Final Exam MBUS 300

For the last two years BRC Company had net income as follows: Net Income Year 1 $160,000 Year 2 $200,000 What was the percentage change in income from Year 1 to Year 2?

25% increase % change = (Alternative measure − Base measure) ÷ Base measure% change = ($200,000 − $160,000) ÷ $160,000 = 25%

All of the following would be considered a fixed cost for a bottled water company except: a) hourly wages for machine operators. b) property taxes on its factory building. c) depreciation on its manufacturing equipment. d) rent on warehouse facility.

A

Which of the following accounts is decreased with a debit?

Accounts Payable Debits increase asset accounts; credits decrease asset accounts. Debits decrease liability and stockholders' equity accounts; credits increase liability and stockholders' equity accounts. Accounts Payable, a liability account, is decreased with a debit.

Contribution margin ratio will remain the same at various levels of sales even if total fixed costs are altered. True or False

True

In order to perform cost-volume-profit analysis, a company must be able to identify its variable and fixed costs. True or False

True

The magnitude of operating leverage for Perkins Corporation is 4.5 when sales are $100,000. If sales increase to $110,000, profits would be expected to increase by what percent? a) 45% b) 10% c) 4.5% d) 14.5%

Percentage increase in net income = Percentage increase in sales × Magnitude of operating leverage Percentage increase in net income = [($110,000 − $100,000) ÷ $100,000] × 4.5 = 45%

Select the incorrect statement regarding fixed and variable costs. a) The terms "fixed" and "variable" refer to the behavior of total cost. b) The concept of relevant range applies to both fixed costs and variable costs. c) Total variable cost is represented by a straight line sloping upward from the origin when total variable cost is graphed versus number of units. d) Fixed cost per unit remains constant as the number of units increases.

D

Select the incorrect statement regarding the relationship between type of user and type of information. a) Assembly line supervisors need more immediate feedback on performance than do senior executives. b) Senior executives use general economic information as well as financial information. c) Middle managers need more nonfinancial, or operational data than do senior executives. d) Senior executives need less aggregated information than do lower-level managers.

D

Which of the following costs typically include both fixed and variable components?

Factory overhead

Target costing begins with determining the cost of the product and then focusing on developing ways to sell the product at a price that will enable the company to achieve its desired profit margin. True or false

False

To attain a target profit, the total gross margin generated from sales must be sufficient to cover total fixed costs plus the target profit. True or False

False. To attain a target profit, the total contribution margin from sales must be sufficient to cover total fixed costs plus the target profit.

Which of the following statement is true regarding the trial balance?

Incorrectly recording a cash sale as a sale on account would not cause the trial balance to be out of balance. Even if the debit and credit totals on the trial balance are equal, there may be errors in the accounting records. For example, equal trial balance totals would not disclose errors like the following: failure to record transactions; misclassifications (such as debiting the wrong account); or incorrectly recording the amount of a transaction. The income statement is prepared using the adjusted trial balance.

Which of the following accounts is increased with a debit?

Insurance expense Debits increase asset accounts; credits decrease asset accounts. Debits decrease liability and stockholders' equity accounts; credits increase liability and stockholders' equity accounts. Debit entries increase expense accounts. Expenses, however, decrease stockholders' equity (retained earnings). Debiting an expense account, therefore, reduces stockholders' equity.

One of the advantages of target costing is that it specifically considers the probable market price for the product. True or False

True

An increase in total fixed costs increases the break-even point. True or False

True. Recall that the break-even point equals fixed costs divided by the contribution margin per unit. If fixed costs increase, the break-even point increases.

The following is a trial balance of Barnhart Company as December 31, Year 1: Account Title:DebitCreditCash12,500 Accounts Receivable3,250 Accounts Payable 2,800 Common Stock 6,600 Retained Earnings 4,500 Service Revenue 7,450 Operating Expenses5,100 Dividends500 Totals21,350 21,350 What is the total amount of assets that will be reported on the balance sheet prepared as of December 31, Year 1?

$15,750 The two asset accounts listed on the trial balance are Cash and Accounts Receivable. Total assets = $12,500 + $3,250 = $15,750

The following account balances were taken from the adjusted trial balance of Kendall Company: Revenues$22,400 Operating Expenses 15,000 Dividends 4,500 Retained Earnings 17,000 What is the Retained Earnings account balance that will be included on the post-closing trial balance?

$19,900 Ending retained earnings = Beginning balance + Revenues − Expenses − Dividends Ending retained earnings = $17,000 + $22,400 − $15,000 − $4,500 = $19,900

The following information is provided for Southall Company: Sales revenue$125,000 Variable manufacturing costs 42,500 Fixed manufacturing costs 37,500 Variable selling and administrative costs 15,000 Fixed selling and administrative costs 12,500

67,500 Contribution margin = Revenues − Variable expensesContribution margin = $125,000 − ($42,500 + $15,000) = $67,500ng income statem

The following income statement was produced when volume of sales was at 400 units. Sales Revenue$2,000 Variable Cost 1,200 Contribution Margin$800 Fixed Cost 300 Net Income$500 If volume reaches 500 units, net income will be:

700 Explanation % change = (Alternative measure − Base measure) ÷ Base measure% change = (500 − 400) ÷ 400 = 25%Magnitude of operating leverage = Contribution margin ÷ Net incomeMagnitude of operating leverage = $800 ÷ $500 = 1.6Increase in net income = Net income + (Net income × Percentage increase in sales × Magnitude of operating leverage)Increase in net income = $500 + ($500 × 0.25 × 1.6) = $700

In order to prepare a contribution format income statement, costs must be separated into: a) variable and fixed costs. b) manufacturing and selling, general, and administrative costs. c) mixed, variable and fixed costs. d) cost of goods sold and operating expenses.

