Accounting Exam #2

7. Which of the following costs would be subtracted from Revenue to calculate Contribution Margin on a Variable Income Statement? A. Direct Materials costs B. Sales commissions C. Variable Manufacturing Overhead D. Direct Labor Wages E. All of the above

E) All of the Above

6. Which of the following might result from dropping an unprofitable customer? A) Sales levels would decrease. B) Future business relations could suffer. C) Costs could decline. D) Costs could stay the same in the short term. E) All of the above

E) All of the above

segment

any part or activity of an organization about which a manager seeks cost, revenue, or profit data

which of the following statements best explains the concept of "relevant range" a) all costs behave in the same manner, regardless of the level of production b) management focuses mainly on how costs behave within the levels of production that are reasonably likely to occur c) over large enough range of production, all costs are generally considered fixed d) over a small enough range of production, all costs are generally considered variable e) all of the above

b) management focuses mainly on how costs behave within the levels of production that are reasonably likely to occur

which of the following is a drawback to absorption costing as opposed to variable costing? a) management cannot accurately price products because non-manufacturing overhead is not applied to inventory b) managers can manipulate earnings by simply producing more than is sold in a period c) fixed overhead is simply expensed as a period cost without being properly considered as a cost of inventory d) absorption costing is not allowed for GAAP purposes e) there is no drawback: absorption costing is always preferable to variable costing

b) managers can manipulate earnings by simply producing more than is sold in a period

practical capacity

the maximum possible volume of activity, while allowing for normal downtime for repairs and maintenance

relevant range

the range of activity where the identified cost behavior is consistent (total fixed costs AND total variable cost per unit will remain constant)

cost behavior analysis

the study of how costs respond to changes in activity or volume levels

when a company has a high operating leverage... a) it has low fixed costs b) it borrows to cover more costs c) it has high variable costs relative to fixed costs d) it has high fixed costs relative to variable costs e) None of the above

it has high fixed costs relative to variable costs

contribution margin ratio

(sales-variable costs) / sales

advantages of variable costing

- managers avoid making "death spiral" decisions - cost info is readily available for CVP analysis - management tends to be more aware of the cost-behavior analysis

disadvantages of variable costing

- not acceptable for external reporting - more costly to maintain - inventory, working capital, and operating expenses tend to be understated

three methods for analyzing cost behavior

- scattergraphs - high-low method - regression analysis (least squares method)

Activity Based Costing (ABC)

- system of cost analysis - analyzes, identifies, and measures the cost of key activities - traces costs to objects

segment margin

- the best gauge of the long-run profitability of a segment - computed by subtracting the traceable fixed costs of a segment from its contribution margin

least square regression method

- uses all of the data points to develop cost behavior formula - most accurate method available to managers (uses a calculator or spreadsheet)

scattergraph

-visual estimate of the relationship between cost and volume (linear pattern = strong correlation; random pattern = low correlation; outliers indicate abnormal data points) -graphs historical cost data on the y-axis and volume data on the x-axis - use y = mx + b

Variable Costing Product Costs

1. Direct Labor 2. Direct Materials 3. Variable Manufacturing Overhead

Absorption Costing Product Costs

1. Direct Labor 2. Direct Materials 3. Variable Manufacturing Overhead 4. Fixed Manufacturing Overhead

Variable costing Period Costs

1. Fixed Manufacturing Overhead 2. Variable selling and administrative expenses 3. Fixed selling and administration expenses

Absorption Costing Period Costs

1. Variable Selling and Administrative Expenses 2. Fixed Selling and Administrative Expenses

mixed costs

A cost that varies in total and also varies on a per unit basis with changes in activity levels (contain both fixed and variable costs)

Which equation properly represents the Margin of Safety ratio? A. (Actual Sales - Break-even Sales) / Actual Sales B. Break-even Sales / Actual Sales C. (1 - Actual Sales) / Break-even Sales D. (1 - Break-even Sales) / Break-even Sales E. None of the above

