XYZ Company estimates it will incur $250,000 in manufacturing overhead in 2002. It will produce 1,000 units of product A requiring 2 hours of direct labor per unit and 500 units of product B requiring 1 hour of direct labor per unit. Overhead costs are allocated based on direct labor hours.

1. (Data for questions 1 to 3)
XYZ Company estimates that during the year 2002 it will incur
$ 250,000 as manufacturing overhead, and produce 1,000 units
of product A and 500 units of product B. Product A requires 2
hours of direct labor and product B requires 1 hour of direct
labor per unit. Product A requires direct material costing $ 10
per unit and direct labor costing $ 20 per unit. Product B
requires direct material costing $ 15 per unit and direct labor
costing $ 10 per unit. The selling price of product A is $250 per
unit and the selling price of product B is $ 200 per unit.
Overhead costs are allocated to products based on direct labor
hours.
1. The manufacturing overhead cost driver rate for the year
2002 is
a. $ 20 per direct labor hour
b. $ 70 per direct labor hour
c. $ 100 per direct labor hour
d. none of the above
2. The total direct cost to manufacture one unit of product A is
a. $ 30
b. $ 70
c. $ 200
d. $ 230
3. The total manufacturing overhead cost charged to each unit
of product A is
a. Same as that charged to each unit of product B
b. Twice as much as that charged to each unit of product B
c. Four times as much as charged to each unit of product B

2. d. Cannot be determined from the data
4. Characteristics of a good performance measure are
a. Sensitivity on providing immediate feedback on managerial
actions
b. Precision and absence of impact of non-controllable or noise
factors
c. Congruence with the organization’s goals
d. All of the above
5. What are the benefits of decentralization?
a. Savings on information acquisition and transfer costs
b. Stronger motivation to manage independent organizational
units
c. Neither a nor b
d. Both a and b
6. A lag indicator in a strategic scorecard is a
a. Measure of operating profit
b. Indicator of immediate financial success
c. A feedback measures on current performance
d. Driver of long term value
7. Frontage Corporation has three products A, B, and C.
A B C Total
Sales 8,000 $12,000 10,000 30,000
Variable costs
5,500 5,500 5,000 16,000
Contribution margin 2,500 6,500 5,000 14,000
Fixed costs
6,000 4,000 3,200 13,200
Net income (3,500) 2,500 1,800 800
Product A appears unprofitable, and management is considering

3. discontinuing it. How much will the discontinuation of Product
A affect net income if the total fixed costs remain unchanged?
a. Increase by $3,500
b. Decrease by $3,500
c. Increase by $2,500
d. Decrease by $2,500
8. The amount of compensation paid to a senior partner in a law
firm who is responsible for supervising many legal clerks
working with different clients is usually treated as
a. A direct cost
b. An indirect cost
c. Not a cost
d. Too high, compared to clerks’ wages
9. The break-even point is the level at which
a. Revenues equal variable costs
b. Revenues equal fixed costs
c. Revenues equal the sum of variable and fixed costs
d. Contribution margin equals variable costs
10. Sunk costs are
a. Relevant costs
b. Variable costs
c. Fixed costs
d. Not relevant costs
(Data for questions 11 to 12)
The budgeted cost for room and cleaning supplies for Lowland
Hotel was $ 4.50 per room night. For the first week of January
2004, 400 room-nights were expected to be occupied. The actual
cost of room and cleaning supplies was $ 2,100 for the 420
room-nights actually occupied in the first week of January
2004.

4. 11. The total variance (between original budget and actual
results) for room and cleaning supplies for Lowland Hotel is
a. $ 400U
b. $ 400F
c. $ 300U
d. $ 300F
12. The flexible budget variance (between adjusted budget and
actual results) for room and cleaning supplies for Lowland
Hotel is
a. $ 300U
b. $ 300F
c. $ 210U
d. $ 210F
13. The sales volume variance (between original budget and
adjusted budget) for room and cleaning supplies for Lowland
Hotel is
a. $ 90U
b. $ 90F
c. $ 120U
d. $ 120F
14. Kitty Supplies Company applies manufacturing overhead
costs to products as a predetermined rate of $ 30 per direct
labor hour. A retail outlet has requested a bid on a special
order. Estimates for this order include $40,000 of direct
materials and 500 direct labor hours @ $ 20 per hour.
Determine the estimated cost for this special order.
a. $ 25,000
b. $ 50,000
c. $ 55,000
d. $ 65,000

5. 15. When you are evaluating whether to replace an old drilling
machine with a new machine, the following costs are all
relevant EXCEPT
a. The cost of the new machine
b. The cost of the old machine
c. The current selling price of the old machine
d. The annual savings on operating costs if the new machine is
purchased
16. While determining the most attractive alternative in a make-
or-buy decision one needs to
a. Compare the sunk costs of alternatives
b. Compare the variable costs of the alternatives
c. Compare the costs avoided to the costs of outsourcing
d. All of the above
17. In deciding the best alternative
a. All costs (and revenues) that remain same across alternatives
are relevant
b. All costs (and revenues) that differ across alternatives are
relevant
c. All revenues are relevant
d. All costs are relevant
18. Consider the following two statements about variable and
fixed costs :
(I) Variable costs are always direct costs.
(II) Fixed costs are never direct costs.
Which of the above two statements is/are accurate?
a. I only
b. II only
c. Both I and II

6. d. Neither I nor II
19. This is a BONUS QUESTIONS !!!!
a. THIS IS THE ANSWER
b. Not this
c. Neither this
d. Definitely not this either
20. If the contribution margin increases by $10 per unit then
operating profit will
a. Increase by $10 per unit
b. Increase by less than $10 per unit
c. Not change
d. Decrease by less than $10 per unit
(Data for questions 21 to 23)
Yanis Company sells a special high quality product at $ 150 per
unit through specialty stores. Currently Yanis Company is
manufacturing 15,000 units using only 75% capacity. The
variable cost is $ 120 per unit. A discount store is willing to
buy 4,000 units of the product at $ 130 per unit. Yanis estimates
that it will result in 10% cannibalization of existing sales.
21. What is the total contribution margin on the 15,000 units
sold currently through specialty stores?
a. $ 600,000
b. $ 450,000
c. $ 1,000,000
d. $ 800,000

7. 22. What is the total contribution margin on the 4,000 units for
sale to the discount store?
a. $ 40,000
b. $ 60,000
c. $ 50,000
d. none of the above
23. What is the total amount of decrease in profit due to
cannibalization if Yanis Company agrees to sell the additional
4,000 units to the discount store?
a. $ 45,000
b. $ 40,000
c. $ 50,000
d. $ 8,000
(Data for questions 24 and 25)
ABC Company decided to trace its manufacturing overhead to
the following three activities as a first step in implementing an
activity-based costing system:
24. The cost driver rate for purchase orders activity is
a. $ 400 per order
b. $ 100 per order
c. $ 200 per order
d. $ 250 per purchase order
25. If the cost drive rate for machine maintenance activity is $
160 per machine hour, then the total machine maintenance
activity cost allocated to product A is
a. $ 50,000
b. $ 56,000
c. $ 62,000

8. d. $ 70,000