MBUS 300 Final Review Questions

Kirsten believes her company's overhead costs are driven (affected) by the number of direct labor hours because the production process is very labor intensive. During the period, the company produced 5,000 units of Product A requiring a total of 1,600 labor hours and 2,500 units of Product B requiring a total of 400 labor hours. What allocation rate should be used if the company incurs overhead costs of $20,000?

$10 per labor hour

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.

$15,000

Payne Company reported the following information for the current year: Sales$1,600,000 Average Operating Assets$500,000 Desired ROI 14% Net Income$85,000 The company's residual income was:

$15,000.

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:

% 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

The following income statement is provided for Grant, Inc. Sales revenue (1,500 @ $30 per unit)$45,000 Variable costs (1,500 @ $14 per unit) 21,000 F ixed costs 16,000 Net income$8,000 What is this company's magnitude of operating leverage?

3

Based on the following operating data, the operating leverage is: Sales$500,000 Variable costs 280,000 Contribution margin 220,000 Fixed costs 180,000 Income from operations$40,000

5.50

Pickard Company pays its sales staff a base salary of $4,500 a month plus a $3.00 commission for each product sold. If a salesperson sells 800 units of product in January, the employee would be paid:

6,900

Which of the following statements regarding a balanced scorecard is correct?

A balanced scorecard includes several different performance measures that can be used to assess how well a business is accomplishing its mission. A balanced scorecard includes financial performance measures such as ROI. A balanced scorecard includes nonfinancial measures such as defect rates or on-time deliveries.

Select the correct statement from the following.

A fixed cost structure offers greater risk but higher opportunity for profitability than does a variable cost structure.

A responsibility report provided to a manager typically includes:

A list of all the items under the manager's control. The budgeted amount for each item on the report. The differences between the budgeted and actual amounts for each item on the report.

Which of the following statements regarding investment centers is incorrect?

A manager of an investment center is responsible for the investment of capital, but not revenues or expenses.

Contribution margin would be the most important variable in evaluating the performance of:

A profit center.

Whether a cost behaves as a fixed cost or as a variable cost depends upon the:

Activity Base used.

Why do accountants normally calculate cost per unit as an average?

All of these are justifications for computing average unit costs.

Select the correct statement regarding break-even point analysis.

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

The kind of responsibility center that would be evaluated by comparing income on assets to the amount of assets invested is:

An investment center

What is the effect on the balance sheet of recording a $200 cash purchase of raw materials?

Assets and stockholders' equity do not change.

What is the effect on the balance sheet of making cash sales of inventory to customers for profit?

Assets and stockholders' equity increase.

During its first year of operations, Forrest Company paid $30,000 for direct materials and $50,000 in wages for production workers. Lease payments, utility costs, and depreciation on factory equipment totaled $15,000. General, selling, and administrative expenses were $20,000. The average cost to produce one unit was $2.50. How many units were produced during the period?

Average cost per unit = (Materials cost + Labor costs + Overhead costs) ÷ Number of units produced$2.50 per unit = ($30,000 + $50,000 + $15,000) ÷ Number of units produced$2.50 per unit = $95,000 ÷ Number of units producedNumber of units produced = $95,000 ÷ $2.50 = 38,000 units

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?

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 unitCost of goods sold = Number of units sold × Average cost per unitCost of goods sold = 3,000 units sold × $10.00 per unit = $30,000Net income = Revenue − Cost of goods sold − Selling and administrative expensesNet income = (3,000 units × $15 per unit) − (3,000 units sold × $10.00 per unit) − $8,000 = $7,000

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?

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

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: $180,000

Which of the following costs would be classified as a direct cost for a company that produces motorcycles?

Both seats used in the motorcycles and wages of motorcycle assembly workers are correct.

What happens to the break-even point in sales dollars when the contribution margin ratio increases?

Break-even point decreases

What happens to break-even point when the sales price per unit decreases?

Break-even point increases.

Which of the following is a characteristic that is needed for decentralization to work well in an organization?

Clear lines of authority, Responsibility, Good communication

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. At 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.

The excess of revenue over variable costs is referred to as:

Contribution Margin

What is the formula for calculating contribution margin ratio?

Contribution margin / sales

Sales revenue (2,500 units × $60 per unit)$150,000 Cost of goods sold (variable; 2,500 units × $20 per unit) (50,000) Cost of goods sold (fixed) (8,000) Gross margin 92,000 Administrative salaries (42,000) Depreciation (10,000) Supplies (2,500 units × $4 per unit) (10,000) Net income$30,000 What is this company's magnitude of operating leverage?

