ACC 418 Exam 2

Broad averaging

"peanut-butter costing"; averaging the cost of resources uniformly to cost objects rather than to specific products or services, which can cause inaccurate product costs because products or services use the resources in nonuniform ways.

Operating Leverage

A measure of how sensitive net operating income is to percentage changes in sales. It is a measure, at any given level of sales, of how a percentage change in sales volume will affect profits.

Absorption Costing

A method of inventory costing in which all variable and fixed manufacturing costs are included as inventoriable costs.

Variable Costing

A method of inventory costing in which all variable manufacturing costs (direct and indirect) are included as inventoriable costs. Also known as direct costing

C

A significant limitation of activity-based costing is the A. attention given to indirect cost allocation. B. many necessary calculations. C. operations staff's attitude toward the accounting staff. D. use it makes of technology.

C

Advertising of a specific product is an example of A. unit-level costs. B. batch-level costs. C. product-sustaining costs. D. facility-sustaining costs.

Yes

Are fixed manufacturing costs inventoried for Absorption costing

No

Are fixed manufacturing costs inventoried for Variable Costing?

C

Assume a manufacturing company that has started production in the current year. Which of the following would result in the highest profit being reported if the company has 1,000 units of ending inventory? A) throughput costing B) variable costing C) absorption costing D) standard costing

Theoretical and Practical

Both ______________________ capacity measure capacity levels in terms of what a plant can supply. (disregards demand for the product).

B

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

C

Choose an example of how a manager can decrease variable costs while increasing fixed costs. A. Using hourly wage workers to replace a robotic machine. B. Hiring a subcontractor to do repairs on a​ per-visit basis rather than on an annual retainer basis. C. Changing a sales force compensation plan from a percent of sales dollars to a fixed salary. D. None of the above.

B

Choose an example of how a manager can increase variable costs while decreasing fixed costs. A. Changing a sales force compensation plan from a percent of sales dollars to a fixed salary. B. Subcontracting a component to a supplier on a​ per-unit basis to avoid purchasing a machine with a high fixed depreciation cost. C. Hiring a subcontractor to do repairs on an annual retainer basis rather than on a​ per-visit basis. D. None of the above.

B

Conroe Company is reviewing the data provided by its management accounting system. Which of the following statements​ is/are correct? I. A cost driver is a causal factor that increases the total cost of a cost object. II. Cost drivers may be volume based or activity based. III. Cost drivers are normally the largest cost in the manufacturing process. A. I, II, and III are correct. B. I and II only are correct. C. I only is correct. D. II and III only are correct.

A

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

Cost-Volume-Profit Analysis

Managers use this to study the behavior of and relationship among these elements as changes occur in the number of units sold, selling price, the variable cost per unit, or the fixed costs of a product.

C

Nobis Company uses an ABC system. Which of the following statements​ is/are correct with respect to​ ABC? I. Departmental costing systems are a refinement of ABC systems. II. ABC systems are useful in​ manufacturing, but not in merchandising or service industries. III. ABC systems can eliminate cost distortions because ABC develops cost drivers that have a​ cause-and-effect relationship with the activities performed. A. I, II, and III are correct. B. II and III only are correct. C. III only is correct. D. None of the listed choices is correct.

D

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

C

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

D

Once a company exceeds its breakeven​ level, operating income can be calculated by​ multiplying: A. The sales price by unit sales in excess of breakeven units. B. Unit sales by the difference between the sales price and fixed cost per unit. C. The contribution margin ratio by the difference between unit sales and breakeven sales. D. The contribution margin per unit by the difference between unit sales and breakeven sales.

A

Using ________ as the denominator level also gives the manager a more accurate idea of the resources needed and used to produce a unit by excluding the cost of unused capacity. A) practical capacity B) normal capacity utilization C) theoretical capacity D) master-budget capacity utilization

C

Using master-budget capacity to allocate budgeted fixed manufacturing costs can result in a A) stable measure; avoiding the recalculation of unit costs when expected demand levels change B) fixed costs spread over available capacity C) can result in a downward demand spiral D) in fixed overhead costs calculated based on capacity available

C

Ways to "produce for inventory" that result in increasing operating income include ________. A) switching production to products that absorb the least amounts of fixed manufacturing costs B) delaying items that absorb the greatest amount of fixed manufacturing costs C) switching production to products that absorb the most amounts of fixed manufacturing costs D) undervaluing ending inventory by not recording certain costs that have been incurred

A

Which of the following capacity levels do proponents of activity-based costing recommend to be used as the denominator level to calculate activity cost rates? A) practical capacity B) normal capacity utilization C) theoretical capacity D) master-budget capacity utilization

