Exam 3

Transactions would cause net income for the period to decrease are

$2,000 of office supplies

Which of the following statements is incorrect?

A predetermined overhead rate is calculated using actual cost and volume data.

Which of the following statements is incorrect?

An outsourcing decision typically affects only product-level costs. (Accepting a special order will involve incurring unit-level costs. Eliminating a business segment often allows a company to avoid some facility-level costs. Facility-level costs generally are not relevant in special order decisions.)

Which of the following costs generally can be traced directly to units of product?

Assembly labor

Select the incorrect statement regarding service companies.

Because service companies do not carry inventory, it is impossible to determine product costs.

At the break-even point:

Both sales would be equal to total costs and contribution margin would be equal to total fixed costs are correct.

With regards to financial statements, "pro forma" means:

Budgeted. Prepared in advance. Financial condition or position that can be expected if planning assumptions prove correct.

Budgeted depreciation expense would not appear on a:

Cash budget.

Asset replacement decisions involve:

Choices between continuing to operate existing equipment or replacing it with new equipment.

Companies A and B are in the same industry and are identical except for cost structure. At a volume of 50,000 units, the companies have equal net incomes. When sales at both companies increase to 60,000 units, Company A's net income would be substantially higher than B's. Based on this information,

Company A's cost structure has higher fixed costs than B's.

Sturbridge Company manufactures fine furniture and grandfather clocks. Sturbridge has an excellent reputation, and each grandfather clock sells for several thousand dollars. Which of the following should not be treated as direct costs, assuming the cost object is individual clocks?

Depreciation on clock-making equipment (The clock face The timing mechanism for each clock Wood)

Outdoor Living Company has just received a special order for 500 hammocks. Outdoor Living has sufficient idle capacity to accept the order. Accepting the order will increase Outdoor Living's variable manufacturing costs. Which type of cost is considered a SUNK COST to Outdoor Living's decision whether to accept or reject the special order?

Depreciation on equipment that would be used to make the hammocks

The margin of safety ratio can be defined as the:

Excess of budgeted sales over break-even sales divided by budgeted sales.

Which of the following items is not needed to prepare a sales budget by product line?

Expected purchase price of each product.

Volume measures are good drivers for fixed overhead costs.

False

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?

Fixed cost and fixed cost

Cost allocation involves:

Identifying a cost driver for each cost to be allocated. Calculating an allocation rate for each cost to be allocated. Multiplying the allocation rate by the weight of the cost driver.

Levenworth Company incurs unnecessary costs each period because of the excess quantities of inventory maintained to meet unexpected customer demand. The costs of inventory financing, storage, supervision, and obsolescence could most likely be reduced by which of the following practices?

Just-in-time inventory

Select the incorrect statement regarding costs and expenses.

Manufacturing-related costs are initially recorded as expenses. (Some costs are initially recorded as expenses while others are initially recorded as assets. Expenses are incurred when assets are used to generate revenue. Non-manufacturing costs should be expensed in the period in which they are incurred.)

Identify the false statement regarding how product costs in a manufacturing company differ from product costs in a service or merchandising company.

Most labor costs for merchandising companies are treated as product costs. (Both manufacturing companies and service companies incur costs for supplies. Manufacturing companies accumulate product costs in inventory accounts, while service companies do not. Products of service companies such as restaurants are consumed immediately.)

Which of the following items would be least useful in preparing a schedule of cash receipts?

Number of units expected to be purchased. (Expected revenue from cash sales. Service charges for credit card sales. Past accounts receivable collection experience.)

Which of the following is a true statement?

Pro forma financial statements are based on the company's budgets. Companies prepare pro forma financial statements to show how their performance for the period will "look" if actual results match the budget. Companies usually prepare a pro forma income statement, pro forma balance sheet, and pro forma statement of cash flows.

Which of the following statements is true with regard to product costs versus general, selling, and administrative costs?

Product costs associated with units sold appear on the income statement as cost of goods sold.

Which of the following is not classified as manufacturing overhead?

Product delivery costs (Salary of factory supervisor Factory insurance Production supplies)

Which of the following is a true statement regarding product-level costs?

Product-level costs are generally relevant to outsourcing decisions.

