Exam #2

ABC eliminates all arbitrary cost allocations. (T/F)

False

At the break-even point, contribution margin equals total variable costs. (T/F)

False

Fixed costs are costs that remain the same per unit regardless of changes in the activity level. (T/F)

False

If volume increases, all costs will increase. (T/F)

False

In general, a company should try to sell more low contribution margin products. (T/F)

False

The contribution margin ratio is computed by multiplying contribution margin by unit selling price. (T/F)

False

The format of a CVP income statement is Sales - Cost of goods sold - Operating expenses = Net Income. (T/F)

False

Traditional costing systems use multiple predetermined overhead rates. (T/F)

False

Traditional Costing systems group costs according to activity cost pools (T/F)

False (Activity-based costing systems, not traditional costing systems, group costs according to activity cost pools.)

A variable cost remains constant per unit at various levels of activity. (T/F)

True

Activity-based costing allocates overhead to multiple cost pools and assigns the cost pools to products using cost drivers. (T/F)

True

Activity-based management leads to the identification of value-added and non-value-added activities. (T/F)

True

Cost structure refers to the relative proportion of fixed versus variable costs that a company incurs. (T/F)

True

Margin of safety is the difference between actual sales and sales at the break-even point. (T/F)

True

Margin of safety measures how far sales can drop before a company will be operating at a loss. (T/F)

True

Operating leverage refers to the extent to which a company's net income reacts to a given change in sales. (T/F)

True

Target net income is an income objective for individual product lines set by management. (T/F)

True

The formula for computing the break-even point in sales dollars for a company with multiple products or multiple divisions is fixed costs divided by weighted average contribution margin ratio. (T/F)

True

The high-low method is used in classifying a mixed cost into its variable and fixed elements. (T/F)

True

The range over which a company expects to operate during a year is called the relevant range of the activity index. (T/F)

True

The weighted-average contribution margin of all the products is computed when determining the break-even sales for a multi-product firm. (T/F)

True

Traditionally, overhead is allocated based on direct labor cost or direct labor hours. (T/F)

True

Two benefits of ABC are that it leads to better management decisions and increases the accuracy of overhead cost allocations. (T/F)

True (ABC leads to better management decisions and increases the accuracy of overhead cost allocations)

Activity-based costing systems rely on multiple bases for overhead cost allocation. (T/F)

True (The activities used must have a cause and effect relationship to the cost.)

A cost driver is a factor or activity that has a direct cause-effect relationship with the resources consumed. (T/F)

True (This statement is correct, because a direct cause-effect relationship with the resources consumed is needed for a cost driver.)