C

Which of the following capacity levels should a company choose, from a long-run product costing perspective, to allocate budgeted fixed manufacturing costs to products? A) master-budget capacity utilization to highlight unused capacity B) normal capacity utilization for benchmarking purposes C) practical capacity for pricing decisions D) theoretical capacity for performance evaluation

A

Which of the following inventory costing methods shown below is required by GAAP (Generally Accepted Accounting Principles) for external financial reporting? A) absorption costing B) variable costing C) throughput costing D) direct costing

B

Which of the following is a reason for companies adopting variable costing for internal reporting purposes? A) It is cost-effective to use variable costing for both internal and external reporting. B) It reduces the incentives for undesirable buildup of inventories. C) It measures the cost of all manufacturing resources, whether variable or fixed, necessary to produce inventory. D) It assists in accurate pricing decisions in case of long-run pricing.

D

One way for managers to cope with uncertainty in profit planning? A. use CVP analysis because it assumes certainty B. recommend management hire a futurist whose work is to predict business trends. C. wait to see what does happen and prepare a report based on actual amounts. D. use sensitivity analysis to explore various what-if scenarios in order to analyze changes in revenues or costs or quantities.

Throughput Costing

Only direct materials are capitalized; all other costs are expensed.

C

Operating income reported on the end-of-period financial statements is changed when ________ is used to handle the production-volume variance at the end of the accounting period. A) the adjusted allocation-rate approach B) the proration approach C) the write-off variances to cost of goods sold approach D) the reinstatement approach

A

Practical capacity is the denominator-level concept that ________. A) reduces theoretical capacity for unavoidable operating interruptions B) is the maximum level of operations at maximum efficiency C) is based on the level of capacity utilization that satisfies average customer demand over periods generally longer than one year D) is based on anticipated levels of capacity utilization for the coming budget period

D

Product-cost cross-subsidization results from: A. allocating indirect costs to multiple products B. assigning traced costs to each product C. assigning costs to different products using varied costing systems within the same organization D. Assigning broadly averaged costs across multiple products without recognizing amounts of resources used by which products.

D

Product-sustaining costs in activity-based costing are similar to ________. A) mixed costs B) variable costs C) semi-variable costs D) fixed costs

Variable Costing

Some managers believe that even _____________ promotes an excessive amount of costs being inventoried

A

The allocation of indirect costs in an activity-based costing system A. may require other costs to be allocated to activities before the costs of the activities can be allocated to the products. B. is simplified because more costs are identified as direct costs. C. requires the use of heterogeneous cost pools. D. is simplified because a limited number of activities are identified as cost objects

B

The budgeted fixed manufacturing cost rate is the lowest for ________. A) practical capacity B) theoretical capacity C) master-budget capacity utilization D) normal capacity utilization

A

Which of the following is not one of the reasons why absorption costing might also be used for internal reporting? A) It is more useful for managerial decision making than variable costing B) It is cost effective and less confusing for managers to use one common method for both internal and external reporting C) It can help prevent managers from making decisions that make their performance look good to the detriment of income reported to shareholders D) For long-term decision making both variable and fixed costs must be considered for inventory related decisions

B

Describe 3 methods that managers can use to express CVP relationships A. Target​ income, contribution​ margin, and graph method B. Equation, contribution​ margin, and graph method C. Operating​ leverage, target​ income, and contribution method D. ​Revenue, equation, and contribution margin method

Inventory Costing Systems

Determines which manufacturing costs are treated as inventoriable costs

A

Distinguish between operating income and net income A. Net income takes into account income​ taxes, whereas, operating income does not take income taxes into account. B. Net income includes cost of goods sold in its​ calculation, whereas, operating income does not. C. Operating income takes into account income​ taxes, whereas, net income does not take income taxes into account. D. Operating income includes operating costs in its​ calculation, whereas, net income does not.

C

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

C

Evaluating customer reaction of the trade-off of giving up some features of a product for a lower price would best fit which category of management decisions under activity-based management? A. Pricing and product-mix decisions B. Cost reduction decisions C. Design decisions D. Discretionary decisions

Denominator Level Capacity

Focuses on the cost allocation base used to set budgeted find manufacturing cost rates.

A

How can a company with multiple products compute its breakeven​ point? A. The breakeven point can be computed by assuming there is a constant sales mix of products at different levels of total revenue. B. The breakeven point can be computed by assuming that each product sold is sold at the same price per unit. C. The breakeven point can be computed by assuming that each product sold has the same contribution margin per unit. D. The breakeven point can not be computed with multiple products.