A

Choose the answer that is not a distinguishing characteristic of financial accounting information. a) It is focused primarily on the future. b) It is more concerned with financial data than physical or economic data. c) It is more highly regulated than managerial accounting information. d) It is global information that reflects the performance of the whole company.

A Financial accounting deals with regulated, historical financial information that pertains to the whole company and is designed primarily to meet the information needs of outsiders.

Which of the following statements concerning manufacturing costs is incorrect? a) Depreciation on manufacturing equipment is a period cost. b) The cost of direct materials can be readily traced to products. c) All salaries incurred by the sales department are expensed as incurred. d) Direct labor costs are recorded initially in an inventory account.

A Product costs are all costs incurred to obtain a product or provide a service. These costs are treated as assets, recorded in inventory, and expensed when the associated products are sold. Depreciation on manufacturing equipment is a product cost. Period costs are all costs not associated with a product. They are associated with the general, selling, and administrative functions of the business and most are expensed in the period in which the associated economic sacrifice is made

Mug Shots operates a chain of coffee shops. The company pays rent of $15,000 per year for each shop. Supplies (napkins, bags, and condiments) are purchased as needed. The managers of each shop are paid a salary of $2,500 per month and all other employees are paid on an hourly basis. The cost of rent relative to the number of customers in a particular shop and relative to the number of customers in the entire chain of shops is which kind of cost, respectively? a) Fixed cost and fixed cost b) Variable cost and fixed cost c) Variable cost and variable cost d) Fixed cost and variable cost

A The behavior pattern of a particular cost may be either fixed or variable, depending on the context. In this context, the total cost of rent remains the same relative to the number of customers in a particular shop and also remains the same relative to the number of customers in the entire chain of shops. As such, in both situations, the rent is a fixed cost.

Select the correct statement regarding break-even point analysis. a) An increase in fixed costs causes the break-even point to increase. b) An increase in contribution margin per unit causes the break-even point in units to increase. c) The break-even point in sales dollars equals total fixed costs divided by contribution margin per unit. d) A decrease in the variable cost per unit causes the break-even point in units to increase.

A An increase in fixed costs causes the break-even point to increase

The closing entry for the Dividends account would involve which of the following?

A credit to Dividends The closing entry to move the balance of the dividends account to the retained earnings account would include a debit to retained earnings to decrease that account. The credit to the dividends account leaves a zero balance in that account.

Which one of the following would not be included in a closing entry? A.A credit to Rent Expense B.A credit to Dividends C.A debit to Unearned Revenue D.A debit to Service Revenue

A debit to Unearned Revenue Closing entries move all current year data from the temporary accounts (revenues, expenses, and dividends) into the retained earnings account. The Unearned Revenue account is a liability account; it is not closed.

The activity director for City Recreation is planning an activity. She is considering alternative ways to set up the activity's cost structure. Select the incorrect statement from the following. a) If the director expects a low turnout, she should use a fixed cost structure. b) If the director shifts the cost structure from fixed to variable, the potential for profits will be reduced. c) If the director shifts the cost structure from fixed to variable, the level of risk decreases. d) If the director expects a large turnout, she should attempt to convert variable costs into fixed costs.

A. A manager who expects revenues to increase should use a fixed cost structure. On the other hand, if future sales growth is uncertain or if the manager believes revenue is likely to decline, a variable cost structure makes more sense. Shifting the cost structure from fixed to variable reduces not only the level of risk but also the potential for profits.

During its first year of operations, Silverman Company paid $14,000 for direct materials and $19,000 for production workers' wages. Lease payments and utilities on the production facilities amounted to $17,000 while general, selling, and administrative expenses totaled $8,000. The company produced 5,000 units and sold 3,000 units at a price of $15.00 a unit. What was Silverman's net income for the first year in operation? a) $7,000 b) $37,000 c) $12,000 d) $28,000

A. Average cost per unit = (Materials cost + Labor costs + Overhead costs) ÷ Number of units produced Average cost per unit = ($14,000 + $19,000 + $17,000) ÷ 5,000 units = $10.00 per unit Cost of goods sold = Number of units sold × Average cost per unit Cost of goods sold = 3,000 units sold × $10.00 per unit = $30,000 Net income = Revenue − Cost of goods sold − Selling and administrative expenses Net income = (3,000 units × $15 per unit) − (3,000 units sold × $10.00 per unit) − $8,000 = $7,000

Select from the following the incorrect statement regarding contribution margin. a) Sales − Fixed costs = Contribution margin b) Net income + Total fixed costs = Contribution margin c) Total sales revenue times the contribution margin percentage = Total contribution margin d) At the breakeven point (where the company has neither profit nor loss), Total fixed costs = Total contribution margin

A. Contribution margin = Revenues − Variable expenses

All of the following are features of managerial accounting except: a) information is characterized by objectivity, reliability, consistency, and accuracy. b) information is provided primarily to insiders such as managers. c) information includes economic and non-financial data as well as financial data. d) information is reported continuously with a present or future orientation.

A. Managerial accounting is concerned with unregulated financial, economic, and nonfinancial data, which pertains more to the sub-units of the organization, that is current and future oriented, and that is designed primarily to meet the information needs of insiders. Financial accounting information is characterized by objectivity, reliability, consistency, and accuracy.

