ACCT 312 Exam 1

At the end of the accounting​ period, Armstrong Corporation reports operating income of​ $30,000. Which of the following statements is​ true, if​ Armstrong's inventory levels decrease during the accounting​ period?

Absorption costing will report less operating income than variable costing.

"All future costs are​ relevant." Do you​ agree? Why? A. No. Relevant costs are defined as those expected future costs that do not differ among alternative courses of action being considered.​ Thus, future costs that differ among the alternatives are irrelevant to deciding which alternative to choose. B. No. Relevant costs are defined as those expected future costs that differ among alternative courses of action being considered.​ Thus, future costs that do not differ among the alternatives are irrelevant to deciding which alternative to choose. C. Yes. Relevant costs are defined as those expected future costs that differ or do not differ among alternative courses of action being considered.​ Thus, future costs are always relevant to deciding which alternative to choose. D. Yes. Relevant costs are defined as those expected future costs that do not differ among alternative courses of action being considered.​ Thus, future costs that differ among the alternatives are irrelevant to deciding which alternative to choose.

B

During the current​ year, XYZ Company increased its variable​ SG&A expenses while keeping fixed​ SG&A expenses the same. As a​ result, XYZ​'s: A. Inventory amounts booked under the financial accounting income statement will be lower than under the contribution income statement. B. Operating income will be the same under both the financial accounting income statement and contribution income statement. C. Contribution margin and gross margin will be lower. D. Contribution margin will be​ higher, while its gross margin will remain the same.

B

In order to determine whether a special order should be accepted at full​ capacity, the sales price of the special order must be compared to the per​ unit: A. Contribution margin of the special order. B. Variable cost of current production and the contribution margin of the next best alernative. C. Variable cost and contribution margin of the special order. D. Variable cost and contribution margin of the next best alternative.

B

Relevant data in a make−or−buy decision of a part include which of the​ following? A. Annual plant insurance costs B. Some portion of fixed costs that would be saved if the product is outsourced C. The portion of fixed costs that would be incurred whether the product is made or purchased D. Management consultant fees to restructure the organization framework of the company and improve overall strategic planning

B

When there is an excess​ capacity, it makes sense to accept a one−time−only special order for less than the current selling price if ​ ________. A. the company placing the order is in the same market segment as your current customers B. incremental revenues exceed incremental costs C. incremental revenue equals incremental operating income D. additional fixed costs is incurred to accommodate the order

B

Cost-volume-profit analysis examines A. the behavior of total​ revenues, total​ costs, and operating income as changes occur in the output​ level, selling​ price, variable cost per​ unit, or fixed costs of a product. B. the​ "what-if" technique that managers use to examine how an outcome will change if the original predicted data are not achieved or if an underlying assumption changes. C. how much a company can charge for its products over and above the cost of acquiring or producing them. D. the difference between the selling price and variable cost per unit.

A

Gross margin is​ ________. A. sales revenue less cost of goods sold B. contribution margin less fixed costs C. sales revenue less variable costs D. contribution margin less variable costs

A

Under the contribution income​ statement, a​ company's contribution margin will​ be: A. Lower if variable manufacturing overhead costs increase. B. Lower if fixed manufacturing overhead costs decrease. C. Higher if variable​ SG&A costs increase. D. Higher if fixed​ SG&A costs decrease.

A

Which of the following costs is inventoried when using variable​ costing? A. electricity consumed in manufacturing process Your answer is correct. B. rent on factory building C. sales commission paid on each sale D. advertising costs incurred for the product

A

Which of the following statements is not true regarding the use of variable and absorption costing for performance​ measurement? A. The Internal Revenue Service allows either absorption or variable costing as long as the method is not changed from year to​ year, while U.S. GAAP only allows absorption costing. B. The net income reported under the contribution income statement is more reliable for use in performance evaluations because the product cost does not include fixed costs. C. The net income reported under the absorption method is less reliable for use in performance evaluations because the cost of the product includes fixed​ costs, which means the level of inventory affects net income. D. Variable costing isolates contribution margins to aid in decision making.

A

An increase in the tax rate will increase the breakeven point.

False

Contribution margin and gross margin are terms that can be used interchangeably.

False

Depreciation allocated to a product line is a relevant cost when deciding to discontinue that product.

False

Gross Margin will always be greater than contribution margin.

False

Revenues that remain the same for two alternatives being examined are relevant revenues.

False

The unit cost of a product is always higher in variable costing than in absorption costing.

False

When there is a constraining​ resource, a firm should attempt to maximize sales of the product or service with the greatest contribution margin per unit.

False

Absorption costing enables managers to increase operating income by increasing the unit level of​ sales, as well as by producing more units.

True

Absorption costing is the required inventory method for external financial reporting in most countries.

True

Under both variable and absorption​ costing, research and development costs are period costs.

True

In a make−or−buy ​decision, which of the following would not be​ relevant? A. the quality of the product B. a lease that could be discontinued upon accepting the​ "buy proposal" C. property taxes on the plant that will still be necessary even if the product is outsourced D. the portion of fixed costs that could be eliminated by outsourcing

C

The breakeven point decreases if​ ________. A. the contribution margin per unit decreases B. the variable cost per unit increases C. the total fixed costs decrease D. the selling price per unit decreases

C

Under absorption​ costing, if a​ manager's bonus is tied to operating​ income, then increasing inventory levels compared to last year would result in​ ________. A. less operating income and therefore decreasing the​ manager's bonus B. being unable to determine the​ manager's bonus using only the above information C. greater operating income and therefore increasing the​ manager's bonus D. not affecting the​ manager's bonus

C

Which of the following is an irrelevant cost when considering where to drop a​ customer? A. marketing support B. cost of goods sold C. depreciation D. sales order and delivery processing

C

Which of the following is true of CVP​ analysis? A. Unit selling​ price, unit variable​ costs, and unit fixed costs are known and remain constant. B. Costs may be separated into separate inventoriable and period components with respect to the level of output. C. Total revenues and total costs are linear in relation to output units. D. Proportion of different products will vary according to demand and supply when multiple products are sold.

