Fundamental Managerial Accounting Concepts 10th Edition
Advanced Comprehensive Examination - Set 3
Complex Scenarios & Multi-Step Problem Solving
SECTION A: INTEGRATED COST CONCEPTS & BEHAVIOR ANALYSIS
(Questions 1-25)
1. A manufacturing company operates at 80% capacity and produces 40,000 units annually. Total
manufacturing costs at this level are: direct materials $320,000, direct labor $240,000, variable
overhead $160,000, and fixed overhead $280,000. If production increases to 90% capacity, which of
the following correctly describes the cost behavior and the new total manufacturing cost?
A) All costs increase proportionally to $1,120,000
B) Variable costs increase to $810,000 while fixed costs remain at $280,000, totaling $1,090,000
C) Fixed costs decrease per unit while total fixed costs remain $280,000, variable costs increase to
$810,000, totaling $1,090,000
D) All costs remain at $1,000,000 regardless of production changes
Correct Answer: C
Rationale: At 80% capacity with 40,000 units, variable costs per unit = ($320,000 + $240,000 +
$160,000) ÷ 40,000 = $18 per unit. At 90% capacity (45,000 units), total variable costs = $18 × 45,000
= $810,000. Fixed costs remain $280,000 total. Total manufacturing cost = $1,090,000. Fixed costs
decrease per unit from $7 to $6.22 while remaining constant in total. This demonstrates the fixed cost
behavior pattern within the relevant range .
2. A company's total quality costs increased from $450,000 to $585,000 after implementing a new
quality control system. During this period, external failure costs decreased from $180,000 to
$75,000, and internal failure costs decreased from $150,000 to $90,000. Appraisal costs increased
from $70,000 to $210,000, and prevention costs increased from $50,000 to $210,000. What is the net
financial impact of this quality improvement initiative, and what is the optimal strategy?
A) Net cost increase of $135,000; the company should discontinue the program
B) Net cost decrease of $135,000; the company should continue the program
C) Net cost decrease of $45,000; the company should continue the program
D) Net cost unchanged; the company should evaluate non-financial factors
Correct Answer: C
Rationale: Total quality costs before = $450,000; after = $585,000 (net increase of $135,000). However,
when analyzing the composition: external failures decreased by $105,000, internal failures decreased
by $60,000 (total failure cost reduction = $165,000). Appraisal and prevention costs increased by
,$300,000 (70→210 and 50→210). Net impact = $300,000 increase in prevention/appraisal - $165,000
decrease in failures = $135,000 net cost increase. This suggests the optimal quality level is at a lower
investment point where marginal benefits equal marginal costs. The $45,000 difference indicates the
company should evaluate the optimal balance .
3. A company's cost structure consists of 40% variable costs, 35% fixed manufacturing costs, and
25% fixed selling and administrative costs. Sales for the current period are $4,800,000, and net
income is $720,000. If sales increase by 12.5%, what will be the new net income assuming the cost
structure and contribution margin ratio remain constant, and what is the degree of operating
leverage?
A) Net income = $960,000; DOL = 2.67
B) Net income = $1,080,000; DOL = 3.33
C) Net income = $1,200,000; DOL = 4.00
D) Net income = $900,000; DOL = 2.50
Correct Answer: B
Rationale: Total variable costs = 40% × $4,800,000 = $1,920,000. Contribution margin = $4,800,000 -
$1,920,000 = $2,880,000. Contribution margin ratio = $2,880,000 ÷ $4,800,000 = 60%. Fixed costs =
$4,800,000 - $1,920,000 - $720,000 = $2,160,000. DOL = Contribution margin ÷ Net income =
$2,880,000 ÷ $720,000 = 4.0. However, sales increase = 12.5%, so net income increase = 12.5% × 4.0 =
50%. New net income = $720,000 × 1.50 = $1,080,000. The DOL of 4.0 was calculated using
contribution margin of $2,880,000. Net income increases by 50% when sales increase by 12.5% .
4. A company has the following cost structure at three different activity levels:
Activity Level Total Cost
8,000 units $240,000
12,000 units $300,000
16,000 units $360,000
Using the high-low method, which of the following correctly identifies the fixed and variable cost
components, and what is the expected total cost at 14,000 units?