Ashley Bradshaw is the manager of one department in a large store. In this capacity, which of the following kinds of information would she be interested in? a) Financial, economic, and nonfinancial data b) Financial data c) Nonfinancial data d)Economic data

A. Managers rely on financial, economic, and nonfinancial data to make decisions and evaluate performance.

Operating leverage exists when: a) small percentage changes in revenue produce large percentage changes in profit. b) management buys enough of the company's shares of stock to take control of the corporation. c) a company utilizes debt to finance its assets. d) the organization makes purchases on credit instead of paying cash.

A. Operating leverage is the cost structure condition that produces a proportionately larger percentage change in net income for a given percentage change in revenue. Business managers apply operating leverage to magnify small changes in revenue into dramatic changes in profitability.

Which of the following costs is not considered a period cost? a) Freight paid on a purchase of raw materials b) Warehousing costs c) Salaries paid to company executives d) Depreciation of delivery vehicles

A. Period costs are associated with the general, selling, and administrative functions of the business. Product costs are all costs incurred to obtain a product or provide a service. Freight paid on a purchase of raw materials is considered a product cost.

Rock Creek Bottling Company pays its production manager a salary of $6,000 per month. Salespersons are paid strictly on commission, at $1.50 for each case of product sold.For Rock Creek Bottling Company, the cost of the salespersons' commissions is an example of: a) a variable cost. b) a mixed cost. c) none of these d) a fixed cost.

A. Since the salespersons are paid strictly on commission, at $1.50 for each case of product sold, the total cost of the salespersons' commissions would increase as the sales volume increases. As such, this cost would be classified as a variable cost.

Cool Runnings operates a chain of frozen yogurt shops. The company pays $5,000 of rent expense per month for each shop. The managers of each shop are paid a salary of $3,000 per month and all other employees are paid on an hourly basis. Relative to the number of shops, the cost of rent is which kind of cost? a) Variable cost b) Opportunity cost c) Fixed cost d) Mixed cost

A. The behavior pattern of a particular cost may be either fixed or variable, depending on the context. In this context, the total cost of rent increases proportionately with the number of shops while cost per shop remains constant. The rent is therefore variable relative to the number of shops.

Which of the following best represents a characteristic of managerial accounting? a) Information is based on estimates and is bounded by relevance and timeliness. b) Information is regulated by the Securities and Exchange Commission. c) Information is historically based and reported annually. d) Information is characterized by reliability and objectivity.

A. While financial accounting is characterized by its objectivity, reliability, consistency, and historical nature, managerial accounting is more concerned with relevance and timeliness. Managerial accounting uses more estimates and fewer facts than financial accounting.

What is the term that is used to describe the difference between the total debit and credit amounts in a T-account?

Account balance For any given account, the difference between the total debit and credit amounts is the account balance.

The excess of revenue over variable costs is referred to as: a) gross profit b) contribution margin c) gross margin d) manufacturing margin

B

Choose the answer that is not a distinguishing characteristic of financial accounting information. a) It is more highly regulated than managerial accounting information. b) It is focused primarily on the future. c) It is more concerned with financial data than physical or economic data. d) It is global information that reflects the performance of the whole company.

B. Financial accounting deals with regulated, historical financial information that pertains to the whole company and is designed primarily to meet the information needs of outsiders.

Which of the following items would be reported directly on the income statement as a period cost? a) All of these b) Selling and administrative salaries c) Wages paid to machine operators d) Cost of lubricant for oiling machinery

B. Selling and administrative salaries are reported directly on the income statement as a period cost. The cost of lubricant for oiling machinery and the wages paid to machine operators would be accumulated in inventory accounts as product costs.

The following information is for Companies M and N for the most recent year: Company M : Company N Sales $500,000 : $500,000 Variable costs $300,000 : $200,000 Fixed costs $50,000 : $150,000 Based on this information, which of the following statements is incorrect? a) If N's sales increased by 20%, its net income would increase by 40%. b) N's magnitude of operating leverage is lower than M's. c) N would suffer more than M from an equal drop in sales revenue. d) N's cost structure carries greater risk and greater potential for profit.

B Magnitude of operating leverage = Contribution margin ÷ Net income Company M: Magnitude of operating leverage = ($500,000 − $300,000) ÷ $150,000 = 1.33 Company N: Magnitude of operating leverage = ($500,000 − $200,000) ÷ $150,000 = 2.0. Given the above, N's magnitude of operating leverage is lower than M's.Since it has relatively higher fixed costs, Company N would suffer more than M from an equal drop in sales revenue.Shifting the cost structure from fixed (Company N) to variable (Company M) reduces not only the level of risk but also the potential for profits. If N's sales increased by 20%, it's net income would increase by 40% (= 20% × 2.0)

For a manufacturing company, product costs include all of the following except: a) direct labor costs. b) warehousing costs of finished goods. c) All of these are product costs. d) indirect material costs.

B Product costs are all costs incurred to obtain a product or provide a service. Period costs are associated with the general, selling, and administrative functions of the business. The cost of storing finished goods is considered a period cost.

Which of the following statements concerning product costs versus general, selling, and administrative costs is false? a) Product costs incurred during the period will initially appear as inventory on the balance sheet. b) General, selling, and administrative costs are always expensed when paid. c) General, selling, and administrative costs never appear as inventory on the balance sheet. d) Product costs may be divided between the balance sheet and income statement.

