Name:__________________________________________ Date:____________________
INSTRUCTIONS: Place your answer in the space provided or on a separate answer sheet. Show all
work!
(TRUE/FALSE)
______1. Historical costs are useful in decision making only to the extent that they predict future costs.
______2. Relevant costs are future costs that are the same among alternative courses of action.
(MULTIPLE CHOICE)
______3. The type of costs presented to management for an equipment replacement decision should
be limited to:
A. relevant costs.
B. standard costs.
C. sunk costs.
D. controllable costs.
E. None of these.
______4. In an outsourcing decision:
A. only variable costs are relevant.
B. fixed costs that can be avoided in the future are relevant.
C. fixed costs that will continue regardless of the decision are relevant.
D. only conversion costs are relevant.
E. None of these.
______5. In which of the following situations would a company most likely manufacture parts rather
than buy those parts? When the manufacturing costs of direct material, plus direct labor, plus variable
overhead:
A. is less than the cost to buy the parts.
B. is greater than the cost to buy the parts.
C. plus fixed overhead is less than the cost to buy the parts.
D. plus avoidable fixed overhead is greater than the cost to buy the parts.
E. None of these.
______6. In evaluating special orders, a producer should consider:
A. all factory overhead.
B. no factory overhead.
C. variable factory overhead.
D. fixed factory overhead.
E. None of these.
Final Exam//Cost Accounting (ACCT 321)//Spring 2016
Page 2 of 4
(SHORT ANSWER)
7. Lockhart & Company manufactures 10,000 units of pump parts for use in its annual production.
Costs are direct materials ($20,000), direct labor ($55,000), variable overhead ($45,000), and fixed
overhead ($70,000). K&B Company has offered to sell Lockhart 10,000 units of the pump parts for $18
per unit. If Lockhart accepts the offer, some of the facilities presently used to manufacture the pump
parts could be rented to a third party at an annual rental of $15,000. Additionally, $4 per unit of the
fixed overhead applied to the pump parts would be totally eliminated. Should Lockhart accept K&B’s
offer, and why?
8. What would be the effect on a company’s net income of discontinuing a department with a
contribution margin of $16,000 and allocated overhead of $32,000 (of which $14,000 cannot be
eliminated)?
9. The Best BBQ Company owns numerous restaurants and food production facilities. The company
routinely evaluates proposals to drive operational efficiency. Four such proposals are currently under
review. One entails the suggestion to close the unprofitable store in San Antonio. Another is to
outsource the acquisition of jalapenos, rather than growing them. Another proposal is to sell packaged
sausage to a non?competing restaurant chain under a private label. The final proposal is to scrap
packaging material that is printed with an old logo. You are the controller for The Best BBQ Company
and are reviewing staff?prepared reports for each proposal. The reports are summarized below.
Critique each proposal (below) as the controller. Your answer should include whether the staff’s logic
is sound or faulty, and include support for your conclusions (e.g., numbers, calculations, etc.).
(Answers should normally be less than 50?75 words).
Final Exam//Cost Accounting (ACCT 321)//Spring 2016
Page 3 of 4
9a. San Antonio Proposal: The Staff indicates that the San Antonio store should be closed. The
company is a consistent money loser. Below is an income report for the San Antonio store for the past
year. Half of the fixed expenses relate to facilities rent under a 20?year non?cancelable lease. The lease
costs cannot be avoided, and the location is not able to be subleased to another user.
Sales $ 1,400,000
Variable expenses 1,000,000
Contribution margin $ 400,000
Fixed expenses 650,000
Income (loss) $ (250,000)
9b. Outsource Jalapenos Proposal: The company spent a total of $2,000,000 producing jalapenos
during the past year. The jalapenos were grown on a company?owned farm. A vendor has offered to
supply a similar quantity and grade of jalapenos for $2,200,000. Staff recommends continuing to grow
jalapenos because the proposed purchase price is 10% higher than the cost of growing jalapenos. Staff
believes it is inappropriate to consider that the jalapeno farm could be leased to another farmer for
$350,000, if it is diverted from jalapeno production.
9c. Sell Packaged Sausage Proposal: The other company has offered to buy packaged sausage at $4 per
pound. The packing plant is well below full capacity and can accommodate the request without
incurring any additional fixed costs. However, staff believes it would be inappropriate to price the
sausage below its own internal cost of $4.50 per pound, which consists of raw materials ($2.50), direct
labor ($0.75), variable factory overhead ($0.25), and fixed factory overhead ($1.00). This transaction
would result in no material amount of added selling, general, or administrative costs.
Final Exam//Cost Accounting (ACCT 321)//Spring 2016
Page 4 of 4
9d. Scrap Packaging Material Proposal: The company spent $500,000 on packaging material that is
imprinted with an old logo. It is unlikely this material will ever be used. However, staff recommends
against scrapping it because this will result in an immediate charge against net income. It costs only
$2,000 per year to store the material.
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