COST exam 4
0. Pink Company and Blue Company's performance for 2005 appears below: Pink Blue Sales revenue $100,000 $100,000 Fixed costs 48,000 30,000 Variable costs 30,000 48,000 Net Income $ 22,000 $ 22,000 If you invested in both companies, which would be considered more risky? A. Pink Company B. Blue Company C. Both companies are equally risky since the profit margins are the same. D. More information is needed to determine the answer.
a
1. What type of information does the high-low method usually produce? a. A reasonable estimate of variable and fixed costs b. A very precise estimate of the behavior of the costs c. A very conservative estimate of costs for analysis purposes d. A exact calculation of variable and fixed costs to be incurred
a
11. When other factors remain constant, a decrease in sales price A. increases the number of units needed to earn profits. B. decreases the number of units needed to earn profits. C. has no effect on the number of units needed to earn profits. D. causes management to expand its relevant range.
a
13. Costs that remain constant in total dollar amount as the level of activity changes and cost that remains constant per unit in dollar amount as the level of activity changes are called (respectively) A. fixed costs and variable costs B. mixed costs and fixed costs C. mixed costs and variable costs D. variable costs and fixed costs
a
13. In cost-volume-profit analysis, all costs are classified into which two categories? A. fixed costs and variable costs B. sunk costs and fixed costs C. opportunity costs and sunk costs D. product and period costs
a
14. Which of the following will have no effect on the breakeven point in units? A. Sales volume increases B. Sales price increases C. Total fixed costs increases D. Variable cost per unit decreases
a
17. Clay Corporation sells a single product at a price of $62 per unit. Fixed costs total $640,000 and variable costs per unit are $22. Clay is considering the purchase of new equipment which would reduce variable costs per unit to $16, but fixed costs would increase to $820,000. What happens to the cost structure if the machine is purchased? A. Clay becomes more risky because its operating leverage increases. B. Clay becomes more risky because its operating leverage decreases. C. Clay becomes less risky because its operating leverage increases. D. Clay becomes less risky because its operating leverage decreases.
a
2. Which one of the following is a relatively accurate method of analyzing cost behavior that relies on an analysis of all cost levels? A. Regression analysis B. Relevant range approach C. Scatter diagram approach D. High-low analysis
a
21. If a company identifies it has a mixed cost, which one of the following is a reasonable option? A. It should break it into a variable cost element and a fixed cost element. B. It should consider it to be a fixed cost. C. It should consider it to be a variable cost. D. It should omit the cost from the analysis.
a
22. Which of the following is most likely a mixed cost? A. Car rental fee B. Storage unit rent C. Equipment depreciation D. Direct labor
a
26. Mayes Company sells two products, Haley and Nat. Nat has a 40% contribution margin and a 16% profit margin. Haley has a 48% contribution margin and a 8% profit margin. If customers plan to buy $100 of products, what should Mayes do? A. It should emphasize Haley B. It should emphasize Nat C. It should emphasize both products, since they are equally profitable D. No recommendation can be made from the data given
a
28. Hot Company and Cold Company's performance for 2016 appears below: Hot Cold Sales revenue $100,000 $200,000 Fixed costs 30,000 40,000 Variable costs 44,000 80,000 Net Income $ 26,000 $ 80,000 Which company is the riskier investment? A. Hot Company B. Cold Company C. Both companies are equally risky since the profit is the same. D. More information is needed to determine the answer.
a
29. What does operating leverage reveal about a company? A. It provides an indication of how sensitive a company's profit or net income is to changes in sales volume. B. It indicates whether a company is profitable or not. C. It determines whether a company has an adequate margin of safety. D. It estimates the cost behavior of product costs in a company.
a
30. Company A and Company B sell their products for exactly the same sales prices. Both have the same annual total fixed costs. Company A's variable and fixed costs at break even total $60,000 and $30,000 respectively. Company B's variable and fixed costs at break even total $30,000 and $60,000 respectively. Both companies have the same net income. If both companies experience a decrease in sales, which company will have the higher net income? A. Company A B. Company B C. Both companies will report the same profits since total costs are the same. D. More information is needed to determine the answer.