All of the following are examples of indirect costs that can be classified as being variable costs except:

Production supervisor salaries. (Utilities. Material handling costs. Transportation costs.)

Outdoor Living Company has just received a special order for 500 hammocks. Outdoor Living has sufficient idle capacity to accept the order. Accepting the order will increase Outdoor Living's total variable manufacturing costs. Which type of cost is considered RELEVANT to Outdoor Living's decision whether to accept or reject the special order?

Raw materials to make the 500 hammocks

The inventory purchases budget is based on which budget?

Sales budget

The cash budget is based on which budget?

Sales budget Inventory purchases budget Selling and administrative expense budget

Which of the following is generally included in a sales budget?

Schedule of cash receipts for the projected sales

Assume that a factory seeks to allocate rent to several departments that occupy the factory. The factory is occupied by all of the departments. Which of the following is the most logical cost driver for allocating the factory rent?

Square footage occupied by each department

Select the correct statement regarding the selling and administrative (S&A) expense budget.

The S&A budget is prepared after the sales budget. The S&A budget is prepared before the cash budget. The S&A budget is prepared before the pro forma income statement.

All of the following are variables that could be considered in a decision to outsource a component that is currently being produced in-house. Which of the following is not likely to be relevant?

The book value of equipment used in making the component (The impact on employee morale The importance of vertical integration to the company The reliability of the supplier)

Alex brought his lunch today but now a coworker has asked him to go to the deli across the street.

The cost of the lunch that Alex had brought has nothing to do with his current decision.

master budget.

The master budget usually includes operating budgets and capital budgets and pro forma financial statements.

Gibbs Corporation makes indoor gas fireplaces. A standard fireplace includes unit-level materials, labor, and overhead costs. In addition, the company incurs product-level engineering and advertising costs. Lastly, the company incurs facility-level costs related to renting the manufacturing building A sales representative has been in contact with a building developer who wants to buy 20 fireplaces only if he can buy them at amount lower than Gibbs's selling price. Which of the following costs would be relevant to this special order decision?

The unit-level materials, labor, and overhead

Which costs are relevant for equipment replacement decisions?

Unit-level costs Batch-level costs Product-level costs

Which of the following statements is false?

Volume measures are good drivers for fixed overhead costs. (Both direct and indirect costs can be assigned to a cost object. Cost drivers are often selected based on the availability of information. Fixed costs that do not have a definitive cost driver are allocated using an allocation base that distributes a rational share of the cost to each product.)

Allocation of costs to various cost objects may:

affect managers' performance evaluation and the apparent profitability of the various products a company makes.

Cost of goods sold is equal to the cost of goods:

available for sale minus ending finished goods.

Fixed cost per unit:

decreases as production volume increases.

Costs associated with holding inventory often include:

financing, warehouse space, supervision, theft, damage, and obsolescence.

Once sales reach the break-even point, each additional unit sold will:

increase profit by an amount equal to the per unit contribution margin.

Larry's Lawn Care incurs significant gasoline costs. This cost would be classified as a variable cost if the total gasoline cost:

increases in direct proportion to the number of hours the lawn equipment is operated.

Indirect costs are often pooled, and not allocated individually because:

individual allocation would be tedious.

A company's numerous specific budgets (sales, inventory purchases, etc.) together are referred to as the:

master budget.

A company that uses a just-in-time inventory system:

may find that having less inventory actually leads to increased customer satisfaction.

A cost that contains both fixed and variable elements is referred to as a:

mixed cost.

Which of the following statements is true regarding the salary of the manager of a fast-food hamburger restaurant?

none are correct (The salary is a fixed cost that is directly traceable to the cost of making hamburgers. The salary is a variable cost that is directly traceable to the cost of operating a specific restaurant. The salary is a variable cost that cannot be traced to the cost of operating a specific restaurant.)

Budgeting that involves the development of a master budget to direct the firm's activities over the short term is referred to as:

operations budgeting.

All of the following are examples of product-level costs except:

property and real estate taxes costs (product inspection costs. engineering design costs. patent costs.)

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:

relevant range.

All of the following are downstream costs except:

research and development. (packaging costs. advertising. sales commissions.)

Planning concerned with long-range decisions such as defining the scope of the business is referred to as:

strategic planning.

The first step in cost accumulation is to identify cost objects.

true