A) (actual sales - break even sales) / actual sales

9. Which of the following equations describes the contribution margin ratio? A. 1 - (Variable Costs / Sales) B. (Variable Costs - 1) / Sales C. (Sales - 1) / Variable Costs D. Sales × (1 - Variable Costs) / Variable Costs E. None of the above

A) 1 - (Variable Costs / Sales)

net income before tax is a. Net income/(1 - income tax rate). b. Income tax rate/net income. c. Net income + contribution margin. d. Net income/income tax rate

A) Net income / (1-income tax rate)

6. Which of the following pieces of information is not needed to calculate the break-even point in units? A. Numbers of units sold B. Sales price per unit C. Variable cost per unit D. Total Fixed costs E. All of the above are needed

A) Number of units sold

Break-even quantity is defined as the volume of output at which revenues are equal to A) Total Costs B) Marginal Costs C) Variable Costs D) Fixed Costs

A) Total Costs

At the break even point a . Contribution margin = fixed costs. b . Variable costs = fixed costs. c . Sales = contribution margin. d . Contribution margin = 0.

A) contribution margin = fixed costs

10. Which of the following statements are true regarding Activity-Based Costing? A) Non-manufacturing costs are not important to include when calculating the cost of each product. B) Costs are allocated based on a pre-determined overhead rate for each cost pool. C) Transitioning from traditional costing methods to Activity-Based Costing is a relatively simple process that most companies complete quickly. D) Activity-Based Costing results in a different amount of total overhead applied than under traditional costing methods. E) None of the above

B) Costs are allocated based on a pre-determined overhead rate for each cost pool

5. Which of the following best explains "step costs"? A. Costs that are fixed overall, but variable within a relevant range B. Costs that are fixed within a relevant range but change at certain thresholds C. Costs that change proportionally with changes in production D.Costs that increase disproportionately at higher levels of demand E. None of the above

B) Costs that are fixed within a relevant range but change at certain thresholds

1. True or false: Variable costing may be used by management in preparing audited financial statements. a. True b. False

B) False

10. A low level of operating leverage signifies: A. Higher risk B. Lower risk C. Higher overall costs D. Lower overall costs E. None of the above

B) Lower Risk

3. If unit production exceeds unit sales during the period, absorption income will be a. less than variable income. b. more than variable income. c. equal to variable income.

B) More than variable income

6. Which of the following costs would not be subtracted from Revenue to calculate Gross Profit on an Absorption Income Statement? A. Direct Materials costs B. Sales commissions C. Variable Manufacturing Overhead D. Direct Labor Wages E. All of the above would be subtracted

B) Sales commissions

3.Why is the cost function for the flexible budget only applicable within the relevant range? A. Management does not expect to have production levels outside of the relevant range B. Some costs will behave differently outside of the relevant range C. The cost levels affect the range of production levels available D. Only the static budget matters when compared with results outside of the relevant range E. None of the above

B) Some costs will behave differently outside of the relevant range

4. Which of the following is a disadvantage of using variable costing? A. Inventory values tend to be overstated B. Two sets of accounting records must be maintained C. CVP relationships are more difficult to determine than under absorption costing D. Per-customer or per-product contribution margin is obscured E. All of the above

B) Two sets of accounting records must be maintained

10. If the number of units produced exceeds the number of units sold, then net operating income under absorption costing will: A. be equal to the net operating income under variable costing. B. be greater than net operating income under variable costing. C. be equal to the net operating income under variable costing plus total fixed manufacturing costs. D. be equal to the net operating income under variable costing less total fixed manufacturing costs.

B) be equal to the net operating income under variable costing less total fixed manufacturing costs

9. Activity-Based Costing is best explained by which of the following statements? A. Ordering all costs alphabetically for easier cataloging in a database. B. Calculating costs sequentially by the order that they affect the production process. C. Accumulating and allocating overhead costs based on a variety of activity drivers. D. More accurately tracking materials and labor costs for each product.