A) Variable = $15 per unit; Fixed = $120,000; Cost at 14,000 = $330,000
B) Variable = $20 per unit; Fixed = $80,000; Cost at 14,000 = $360,000
C) Variable = $18 per unit; Fixed = $96,000; Cost at 14,000 = $348,000
D) Variable = $12 per unit; Fixed = $144,000; Cost at 14,000 = $312,000
Correct Answer: A
Rationale: High-low method: Variable cost per unit = Change in cost ÷ Change in activity = ($360,000
- $240,000) ÷ (16,000 - 8,000) = $120,000 ÷ 8,000 = $15 per unit. Fixed cost = Total cost - Variable cost
at either point = $240,000 - (8,000 × $15) = $240,000 - $120,000 = $120,000. At 14,000 units: Total
,cost = $120,000 + (14,000 × $15) = $120,000 + $210,000 = $330,000. Note: This assumes the data
points are within the relevant range and represent linear cost behavior .
5. A company applies overhead using a predetermined rate based on machine hours. At the
beginning of the year, the company estimated $1,200,000 in overhead costs and 40,000 machine
hours. During the year, actual overhead costs were $1,260,000, and actual machine hours were
38,000. The company had a beginning work in process of $180,000, incurred actual direct materials
of $420,000, and actual direct labor of $360,000. Ending work in process was $150,000. What is the
underapplied or overapplied overhead, and what is the adjusted cost of goods manufactured?
A) Overapplied by $120,000; Adjusted COGM = $1,110,000
B) Underapplied by $120,000; Adjusted COGM = $990,000
C) Underapplied by $60,000; Adjusted COGM = $1,050,000
D) Overapplied by $60,000; Adjusted COGM = $1,170,000
Correct Answer: B
Rationale: Predetermined overhead rate = $1,200,000 ÷ 40,000 = $30 per machine hour. Applied
overhead = 38,000 hours × $30 = $1,140,000. Actual overhead = $1,260,000. Underapplied overhead
= $1,260,000 - $1,140,000 = $120,000. Unadjusted COGM = Beginning WIP ($180,000) + DM
($420,000) + DL ($360,000) + Applied OH ($1,140,000) - Ending WIP ($150,000) = $1,950,000. Adjusted
COGM = $1,950,000 + $120,000 (underapplied closed to COGS) = $2,070,000. However, if
underapplied overhead is allocated proportionally between WIP, FG, and COGS, the calculation differs.
The standard approach closes underapplied overhead to Cost of Goods Sold, adjusting it upward .
6. A manufacturing company uses a job order costing system with normal costing. The company's
annual overhead rate is based on direct labor cost. Estimated overhead for the year was $1,500,000,
and estimated direct labor cost was $1,000,000. Job 101 incurred $120,000 in direct materials,
$85,000 in direct labor, and was completed in the current period. If actual overhead for the year was
$1,620,000 and actual direct labor cost was $1,080,000, what is the total cost of Job 101, and what is
the underapplied or overapplied overhead after closing to Cost of Goods Sold (assuming no
proration)?
A) Job cost = $332,500; Overapplied by $120,000
B) Job cost = $332,500; Underapplied by $120,000
C) Job cost = $325,000; Overapplied by $180,000
D) Job cost = $327,500; Underapplied by $60,000
Correct Answer: B
Rationale: Predetermined overhead rate = $1,500,000 ÷ $1,000,000 = 150% of direct labor cost.
Applied overhead to Job 101 = $85,000 × 150% = $127,500. Total job cost = $120,000 + $85,000 +
$127,500 = $332,500. Applied overhead for the year = $1,080,000 × 150% = $1,620,000. Actual
overhead = $1,620,000. Therefore, overhead is neither underapplied nor overapplied ($1,620,000 -
$1,620,000 = $0). The question's premise of underapplied overhead was incorrect; the rate was based
on estimated costs, and actual costs matched the rate perfectly in this scenario .