a
30. Which one of the following would most likely be considered a mixed cost? A. Cost of using a copy machine C. Supervisory salaries B. Direct labor D. Direct materials
a
31. Why do managers use scattergraphs? A. To estimate the relation between cost and activity B. To verify actual costs incurred during the period C. To determine the profitability of a company or division D. To calculate break even amounts
a
4. The cost estimation method that most effectively uses all relevant data points is A. regression analysis B. scatter graphs C. high-low method D. A, B, and C E. Both A and C
a
7. When graphing cost-volume-profit data on a CVP graph A. Units are plotted on the horizontal axis; costs on the vertical axis B. Units are plotted on the vertical axis; costs on the horizontal axis C. Both units and costs are plotted on the horizontal axis. D. Both units and cost are plotted on the vertical axis
a
1. In the graph of CVP, the breakeven point is the A. point where the variable costs line crosses the fixed costs line. B. point where the sales revenue line crosses the total costs line. C. point where the variable costs line crosses the sales line. D. point where the variable cost line, the fixed cost line, and the sales line all meet.
b
10. Todd Company sells two products, Fred and Barney. Fred has a 40 percent contribution margin and Barney has a 20 percent contribution margin. If customers plan to spend a total of $50, what should Todd Company do? A. It should sell more Barney units. B. It should sell more Fred units. C. It should sell an equal number of each. D. No recommendation can be made from the data given
b
14. Which of the following describes the behavior of the fixed cost per unit? A. Decreases with decreasing production B. Decreases with increasing production C. Remains constant with changes in production D. Increases with increasing production
b
17. Why is identification of a relevant range important? A. It is required under GAAP. B. Cost behavior outside of the relevant range is not linear, which distorts CVP analysis. C. It directly impacts the number of units of a product a customer buys. D. It is a cost that is incurred by a company that must be accounted for.
b
18. For what purpose is the high low method primarily used? A. To analyze the behavior of fixed costs B. To separate mixed costs into the fixed and variable portions C. To analyze the behavior of variable costs D. To determine how much to price products
b
2. H55 Company sells two products, beer and wine. Beer has a 10 percent profit margin and wine has a 12 percent profit margin. Beer has a 27 percent contribution margin and wine has a 25 percent contribution margin. If customers want to buy only one product and beer sells for $4, while wine sells for $5, which product should H55 push to customers? A. Beer B. Wine C. The product that has the higher sales price D. It should sell an equal quantity of both. E. Selling either results in the same additional income for the company.
b
21. Max, Inc. was evaluating its margin of safety. Which one of the following is true? A. The margin of safety ignores fixed costs. B. The higher the margin of safety, the lower the operating leverage. C. The higher the margin of safety, the lower the amount of sales revenue. D. The lower the margin of safety, the more cushion the company has.
b
26. Which is true as it relates to fixed costs? A. Total fixed cost increases as production/sales increase B. Fixed cost per unit declines as production/sales increases. C. Fixed cost per unit increases as production/sales increases. D. Total fixed cost declines as production/sales increase
b
27. Orr Corporation sells managerial accounting CDs. Fixed costs are $120,000 and variable costs per unit are $20. Orr is considering the purchase of new equipment that would reduce variable costs, but fixed costs would increase. What effect would the purchase of the new equipment have on Orr's operating leverage? A. None. Operating leverage would stay the same. B. Operating leverage will increase. C. Operating leverage will decrease. D. The problem does not provide enough information to answer the question.
b
28. For what purpose is account analysis used in accounting? A. To determine the break even point B. To estimate the behavior of costs C. To allocate costs to products, services, jobs, or departments. D. To determine how profitably the companies activities are.
b
3. Presented below is data for 5 months: Costs Units January $100,000 1,200 February 120,000 1,600 March 90,000 1,100 April 85,000 1,250 May 110,000 1,300 Using the high-low method, what periods will be selected? A. February and April B. March and February C. March and April D. Either February and March or February and April
b
34. Bennet Company employs 30 individuals. Eighteen employees are paid $14 per hour and the rest are salaried employees paid $4,000 a month. How would these costs be classified? A. variable B. mixed C. a variable cost within a relevant range D. a fixed cost within a relevant range
b
35. Which of the following statements is false regarding regression analysis? A. It is used to predict the fixed and variable components of a mixed cost. B. It is used to predict whether or not a cost is a product or period cost. C. It is usually more accurate than the high/low method. D. It uses statistical methods to fit a cost line through a number of data points.
b
37. The cost to be predicted is referred to as the A. independent variable B. dependent variable C. cost driver D. regression
b
40. During June, the cost components of a picture frame include $0.25 for the glass, $0.65 for the wooden frame, and $0.80 for assembly. The assembly desk and tools cost $400. 1,000 frames are expected to be produced in the coming year. What cost function best represents these costs? A. y = 1.70 + 400X B. y = 400 +1.70X C. y = 2.10 + 1,000X D. y = .90 + 400X
b
8. Delta Gamma is planning to hold a cookout for students on the Green. It has two options: OPTION 1: Fixed equipment rental cost of $1,000 and $3 per person for food OPTION 2: Fixed equipment rental cost of $400 and $5 per person for food Tickets will be $5 per student. Which option is the least risky? A. Option 1 B. Option 2 C. Both options provide the same amount of risk. D. Neither option has risks.