C) Accumulating and allocating overhead costs based on a variety of activity drivers

7. If all possible levels of production are considered, which of the following statements is/are true? A. All costs are essentially Fixed B. All costs are essentially Mixed C. All costs can change D. Not all costs are relevant E. All of the above

C) All costs can change

5. Under absorption costing, which of the following costs are applied to manufactured inventory? A. All fixed costs B. All variable costs C. All manufacturing costs D. All period costs E. All administrative costs

C) All manufacturing costs

2. ABC differs from traditional product costing in which of the following ways? a. Overhead is allocated to products in ABC. b. Estimated costs are used. c. Diverse cost drivers are used. d. It is completely accurate.

C) Diverse cost drivers are used

4. Designing a new product is an example of (an): A. Unit-level activity. B. Batch-level activity. C. Product-level activity. D. Organization-sustaining activity.

C) Product-level activity

contribution margin ratio is a . Unit sales price/unit contribution margin. b . I/margin of safety. c . Total contribution margin/sales. d . Variable cost/fixed cost.

C) total contribution margin/sales

1. Which of the following is not an element of ABC? a. Tracing costs to cost objects b. Calculating a predetermined rate c. Identifying the cost drivers d. All are elements of ABC.

D) All are elements of ABC

7. When choosing an activity basis to measure in conducting cost behavior analysis, which of the following statements is not true? A) There should be a logical causal relationship between the cost and the driver. B) The quantities of the driver and the costs should be highly correlated. C) The cost of measuring the driver should not outweigh the benefit it provides. D) All of the above are true.

D) All of the above are true

5. Which of the following statements regarding Activity-Based Costing is correct? A) Overhead costs are allocated based on actual costs incurred in a period. B) Direct costs (materials and labor) are accumulated in cost pools and assigned based on driver usage. C) Increases in information technology have made Activity-Based Costing less useful. D) Cost drivers and cost objects are essential parts of Activity-Based Costing. E) All of the above are correct.

D) Cost drivers and cost objects are essential parts of Activity-Based Costing

2. In determining inventory costs, which of the following cost elements is included when using absorption costing but excluded when using variable costing? a. Selling costs b. Direct labor cost c. Non-factory administrative costs d. Fixed overhead

D) Fixed Overhead

8. Which of the following is not a limitation of activity-based costing? A. Maintaining an activity-based costing system is more costly than maintaining a traditional direct labor-based costing system. B. Changing from a traditional direct labor-based costing system to an activity-based costing system changes product margins and other key performance indicators used by managers. Such changes are often resisted by managers. C. In practice, most managers insist on fully allocating all costs to products, customers, and other costing objects in an activity-based costing system. This results in overstated costs. D. More accurate product costs may result in increasing the selling prices of some products.

D) More accurate product costs may result in increasing the selling prices of some products

8. What is the general break-even formula? A. Total Sales = Variable Costs - Fixed Costs B. Fixed Costs = Variable Sales - Total Sales C. Fixed Costs = Variable Costs + Total Costs D. Total Sales = Variable Costs + Fixed Costs E. None of the above

D) Total Sales = Variable Costs + Fixed Costs

activity based management

The identification and selection of activities to maximize the values of the activities while minimizing their cost from the perspective of the final consumer

Break-even point

When sales revenue equals costs. Can be calculated using unit sales or sales dollars (intersection of total revenue line and total cost line) - any sales volume above the break even point would result in a profit **above breakeven total revenue > total cost **below breakeven total costs > total revenue

Margin of Safety

amount that actual sales exceeds the break even sales level

If a manufacturing company uses variable costing to cost inventories, which of the following costs are considered inventoriable costs? a. Only raw materials direct labor, and variable manufacturing overhead costs b. Only raw materials, direct labor, variable manufacturing overhead, and variable selling and administrative costs c. Only raw materials and direct labor costs d. Only raw materials direct labor, and variable and fixed manufacturing overhead costs Feedback

a. Only raw materials, direct labor, and variable manufacturing overhead costs

All of the following are likely to be used as a cost allocation base in activity-based costing except the a. cost of materials used to manufacture the product. b. number of different materials used to manufacture the product. c. number of vendors supplying the materials used to manufacture the product. d. units of materials used to manufacture the product.