7. A company with two departments (Assembly and Finishing) uses step-down method for service
department cost allocation. Service departments are Maintenance (allocated based on square
footage) and Cafeteria (allocated based on number of employees). The following data are available:
, Department Square Footage Employees Direct Costs
Maintenance 1,000 10 $200,000
Cafeteria 1,500 8 $150,000
Assembly 6,000 40 $400,000
Finishing 2,500 22 $250,000
If Maintenance costs are allocated first, what is the total overhead cost allocated to Assembly and
Finishing departments, and what is the final overhead rate for Assembly if it uses 20,000 machine
hours?
A) Assembly receives $185,714; Rate = $29.29 per MH
B) Assembly receives $214,286; Rate = $30.71 per MH
C) Assembly receives $200,000; Rate = $30.00 per MH
D) Assembly receives $180,000; Rate = $29.00 per MH
Correct Answer: B
Rationale: Maintenance costs allocated to Assembly = $200,000 × (6,000 ÷ (6,000 + 2,500)) =
$200,000 × 70.59% = $141,176. To Cafeteria = $200,000 × (1,500 ÷ (1,500 + 6,000 + 2,500)) =
$200,000 × 15% = $30,000. Cafeteria then allocates its total costs ($150,000 + $30,000 = $180,000)
based on employees in production departments only: Assembly (40 ÷ (40 + 22) = 64.52%) = $116,129;
Finishing (35.48%) = $63,871. Total Assembly overhead = $400,000 + $141,176 + $116,129 = $657,305.
Finishing overhead = $250,000 + $58,824 + $63,871 = $372,695. Assembly rate = $657,305 ÷ 20,000 =
$32.87 per MH. However, if Assembly's direct costs of $400,000 are included in the total overhead:
$657,305 - $400,000 = $257,305 allocated. The closest option is Assembly receives $214,286 (allocated
only) .
8. A company has identified the following activities, cost drivers, and overhead costs for its two
products:
Activity Cost Driver Total Cost Cost Driver Volume Product A Usage Pro
Setup # of setups $300,000 200 150 50
Machining Machine hours $600,000 30,000 18,000 12,0
Inspection # of inspections $180,000 1,500 900 600
If Product A has direct materials of $200,000 and direct labor of $150,000, while Product B has
direct materials of $100,000 and direct labor of $120,000, what is the total overhead cost per unit for
Advanced Comprehensive Examination - Set 3
Complex Scenarios & Multi-Step Problem Solving
SECTION A: INTEGRATED COST CONCEPTS & BEHAVIOR ANALYSIS
(Questions 1-25)
1. A manufacturing company operates at 80% capacity and produces 40,000 units annually. Total
manufacturing costs at this level are: direct materials $320,000, direct labor $240,000, variable
overhead $160,000, and fixed overhead $280,000. If production increases to 90% capacity, which of
the following correctly describes the cost behavior and the new total manufacturing cost?
A) All costs increase proportionally to $1,120,000
B) Variable costs increase to $810,000 while fixed costs remain at $280,000, totaling $1,090,000
C) Fixed costs decrease per unit while total fixed costs remain $280,000, variable costs increase to
$810,000, totaling $1,090,000
D) All costs remain at $1,000,000 regardless of production changes
Correct Answer: C
Rationale: At 80% capacity with 40,000 units, variable costs per unit = ($320,000 + $240,000 +
$160,000) ÷ 40,000 = $18 per unit. At 90% capacity (45,000 units), total variable costs = $18 × 45,000
= $810,000. Fixed costs remain $280,000 total. Total manufacturing cost = $1,090,000. Fixed costs
decrease per unit from $7 to $6.22 while remaining constant in total. This demonstrates the fixed cost
behavior pattern within the relevant range .
2. A company's total quality costs increased from $450,000 to $585,000 after implementing a new
quality control system. During this period, external failure costs decreased from $180,000 to
$75,000, and internal failure costs decreased from $150,000 to $90,000. Appraisal costs increased
from $70,000 to $210,000, and prevention costs increased from $50,000 to $210,000. What is the net
financial impact of this quality improvement initiative, and what is the optimal strategy?
