The contribution margin per unit of a given product guides managers when deciding
which product to emphasize in a sales mix.
Process-costing systems apply costs to like products that are usually mass-produced in
continuous fashion through a series of production processes.
Companies must pay managers more if the managers bear more risk, assuming the
managers are risk averse.
The transfer price is revenue to the acquiring segment, and it is a cost to the segment
producing the product.
Since managers are usually evaluated based on the operating results in one year, they do
not usually consider the long range impact of their decisions.
Process costing averages costs over large numbers of nearly identical products.
The use of net book value for plant assets promotes a more conservative approach to
asset replacement when compared to gross book value.
Nonfinancial performance measures are often lagging indicators that arrive too late to
help prevent problems.
In job-order costing, the journal entry to record the completion of units in process
would include a Debit to Finished Goods Inventory.
Committed fixed costs usually arise from the possession of facilities, equipment and a
basic organizational structure.
Relevant information is the historical costs and revenues that differ due to alternative
courses of action.
The present value of tax savings from depreciation is greater for straight-line
depreciation than an accelerated depreciation method.
Product life cycles may range from a few months to many years.
Separable costs are part of a joint process and cannot be exclusively identified with
individual products.
An equipment’s book value is the original cost plus accumulated depreciation.
Determining the relationships among cost objects, activities, and resources is the second
step in the design of an ABC system.
Goodwill can only be recognized when one company acquires another company.
A cost management system provides information for strategic management decisions
and financial reporting.
Return on sales equals revenue divided by income.
Allocation of costs to cost objects may be described as absorb or apply.
Under absorption-costing, fixed factory overhead costs appear only in cost of goods
sold.
Committed fixed costs usually arise from the possession of facilities, equipment and a
basic organizational structure.
Operating income summarizes the results of basic operating activities of a company.
Product design affects a small amount of costs in the value chain.
Variable and fixed costs from service departments should be allocated separately to user
departments.
In the NPV method, errors in forecasting terminal disposal values are usually not
crucial because the present value of these cash flows is small.
The last step in calculating the production-cost report is to apply unit costs to units
completed and to units in the ending work-in-process inventory.
The sales budget should be the responsibility of line management.
The balance sheet is not linked to the income statement.
Variable and fixed costs from service departments should be allocated separately to user
departments.
The proration method of disposing of an overhead variance prorates the variance among
three accounts that include Direct Materials Inventory, Work-in-Process Inventory and
Finished Goods Inventory.
A company’s operating cycle can be longer than one year.
Nonfinancial measures of performance include profit targets and required return on
investment.
If the vast majority of costs were directly traceable to cost objects, then cost allocation
would be a minor issue.
Heating and air conditioning costs are examples of common costs to the different
departments in a retail store.
There should be a strong cause-and-effect relationship between factory overhead costs
incurred and the cost-allocation base chosen for its application.
When sales exceed production, variable-costing income is greater than
absorption-costing income.
Companies must assign all production costs and only production costs to products for
external financial reporting purposes.
The cost of new equipment is relevant in deciding whether to keep or replace old
equipment.
Flajovich Company manufactures tape dispensers. The Assembly Department reported
the follow data for the past month:
Units started and completed 70,000
Units started and not complete 10,000
Units in beginning inventory 0
Direct materials costs $480,000
Conversion costs $240,000
The partially complete units at the end of the month were 100 percent complete with
respect to materials and 50 percent complete with respect to conversion costs. The total
cost of units completed and transferred is ________.
A) $630,000
B) $644,000
C) $690,000
D) $720,000
Which example is NOT a step cost?
A) When oil and gas exploration activity reaches a certain level in a given area, a
company leases an additional rig. The lease cost of the rigs is a step cost.
B) When ten nurses are added to a shift, a nursing supervisor is also added to the shift.
The salaries of the nursing supervisors are a step cost.
C) When a telemarketing company adds ten workers to a shift, a supervisor is also
added to the shift. The salaries of the supervisors are a step cost.