B Product costs are all costs incurred to obtain a product or provide a service. These costs are treated as assets, recorded in inventory, and expensed (as cost of goods sold) when the associated products are sold. Period costs are all costs not associated with a product. They are associated with the general, selling, and administrative functions of the business and most are expensed in the period in which the associated economic sacrifice is made. The cost of purchasing a building to be used for administration would not be expensed when paid. The administration building would be considered an asset and depreciated over its useful life.

Steuben Company produces dog houses. During the current year, Steuben Company incurred the following costs: -Rent on manufacturing facility$250,000 -Office manager's salary 150,000 -Wages of factory machine operators 110,000 -Depreciation on manufacturing equipment 50,000 -Insurance and taxes on selling and administrative offices 30,000 -Direct materials purchased and used 170,000 Based on the above information, which of the following would not be treated as a product cost: a) Rent expense incurred on manufacturing facility b) Office manager's salary c) Wages of factory machine operators d) Depreciation on manufacturing equipment

B Selling, general, and administrative costs (SG&A) are normally expensed in the period in which they are incurred. Because of this recognition pattern, nonproduct expenses are sometimes called period costs. In this case, the period costs are comprised of the office manager's salary and the insurance and taxes on selling and administrative offices.

Steuben Company produces dog houses. During the current year, Steuben Company incurred the following costs: -Rent on manufacturing facility$250,000 -Office manager's salary 150,000 -Wages of factory machine operators 110,000 -Depreciation on manufacturing equipment 50,000 -Insurance and taxes on selling and administrative offices 30,000 -Direct materials purchased and used 170,000 Based on the above information, the amount of period costs shown on Steuben's income statement is: a) $150,000 b) $180,000 c) $430,000 d) $30,000

B Selling, general, and administrative costs (SG&A) are normally expensed in the period in which they are incurred. Because of this recognition pattern, nonproduct expenses are sometimes called period costs. In this case, the period costs of $180,000 are comprised of the office manager's salary of $150,000 and the insurance and taxes on selling and administrative offices of $30,000.

Select the incorrect statement regarding the relevant range of volume. a) Total fixed costs are expected to remain constant. b) Total cost per unit is expected to remain constant. c) Variable cost per unit is expected to remain constant. d) Total variable costs are expected to vary in direct proportion with changes in volume.

B Within the relevant range, the total cost per unit will decrease as volume increases.

What is the formula for calculating contribution margin ratio? a) Contribution margin ÷ Desired profit b) Contribution margin ÷ Sales c) Contribution margin ÷ Fixed costs d) Contribution margin ÷ Net income

B Contribution margin ÷ Sales

Camden Company sets the selling price for its product by adding a markup to the product's variable manufacturing costs. This approach to pricing is referred to as: a) target costing b) cost-plus pricing c) target pricing d) contribution margin-based pricing

B)cost-plus pricing

Which of the following costs would be classified as a direct cost for a company that produces motorcycles? a) Seats used in the motorcycles. b) Both seats used in the motorcycles and wages of motorcycle assembly workers are correct. c) Rent of manufacturing facility that produces motorcycles. d) Wages of motorcycle assembly workers.

B. Direct costs can be traced to a specific product. The costs of the seats used in the motorcycles and wages of motorcycle assembly workers are direct costs. An indirect cost cannot be easily or economically traced to a specific product. The rent of the manufacturing facility that produces motorcycles is an indirect cost.

What is the effect on the balance sheet of making cash sales of inventory to customers for profit? a) Assets increase and stockholders' equity decreases. b) Assets and stockholders' equity increase. c) Assets decrease and stockholders' equity increases. d) Assets and stockholders' equity decrease.

B. The first part of the transaction is recording revenue from the sale. Recording cash revenue increases the asset account, Cash, and increases the stockholders' equity account, Retained Earnings. The second part of the transaction is removing the inventory that has been sold which decreases the asset account, Inventory, and decreases the stockholders' equity account, Retained Earnings. Overall, since the inventory was sold at a profit, the transaction will increase assets and stockholders' equity.

Executive management at Ballard Books is very optimistic about the chain's ability to achieve significant increases in sales in each of the next five years. The company will most benefit if management creates a: a) low operating leverage cost structure. b) high operating leverage cost structure. c) medium operating leverage cost structure. d) no operating leverage cost structure.

B. The higher the proportion of fixed cost to total costs, the greater the operating leverage. A manager who expects revenues to increase should use a fixed cost structure. While the variable cost structure reduces risk, it also limits the opportunity to benefit from operating leverage.

Which of the following most exemplifies the value-added principle? a) Managerial accounting information is measured in economic, physical, and financial terms. b) Information gathering and reporting activities should be restricted to those activities that add value in excess of their cost. c) An ongoing process where continuous improvement is the goal. d) A competitive management program that emphasizes quality.

B. The value-added principle means that management accountants are free to engage in any information gathering and reporting activity so long as the activity adds value in excess of its cost.

A transaction has been recorded in the T-accounts of Vernon Company as follows: Land10,000 Cash 10,000 Which of the following reflects how this event affects the company's financial statements? Asset=Liab.+Stk.EquityRev.-Exp.=Net Inc.Stmt ofCash Flows A.+=++NANA-NA=NA+FA B.+=NA++NA-NA=NA-FA C.+=++NANA-NA=NA-IA D.NA=NA+NANA-NA=NA-IA

B.+=NA++NA-NA=NA-FA The debit to the Land T-account increases total assets and the credit to the Cash T-account decreases total assets. The increase is offset by the decrease and total assets do not change as a result of this transaction. The income statement is not affected, and the transaction is reported as a cash outflow for investing activities.