Contribution margin = Revenues − Variable expensesContribution margin = $150,000 − ($50,000 + $10,000) = $90,000Magnitude of operating leverage = Contribution margin ÷ Net incomeMagnitude of operating leverage = $90,000 ÷ $30,000 = 3.00

Kingston Company sells its product for $200 per unit. The company's accountant provided the following cost information: Manufacturing costs$25,000+40%of sales Selling costs$10,000+20%of sales Administrative costs$15,000+10%of sales What is Kingston Company's contribution margin ratio?

Contribution margin ratio = (Selling price per unit − Variable costs per unit) ÷ Selling price per unitContribution margin ratio = {$200 per unit − [(40% + 20% + 10%) × $200 per unit]} ÷ $200 per unit = ($200 per unit − $140 per unit) ÷ $200 per unit = 30%

The concept that says managers should be evaluated on the basis of revenues and/or expenses they can control is known as the:

Controllability concept.

Jacob is a department manager who recently instituted a new recognition program for his employees. He budgeted the cost of the new program at $10 per employee, but actual costs were $15 per employee. The cost associated with the recognition program would be considered which of the following kinds of cost?

Controllable cost

The research and development department of Apple Computers would likely be organized as:

Cost Center

Vanessa Grant is responsible for controlling expenses, but is not responsible for generating revenues. Vanessa Grant is a manager of a(n):

Cost center

Which of the following is a product cost for a construction company?

Cost of transporting raw materials to the job site

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:

Cost-plus pricing

Wu Company incurred $40,000 of fixed cost and $50,000 of variable cost when 4,000 units of product were made and sold.If the company's volume doubles, the company's total cost will:

Current cost:Total cost = Fixed cost + Variable costTotal cost = $40,000 + $50,000 = $90,000Cost per unit when volume doubles:Total cost = $40,000 + ($50,000 × 2) = $140,000

Which of the following is an advantage of decentralization?

Decentralization motivates managers to improve productivity.

Which of the following is not typically found in a decentralized organization?

Decision center

Which of the following would increase residual income? (Assume all other things are equal)

Decrease in investment

Bruce Company recently reduced its advertising budget. All other costs and revenues were unchanged. Select the response that indicates the impact of the advertising cuts on the company's break-even point and margin of safety. Break-even Point Margin of Safety A)Increase Increase B)Decrease Decrease C)Increase Decrease D)Decrease Increase

Decrease, Increase. Recall that the break-even point equals fixed costs divided by the contribution margin per unit. If fixed costs, such as advertising, decrease, the break-even point decreases. The margin of safety equals the excess of budgeted sales over break-even sales. If the break-even point decreases, the margin of safety increases.

Which of the following statements concerning manufacturing costs is incorrect?

Depreciation on manufacturing equipment is a period cost.

Thanks to his firm's decentralization and use of responsibility accounting, Matt has more time to review a proposed new joint venture with one of the firm's business partners. What advantage of decentralization does this illustrate?

Encourages upper-level management to concentrate on strategic decisions

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

Factory overhead

For a company using target costing, market price minus profit equals target price.

False

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.

False

Wayans Company has a contribution margin ratio of 60%. This means that its variable costs are 60% of sales.

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.

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

Select the correct statement regarding managerial and financial accounting.

Financial accounting is more highly regulated than managerial accounting.

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?

Financial, economic, and nonfinancial data

Sharon Company has variable costs of $80 per unit, total fixed costs of $200,000, and a break-even point of 5,000 units. If the sales price per unit is increased by $10, how many units must Sharon Company sell to break even?

First, calculate contribution margin before the change:Break-even point in units before change = Fixed costs ÷ Contribution margin per unit5,000 units = $200,000 ÷ Contribution margin per unitContribution margin per unit = $200,000 ÷ 5,000 units = $40 per unitThen calculate the break-even point in units after change:Break-even point in units after change = $200,000 ÷ ($40 per unit + $10 per unit) = 4,000 units

Jasper Company has variable costs per unit of $20, fixed costs of $300,000, and a break-even point of 60,000 units. What will be the new break-even point in units if variable costs decrease by $3 per unit and fixed costs increase by $100,000?

First, determine the contribution margin:Break-even point in units before changes = Fixed costs ÷ Contribution margin per unit Break-even point in units before changes = $300,000 ÷ Contribution margin per unit = 60,000 units Contribution margin per unit = $300,000 ÷ 60,000 units = $5 per unit Break-even point in units after changes = ($300,000 + $100,000) ÷ ($5 per unit + $3 per unit) = 50,000 unit

Select the incorrect statement regarding fixed and variable costs.

Fixed cost per unit remains constant as the number of units increases.