D) When a manufacturing company ceases production, a skeleton crew of maintenance
workers continues to work, but the rest are terminated. When production resumes,
maintenance workers are rehired in direct proportion to the amount of production. The
wages of the maintenance workers are a step cost.
Assume fixed costs are constant and contribution margin per unit is reduced by 50
percent. What will happen to the break-even point in units?
A) It will decrease 50 percent.
B) It will increase 100 percent.
C) It will be the same.
D) It will increase 50 percent.
Historical cost is widely used for asset valuation in calculating return on investment
because ________.
A) it reports the replacement cost of long-term assets
B) it is more subjective than other approaches
C) it requires additional data collection
D) the cost of obtaining additional data exceeds the benefit
Why do companies use variable costing for internal financial statements?
A) Production volume variance does not affect variable costing income but it does
affect absorption costing income.
B) Variable costing does not create an incentive to produce additional unneeded units to
increase net income.
C) A sales-oriented company wants to track the effect of sales on net income.
D) All of the above
Which of the following types of organizations can use management by objectives?
A) profit-seeking organizations only
B) nonprofit organizations only
C) universities, hospitals and churches only
D) all of the above
Surly Company makes small boats. The company produces and sells 5,500 boats per
year at a selling price of $160 per boat. Surly Company has excess capacity and is
trying to get special orders. A new retailer wants to purchase 1,000 boats for $125 per
boat. Surly Company is going to decline the special order because it costs $130 to make
a single boat as seen below:
Direct materials $50 per unit
Direct manufacturing labor $55 per unit
Variable manufacturing overhead $10 per unit
Fixed manufacturing overhead $15 per unit
Total $130 per unit
Required:
A) Should Surly Company reject the special order from the new retailer? Why?
B) How much will Surly’s net income increase with the special offer?
The following information was extracted from the accounting records of Vogel
Company:
Beginning Paid-in Capital $90,000
Beginning Retained Earnings $300,000
Beginning Assets $455,000
Contributions by Owners $0
Revenues $200,000
Expenses $155,000
At the beginning of the period, what is the total amount of liabilities?
A) $65,000
B) $100,000
C) $155,000
D) $245,000
Michigan Company has budgeted the following costs for the production of its only
product:
Direct Materials $35,000
Direct Labor 25,000
Variable indirect production costs 30,000
Fixed indirect production costs 15,000
Variable selling and administrative costs 7,500
Fixed selling and administrative costs 12,500
Total Costs $125,000
Michigan Company wants a profit of $50,000, and expects to produce 1,000 units. The
market price is $150 per unit. What is the target cost per unit of the product?
A) $100 per unit
B) $125 per unit
C) $150 per unit
D) $175 per unit
When public accounting firms apply indirect costs to audit engagements, they use
________ or ________ as the cost driver.
A) direct labor cost; equipment usage
B) direct labor cost; direct labor hours
C) hours of equipment use; hours of computer use
D) traveling costs; hours of clerical assistance
The degree of operating leverage for Murphy Company is 8.0 at 80,000 units of sales.
At 80,000 units of sales, the net profit is $10,000. If the sales volume decreases to
72,000 units, what is the net profit?
A) $2,000
B) $8,000
C) $10,000
D) $18,000
Which example is NOT a step cost?
A) When oil and gas exploration activity reaches a certain level in a given area, a
company leases an additional rig. The lease cost of the rigs is a step cost.
B) When ten nurses are added to a shift, a nursing supervisor is also added to the shift.
The salaries of the nursing supervisors are a step cost.
C) When a telemarketing company adds ten workers to a shift, a supervisor is also
added to the shift. The salaries of the supervisors are a step cost.
D) When a manufacturing company ceases production, a skeleton crew of maintenance
workers continues to work, but the rest are terminated. When production resumes,
maintenance workers are rehired in direct proportion to the amount of production. The
wages of the maintenance workers are a step cost.
Martin Company purchased 10% of the outstanding shares of Winn Company. Martin
Company classifies the investments as trading securities. At the end of the year, the
market value of the shares increased from the prior year. The increase in market value
of Winn Company’s shares will affect Martin Company by ________.