Bloom Company has variable cost per unit of $20 and a sales price of $35 per unit. Its total fixed costs are $240,000. Which of the following is a correct statement? a) Company D's break-even point is 12,000 units. b) If Company D's variable cost per unit increases and nothing else changes, the margin of safety will decrease. c) If Company D's variable cost per unit decreases and nothing else changes, the break-even point will stay the same. d) If budgeted sales are 25,000 units, D's margin of safety is 10,000 units.

B.If Company D's variable cost per unit increases and nothing else changes, the margin of safety will decrease Recall that the break-even point equals fixed costs divided by the contribution margin per unit. If variable costs per unit increase, the contribution margin per unit decreases and the break-even point increases. If the break-even point increases, the margin of safety will decrease.

Select the correct statement regarding the contribution margin ratio. a) Total fixed costs divided by the contribution margin ratio equals the break-even point in units. b) The contribution margin ratio can be calculated using either total amounts or per unit amounts. c) The contribution margin ratio equals contribution margin per unit divided by variable cost per unit. d) An increase in variable cost per unit will cause the contribution margin ratio to increase.

B.The contribution margin ratio can be calculated using either total amounts or per unit amounts. The contribution margin ratio is contribution margin divided by sales. It can be calculated using per unit amounts such as contribution margin per unit / sales price per unit. It can also be calculated using total amounts such as total contribution margin / total sales.

A cost that contains both fixed and variable elements is referred to as a: a) relevant cost. b) nonvariable cost. c) mixed cost. d) hybrid cost.

C

During its first year of operations, Silverman Company paid $14,000 for direct materials and $19,000 for production workers' wages. Lease payments and utilities on the production facilities amounted to $17,000 while general, selling, and administrative expenses totaled $8,000. The company produced 5,000 units and sold 3,000 units at a price of $15.00 a unit.What is the amount of finished goods inventory on the balance sheet at year-end? a) $4,000 b) $15,000 c) $20,000 d) $10,000

C Average cost per unit = (Materials cost + Labor costs + Overhead costs) ÷ Number of units producedAverage cost per unit = ($14,000 + $19,000 + $17,000) ÷ 5,000 units = $10.00 per unitFinished goods inventory = Unsold units × Average cost per unitFinished goods inventory = (5,000 units produced − 3,000 units sold) × $10.00 per unit = $20,000

Based on the income statements of the three following retail businesses, which company has the highest operating leverage? A Company:B Company:G Company Revenue $200,000:$200,000:$200,000 VarCosts (95,000):(155,000):(125,000) CM $105,000:$45,000:$75,000 FixCosts (80,000):(20,000):(50,000) Net income $25,000:$25,000:$25,000 a) They all have same operating leverage b) Gamma Company c) Alpha Company d) Beta Company

C Given that all three companies have the same sales revenue and the same net income, the company with the greatest contribution margin will have the highest degree of operating leverage. Alternatively, the answer can be obtained by calculating the degree of operating leverage for each company: Magnitude of operating leverage = Contribution margin ÷ Net income Alpha: Magnitude of operating leverage = $105,000 ÷ $25,000 = 4.2 Beta: Magnitude of operating leverage = $45,000 ÷ $25,000 = 1.8 Gamma: Magnitude of operating leverage = $75,000 ÷ $25,000 = 3.0

Which of the following items would not be found on a contribution format income statement? a) Variable cost b) Fixed cost c) Gross margin d) Net income

C Gross margin is a subtotal calculated by subtracting cost of goods sold from sales. Gross margin is listed on an income statement prepared under GAAP for external reporting. However, for internal purposes, companies use a contribution margin approach. The contribution margin income statement subtracts variable costs from sales to arrive at the contribution margin, then subtracts fixed costs to arrive at net income.

Mark Company, Inc. sells electronics. The company generated sales of $45,000. Contribution margin is $20,000 and net income is $4,000. Based on this information, the magnitude of operating leverage is: a) 6.25 b) 2.25 c) 5.00 d) 11.25

C Magnitude of operating leverage = Contribution margin ÷ Net income Magnitude of operating leverage = $20,000 ÷ $4,000 = 5.0

Select the correct statement from the following. a) A fixed cost structure offers less risk (i.e., less earnings volatility) and higher opportunity for profitability than does a variable cost structure. b) A variable cost structure offers greater risk but higher opportunity for profitability than does a fixed cost structure. c) A fixed cost structure offers greater risk but higher opportunity for profitability than does a variable cost structure. d) A variable cost structure offers less risk and higher opportunity for profitability than does a fixed cost structure.

C Shifting the cost structure from fixed to variable reduces not only the level of risk but also the potential for profits.

Southern Food Service operates six restaurants in the Atlanta area. The company pays rent of $20,000 per year for each shop. The managers of each shop are paid a salary of $4,200 per month and all other employees are paid on an hourly basis. Relative to the number of hours worked, total compensation cost for a particular shop is which kind of cost? a) None of these b) Variable cost c) Mixed cost d) Fixed cost

C The total compensation cost is comprised of the cost of the manager salaries, which is a fixed monthly cost, and the cost of the other employees, which is a variable cost based on the hours worked. A cost that contains both fixed and variable elements is referred to as a mixed cost.

