Accountancy II Quiz Conceptual Questions (True or False)

A continuous or perpetual budget is a 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed

True

A cost that can be avoided by choosing one alternative over another is relevant for decision purposes

True

A factory supervisor's salary would be classified as an indirect cost with respect to unit of a product

True

A revenue variance is the difference between what the total sales revenue should be, given the actual level of activity of the period, and the actual total sales revenue

True

A shift in the sales mix from products with high contribution margin ratios towards products with low contribution margin ratios will raise the break-even point for the company as a whole

True

Actual overhead costs are not assigned to jobs in a job costing system

True

Advertising is not considered as a product cost even if it promotes a specific product

True

All other things the same, an increase in unit sales will normally result in an increase in the ROI

True

An advantage of using ROI to evaluate performance is that it encourages the manager to reduce the investment in operating assets as well as increase net operating income

True

An employee time ticket is an hour-by-hour summary of the employee's activities throughout the day

True

Book value per common share is based on past transactions whereas the market price of a share of stock mainly reflects what investors expect to happen in the future

True

Cash collections in a schedule of cash collections typically consists of collections on sales made to customers in prior periods plus collections on sales made in the current budget period

True

Comparing a static planning budget to actual costs is not a good way to assess whether variable costs are under control

True

Conversion cost is the sum of direct labor cost and manufacturing overhead cost

True

The costs attached to products that have not been sold are included in ending inventory on the balance sheet

True

The fact that one department may be labor intensive while another department is machine intensive explains in part why multiple predetermined overhead rates are often used in larger companies

True

The labor efficiency variance is labeled favorable (F) if the actual hours used is less than the standard hours allowed for the actual output

True

The master budget consists of a number of separate but interdependent budgets

True

The materials price variance is computed based on the amount of materials purchased during the period

True

The production budget is typically prepared before the direct materials budget

True

The selling and administrative budget is typically prepared before the cash budget

True

The labor variance measures the difference between the actual hourly rate and the standard hourly rate, multiplied by the standard hours allowed for the actual output

False

The margin of safety percentage is equal to the margin in safety in dollars divided by the total contribution margin

False

Control involves developing goals and preparing various budgets to achieve those goals

False

Fixed costs are irrelevant in decisions about whether a product should be dropped

False

Fixed costs are sunk costs

False

Fixed costs should not be included in a flexible budget because they do not change when the level of activity changes

False

For a given level of sales, a low contribution margin ratio will product more net operating income than a high contribution margin ratio

False

For performance evaluation purposes, variables service department costs should be charged to operating departments in predetermined, lump-sum amounts

False

Future costs that do differ among the alternatives are not relevant in a decision

False

Future costs that do not differ between the alternatives in a decision are avoidable costs

False

If a job is not completed at year end, then no manufacturing overhead cost would be applied to that job when a predetermined overhead rate is used

False

If demand is insufficient to keep everyone busy and workers are not laid off, a favorable (F) labor efficiency variance often will be a result

False

If the allocation base in the predetermined overhead rate does not drive overhead costs, it will nevertheless provide reasonably accurate unit product costs because of the averaging process

False

If the overhead rate is computed annually based on the actual costs and activity for the year, the manufacturing overhead assigned to any particular job can be computed as soon as the job is completed

False

In a CVP graph, the anticipated profit or less at any given level of sales is measured by the vertical distance between the total revenue line (sales) an the total fixed expense line

False

In a job-order cost system, indirect labor is assigned to a job using information from the employee time ticket

False

In a job-order costing system, costs are traced to individual units of product. The sum total of such traced costs is called the unit product cost

False

In a manufacturing company, all costs are period costs

False

In a special order situation, any fixed cost associated with the order would be irrelevant

False

In general, the production manger is responsible for the materials price variance

False

In service department cost allocations, sales dollars should be used as an allocation base whenever possible

False

Incremental analysis is an analytical approach that focuses only on those revenues and costs that will not change as a result of a decision

False

One disadvantage of budgeting is that it makes it more difficult to coordinate the plans and activities of departmental managers

False

One of the weaknesses of budgets is that they are of little value in uncovering potential bottlenecks

False

Purchasing inventory on credit increases the book value per share of a retailer

False

ROI equals margin multiplied by sales

False

Residual income can be used most effectively in comparing the performance of divisions of different size

False

Selling costs are indirect costs

False

Since sales dollars represents "ability to pay," it is superior to most other bases used for allocating or charging service department costs

False

Sunk costs and future costs that do not differ between the alternatives may or may not be relevant in a decision

False

The activity variance for revenue is favorable if that actual revenue for the period exceeds the revenue in the static planning budget

False

The amount of overhead applied to a particular job equals the actual amount of overhead caused by the job

False

The book value of an old machine is always considered an opportunity cost in a decision

False

The cash budget is the starting point in preparing the master budget

False

The degree of operating leverage is computed by dividing sales by the contribution margin

False

The disbursements section of a cash budget consists of all cash payments for the period except cash payments for dividends

False

Contribution margin and gross margin mean the same thing

False

A benefit from budgeting is that it forces managers to think about and plan for the future

True

A bill of materials is a document that lists the type and quantity of each type of direct materials needed to complete a unit of a product

True

A common size financial statement is a vertical analysis in which each financial statement account is expressed as a percetage

True

A complete income statement need not be prepared as part of a differential cost analysis

True

Contribution format income statements are prepared primarily for external reporting purposes

False

Consistency demands that a cost that is relevant in one decision be regarded as relevant in other decisions as well

False

An employee time ticket is used to record points that are earned by employees based on the hours they worked that can be used to pay for coffee, food in the cafeteria, and even in some cases for vacation travel