D

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

A

If 1,000 units are produced and only 700 units are sold, ________ results in the greatest amount of expense reported on the income statement. A) throughput costing B) variable costing C) absorption costing D) job costing

Cross-subsidization

If one product is undercoated then at least one other product must be overcosted. The overcosted product absorbs too much cost, making it seem less profitable that it really is. The undercosted product is left with too little cost, making it seem more profitable that it really is.

D

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

B

In planning and control of capacity costs, managers must consider possible capacity measures. Which of the following measures the available supply of capacity in a factory? A) Theoretical capacity B) Practical capacity C) Normal capacity D) Master-budget capacity

C

In refining a cost system A. total direct costs are unchanged because they can be traced in an economically feasible way to the product and traced costs are more accurate B. the costs are grouped in homogenous pools of the same or similar amounts C. the criterion of cause-and-effect is used to relate indirect costs to a factor that systematically links to a cost object D. the organization looks for cost-allocation bases that will provide uniform spreading of indirect costs to each product.

Yes

Is there a production-volume variance for Absorption Costing?

No

Is there a production-volume variance for Variable Costing?

B

The effect of spreading fixed manufacturing costs over a shrinking master-budget capacity utilization amount results in ________. A) greater utilization of capacity B) increased unit costs C) more competitive selling prices D) greater demand for the product

Planned unused capacity

The large differences between practical capacity and master-budget capacity utilization, which are shown as a separate cost on the financial statements.

Theoretical Capacity

The level of capacity based on producing at full efficiency all the time; it does not allow for any slowdowns due to plant maintenance, shutdown periods or interruptions because of downtime; In the real world, these levels are unattainable, but they can represent the ideal goal of capacity utilization a company can aspire to.

C

The marketing manager's performance evaluation is most fair when based on a denominator level using ________ as it is the principal short-run planning and control tool. A) practical capacity B) theoretical capacity C) master-budget capacity utilization D) normal capacity utilization

Cost Structure

The relative portion of fixed and variable costs in an organization.

B

The use of theoretical capacity results in an unrealistically low fixed manufacturing cost per unit because it is based on ________. A) real available capacity B) an unattainable and idealistic level of capacity C) normal capacity utilization D) normal costing

D

There is no output-level variance for variable costing, when ________. A) the inventory level decreases during the period B) the inventory level increases during the period C) fixed manufacturing overhead is allocated to work in process D) fixed manufacturing overhead is not allocated to work in process

C

To discourage producing for inventory, management can ________. A) discourage using nonfinancial measures such as units in ending inventory compared to units in sales as nonfinancial measures may not be congruent with management performance goals B) evaluate performance over a quarterly period rather than a single year C) develop budgeting and planning activities that reduce management's freedom to inappropriately build inventory through increased production D) implement absorption costing across all departments

A

Which of the following is true about what the Internal Revenue Service requires for calculating indirect manufacturing costs per unit? A) a method of which fairly apportions indirect production costs among the various items produced B) requires that theoretical capacity be used as a means of allocating indirect manufacturing costs C) requires the use of master-budget capacity utilization D) requires the use of normal capacity utilization

D

Which of the following is true of absorption costing? A) It enables a manager to decrease margins and operating income by producing more beginning inventory. B) It enables a manager to increase margins and operating income by producing more beginning inventory. C) It enables a manager to decrease margins and operating income by producing more and building ending inventory. D) It enables a manager to increase margins and operating income by producing more and building ending inventory.

D

Which of the following steps can a management take to reduce the undesirable effects of absorption costing? A) It can evaluate managers on quarterly basis rather than the usual yearly period thereby mitigating the undesirable effects of absorption costing. B) It can delegate powers to managers to decide which orders they want to accept so that any order which will lead to inventory build-up can be rejected. C) It can empower managers to decide the timings of maintenance of plants thereby ensuring that the production is not affected. D) It can encourage using nonfinancial measures such as units in ending inventory compared to units in sales.

A

Which of the following would not lead to a build up inventory as a strategy to increase operating income? A) Cutting overhead costs as year-end approaches. B) Plant manager switching to make products that absorb the highest amounts of fixed cists C) Plant manager accepting an order to increase production and build up inventory when another plant in the same company would be better suited to take on the order D) Allocating resources to production by deferring maintenance of equipment and building beyond the current period

D

Why is it more accurate to describe the subject matter of this chapter as CVP analysis rather than as breakeven analysis? A. The breakeven analysis only denotes the study of the breakeven point. B. Cost-volume-profit is a more comprehensive term than breakeven analysis. C. The breakeven point is an incidental part of the relationship between​ cost, volume, and profit. D. All of the above.