Which of the following costs is not considered a period cost?

Freight paid on a purchase of raw materials

Which of the following statements concerning product costs versus general, selling, and administrative costs is false?

General, selling, and administrative costs are always expensed when paid.

Which of the following items would not be found on a contribution format income statement?

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.

Which of the following statements regarding Company A is incorrect?

If Company A has fixed costs of $720,000, a selling price of $50 per unit, and contribution margin of $30 per unit, its break-even point in units is 36,000 units. Break-even point in units = Fixed costs ÷ Contribution margin per unit Break-even point in units = $720,000 ÷ $30 per unit = 24,000 units (rather than 36,000 units)

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?

If Company D's variable cost per unit increases and nothing else changes, the margin of safety will decrease.

Select the incorrect statement regarding the relationship between cost behavior and profits.

In a pure fixed cost structure, the unit selling price and unit contribution margin are equal.

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

Increase profit by an amount equal to the per unit contribution margin

Which of the following most exemplifies the value-added principle?

Information gathering and reporting activities should be restricted to those activities that add value in excess of their cost.

Which of the following best represents a characteristic of managerial accounting?

Information is based on estimates and is bounded by relevance and timeliness.

Which of the following costs should not be recorded as an expense?

Insurance on factory building

Choose the answer that is not a distinguishing characteristic of financial accounting information.

It is focused primarily on the future.

Which of the following statements regarding responsibility accounting is not correct?

It requires top management to prepare a budget for the entire company and communicate that plan to lower levels of management.

Which of the following should not be included in the investment base used to compute residual income?

Land held for future use

The manager of the production department for Romulus Manufacturing has responsibility for all stages of the production process and does not have time to review all the operational details of his department. He has found it to be more productive to focus on the significant deviations from budget. This kind of management is called:

Management By execption

Select the incorrect statement regarding costs and expenses.

Manufacturing-related costs are initially recorded as expenses.

Marcy is plant manager for Diversified Industries. She and the managers of four other plants report to the vice president in charge of manufacturing operations. Three department managers report to Marcy. Select the incorrect statement regarding the preparation of responsibility reports.

Marcy's administrative costs should be included on the reports of her three department managers.

Wham Company sells electronic squirrel repellants for $60. Variable costs are 60% of sales and total fixed costs are $40,000. What is the firm's magnitude of operating leverage if 2,000 units are sold?

Net income = Sales − Variable expenses − Fixed expensesNet income = ($60 × 2,000 units) − ($60 × 0.60 × 2,000 units) − $40,000 = $48,000 − $40,000 = $8,000 Magnitude of operating leverage = Contribution margin ÷ Net incomeMagnitude of operating leverage = $48,000 ÷ $8,000 = 6.00

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

Office manager's salary

A tool that is often used to depict the lines of authority and responsibility within a firm is:

Organization Chart

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:

Prestige pricing

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.

An organizational unit of a business that incurs costs and generates revenues is known as a(n):

Profit cetner

Which of the following is not a characteristic of an effective responsibility accounting system?

Reports that set goals for long-term strategic performance

Howard Company provided the following selected information about its consumer products division for the current year: Desired ROI 12% Net Income$150,000 Residual Income$30,000 Based on this information, the division's investment amount was:

Residual income = Operating income − (Operating assets × Desired ROI) $30,000 = $150,000 − (Operating assets × 12%) Operating assets × 12% = $150,000 − $30,000 Operating assets = $120,000 ÷ 12% = $1,000,000

The New Products Division of Testar Company had operating income of $8,000,000 and operating assets of $44,800,000 during the current year. The New Products Division has developed a potential new product that would require $8,500,000 in operating assets and would be expected to provide $1,400,000 in operating income each year. Testar has set a target return on investment (ROI) of 16% for each of its divisions. Assuming that the new product is put into production, calculate the residual income for the division.

Residual income = Operating income − (Operating assets × Desired ROI) Residual income = ($8,000,000 + $1,400,000) − [($44,800,000 + $8,500,000) × 16%] = $872,000

In the current year, the New Products Division of Testar Company had operating income of $8,000,000 and operating assets of $44,800,000. Testar has set a target return on investment (ROI) of 16% for each of its divisions. Which of the following statements is correct?

Residual income for the New Products division was $832,000.

Terra Company has two divisions, the Retail Division and the Wholesale Division. The following information was gathered for the two divisions for the current year: Retail Wholesale OI$2,500,000 $6,000,000 OS$16,000,000 $36,000,000 Terra Company has set a target return on investment (ROI) of 15% for both divisions. Which of the following statements is accurate?

Residual income for the wholesale division was $600,000.

Which of the following statements about residual income is true?

