Business Environment & Concepts 5

Class Questions
1. CPA-03477
A processing department produces joint products Ajac and Bjac, each of which incurs separable
production costs after split-off. Information concerning a batch produced at a $60,000 joint cost
before split-off follows:
Product
Ajac
Bjac

Separable
costs
$ 8,000
22,000
$30,000

Sales
value
$ 80,000
40,000
$120,000

What is the joint cost assigned to Ajac if costs are assigned using the relative net realizable
value?
a.
b.
c.
d.

$16,000
$40,000
$48,000
$52,000

CPA-03477
Choice "c" is correct. Using the relative net realizable value method of allocating the joint costs,
the net realizable value of both products needs to be calculated:
Sales
Separable costs
Net realizable value

Ajac
$ 80,000
(8,000)
$ 72,000

Bjac
$40,000
(22,000)
$18,000

The joint costs are allocated based on relative net realizable values. The two products together
have a net realizable value of $90,000 ($72,000 + $18,000). Ajac contributes 80% of this total
(72,000 / $90,000 = 80%). 80% of the joint costs are thus allocated to Ajac: 80% x $60,000 =
$48,000.
Choice "a" is incorrect. This answer uses only the separable costs, not the net realizable value.
The sales value must also be taken into consideration.
Choice "b" is incorrect. This answer uses only the sales value, not the net realizable value. The
separable costs must also be taken into consideration.
Choice "d" is incorrect. The net realizable value (sales value less separable costs) must be
computed in order to allocate the joint costs using the net realizable value method.

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Business Environment & Concepts 5

Class Questions
2. CPA-03584
Mason Company uses a job-order cost system and applies manufacturing overhead to jobs using
a predetermined overhead rate based on direct-labor dollars. The rate for the current year is 200
percent of direct-labor dollars. This rate was calculated last December and will be used
throughout the current year. Mason had one job, No. 150, in process on August 1 with raw
materials costs of $2,000 and direct-labor costs of $3,000. During August, raw materials and
direct labor added to jobs were as follows:
Raw materials
Direct labor

No. 150
$

1,500

No. 151
$4,000
5,000

No. 152
$1,000
2,500

Actual manufacturing overhead for the month of August was $20,000. During the month, Mason
completed Job Nos. 150 and 151. For August, manufacturing overhead was:
a.
b.
c.
d.

Overapplied by $4,000.
Underapplied by $7,000.
Underapplied by $2,000.
Underapplied by $1,000.

CPA-03584
Choice "c" is correct. Since manufacturing overhead is applied on the basis of direct-labor
dollars, the total of the direct-labor dollars for August must first be determined:
$1,500 + $5,000 + $2,500 = $9,000
Manufacturing overhead is applied at the rate of 200%, so $18,000 was applied for the month of
August (200% x $9,000 = $18,000). Actual manufacturing overhead for August was $20,000, so
manufacturing overhead was underapplied by $2,000 [$20,000 - $18,000].
Choice "a" is incorrect. Manufacturing overhead is applied on the basis of direct-labor dollars
incurred during the period. If the amount applied is less than the actual amount, then
manufacturing overhead is underapplied.
Choice "b" is incorrect. Manufacturing overhead is applied on the basis of direct-labor dollars
incurred during the period. The total of the direct-labor dollars is $1,500 + $5,000 + $2,500, or
$9,000.
Choice "d" is incorrect. Manufacturing overhead is applied on the basis of direct-labor dollars
incurred during the period. The total of the direct-labor dollars is $1,500 + $5,000 + $2,500, or
$9,000.

2
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Business Environment & Concepts 5

Class Questions
3. CPA-03601
Kerner Manufacturing uses a process cost system to manufacture laptop computers. The
following information summarizes operations relating to laptop computer model #KJK20 during
the quarter ending March 31:

Work-in-process inventory, January 1

Started during the quarter
Completed during the quarter
Work-in-process inventory, March 31
Costs added during the quarter

Direct
Materials
$ 70,000

Units
100
500
400
200

$750,000

Beginning work-in-process inventory was 50% complete for direct materials. Ending work-inprocess inventory was 75% complete for direct materials. What were the equivalent units of
production using the FIFO method, with regard to materials for March?
a.
b.
c.
d.

450
500
550
600

CPA-03601
Choice "b" is correct. Under the FIFO method, the equivalent units of production is comprised of
three parts: the completion of units on hand at the beginning of the period, the units started and
completed during the period, and the units partially completed at the end of the period. Applying
these principles to the given fact pattern, the total equivalent units of production for the quarter is
detemined as follows:
Equivalent units for the first quarter:
Work in process, beginning
(100 units 50% to complete)
Units started and completed:
Units completed and transferred out
Units in beginning inventory

50
400
(100)

300

Work in process, ending

(200 units 75% complete)

150

Equivalent units of production

500

Choices "a", "c", and "d" are incorrect, per the above.