False

An unfavorable materials quantity variance occurs when the actual quantity used in production is less than the standard quantity allowed for the actual output of the period

False

Avoidable costs are irrelevant costs in decisions

False

A cost that is traceable to a segment through activity-based costing is always an avoidable cost for decision-making

False

A decrease in the number of units sold will decrease the break even point

False

A flexible budget performance report contains activity variances but not revenue or spending variances

False

A flexible budget performance report with more than one cost driver can contain activity variances but not revenue or spending variances due to the increased complexity

False

A flexible budget performance report with ore than once cost driver will always have more unfavorable revenue and spending variances than a performance report with only one cost driver

False

A job cost sheet is used to record how much a customer pays for the job once the job is completed

False

A revenue variance is unfavorable if the revenue in the static planning budget is less than the revenue in the flexible budget

False

A shift in the sales mix from low-margin items to high-margin items will decrease total profits even though total sales increase

False

Actual costs are determined by plugging the actual level of activity for a period into the cost formulas used in flexible budgets

False

Administrative costs are indirect costs

False

An activity variance is the difference between an actual revenue or cost and the revenue or cost in the flexible budget that is adjusted for the actual level of activity of the period

False

An avoidable cost is a sunk cost that can be eliminated (in whole or in part) as a result of choosing one alternative or another

False

The production budget is typically prepared prior to the sales budget

False

The standard labor rate per hour should not include any employment taxes

False

The transfer price used for internal transfers between divisions of the same company cannot affect the divisions' reported profits

False

The variable cost per unit depends on how many units are produced

False

Two companies with the same margin of safety in dollars will also have the same total contribution margin

False

Within the relevant range, a change in activity results in a change in variable cost per unit and total fixed cost

False

Depreciation on equipment a company uses in its selling and administrative activities would be classified as a period cost

True

Differences between the static planning budget and the flexible budget show what should have happened because the actual level of activity differed from what had been planned

True

Fawn Company's margin of safety is $90,000. If the company's sales drop by $80,000, it will still have positive net operating income

True

Fixed costs should not be ignored when evaluating how well a manager has controlled costs

True

Flexible budgets can be used when there is more than one cost driver (i.e., measure of activity)

True

If a company contains a number of investment centers of different sizes, ROI should be used rather than residual income to rank the financial performance of the divisions

True

If a retailer sells a product whose contribution margin equals the gross margin percentage, the gross margin percentage will be unaffected by the transaction

True

If fixed expenses increase by $10,000 per year, then the sales needed to break even will generally increase by more than $10,000

True

If the actual hourly rate is greater than the standard hourly rate, the labor rate variance is labeled unfavorable (U)

True

If the actual hourly rate is greater than the standard hourly rate, the labor variance is labeled unfavorable (U)

True

If the variable expense per unit decreases, and all other factors remain the same the contribution margin ratio will increase

True

In a CVP graph (sometimes called a break-even chart), unit volume is on the x-axis and dollars is on the y-axis

True

In a flexible budget, when the activity declines, the total variable cost also declines

True

In the merchandise purchases budget, the required purchases (in units) for a period can be determined by subtracting the beginning merchandise inventory (in units) from the budgeted sales (in units) and desired ending merchandise inventory (in units)

True

Job-order costing systems often use allocation bases that do not reflect how jobs actually use overhead resources

True

Liquidity refers to how quickly an asset can be converted into cash

True

Most countries require some form of absorption costing for external reports

True

Prime cost is the sum of direct materials cost and direct labor cost

True

ROI and residual income are tools used to evaluate managerial performances in investment centers

True

Residual income is the difference between net operating income and the product of average operating assets and the minimum rate of return

True

Residual income should be used to evaluate an investment center rather than a cost or profit center

True

The amount that a manufacturing company could earn by renting unused portions of its warehouses is an example of an opportunity cost

True

The basic objective of responsibility accounting is to charge each manager with those costs and/or revenues over which he was control

True

The break-even points in units can be obtained by dividing total fixed expenses by the unit contribution margin

True

The budgeted income statement is typically prepared before the budgeted balance sheet

True

The budgeted variable selling and administrative expenses is calculated by multiplying the budgeted unit sales by the variable selling and administrative expense per unit

True

The standard quantity of standard hours allowed refers to the amount of the input that should have been used to produce the actual output of the period

True

The standard quantity or standard hours refers to the amount of the input that should have been used to produce the actual output of the period

True

The sum of all manufacturing costs except for direct materials and direct labor is called manufacturing overhead

True

The use of ROI as a performance measure may lead managers to reject a project that would be favorable for the company as a whole

True

The variable costs of a product are relevant in a decision concerning whether to eliminate the product

True

The variable overhead efficiency variance measures the difference between the actual level of activity and the standard activity allowed for the actual output, multiplied by the variable part of the predetermined overhead rate

True

To estimate what the profit will be at various levels of sales volume, multiply the number of units to be sold above or below the break-even points by the unit contribution margin

True

To help assess how well a manager has controlled costs, actual costs should be compared to what the costs should have been for the actual level of activity

True

Variable costs per unit are not affected by changes in activity

True

Vertical analysis of financial statements is accomplished by preparing common size statements

True

When a company has a production constraint, the total contribution margin will be maximized by emphasizing the products with the highest contribution margin per unit of the constrained resource

True

When more hours of labor time are necessary to complete a job than the standard allows, the labor efficiency variance is unfavorable

True

When the materials price variance is recorded at the time of purchase, raw materials are recorded as inventory at standard cost

True

When used in ROI calculation, turnover equals sales divided by average operating assets

True