D

________ is based on the level of capacity utilization that satisfies average customer demand over periods generally longer than one year. A) Practical capacity B) Theoretical capacity C) Master-budget capacity utilization D) Normal capacity utilization

A

________ is the continuing reduction in the demand for a company's products that occurs when competitor prices are not met. A) Downward demand spiral B) Competitor pricing pressure C) Continuous step down demand D) Super-demand cutback

B

________ is the level of capacity based on producing at full efficiency all the time. A) Practical capacity B) Theoretical capacity C) Normal capacity D) Demand capacity

B

________ is the level of capacity utilization that managers expect for the current budget period, which is typically one year. A) Practical capacity B) Master-budget capacity utilization C) Theoretical capacity D) Normal capacity utilization

Throughput Costing

a method of inventory costing in which only direct material costs are included as inventory costs. All other product costs are treated as period expenses

Undercosting

a product consumes a high level of resources but is allocated low costs per unit

Overcosting

a product consumes a low level of resources but is allocated high costs per unit

Practical Capacity

the level of capacity that reduces theoretical capacity by considering unavoidable operating interruptions like maintenance and holiday shutdowns;

Master-Budget Capacity Utilization

the level of capacity utilization that managers expect for the current budget period which is typically 1 year (the budget for the next fiscal year);

Normal Capacity Utilization

the level of capacity utilization that satisfies average customer demand over a period that is long enough to consider seasonal, cyclical and trend factors; considers demand for the output of the plant - how much of the capacity the plant expects to use based on the demand for its products; The demand under this one is demand expected over a period of 2-3 years.

Absorption Costing

the required inventory method for external financial reporting in most countries

D

It is most difficult to estimate ________ because of the need to predict demand for the next few years. A) practical capacity B) theoretical capacity C) master-budget capacity utilization D) normal capacity utilization

Downward Demand Spiral

It is the continuing reduction in the demand for its products that occurs when competitor prices are not met, demand drops further and the fixed costs are spread over fewer units, resulting in greater and greater costs per unit

B

Select the description of sensitivity analysis and how the advent of electronic spreadsheets has affected its use. A. Sensitivity analysis measures how much a company can charge for its products over and above the cost of acquiring or producing them. The advent of the electronic spreadsheet has greatly decreased the ability to explore the effect of alternative assumptions and is more expensive than previous methods. B. Sensitivity analysis is the​ "what-if" technique that managers use to examine how an outcome will change if the original predicted data are not achieved or if an underlying assumption changes. The advent of the electronic spreadsheet has greatly increased the ability to explore the effect of alternative assumptions at minimal cost. C. Sensitivity analysis is the difference between the selling price and variable cost per unit. The advent of the electronic spreadsheet has greatly increased the ability to explore the effect of alternative assumptions at minimal cost. D. Sensitivity analysis is the​ "what-if" technique that managers use to examine how an outcome will change if the original predicted data are not achieved or if an underlying assumption changes. The advent of the electronic spreadsheet has greatly increased the ability to explore the effect of alternative assumptions but comes at a much higher cost to companies.

A

What is operating​ leverage? How is knowing the degree of operating leverage helpful to​ managers? A. It describes the effects that fixed costs have on changes in operating income as changes occur in units sold and contribution margin. Knowing the degree of operating leverage at a given level of sales helps managers calculate the effect of fluctuations in sales on operating income. B. It describes the measure of competitiveness long dash— how much a company can charge for its products over and above the cost of acquiring them. Knowing the degree of operating leverage helps managers know how much of the​ company's revenues are available to cover fixed costs. C. It describes the amount by which budgeted​ (or actual) revenues exceed breakeven revenues. Knowing the degree of operating leverage helps managers know how far they can fall below budget before the breakeven point is reached and if they are in danger of suffering a loss. D. It describes the quantity of output sold at which total revenues equal total costs. Knowing the degree of operating leverage helps managers avoid operating losses.

1, 2, 4, 6

Which numbers are the 4 assumptions underlying CVP Analysis. 1. Changes in the level of revenues and costs arise only because of changes in the number of product (or service) units sold. 2. Total costs can be separated into a fixed component that does not vary with the units sold and a component that is variable with respect to the units sold. 3. Fixed costs only include the direct fixed costs and do not include indirect fixed costs of a product (or service). 4. When represented graphically, the behavior of total revenues and total costs are linear (represented as a straight line) in relation to units sold within a relevant range and time period. 5. The number of units sold is one of many cost drivers. 6. The selling price, variable cost per unit, and fixed costs are known and constant.