A) increasing cash and increasing investments
B) decreasing investments and increasing retained earnings
C) increasing investments and increasing retained earnings
D) increasing cash and increasing stockholders’ equity
Indirect production costs do NOT include ________.
A) property taxes on factory building
B) rent expense on factory building
C) wages of security guards at corporate headquarters
D) wages of forklift truck operators in assembly area
Frequently, companies do not use a contribution approach to pricing because ________.
A) it promotes price stability
B) it provides the best defense for legal challenges
C) of a fear of underpricing products by using variable costs to price products
D) it is not sensitive to cost-volume-profit relationships
The following data was obtained for a company that makes statues:
Standard Inputs Expected Standard Price
For Each Unit of Output Per Unit of Input
Direct material 5 pounds $12 per pound
Direct labor 1.5 hours $12 per hour
During the month of July, the company actually produced 1,000 statutes, which is 100
units less than expected. Direct material purchased and used amounted to 5,500 pounds
at a cost of $12.50 per pound. Actual direct labor was 1,450 hours at an actual cost of
$13.00 per hour.
Required:
A) Compute the price and quantity variances for direct materials.
B) Compute the price and quantity variances for direct labor.
________ is the classification, accumulation, and reporting of data that help users
understand and evaluate organizational performance.
A) Scorekeeping
B) Attention directing
C) Problem solving
D) Cost accounting
Stefanko Manufacturing has prepared the following income statement:
Sales $450,000
Cost of goods sold 200,000
Gross margin 250,000
Operating expenses 196,000
Operating income $54,000
According to company records, $100,000 of Cost of Goods Sold and $100,000 of
Operating Expenses are fixed.
Required:
A) Compute the contribution margin.
B) Compute the contribution margin ratio.
C) Compute the break-even point in sales dollars.
Bernice Company’s records reveal the following:
Division X
Market price of finished component to outsiders $32 per unit
Variable costs per component $24 per unit
Division Y
Sale price of finished product $42 per unit
Variable costs:
Division X(1 component) ?
Division Y Assembly 9 per unit
Division Y Packaging 4 per unit
Division Y wants to buy the component from Division X. The variable costs of Division
Y will be incurred whether it buys the component from Division X or from an outside
supplier. Assume Division X has excess capacity. Division Y can buy the component
from an outside supplier for $32 per unit. What is the lowest transfer price per unit at
which Division X would be willing to sell to Division Y?
A) $8
B) $22
C) $24
D) $32
Green Company had the following information:
Budgeted factory overhead costs $144,500
Actual factory overhead costs $151,980
Budgeted direct labor hours 34,000
Actual direct labor hours 30,400
Assume direct labor hours are the cost driver for factory overhead costs. The budgeted
factory overhead rate is ________.
A) $4.25 per direct labor hour
B) $4.45 per direct labor hour
C) $4.63 per direct labor hour
D) $4.84 per direct labor hour
Maralee Company’s records reveal the following:
Division X
Market price of finished component to outsiders $32 per unit
Variable costs per component $24 per unit
Division Y
Sale price of finished product $42 per unit
Variable costs:
Division X (1 component) ?
Division Y Assembly 9 per unit
Division Y Packaging 4 per unit
Division Y wants to buy the component from Division X. The variable costs of Division
Y will be incurred whether it buys the component from Division X or from an outside
supplier. Assume Division X is working at full capacity; there is no excess capacity.
Division Y can buy the component from an outside supplier for $32 per unit. What is
the lowest transfer price per unit Division X should accept from Division Y for the
component?
A) $8 per unit
B) $22 per unit
C) $24 per unit
D) $32 per unit
On a cost-volume-profit graph, at the point where the Total Revenue line intersects the
Total Cost line, ________.
A) net income is positive
B) net income is negative
C) net income is zero
D) not enough information is given
What happens when the cost-driver activity level decreases within the relevant range?
A) Total fixed costs increase.
B) Fixed costs per unit of cost driver decrease.
C) Total variable costs decrease.
D) Variable costs per unit of cost driver decrease.
A multiple step income statement ________.
