hours worked.
E. Actual labor rate, standard labor rate, and actual hours worked.

2.

Which of the following situations cannot occur together during the same accounting
period?
A. Unfavorable labor rate variance and favorable labor efficiency variance.
B. Unfavorable labor efficiency variance and favorable materials quantity variance.
C. Favorable labor rate variance and unfavorable total labor variance.
D. Favorable labor efficiency variance and favorable materials quantity variance.
E. None of the above, as all of these situations are possible.

3.

Badger Bakeries anticipated making 28,000 fancy cakes during a recent period,
requiring 14,000 hours of process time. Each hour of process time was expected
to cost the firm $11. Actual activity for the period was higher than anticipated:
30,400 cakes and 15,200 hours. If each hour of process time actually cost Badger
$12, what process-time cost variances would be disclosed on a performance report
that incorporated both static budgets and flexible budgets?
Static
Flexible
$28,400U
$28,400U
$28,400U
$15,200U
$15,200U
$28,400U
$15,200U
$15,200U
None of the above

4.

A fixed-overhead volume variance would normally arise when:

A. actual hours of activity coincide with actual units of production.
B. budgeted fixed overhead is overapplied to production.
C. there is a fixed-overhead budget variance.
D. actual fixed overhead exceeds budgeted fixed overhead.
E. there is a variable-overhead efficiency variance.

Page 11 of 16

12/10/2014

AMIS 212

5.

Module 3

Bushnell, Inc., has a standard variable overhead rate of $4 per machine hour, with
each completed unit expected to take three machine hours to produce. A review of
the company's accounting records found the following:
Actual variable overhead: $210,000
Variable-overhead efficiency variance: $18,000U
Variable-overhead spending variance: $30,000F
A.
B.
C.
D.
E.

6.

How many units did Bushnell actually produce during the period?
13,500.
16,500.
18,500.
21,500.
Some other amount.

Luke, Inc., has a standard variable overhead rate of $5 per machine hour, with each
completed unit expected to take three machine hours to produce. A review of the
company's accounting records found the following:
Actual production: 19,500 units
Variable-overhead efficiency variance: $9,000U
Variable-overhead spending variance: $21,000F
A.
B.
C.
D.
E.

7.

What was Luke's actual variable overhead during the period?

$262,500.
$280,500.
$304,500.
$322,500.
Some other amount.

Atlanta Enterprises incurred $828,000 of fixed overhead during the period. During
that same period, the company applied $845,000 of fixed overhead to production
and reported an unfavorable budget variance of $41,000. How much was Atlanta's
budgeted fixed overhead?
A. $787,000.
B. $804,000.
C. $869,000.
D. $886,000.
E. Not enough information to judge.

Page 12 of 16

12/10/2014

AMIS 212

8.

Copper Top, which has excess capacity, received a special order for 3,000 units at a
price of $14 per unit. Currently, production and sales are budgeted for 10,000 units
without considering the special order. Budget information for the current year
follows.
Sales
Less: Cost of goods
sold
Gross margin

A.
B.
C.
D.
E.
9.

Module 3

$170,000
130,000
$ 40,000

Cost of goods sold includes $30,000 of fixed manufacturing cost. If the special
order is accepted, the company's income will:
increase by $3,000.
increase by $12,000.
decrease by $3,000.
decrease by $12,000.
change by some other amount.

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.
E. cannot be determined.

Page 13 of 16

12/10/2014

AMIS 212

Module 3

10. Johnson Company makes two products: Carpet Kleen and Floor Deodorizer. Operating
information from the previous year follows.

Units produced and sold

Machine hours used
Sales price per unit
Variable cost per unit

Carpet
Kleen
5,000
5,000
$7
$4

Floor
Deodorizer
4,000
2,000
$10
$8

Fixed costs of $20,000 per year are presently allocated equally between both products. If
the product mix were to change, total fixed costs would remain the same.
Assuming there is unlimited demand for both products and Johnson has 10,000
machine hours available, how many units of each product should be produced and
sold?
Carpet
Floor
Kleen
Deodorizer
0 units
0 units
0 units
20,000 units
5,000 units
10,000 units
8,000 units
4,000 units
10,000 units
0 units
11.

When income taxes are considered in capital budgeting, the cash flows related to a
company's advertising expense would be correctly figured by taking the cash paid
for advertising and:
A. adding the result of multiplying (advertising expense x tax rate).
B. adding the tax rate.
C. adding the result of multiplying [advertising expense x (1 - tax rate)].
D. subtracting the result of multiplying (advertising expense x tax rate).
E. subtracting the result of multiplying [advertising expense x (1 - tax rate)].

Page 14 of 16

12/10/2014

AMIS 212

Module 3

12. Julius Company is considering the purchase of a new machine for $100,000. The
machine generates annual revenues of $62,500 and annual expenses of $37,500,
which includes $7,500 of depreciation. What is the payback period in years on the
machine approximated to one decimal point?
A. 1.6.
B. 3.1.
C. 4.0.
D. 1.7.
E. some other amount.
13. St. Andrews ranks investments by using the profitability index (PI). The following data
relate to Project X and Project Y:
Initial investment
Present value of inflows
A.
B.
C.
D.
E.

Project X
$400,000
600,000

Project Y
$1,300,000
1,800,000

Which project would be more attractive as judged by its ranking, and why?
Project X because the PI is 0.50.
Project Y because the PI is 0.38.
Project X because the PI is 0.67.
Project Y because the PI is 0.72.
Both projects would be equally attractive in terms of ranking, as indicated by a
positive PI.

Page 15 of 16

12/10/2014

AMIS 212

Module 3

The Answers:
Part 1
1.
3.
4.
5.
6.
7.
13.
14.
15.
17.
19.
20.
21.
25.
26.
27.
28.
29.
31.
32.
33.
35.

38.
41.
42.
43.
44.

c
c
c
b
c
d
d
d
a
c
c
a
c
a
a
a
c
b
b
c
b
a

c
a
b
c
b

Part 2
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.

Page 16 of 16

E
E
B
B
C
B
A
B
D
B
D
B
A

12/10/2014