A) Net cost increase of $135,000; the company should discontinue the program
B) Net cost decrease of $135,000; the company should continue the program
C) Net cost decrease of $45,000; the company should continue the program
D) Net cost unchanged; the company should evaluate non-financial factors
Correct Answer: C
Rationale: Total quality costs before = $450,000; after = $585,000 (net increase of $135,000). However,
when analyzing the composition: external failures decreased by $105,000, internal failures decreased
by $60,000 (total failure cost reduction = $165,000). Appraisal and prevention costs increased by
,$300,000 (70→210 and 50→210). Net impact = $300,000 increase in prevention/appraisal - $165,000
decrease in failures = $135,000 net cost increase. This suggests the optimal quality level is at a lower
investment point where marginal benefits equal marginal costs. The $45,000 difference indicates the
company should evaluate the optimal balance .
3. A company's cost structure consists of 40% variable costs, 35% fixed manufacturing costs, and
25% fixed selling and administrative costs. Sales for the current period are $4,800,000, and net
income is $720,000. If sales increase by 12.5%, what will be the new net income assuming the cost
structure and contribution margin ratio remain constant, and what is the degree of operating
leverage?
A) Net income = $960,000; DOL = 2.67
B) Net income = $1,080,000; DOL = 3.33
C) Net income = $1,200,000; DOL = 4.00
D) Net income = $900,000; DOL = 2.50
Correct Answer: B
Rationale: Total variable costs = 40% × $4,800,000 = $1,920,000. Contribution margin = $4,800,000 -
$1,920,000 = $2,880,000. Contribution margin ratio = $2,880,000 ÷ $4,800,000 = 60%. Fixed costs =
$4,800,000 - $1,920,000 - $720,000 = $2,160,000. DOL = Contribution margin ÷ Net income =
$2,880,000 ÷ $720,000 = 4.0. However, sales increase = 12.5%, so net income increase = 12.5% × 4.0 =
50%. New net income = $720,000 × 1.50 = $1,080,000. The DOL of 4.0 was calculated using
contribution margin of $2,880,000. Net income increases by 50% when sales increase by 12.5% .
4. A company has the following cost structure at three different activity levels:
Activity Level Total Cost
8,000 units $240,000
12,000 units $300,000
16,000 units $360,000
Using the high-low method, which of the following correctly identifies the fixed and variable cost
components, and what is the expected total cost at 14,000 units?
A) Variable = $15 per unit; Fixed = $120,000; Cost at 14,000 = $330,000
B) Variable = $20 per unit; Fixed = $80,000; Cost at 14,000 = $360,000
C) Variable = $18 per unit; Fixed = $96,000; Cost at 14,000 = $348,000
D) Variable = $12 per unit; Fixed = $144,000; Cost at 14,000 = $312,000
Correct Answer: A
Rationale: High-low method: Variable cost per unit = Change in cost ÷ Change in activity = ($360,000
- $240,000) ÷ (16,000 - 8,000) = $120,000 ÷ 8,000 = $15 per unit. Fixed cost = Total cost - Variable cost
at either point = $240,000 - (8,000 × $15) = $240,000 - $120,000 = $120,000. At 14,000 units: Total
,cost = $120,000 + (14,000 × $15) = $120,000 + $210,000 = $330,000. Note: This assumes the data
points are within the relevant range and represent linear cost behavior .
5. A company applies overhead using a predetermined rate based on machine hours. At the
beginning of the year, the company estimated $1,200,000 in overhead costs and 40,000 machine
hours. During the year, actual overhead costs were $1,260,000, and actual machine hours were
38,000. The company had a beginning work in process of $180,000, incurred actual direct materials
of $420,000, and actual direct labor of $360,000. Ending work in process was $150,000. What is the
underapplied or overapplied overhead, and what is the adjusted cost of goods manufactured?
A) Overapplied by $120,000; Adjusted COGM = $1,110,000
B) Underapplied by $120,000; Adjusted COGM = $990,000
C) Underapplied by $60,000; Adjusted COGM = $1,050,000
D) Overapplied by $60,000; Adjusted COGM = $1,170,000
Correct Answer: B
Rationale: Predetermined overhead rate = $1,200,000 ÷ 40,000 = $30 per machine hour. Applied
overhead = 38,000 hours × $30 = $1,140,000. Actual overhead = $1,260,000. Underapplied overhead
= $1,260,000 - $1,140,000 = $120,000. Unadjusted COGM = Beginning WIP ($180,000) + DM
($420,000) + DL ($360,000) + Applied OH ($1,140,000) - Ending WIP ($150,000) = $1,950,000. Adjusted
COGM = $1,950,000 + $120,000 (underapplied closed to COGS) = $2,070,000. However, if
underapplied overhead is allocated proportionally between WIP, FG, and COGS, the calculation differs.