A) lists all the expenses together and calculates a total
B) has a subtotal for gross profit
C) has a subtotal for total assets
D) has a subtotal for total retained earnings
Randy Company acquired 40% of the voting stock of Biel Company for $40 million. At
the end of Year 1, Biel Company reports net income of $15 million and pays cash
dividends of $5 million. At the end of Year 1, the market value of Randy Company’s
investment in Biel Company is $44 million. The ________ method should be used by
Randy Company to account for the investment.
A) market-value
B) consolidated
C) cost
D) equity
The most recent income statement for the South Branch of First Financial Bank is
presented below:
Sales $57,000
Variable costs 31,500
Contribution margin 25,500
Avoidable fixed costs 13,500
Unavoidable fixed costs 18,000
Operating loss $(6,000)
First Financial Bank is thinking about eliminating the South Branch. If the branch is
eliminated, First Financial Bank’s operating income will ________.
A) increase by $6,000
B) increase by $25,500
C) decrease by $12,000
D) decrease by $31,500
Presented below is the production data for the first six months of the year showing the
mixed costs incurred by Eunice Company.
Month Cost Units
January $7,500 4,000
February 13,000 7,500
March 11,500 9,000
April 11,700 11,500
May 13,500 12,000
June 11,850 6,000
Eunice Company uses the high-low method to analyze mixed costs. The variable cost
per unit is ________.
A) $0.625
B) $0.75
C) $1.25
D) $1.31
Matthew Company manufactures two models of pens, a standard model and a deluxe
model. Three activities have been identified in the production of the pens. The
following information is available:
Number of Number of Number of Direct
Product Setups Components Labor Hours
Standard 22 8 375
Deluxe 28 12 225
Cost Pool Total Costs Cost Driver
Setup Costs $15,000 Number of setups
Assembly Costs $36,000 Number of components
Labor Costs $9,000 Number of direct labor hours
If activity-based costing is used, the total costs assigned to the standard model are
________.
A) $22,500
B) $26,625
C) $33,375
D) $37,500
Zach Company produces and sells a product that has variable costs of $7 per unit and
fixed costs of $200,000 per year. If 40,000 units are produced and sold in a year, what is
the total cost per unit?
A) $7
B) $10
C) $12
D) $17
Audrey Company has the following data:
Month Budgeted Sales
May $46,000
June 50,000
July 52,000
August 48,000
The cost of goods sold percentage is 65% of sales and the desired ending inventory is
25% of next month’s sales at cost. What are the total purchases budgeted for July?
A) $33,150
B) $33,800
C) $41,600
D) $42,250
Wendel Company has actual fixed overhead costs of $14,700. Fixed overhead costs
based on the flexible budget and the actual use of the cost driver are $14,400. Actual
variable overhead costs are $14,500. What is the flexible-budget variance for fixed
overhead costs?
A) $300 Favorable
B) $300 Unfavorable
C) $100 Favorable
D) $100 Unfavorable
When examining the output from regression analysis, the fixed cost measure is labeled
the ________ by most computer programs.
A) coefficient of determination
B) X coefficient
C) standard error of estimate
D) constant or intercept
Mueller Company is considering the replacement of equipment used in operations. The
following data are available:
Old Equipment New Equipment
Original cost $93,000 $60,000
Useful life in years 13 6
Current age in years 7 0
Book value $57,000 –
Disposal value now $50,000 –
Disposal value in 6 years 0 0
Annual cash operating costs $14,000 $11,000
Required:
A) Prepare a cost comparison for replacing the old equipment. Use only relevant items
and add the items together for the next 6 years.
B) Should the old equipment be replaced?
Kilsdonk Company has the following information available:
Budgeted cost of direct materials at 900,000 units $900,000
Budgeted cost of direct materials at 820,000 units $820,000
Actual cost of direct materials at 820,000 units $840,000
Actual level of output(units) 820,000
Planned level of output(units) 900,000
The cost driver of product costs is units of output. What is the static budget variance for
direct material costs?
A) $20,000 Unfavorable
B) $20,000 Favorable
C) $60,000 Favorable
D) $60,000 Unfavorable