Based on the following cost data, what conclusions can you make about the costs of Product A and Product B? Total Cost Production: Product A Product B 10 units $100 ? 100 units $1,000 ? 1,000 units $10,000 ? Unit Cost Production:Product A Product B 10 units ? $10,000 100 units ? $1,000 1,000 units ? $100 a) The costs of Product A and Product B are both variable costs. b) The costs of Product A and Product B are both mixed costs. c) The cost of Product A is a variable cost and the cost of Product B is a fixed cost. d) The cost of Product A is a fixed cost and the cost of Product B is a variable cost.

C When the volume increases, the total cost of Product A increases; as such, the cost of Product A is a variable cost. The fixed cost per unit of Product B decreases when volume increases; as such, the cost of Product B is a fixed cost.

A pricing strategy that sets the price at a premium under the assumption that people will pay more for the product because of the product's brand name, media attention, or some other reason that has piqued the interest of the public is known as: a) target pricing. b) contribution margin-based pricing. c) prestige pricing. d) cost-plus pricing.

C)prestige pricing.

During its first year of operations, Silverman Company paid $14,000 for direct materials and $19,000 for production workers' wages. Lease payments and utilities on the production facilities amounted to $17,000 while general, selling, and administrative expenses totaled $8,000. The company produced 5,000 units and sold 3,000 units at a price of $15.00 a unit. What is Silverman's cost of goods sold for the year? a) $50,000 b) $41,000 c) $30,000 d) $24,600

C. Average cost per unit = (Materials cost + Labor costs + Overhead costs) ÷ Number of units produced Average cost per unit = ($14,000 + $19,000 + $17,000) ÷ 5,000 units = $10.00 per unit Cost of goods sold = Number of units sold × Average cost per unit Cost of goods sold = 3,000 units sold × $10.00 per unit = $30,000

The following information relates to Marshall Manufacturing's current accounting period: Raw materials used$34,000 Direct labor wages 66,000 Sales salaries and commissions 50,000 Depreciation on production equipment 6,000 Rent on manufacturing facilities 4,000 Administrative supplies and utilities 10,000 Sales revenue 210,000 Units produced 10,000 Units sold 10,000 Based on this information, what is the company's net income? a) $30,000 b) $70,000 c) $40,000 d) $42,000

C. Average cost per unit = (Materials cost + Labor costs + Overhead costs) ÷ Number of units produced Average cost per unit = [$34,000 + $66,000 + ($6,000 + $4,000)] ÷ 10,000 units = $11.00 per unit Cost of goods sold = Number of units sold × Average cost per unit Cost of goods sold = 10,000 units sold × $11.00 per unit = $110,000 Net income = Revenue − Cost of goods sold − Selling and administrative expenses Net income = $210,000 − $110,000 − ($50,000 + $10,000) = $40,000

Frazier Company sells women's ski jackets. The average sales price is $275 and the variable cost per jacket is $175. Fixed Costs are $1,350,000. If Frazier sells 15,000 jackets, the contribution margin will be: a) $2,775,000 b) $2,250,000 c) $1,500,000 d) $150,000

C. Contribution margin = Revenues − Variable expenses Contribution margin = ($275 × 15,000 jackets) − ($175 × 15,000 jackets) = $1,500,000

The results below represent what form of cost behavior? Year 1 Year 2 Units: 4,500 4,800 Total Cost: $11,250 $12,000 a) Fixed Cost b) Mixed Cost c) Variable Cost d) Opportunity Cost

C. Cost per unit in Year 1: $11,250 ÷ 4,500 units = $2.50 Cost per unit in Year 2: $12,000 ÷ 4,800 units = $2.50 When the volume increases, the cost per unit of stayed the same; as such, the cost is a variable cost.

The magnitude of operating leverage for Forbes Corporation is 1.8 when sales are $200,000 and net income is $24,000. If sales increase by 5%, what is net income expected to be? a) $24,667 b) $43,200 c) $26,160 d) $25,200

C. Expected net income = Net income + (Net income × Percentage increase in sales × Magnitude of operating leverage) Expected net income = $24,000 + ($24,000 × 0.05 × 1.8) = $26,160

Select the correct statement regarding managerial and financial accounting. a) Timeliness is more important in financial accounting than in managerial accounting. b) Users of managerial accounting information desire greater aggregation than do users of financial accounting information. c) Financial accounting is more highly regulated than managerial accounting. d) Both managerial and financial accounting use economic and physical data in addition to financial data.

C. Financial accounting deals with regulated, historical, financial information that pertains to the whole company and is designed primarily to meet the information needs of outsiders. Managerial accounting is concerned with unregulated financial, economic, and nonfinancial data, which pertains more to the sub-units of the organization, that is current and future oriented, and that is designed primarily to meet the information needs of insiders.

Select the correct statement regarding fixed costs. a) Because they do not change, fixed costs should be ignored in decision making. b) The fixed cost per unit does not change when volume decreases. c) The fixed cost per unit decreases when volume increases. d) The fixed cost per unit increases when volume increases.

C. The total amount of a fixed cost does not change when volume changes. In contrast, fixed cost per unit is not fixed. It changes as the volume changes. The fixed cost per unit decreases when volume increases and the fixed cost per unit increases when volume decreases.

Select the incorrect statement regarding the contribution margin income statement.

Contribution margin represents the amount available to cover product costs and thereafter to provide profit.

What is the term used to describe the right side of a T-account?

Credit side The right side of an account is the credit side.