3
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Business Environment & Concepts 5

Class Questions
4. CPA-03628
The following information concerns Forming's equivalent units in May 20X1:
Units
2,000
8,000
7,000
2,500

Beginning work-in-process (50% complete)

Units started during May
Units completed & transferred
Ending work-in-process (80% complete)

Using the weighted average method, what were Forming's May 20X1 equivalent units?
a.
b.
c.
d.

7,000
9,000
10,000
19,500

CPA-03628
Choice "b" is correct.
Units completed
Ending WIP (2,500 x .80)

7,000
2,000
9,000

Choices "a", "c", and "d" are incorrect based on the above explanation.

5. CPA-03655
What is the normal effect on the numbers of cost pools and allocation bases when an activitybased cost (ABC) system replaces a traditional cost system?
a.
b.
c.
d.

Cost pools
No effect
Increase
No effect
Increase

Allocation bases
No effect
No effect
Increase
Increase

CPA-03655
Choice "d" is correct. Activity-based costing (ABC) tends to increase both the number of cost
pools and the number of allocation bases. ABC breaks down a production process into many
activities. It then accumulates costs by activity (i.e., cost pools) using an appropriate allocation
base for each activity. A traditional cost system would use one cost and one allocation base (i.e.,
for factory overhead). On the other hand, ABC would designate many activities within the
process and allocate costs by activity using a different allocation base for each activity.
Choices "a", "b", and "c" are incorrect based on the above explanation.

4
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Business Environment & Concepts 5

Class Questions
6. CPA-03709
Break-even analysis assumes that over the relevant range:
a.
b.
c.
d.

Unit revenues are nonlinear.

Unit variable costs are unchanged.
Total costs are unchanged.
Total fixed costs are nonlinear.

CPA-03709
Choice "b" is correct. Break-even analysis assumes that all variable costs and revenues are
constant on a per unit basis and are linear over a relevant range. Fixed costs in total are
constant.
Choice "a" is incorrect. Break-even analysis assumes that all variable costs and revenues are
constant on a per unit basis and linear over a relevant range.
Choice "c" is incorrect. Total costs do change over a relevant range. Break-even analysis
assumes that all variable costs and revenues are constant per unit and linear within a relevant
range.
Choice "d" is incorrect. Total fixed costs are assumed to be constant (representing a linear
relationship) over a relevant range.

5
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Business Environment & Concepts 5

Class Questions
7. CPA-03676
At annual sales of $900,000, the Ebo product has the following unit sales price and costs:
Sales price
Prime cost
Manufacturing overhead
Variable
Fixed
Selling & admin. costs
Variable
Fixed

$20
6
1
7
1
3
18
$2

Profit
What is Ebo's breakeven point in units?
a.
b.
c.
d.

25,000
31,500
37,500
45,000

CPA-03676
Choice "c" is correct.
Step 1: Determine how many units were sold to generate the $900,000 in sales
shown in the fact pattern: $900,000/$20 per unit = 45,000 units sold
Step 2: Determine the total fixed costs:
Unit costs:
Fixed manufacturing costs
Fixed selling and administrative costs
Total fixed cost per unit

$ 7
$ 3
$10

Total fixed costs = $10 per unit x 45,000 units = $450,000

Step 3: Determine the contribution margin per unit:
Selling price per unit
Prime costs
Variable overhead costs
Variable selling & administrative costs
Contribution margin per unit
Step 4:
Breakeven in units =

Fixed costs
C.M. per unit

450,000
= 37,500 units
12

Choices "a", "b", and "d" are incorrect based on the above explanation.

6
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$20
(6)
(1)
(1)
$12

Business Environment & Concepts 5

Class Questions
8. CPA-03813
The basic difference between a master budget and a flexible budget is that a master budget is:
a. Only used before and during the budget period and a flexible budget is only used after the
budget period.
b. For an entire production facility and a flexible budget is applicable to single departments only.
c. Based on one specific level of production and a flexible budget can be prepared for any
production level within a relevant range.
d. Based on a fixed standard and a flexible budget allows management latitude in meeting
goals.
CPA-03813
Choice "c" is correct. A master budget is an overall budget, consisting of many smaller budgets,
that is based on one specific level of production. A flexible budget is a series of budgets based
on different activity levels within the relevant range.
Choice "a" is incorrect. The usefulness of master budgets and flexible budgets is not limited to
specific periods.
Choice "b" is incorrect. The master budget includes the entire company, not just the production
facility. The flexible budget can cover many levels of activity, not just one department.
Choice "d" is incorrect. Flexible budgets do not allow management latitude in meeting goals, but
they do give management the opportunity to compare actual results to the budget for the activity
level achieved.