b
9. A significant weakness of the high-low method is that A. a significant amount of management expertise is necessary to break out the variable and fixed costs. B. the two data points that are used may not be representative of the general relation between cost and activity. C. it is difficult to obtain data to be used for the high low method. D. monthly data must be collected for several years before the method can be used.
b
10.When units produced and total production costs are graphed, the result is called A. incremental analysis. B. a profit graph. C. a scatter graph D. a CVP analysis graph
c
12. A firm will break even when A. Revenues = variable costs - fixed costs B. Its sales exceed its fixed costs. C. Revenues = total variable costs + total fixed cost D. Either B or C
c
15. A mixed cost A. fluctuates between fixed to variable from period to period. B. changes in proportion to changes in volume both in unit and in total. C. includes both a variable cost component and a fixed cost. D. is omitted from CVP analysis since it does not fit either fixed or variable
c
18. Which of the following statements is true when making decisions using CVP analysis? A. As long as the contribution margin is a positive number, net income will be positive. B. As long as variable costs are more than fixed costs, net income will be negative. C. As long as the contribution margin is greater than fixed costs, net income will be positive. D. As long as the sales price per unit is greater than fixed costs per unit, net income will be positive.
c
19. What is a relevant range of activity? A. The geographical locations in which the company operates B. The activity level at which profits are maximized C. The levels of activity over which the company expects to operate D. The level of activity in which all costs are constant
c
20. In cost analysis, what does the term "cost" mean? A. It includes all fixed and variable costs of products, but excludes period costs. B. It includes all costs which are part of cost of goods sold, plus variable operating expenses. C. It includes all manufacturing costs and operating expenses. D. It includes only manufacturing costs.
c
20. What is a relevant range of activity? A. The geographical locations in which the company operates B. The activity level at which profits are maximized C. The levels of activity over which the company expects to operate D. The level of activity in which all costs are constant
c
22. In CVP analysis, what does the term "cost" mean? A. It includes all fixed and variable costs of products, and excludes period costs. B. It includes all costs which are part of cost of goods sold, plus variable operating expenses. C. It includes all manufacturing costs and operating expenses. D. It includes only manufacturing costs.
c
23. Which statement describes a fixed cost? A. It varies in total at every level of activity. B. The unit cost varies directly to the activity level. C. Its unit cost varies inversely to the level of activity. D. It remains the same per unit regardless of activity level.
c
24. The cost function y = 2,000 + 6.00X: A. has a slope coefficient of 2,000 B. has an intercept of 6 C. is a straight line D. represents a fixed cost
c
29. Which statement describes a fixed cost? A. It varies in total at every level of activity. B. The unit cost varies directly to the activity level. C. Its unit cost varies inversely to the level of activity. D. It remains the same per unit regardless of activity level.
c
31. Four companies all produce and sell the same product, buckets. All companies charge the same sales price and all produced and sold 5,000 units during 2016. Additional information follows: Company A Company B Company C Company D Fixed costs $32,000 $17,000 $45,000 $21,000 Variable costs 23,000 38,000 10,000 34,000 Total costs $55,000 $55,000 $55,000 $55,000 Which company is the most risky? A. Company A B. Company B C. Company C D. Company D
c
32. When 200 gallons of ice cream are produced, the total cost is $200. When 300 gallons of ice cream are produced, the total cost is $250. Which of the following statements is true? A. This company has only fixed costs B. This company has only variable costs C. This company has both variable and fixed costs D. It is impossible to determine this company's cost structure without more information.
c
36. A steep, upward sloped regression line indicates A. a high R squared will result. B. a greater proportion of fixed costs than variable costs C. an economically plausible relationship exists D. management should cut costs
c
39. The high-low method A. accurately estimates the relationship between the dependent variable and two or more independent variables B. is more accurate than the regression method C. calculates the slope coefficient using only two observed values within the relevant range D. uses the fixed cost amount to measure goodness of fit
c
4. Cost-volume-profit analysis assumes all EXCEPT A. all costs are variable or fixed. B. units manufactured equal units sold. C. total variable costs remain the same over the relevant range. D. total fixed costs remain the same over the relevant range.