Which of the following statements regarding credit entries is true?

Credits increase the common stock account. Debits increase asset accounts; credits decrease asset accounts. Debits decrease liability and stockholders' equity accounts; credits increase liability and stockholders' equity accounts. Common Stock, a stockholders' equity account, is increased with a credit.

Craft, Inc. normally produces between 120,000 and 150,000 units each year. Producing more than 150,000 units alters the company's cost structure. For example, fixed costs increase because more space must be rented, and additional supervisors must be hired. The production range between 120,000 and 150,000 is called the: a) leverage range. b) median range. c) differential range. d) relevant range.

D

The manager of Kenton Company stated that 45% of its total costs were fixed. The manager was describing the company's: a) operating leverage. b) cost averaging. c) contribution margin. d) cost structure.

D

Why do accountants normally calculate cost per unit as an average? a) Determining the exact cost of a product is virtually impossible. b) Even when producing multiple units of the same product, normal variations occur in the amount of materials and labor used. c) Some manufacturing-related costs cannot be accurately traced to specific units of product. d) All of these are justifications for computing average unit costs.

D

Manufacturing costs that cannot be traced to specific units of product in a cost-effective manner include: a) depreciation on production equipment. b) direct material. c) indirect labor. d) both depreciation on production equipment and indirect labor.

D An indirect product cost (i.e. indirect manufacturing cost) cannot be easily or economically traced to a specific product. Both depreciation on production equipment and indirect labor cannot be traced to specific units of product in a cost-effective manner.

Java Joe operates a chain of coffee shops. The company pays rent of $20,000 per year for each shop. Supplies (napkins, bags, and condiments) are purchased as needed. The manager of each shop is paid a salary of $3,000 per month, and all other employees are paid on an hourly basis. Relative to the number of customers for a shop, the cost of supplies is which kind of cost? a) Mixed cost b) Fixed cost c) Relevant cost d) Variable cost

D When the volume increases, the total cost of supplies increases; when volume decreases, the total decreases; as such, the cost of supplies is a variable cost.

The pricing strategy that begins with the determination of a price at which a product will sell and then focuses on developing a cost structure for the product that will yield a profit is known as: a) prestige pricing. b) developmental pricing. c) cost-plus pricing. d) target costing.

D) target costing.

During its first year of operations, Connor Company paid $50,000 for direct materials and $36,000 in wages for production workers. Lease payments and utilities on the production facilities amounted to $14,000. General, selling, and administrative expenses were $16,000. The company produced 5,000 units and sold 4,000 units for $30.00 a unit. The average cost to produce one unit is which of the following amounts? a) $18.40 b) $16.00 c) $25.00 d) $20.00

D. Average cost per unit = (Materials cost + Labor costs + Overhead costs) ÷ Number of units produced Average cost per unit = ($50,000 + $36,000 + $14,000) ÷ 5,000 units = $20.00 per unit

Which of the following transactions would cause net income for the period to decrease? a) Recorded $5,000 of depreciation on production equipment b) Paid $2,500 cash for raw material cost c) Purchased $8,000 of merchandise inventory d) Used $2,000 of office supplies

D. Costs that are not classified as product costs are normally expensed in the period in which they are incurred and, as such, decrease net income. These costs include general operating costs, selling and administrative costs (such as the use of office supplies), interest costs, and the cost of income taxes.

Which of the following costs should be recorded as an expense? a) Depreciation of manufacturing equipment b) Insurance for the factory building c) All of these are expenses. d) Salary of administrative employee

D. Product costs (i.e. manufacturing costs) are all costs incurred to obtain a product or provide a service. These costs are treated as assets, recorded in inventory, and expensed when the associated products are sold. Period costs (i.e. non-manufacturing costs) are all costs not associated with a product. They are associated with the general, selling, and administrative functions of the business and most are expensed in the period in which the associated economic sacrifice is made.

Which of the following is a product cost for a construction company? a) All of these. b) Wages paid to the company's payroll clerk c) Rent of the company's main office d) Cost of transporting raw materials to the job site

D. Product costs are all costs incurred to obtain a product or provide a service. Period costs are associated with the general, selling, and administrative functions of the business. Wages paid to the company's payroll clerk and rent of the company's main office would be categorized as period costs.

Which of the following types of labor costs will never flow through the balance sheet? a) Assembly labor b) Plant supervision c) Material handling d) Sales commissions

D. Product costs are all costs incurred to obtain a product or provide a service. These costs are treated as assets, recorded in inventory, and expensed when the associated products are sold. Period costs are all costs not associated with a product. They are associated with the general, selling, and administrative functions of the business and most are expensed in the period in which the associated economic sacrifice is made. Sales commissions are a period cost. Therefore, the sales commissions will be expensed when incurred and will never flow through the balance sheet.

Larry's Lawn Care incurs significant gasoline costs. This cost would be classified as a variable cost if the total gasoline cost: a) is not affected by the number of hours the lawn equipment is operated. b) varies inversely with the number of hours the lawn equipment is operated. c) None of these are correct. d) increases in direct proportion to the number of hours the lawn equipment is operated.

D. The gasoline cost would be classified as variable if the total gasoline cost increases when the volume increases and the total gasoline cost decreases when the volume decreases.