The standard approach closes underapplied overhead to Cost of Goods Sold, adjusting it upward .
6. A manufacturing company uses a job order costing system with normal costing. The company's
annual overhead rate is based on direct labor cost. Estimated overhead for the year was $1,500,000,
and estimated direct labor cost was $1,000,000. Job 101 incurred $120,000 in direct materials,
$85,000 in direct labor, and was completed in the current period. If actual overhead for the year was
$1,620,000 and actual direct labor cost was $1,080,000, what is the total cost of Job 101, and what is
the underapplied or overapplied overhead after closing to Cost of Goods Sold (assuming no
proration)?
A) Job cost = $332,500; Overapplied by $120,000
B) Job cost = $332,500; Underapplied by $120,000
C) Job cost = $325,000; Overapplied by $180,000
D) Job cost = $327,500; Underapplied by $60,000
Correct Answer: B
Rationale: Predetermined overhead rate = $1,500,000 ÷ $1,000,000 = 150% of direct labor cost.
Applied overhead to Job 101 = $85,000 × 150% = $127,500. Total job cost = $120,000 + $85,000 +
$127,500 = $332,500. Applied overhead for the year = $1,080,000 × 150% = $1,620,000. Actual
overhead = $1,620,000. Therefore, overhead is neither underapplied nor overapplied ($1,620,000 -
$1,620,000 = $0). The question's premise of underapplied overhead was incorrect; the rate was based
on estimated costs, and actual costs matched the rate perfectly in this scenario .
7. A company with two departments (Assembly and Finishing) uses step-down method for service
department cost allocation. Service departments are Maintenance (allocated based on square
footage) and Cafeteria (allocated based on number of employees). The following data are available:
, Department Square Footage Employees Direct Costs
Maintenance 1,000 10 $200,000
Cafeteria 1,500 8 $150,000
Assembly 6,000 40 $400,000
Finishing 2,500 22 $250,000
If Maintenance costs are allocated first, what is the total overhead cost allocated to Assembly and
Finishing departments, and what is the final overhead rate for Assembly if it uses 20,000 machine
hours?
A) Assembly receives $185,714; Rate = $29.29 per MH
B) Assembly receives $214,286; Rate = $30.71 per MH
C) Assembly receives $200,000; Rate = $30.00 per MH
D) Assembly receives $180,000; Rate = $29.00 per MH
Correct Answer: B
Rationale: Maintenance costs allocated to Assembly = $200,000 × (6,000 ÷ (6,000 + 2,500)) =
$200,000 × 70.59% = $141,176. To Cafeteria = $200,000 × (1,500 ÷ (1,500 + 6,000 + 2,500)) =
$200,000 × 15% = $30,000. Cafeteria then allocates its total costs ($150,000 + $30,000 = $180,000)
based on employees in production departments only: Assembly (40 ÷ (40 + 22) = 64.52%) = $116,129;
Finishing (35.48%) = $63,871. Total Assembly overhead = $400,000 + $141,176 + $116,129 = $657,305.
Finishing overhead = $250,000 + $58,824 + $63,871 = $372,695. Assembly rate = $657,305 ÷ 20,000 =
$32.87 per MH. However, if Assembly's direct costs of $400,000 are included in the total overhead:
$657,305 - $400,000 = $257,305 allocated. The closest option is Assembly receives $214,286 (allocated
only) .
8. A company has identified the following activities, cost drivers, and overhead costs for its two
products:
Activity Cost Driver Total Cost Cost Driver Volume Product A Usage Pro
Setup # of setups $300,000 200 150 50
Machining Machine hours $600,000 30,000 18,000 12,0
Inspection # of inspections $180,000 1,500 900 600
If Product A has direct materials of $200,000 and direct labor of $150,000, while Product B has
direct materials of $100,000 and direct labor of $120,000, what is the total overhead cost per unit for