9. CPA-03560
When production levels are expected to increase within a relevant range, and a flexible budget is
used, what effect would be anticipated with respect to each of the following costs?

a.
b.
c.
d.

Fixed costs
per unit
Decrease
No change
No change
Decrease

Variable costs
per unit
Decrease
No change
Decrease
No change

CPA-03560
Choice "d" is correct. Within a relevant range, total fixed costs remain constant. Fixed costs per
unit therefore decrease as production levels (i.e., the number of units) increase. On the other
hand, variable costs per unit remain constant, so total variable costs increase as production
levels increase.
Choices "a", "b", and "c" are incorrect based on the above explanation.

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Business Environment & Concepts 5

Class Questions
10. CPA-03836
The standard direct material cost to produce a unit of Lem is 4 meters of material at $2.50 per
meter. During May 1995, 4,200 meters of material costing $10,080 were purchased and used to
produce 1,000 units of Lem. What was the material price variance for May 1995?
a.
b.
c.
d.

$400 favorable.
$420 favorable.
$80 unfavorable.
$480 unfavorable.

CPA-03836
Choice "b" is correct. Material price variance is the difference between actual price and standard
price times actual quantity.
(AP SP) AQ = Material price variance
[($10,080 4,200) $2.50] 4,200
($2.40 $2.50) 4,200 = 420
The variance is favorable because the actual cost ($2.40) was less than the standard cost
($2.50).
Choice "a" is incorrect. The material price variance equals the difference in prices times the
quantity purchased.
Choice "c" is incorrect. The total material variance is $80 unfavorable ($10,000 $10,080). This
total variance needs to be separated into price and quantity variances.
Choice "d" is incorrect. The material price variance equals the difference in prices times the
quantity purchased.

8
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Business Environment & Concepts 5

Class Questions
11. CPA-03831
Baby Frames, Inc., evaluates manufacturing overhead by using variance analysis. The following
information applies to the month of May:
Number of frames manufactured
Variable overhead costs
Fixed overhead costs
Direct labor hours

Actual
19,000
$4,100
$22,000
2,100 hours

Budgeted
20,000
$2 per direct labor hour
$20,000; $1 per unit
0.1 hour per frame

What is the production volume variance?

a.
b.
c.
d.

$1,000 favorable.
$1,000 unfavorable.
$2,000 favorable.
$2,000 unfavorable.

CPA-03831
Rule: The formula for the production volume variance component for overhead variances is
computed as applied overhead minus budgeted overhead based on standard hours. The sole
difference between these two calculated amounts is the application of fixed factory overhead.
Choice "b" is correct. Volume variances are computed as follows:
Applied Overhead
(Std Var OH Rate x Std DLH Allowed) + (Std Fixed OH Rate x Actual Production)
= ($2.00 x .1 x 19,000) + ($1.00 x 19,000) = $22,800
Budgeted overhead based on standard hours
(Std Var OH Rate x Std DLH Allowed) + (Std Fixed OH Rate x Standard Production)
= ($2.00 x .1 x 19,000) + ($1.00 x 20,000) = $23,800
Difference: Unfavorable Variance

($ 1,000)

Choices "a", "c", and "d" are incorrect, per the computation above.

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Business Environment & Concepts 5

Class Questions
12. CPA-03883
Listed below are selected line items from the Cost of Quality Report for Watson Products for last
month.
Category
Rework
Equipment maintenance
Product testing
Product repair

Amount
$ 725
1,154
786
695

What is Watson's total prevention and appraisal cost for last month?
a.
b.
c.
d.

$786
$1,154
$1,849
$1,940

CPA-03883
Choice "d" is correct. $1,940 total prevention and appraisal cost.
Equipment maintenance (prevention)
Product testing (appraisal)

$1,154
786
$1,940

Rework is an internal failure cost.

Product repair (warranty) is an external failure cost.
Choices "a", "b", and "c" are incorrect based on the above explanation.

13. CPA-03890
In a quality control program, which of the following is (are) categorized as internal failure costs?
I. Rework.
II. Responding to customer complaints.
III. Statistical quality control procedures.
a.
b.
c.
d.

I only.
II only.
III only.
I, II, and III.

CPA-03890
Choice "a" is correct. In a quality control program, internal failure costs are incurred because
nonconforming products and services are detected prior to being shipped to customers.
Examples are rework, scrap, reinspection and retesting.
Choice "b" is incorrect. Responding to customer complaints is an external failure cost incurred
because products or services failed to conform to requirements after being delivered to
customers.
Choice "c" is incorrect. Statistical quality control procedures are appraisal costs incurred to
detect defects.
Choice "d" is incorrect. Responding to customer complaints is an external failure cost. Statistical
quality control procedures are prevention costs.

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2009 DeVry/Becker Educational Development Corp. All rights reserved.