B

Which of the following approaches spreads underallocated or overallocated overhead among ending balances in Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold? A) the adjusted allocation-rate approach B) the proration approach C) the write-off variances to cost of goods sold approach D) the reinstatement approach

A

Which of the following is true of master-budget capacity utilization? A) It hides the amount of unused capacity. B) It represents the maximum units of production intended for current capacity. C) It provides the best cost estimate for benchmarking purposes. D) It is an average that provides no meaningful feedback to a firm's marketing manager for a particular year.

B

Which of the following is true of normal capacity utilization? A) It will almost always show results that are very close to that of practical capacity utilization B) It can result in setting selling prices that are not competitive. C) It results in the lowest cost estimate of the four capacity options when used for product costing. D) It is also called master-budget capacity utilization

C

Which of the following measures capacity levels in terms of demand for the output of the plant? A) practical capacity and theoretical capacity B) theoretical capacity and normal capacity utilization C) normal capacity utilization and master-budget capacity utilization D) master-budget capacity utilization and practical capacity

D?

Which of the following statements is more representative of activity-based costing in comparison to a department-costing system? A. The use of multiple cost-allocation bases B. The use of indirect-cost rates for significant resource use C. The use of activities having a cause-and-effect relationship D. The use of multiple cost pools

D

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

A

​"CVP analysis is both simple and simplistic. If you want realistic analysis to underpin your​ decisions, look beyond CVP​ analysis." Do you​ agree? Explain. A. CVP analysis is​ simple, with its assumption of output as the only revenue and cost​ driver, and linear revenue and cost relationships. It is not necessarily​ simplistic, though, since the basic ideas can be expanded upon to provide useful insights in more complex​ decision-making cases. B. CVP analysis is not simple or simplistic.​ It's assumption of output as just one of many revenue and cost​ drivers, and its​ non-linear revenue and cost relationships creates a complexity which makes it very difficult to understand and useful only in very complex​ decision-making cases. C. CVP analysis is​ simple, with its assumption of fixed costs as the only revenue and cost​ driver, and linear revenue and cost relationships. It is not necessarily​ simplistic, though, since the basic ideas can be expanded upon to provide useful insights in more complex​ decision-making cases. D. CVP analysis is​ simple, with its assumption of output as the only revenue and cost​ driver, and linear revenue and cost relationships. Because CVP analysis is so​ simplistic, it provides very little value in more complex​ decision-making cases.

B

​"In CVP​ analysis, gross margin is a​ less-useful concept than contribution​ margin." Do you​ agree? Explain briefly. A. ​Yes, gross margin calculations emphasize the distinction between fixed and variable costs. Contribution margin calculations emphasize the distinction between manufacturing and nonmanufacturing costs.​ Hence, contribution margin is a more useful concept than gross margin in CVP analysis. B. ​Yes, gross margin calculations emphasize the distinction between manufacturing and nonmanufacturing costs. Contribution margin calculations emphasize the distinction between fixed and variable costs.​ Hence, contribution margin is a more useful concept than gross margin in CVP analysis. C. No, gross margin calculations emphasize the distinction between manufacturing and nonmanufacturing costs. Contribution margin calculations emphasize the distinction between fixed and variable costs.​ Hence, gross margin is a more useful concept than contribution margin in CVP analysis. D. ​No, gross margin calculations emphasize the distinction between fixed and variable costs. Contribution margin calculations emphasize the distinction between manufacturing and nonmanufacturing costs.​ Hence, gross margin is a more useful concept than contribution margin in CVP analysis.

A

​"There is no such thing as a fixed cost. All costs can be​ 'unfixed' given sufficient​ time." Do you​ agree? What is the implication of your answer for CVP​ analysis? A. Many items classified as a fixed in the short run may become variable costs with a longer time horizon​ (period of time for a​ decision). CVP is not made any less relevant when the time horizon lengthens. B. Once an item is classified as either fixed or​ variable, it cannot be changed. The classification of items as either fixed or variable has no impact on CVP​ analysis; therefore, the decision is irrelevent anyway. C. Items classified as fixed in the short run may become variable with a longer time horizon​ (period of time for a​ decision). CVP analysis depends upon these classifications remaining the​ same, though.​ Therefore, any change would cause the analysis to lose its usefulness. D. Once an item is classified as either fixed or​ variable, it cannot be changed. CVP analysis depends upon these classifications remaining the​ same; therefore, any change would cause the analysis to lose its usefulness.