Residual income is the amount of income in excess of a target or desired return on investment

Brookings Company evaluates its managers on the basis of return on investment. Division Three has a return on investment (ROI) of 15%, while the company as a whole has an ROI of only 10%. Which of the following performance measures will motivate the manager of Division Three to accept a project earning a 12% return?

Residual income.

The process of evaluating the performance of individual managers is known as:

Responsibility accounting.

Stephanie's responsibility report includes the salary and benefits of her secretary. Although Stephanie prepares a performance evaluation for the secretary each year, Stephanie's superior determines how much the secretary will be paid. This example is an illustration of the fact that:

Responsibility reporting systems are not perfect. Managers sometimes are held responsible for items over which they have only limited control. Control may be shared.

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 Based on the above information, select the correct statement.

Salary cost is a mixed cost. 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 costs should be recorded as an expense?

Salary of administrative employee

Which of the following types of labor costs will never flow through the balance sheet?

Sales commissions

The records of Gemini Company show a contribution margin ratio of 40%. The company desires to earn a profit of $35,000 and has fixed costs of $70,000. What sales revenue would have to be generated in order to earn the desired profit?

Sales volume in dollars = (Fixed costs + Desired profit) ÷ Contribution margin ratioSales volume in dollars = ($70,000 + $35,000) ÷ 0.40 = $262,500

Phan Company has not reported a profit in five years. This year the company would like to narrow its loss to $7,500. Assuming its selling price is $36.50 per unit and its variable costs per unit are $24, how many units must be sold to achieve its target given that total fixed costs are $60,000? (Do not round intermediate calculations.)

Sales volume in units = (Fixed costs + Desired profit) ÷ Contribution margin per unit Sales volume in units = [$60,000 + ($7,500)] ÷ ($36.50 per unit − $24.00 per unit) = $52,500 ÷ $12.50 per unit = 4,200 units

Select from the following the incorrect statement regarding contribution margin.

Sales − Fixed costs = Contribution margin, the real CM is Revenues − Variable expenses

During the current year, Winchester Company sold 80,000 units at a selling price of $20 per unit. Variable cost per unit was $15, and Winchester's net income for the year was $40,000. What was the amount of Winchester's fixed costs?

Sales − Variable costs − Fixed costs = Profit($20 per unit × 80,000 units) − ($15 per unit × 80,000 units) − Fixed costs = $40,000$1,600,000 − $1,200,000 − Fixed costs = $40,000Fixed costs = $400,000 − $40,000 = $360,000

Pierce Company's break-even point is 12,000 units. Its product sells for $25 and has a $10 variable cost per unit. What is the company's total fixed cost amount?

Sales − Variable costs − Fixed costs = Profit($25 per unit × 12,000 units) − ($10 per unit × 12,000 units) − Fixed costs = $0Fixed costs = $300,000 − $120,000 = $180,000

Return to question Item 7 Item 7 Which of the following items would be reported directly on the income statement as a period cost?

Selling and administrative salaries

Which of the following items would be reported directly on the income statement as a period cost?

Selling and administrative salaries

Chester Company plans to introduce a new product. A market research specialist claims that 20,000 units can be sold at a $100 selling price. Assuming the company desires a profit margin of 22% of sales, what is the target cost per unit?

Selling price per unit = Target cost per unit + MarkupTarget cost per unit = Selling price per unit − MarkupTarget cost per unit = $100 per unit − ($100 per unit × 0.22) = $100 per unit − $22 per unit = $78 per unit

Select the incorrect statement regarding the relationship between type of user and type of information.

Senior executives need less aggregated information than do lower-level managers.

The term that describes what occurs when a manager does what is in his/her best interests and not what is in the best interests of the company as a whole is known as:

Suboptimization

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:

Target costing

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?

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.

If total fixed costs increase while variable costs and sales price are unchanged, what happens to the break-even point?

The break-even point increases, and therefore more units must be sold to break even.

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?

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

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 10 units$100 100 units$1,000 1,000 units$10,000 Total Unit Cost Product B 10 units $10,000 100 units $1,000 1,000 units $100

The cost of Product A is a variable cost and the cost of Product B is a fixed cost.

Select the correct statement regarding fixed costs.

The fixed cost per unit decreases when volume increases.

Select the incorrect statement regarding cost structures.

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

The New Products Division of Testar Company has developed a potential new product that would require $8,500,000 in operating assets and would be expected to provide $1,400,000 in operating income each year. Testar has set a target return on investment (ROI) of 16% for each of its divisions. Which of the following statements is accurate?

The new product is acceptable because it will yield an ROI that is higher than the target ROI and will yield residual income of $40,000.