a. cost of materials used to manufacture the product

When comparing absorption costing with variable costing, the difference in operating income can be explained by the difference between the: a. units sold and the units produced, multiplied by the budgeted variable manufacturing cost per unit. b. ending inventory in units and the beginning inventory in units, multiplied by the budgeted fixed manufacturing cost per unit. c. units sold and the units produced, multiplied by the unit sales price. d. ending inventory in units and the beginning inventory in units, multiplied by the unit sales price.

b. ending inventory in units and the beginning inventory in units, multiplied by the budgeted fixed manufacturing cost per unit

Product costs in a complex organization are likely to be distorted if a traditional volume-based cost driver is used and a. raw materials costs are a significant percentage of total production costs. b. manufacturing overhead costs are a significant percentage of total production costs. c. direct costs are a significant percentage of total production costs. d. direct labor costs are a significant percentage of total production costs.

b. manufacturing overhead costs are a significant percentage of total production costs

Which of the following is true with respect to variable and absorption costing systems? a. Variable costing systems include variable manufacturing overhead as period costs. b. Variable costing systems include fixed manufacturing overhead as period costs. c. Absorption costing systems include variable manufacturing overhead as period costs. d. Absorption costing systems include fixed manufacturing overhead as period costs. Feedback

b. variable costing systems include fixed manufacturing overhead as period costs

All of the following are assumptions of cost-volume-profit analysis **except** a. sales mix for multi-product situations do not vary with volume changes. b. variable costs per unit change proportionately with volume. c. total fixed costs do not change with a change in volume. d. revenues change proportionately with volume.

b. variable costs per unit change proportionately with volume

which of the following WILL NOT affect net income under variable costing a) incurring additional fixed costs b) production levels not being the same as sales c) a change in the fixed overhead application rate d) a change in the price paid for direct materials e) none of the above will affect net income

c) a change in the fixed overhead application rate

omission of costs

costs assigned to a segment should include all costs attributable to that segment from the company's entire value chain

production department overhead costs

costs that are incurred by the production department, such as indirect labor, indirect materials, depreciation on equipment, supervisory wages, and so forth

variable cost

costs that are incurred for every unit of volume. Total variable cost change in direct proportion to changes in volume

traceable fixed costs

costs that arise because of the existence of a particular segment and would disappear over time if the segment itself disappeared

common fixed costs

costs that arise because of the overall operation of the company and would not disappear if any particular segment were eliminated

fixed costs

costs that do not change in total despite changes in volume (Examples = property taxes and insurance, straight line depreciation and maintenance, lease payments, salaries of managers)

step costs

increase abruptly at certain intervals in a "step" pattern

which of the following is NOT an assumption of CVP analysis a) total fixed cost and total variable cost per unit are constant over the entire range b) sales price will remain constant on a per-unit basis regardless of the level of sales c) the sales mix ratio (for multiple products) remains constant d) all costs are variable in the relevant range e) all of the above

d) all costs are variable in the relevant range

Operating income under variable costing is contribution margin minus: a. variable selling and administrative expenses and fixed selling and administrative expenses. b. cost of goods sold and administrative expenses. c. fixed manufacturing overhead and variable manufacturing overhead. d. fixed manufacturing overhead and fixed selling and administrative expenses

d. Fixed manufacturing overhead and fixed selling and administrative expenses

curvilinear costs

increase at an inconsistent rate as activity level increases

Which of the following is not a likely result of dropping an unprofitable customer? a) decrease in sales levels b) loss of future business costs c) decline in costs d) costs could remain unchanged e) all of the above are potential outcomes

e) all of the above are potential outcomes

variable costing

fixed manufacturing costs are capacity costs and will be incurred even if nothing is produced

absorption costing

fixed manufacturing costs must be assigned to products to properly match revenues and costs

operating leverage

represents how sensitive a company's net income is to a change in the unit sales formula = contribution margin / net operating income

cost pool

represents the sum of resources related to a particular activity undertaken in response to a customer request or need

cost object

typically a product or customer service supplied by the company in response to a customer demand or need

high-low method

uses 2 actual data points to develop cost behavior formula - points chosen based on high-volume and lowest-volume data