Taste of the Town, Inc. operates a gourmet sandwich shop. The company orders bread, cold cuts, and produce several times a week. If the cost of these items remains constant per customer served, the cost is said to be: a) Fixed b) Opportunity c) Mixed d) Variable

D. Variable cost per unit remains constant within the relevant range.

transaction has been recorded in the general journal of Van Buren Company as follows: Cash5,000 Service revenue 5,000 Which of the following describes how this entry affects the company's financial statements when it is posted to the ledger accounts? Asset=Liab.+Stk.EquityRev.-Exp.=Net Inc.Stmt ofCash Flows A.+=++NANA-+=-NA B.+-=NA+NA+-NA=++OA C.+=NA+++-NA=++FA D.+=NA+++-NA=++OA

D.+=NA+++-NA=++OA The debit to cash increases assets and the credit to service revenue increases revenue, which increases net income and stockholders' equity (retained earnings). The transaction is reported as a cash inflow from operating activities.

If total fixed costs increase while variable costs and sales price are unchanged, what happens to the break-even point? a) The break-even point decreases and therefore more units must be sold to break even. b) The break-even point decreases, and therefore fewer units must be sold to break even. c) The break-even point remains the same. d) The break-even point increases, and therefore more units must be sold to break even.

D.The break-even point increases, and therefore more units must be sold to break even. Recall that the break-even point equals fixed costs divided by the contribution margin per unit. If fixed costs increase, the break-even point increases. As a result, more units must be sold to break even.

What is the term used to describe the left side of a T-account?

Debit side The left side of an account is the debit side.

Which of the following statements about debits is false?

Debits increase liabilities. Debits increase asset accounts; credits decrease asset accounts.Debits decrease liability and stockholders' equity accounts; credits increase liability and stockholders' equity accounts.

Which of the following accounts is decreased with a credit?

Prepaid Insurance Debits increase asset accounts; credits decrease asset accounts. Debits decrease liability and stockholders' equity accounts; credits increase liability and stockholders' equity accounts. Prepaid insurance, an asset account, is decreased with a credit.

Which of the following accounts normally has a debit balance?

Prepaid insurance Assets, such as prepaid insurance, normally have a debit balance; that is, debits increase those accounts. Liabilities, such as unearned revenue and accounts payable, normally have a credit balance; that is, credits increase those accounts. Stockholders' equity accounts, such as common stock, normally have a credit balance; that is, credits increase those accounts.

What effect will the following closing entry have on the retained earnings account? Service Revenue18,800 Interest Expense 750Operating Expenses 15,500Retained Earning 2,550

Retained earnings will increase by $2,550. A credit to retained earnings of $2,550 (to close the service revenue, interest expense, and operating expenses accounts) will increase retained earnings by $2,550.

Bijan Corporation earned $4,000 of revenue that had been deferred. How would the related adjusting entry be recorded in the company's T-accounts?

Revenue4,000 Unearned Revenue 4,000 The adjusting entry decreases unearned revenue, a liability, and increases revenue. It is recorded as a debit to unearned revenue and a credit to the revenue account

Based on the above information, select the correct statement. Units sold 20 40 60 Total salary cost$6,000 $7,800 $9,200 Total cost of goods sold 14,000 28,000 42,000 Depreciation cost per unit$120 $60 $40

Salary cost is a mixed cost Explanation As shown below, the salary cost is a mixed cost since it differs in total and also differs on a per unit basis.$6,000 ÷ 20 = $300.00$7,800 ÷ 40 = $195.00$9,200 ÷ 60 = $153.33

Which of the following statements is true? A. Adjusting entries are recorded after the closing entries have been recorded. B. Equal totals in a trial balance guarantees that no errors were made in the recording process. Incorrect C. Debits are equal to credits only after closing entries have been recorded. D. The balance in the retained earnings account in the trial balance will equal the retained earnings balance on the balance sheet only after closing entries have been posted to the general ledger.

The balance in the retained earnings account in the trial balance will equal the retained earnings balance on the balance sheet only after closing entries have been posted to the general ledger. Every entry (not only closing entries) must include at least one debit to an account and at least one credit to an account. This system is called double-entry accounting. Adjusting entries are recorded before (rather than after) the closing entries are recorded. If the debit total does not equal the credit total on the trial balance, the accountant knows to search for an error. Even if the totals are equal, however, there may be errors in the accounting records. Prior to posting closing entries, the balance in the retained earnings account will be the balance at the beginning of the accounting period. Only after closing entries are posted will the trial balance reflect the same retained earnings account balance as the balance sheet.

Anton believes his company's overhead costs are driven (affected) by the number of machine hours because the production process is heavily automated. During the period, the company produced 3,000 units of Product A requiring a total of 100 machine hours and 2,000 units of Product B requiring a total of 25 machine hours. What allocation rate should be used if the company incurs overhead costs of $10,000? a) $80 per unit b) $2 per machine hour c) $80 per machine hour d) $2 per unit

The company's overhead costs are driven (affected) by the number of machine hours because the production process is heavily automated. As a result, the allocation rate should be based on machine hours.Allocation rate = Overhead cost ÷ Allocation baseAllocation rate = $10,000 ÷ (100 machine hours + 25 machine hours) = $80 per machine hour

Which of the following statements is true regarding a trial balance that balances?

The equality of debits and credits has been proven. The trial balance only proves the equality of debits and credits. It does not detect missing or incorrect entries that were recorded with equal debits and credits. If the debit total does not equal the credit total on the trial balance, adjusted trial balance, or post-closing trial balance, the accountant knows to search for an error.

Select the incorrect statement regarding cost structures

The more variable cost, the higher the fluctuation in income as sales fluctuate.