C

Which of the following is true of absorption​ costing? A. It expenses marketing costs as cost of goods sold. B. It treats indirect manufacturing costs as a period cost. C. It includes fixed manufacturing overhead as an inventoriable cost. D. It treats direct manufacturing costs as a period cost.

C

​"Variable costs are always​ relevant, and fixed costs are always​ irrelevant." Do you​ agree? Why? A. Yes. Variable costs may differ among the alternatives under consideration​ and, hence, will be relevant. Fixed costs will not differ among the alternatives​ and, hence, will be irrelevant. B. No. Some variable costs may not differ among the alternatives under consideration​ and, hence, will be irrelevant. Some fixed costs may differ among the alternatives​ and, hence, will be relevant. C. Yes. To be relevant for a particular​ decision, a revenue or cost item must be an expected future revenue or expected future cost. Fixed costs will occur in the future​ and, hence are relevant. Variable costs may or may not occur in the future so they do not qualify as expected future costs​ and, hence, wll be irrelevant. D. No. Variable costs are viewed as a total amount and fixed costs are viewed on a per unit basis. Relevant costing focuses on unit costs and​ hence, the variable costs will be irrelevant and the total costs will be relevant.

B

​"Management should always maximize sales of the product with the highest contribution margin per​ unit." Do you​ agree? Why? A. No. Managers should aim to get the highest contribution margin per unit based on opportunity costs. The opportunity cost is the contribution to operating income that is forgone by not using a limited resource in its​ next-best alternative use. B. Yes. Managers should aim to get the highest contribution margin per unit. There are no other factors to take into consideration. C. No. Managers should aim to get the highest contribution margin per unit of the constraining factor. The constraining factor is what restricts or limits the production or sale of a given product. D. No. Managers should aim to get the highest contribution margin per unit of revenue. The revenue is what drives profits of a given product.

C

Define relevant costs. Why are historical costs​ irrelevant? A. Relevant costs are expected future costs that do not differ among the alternative courses of action being considered. Historical costs are irrelevant because they are past costs​ and, therefore, differ among alternative future courses of action. B. Relevant costs are past costs that do not differ among the alternative courses of action being considered. Historical costs are irrelevant because they are also past costs​ and, therefore, differ among alternative future courses of action. C. Relevant costs are past costs that differ among the alternative courses of action being considered. Historical costs are irrelevant because they are future costs​ and, therefore, cannot differ among alternative future courses of action. D. Relevant costs are expected future costs that differ among the alternative courses of action being considered. Historical costs are irrelevant because they are past costs​ and, therefore, cannot differ among alternative future courses of action.

D

How does an increase in the income tax rate affect the breakeven​ point? A. An increase in the income tax rate would increase the selling price. Customers will buy less units at an increased​ price, therefore, changing the breakeven point. B. An increase in the income tax rate decreases operating income and would change the breakeven point. C. An increase in the income tax rate decreases net income and would change the breakeven point. D. None of the above. An increase in the income tax rate does not affect the breakeven point.

D

If the unit level of inventory increases during an accounting​ period, then​ ________. A. less operating income will be reported under absorption costing than variable costing B. operating income will be the same under absorption costing and variable costing C. the exact effect on operating income cannot be determined D. more operating income will be reported under absorption costing than variable costing

D

In comparing the absorption and variable cost​ methods, each of the following statements is true​ except: A. ​SG&A fixed expenses are not included in inventory in either method. B. Only the absorption method may be used for external financial reporting. C. Variable costing charges fixed overhead costs to the period they are incurred. D. When inventory increases over the​ period, variable net income will exceed absorption net income.

D

Sensitivity analysis is​ _______. A. a way of seeing how employees will be affected by changes B. a way of determining how customers will react to new products C. a way of seeing how far from budget actual results are D. a way of determining what will happen if assumptions change

D

The margin of safety is the difference between​ ________. A. actual operating income and budgeted operating income B. actual sales margin and budgeted sales margin C. budgeted expenses and breakeven expenses D. budgeted revenues and breakeven revenues

D

Which of the following costs will be treated as period costs under absorption​ costing? A. depreciation on factory equipment B. rent for factory building C. raw materials used in the production D. sales commission paid on sale of product

D

Which of the following statements is​ true? A. When production is greater than​ sales, operating income is greater under variable costing than under absorption costing. B. When production is equal to​ sales, operating income will be greater under variable costing than under absorption costing. C. When production is less than​ sales, operating income is higher under absorption costing than variable costing. D. When production is greater than​ sales, operating income will be lower under variable costing than absorption costing.

D

​"A branch office or business segment that shows negative operating income should be shut​ down." Do you​ agree? Explain briefly. A. Yes. But when one branch or business segment shows a negative operating​ income, they should always shut down the bottom​ 10% of their branches or business segments. Thereby leaving the most profitable sections with more business. B. Yes. If the branch or business segment shows negative operating​ income, it should be shut down without considering other factors. Shutting down will stop a drain on the​ company's resources. C. No. They should always offset the operating loss with the operating profit of the most profitable branch or business segment. This is done by transferring the funds to the section of the company that needs it the most. D. No. For​ example, if the revenues that will be lost exceed the costs that will be​ saved, the branch or business segment should not be shut down. Shutting down will only increase the loss.

D

Under absorption​ costing, fixed manufacturing costs​ ________.

are inventoriable costs