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?

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.

Select the incorrect break-even equation from the following:

Total contribution margin = total variable costs

Select the incorrect statement regarding the relevant range of volume.

Total cost per unit is expected to remain constant. Within the relevant range, the total cost per unit will decrease as volume increases.

A company can use target profit analysis to determine the level of sales required to earn a target loss.

True

An increase in total fixed costs increases the break-even point

True

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

True

If a company is operating beyond its break-even point, sale of one more unit of product increases the company's profit by the amount of the unit contribution margin.

True

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

True

Jensen Company has a contribution margin ratio of 45%. This means that its variable costs are 55% of sales.

True

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

True

When computing the break-even point in units, a company should round to the next whole unit because partial units ordinarily are not sold.

True

Which of the following is not an advantage of decentralization?

Upper-level managers are able to concentrate on routine decisions

Select the incorrect statement regarding upstream and downstream costs.

Upstream and downstream costs are reported as product costs on the income statement.

Which of the following transactions would cause net income for the period to decrease?

Used $2,000 of office supplies

Managerial accounting information is limited or restricted by which of the following authorities or principles?

Value-Added Principle

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:

Variable

The results below represent what form of cost behavior? Year 1 Year 2Units 4,500 4,800 Total Cost$11,250 $12,000

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?

Variable cost

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?

Variable cost

The following income statements are provided for Li Company's last two years of operation: Year 1 Year 2 Number of units produced and sold 3,500 3,000 S ales revenue$101,500 $87,000 Cost of goods sold 68,000 60,000 Gross margin 33,500 27,000 General, selling, and administrative expenses 13,000 12,000 Net income$20,500 $15,000 Assuming that cost behavior did not change over the two-year period, what is Li Company's contribution margin in Year 2?

Variable cost per unit = Change in costs ÷ Change in activityCost of goods sold:Variable cost per unit = ($68,000 − $60,000) ÷ (3,500 units − 3,000 units) = $16.00 per unitSelling and administrative expense:Variable cost per unit = ($13,000 − $12,000) ÷ (3,500 units − 3,000 units) = $2.00 per unitContribution margin in Year 2:Contribution margin = Sales revenue − Variable costs Contribution margin = $87,000 − [3,000 units × ($16.00 per unit + $2.00 per unit)] = $33,000

Wu Company incurred $40,000 of fixed cost and $50,000 of variable cost when 4,000 units of product were made and sold.If the company's volume increases to 5,000 units, the total cost per unit will be:

Variable cost per unit = Total variable cost ÷ Number of unitsVariable cost per unit = $50,000 ÷ 4,000 units = $12.50 per unitTotal cost per unit = Fixed cost per unit + Variable cost per unitTotal cost per unit = ($40,000 ÷ 5,000 units) + $12.50 per unit = $20.50 per unit

Management recently instituted a new training program for upper-level managers. They budgeted the cost of the new program at $1,000 per employee trained, but actual costs were $1,250 per employee trained. The difference between the budgeted cost for training and the actual cost of training is called a:

Variance.

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 production manager's salary is an example of:

a fixed cost

Steuben Company produces dog houses. During the current year, Steuben Company incurred the following costs:Wages paid to factory machine operators in producing the dog houses should be categorized as:

a product cost and recorded in the inventory account

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 variable cost.

Manufacturing costs that cannot be traced to specific units of product in a cost-effective manner include:

both depreciation on production equipment and indirect labor.

All of the following are characteristics that are required for effective responsibility accounting except:

centralization.

The manager of Kenton Company stated that 45% of its total costs were fixed. The manager was describing the company's:

cost structure.

Responsibility reports are prepared:

for each manager who controls a responsibility center.

All of the following would be considered a fixed cost for a bottled water company except:

hourly wages for machine operators.

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.

All of the following are features of managerial accounting except:

information is characterized by objectivity, reliability, consistency, and accuracy.

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

mixed cost.

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.

Operating leverage exists when:

small percentage changes in revenue produce large percentage changes in profit.

In order to prepare a contribution format income statement, costs must be separated into:

variable and fixed costs.

For a manufacturing company, product costs include all of the following except:

warehousing costs of finished goods.

Hard Nails and Bright Nails are competing nail salons. Both companies have the same number of customers. Both charge the same price for a manicure. The only difference is that Hard Nails pays its manicurists on a salary basis (i.e., a fixed cost structure) while Bright Nails pays its manicurists on the basis of the number of customers they serve (i.e., a variable cost structure). Both companies currently make the same amount of net income. If sales of both salons increase by an equal amount, Hard Nails:

will earn a higher profit than Bright Nails.