c
5. The break-even point is the point where A. total income taxes are zero. B. total contribution margin equals total fixed expenses. C. both A and B are true. D. neither A nor B is true.
c
5. Which of the following best describes the relationship between total fixed costs and total variable costs, as total volume decreases? A. Total fixed costs stays the same and total variable costs stays the same. B. Total fixed costs decrease and total variable costs stays the same. C. Total fixed costs stays the same and total variable costs decrease. D. Total fixed costs decrease and total variable costs decrease.
c
7. Which of the following is the most valid criticism of the high-low method? A. It never produces accurate results. B. It is mathematically too complex for most managers to comprehend. C. Its 2 data points might be extremes of the data. D. Data points might be outside the normal range of activity.
c
8. What is the best explanation for the use of regression analysis by accountants? A. Regression analysis provides the exact measure of variable costs. B. Regression analysis is more difficult to use than the high-low method. C. Regression analysis provides an estimate based upon statistical measures. D. Regression analysis produces profitability analysis at different activity lvls
c
11. What is cost behavior? A. The way management chooses to estimate its costs B. The method used to allocate costs to products C. The operating leverage of a company D. The manner in which a cost changes as the related activity changes
d
12. Which of the following is an equation of a fixed cost function? A. y = mX + b B. y = b + mX C. y = mX D. y = b
d
15. Why must a company determine what its relevant range is? A. It directly impacts the indirect cost allocated to a product or service. B. It is a relevant cost. C. GAAP requires companies to report this information. D. Cost behavior outside of the relevant range is generally distorted
d
16. Which is not part of a CVP graph? A. Total cost line B. Fixed cost line C. Revenue line D. Variable cost line
d
16. Why do management accountants use regression analysis and the high-low method? A. To verify actual costs incurred during the period. B. To determine the profitability of a company or division C. To calculate break even amounts D. To estimate the relation between cost and activity
d
19. Carver Company's management established its target net income for the year. What did Carver do? A. It estimated its breakeven income level for the year. B. It calculated its contribution margin. C. It allocated its costs to cost objects. D. It established its desired annual income for its product lines.
d
23. Why is the high-low method frequently not as accurate as regression analysis? A. It assumes managers have classified costs correctly. B. It uses analytical techniques which are questionable. C. It assumes that costs behave linearly. D. It uses extreme points which may not be representative of the rest of the data.
d
24. Todd Company sells two products, Fred and Barney. Fred has a 40 percent contribution margin and Barney has a 20 percent contribution margin. If customers plan to buy three items, what should Todd Company do? A. It should sell more Barney units. B. It should sell more Fred units. C. It should sell an equal number of each. D. No recommendation can be made from the data given
d
25. Hanalia, Inc. provided the following results: 2017 2016 Units 2,400 3,000 Total Cost $19,200 $24,000 What form of cost behavior is represented by the above results? A. Fixed Cost B. Opportunity Cost C. Mixed Cost D. Variable Cost
d
27. Why is determination of a relevant range important? A. Cost behavior outside of the relevant range is generally linear. B. It directly impacts the direct cost allocated to a product or service. C. It is a relevant cost. D. Costs incurred at extreme levels are not indicative of the cost behavior of all activity levels.
d
3. What most likely occurs when variable costs per unit increase? A. The breakeven point will decrease B. The selling price will decrease C. The fixed cost per unit increase D. Breakeven sales will increase
d
33. Variable costs per unit A. can be estimated by using break even analysis. B. remain the same on a per unit basis when the level of activity changes. C. are represented by the slope of the total cost line. D. Both B and C are correct, but not A. E. A, B and C are correct.
d
38. Which is true of the independent variable? A. It is also referred to as the cost driver B. It may also be called the cost-allocation base if referring to an indirect cost C. It should have an economically plausible relationship with the dependent variable D. All of these answers are correct.
d
6. A business's normal operating range, which excludes extremely high and low volumes that are not likely to be encountered, is the A. Margin of safety B. Contribution margin C. Break-even point D. Relevant range
d
6. Saylor, Inc. provided the following results: 2017 2016 Units 2,600 3,000 Total cost $17,550 $20,250 What form of cost behavior is represented by the above results? A. Fixed cost B. Opportunity cost C. Mixed cost D. Variable cost
d
25. In a multi-product environment, which one of the following is not an assumption used in CVP analysis? A. The selling price is constant throughout the entire relevant range. B. Costs are linear throughout the relevant range. C. The sales mix is constant. D. The number of units produced and sold are the same. E. Unit variable cost and unit fixed cost are constant throughout the relevant range.
e
