Fs Analysis Theories

FS ANALYSIS THEORIES:True/False Questions

1. Common-size statements are financial statements of companies of similar size.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

2. One limitation of vertical analysis is that it cannot be used to compare two companies that are significantly different in size.


3. The gross margin percentage is computed by dividing the gross margin by total assets.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

4. The sale of used equipment at book value for cash will increase earnings per share.

Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium

5. Earnings per share is computed by dividing net income (after deducting preferred dividends) by the average number of common shares outstanding.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy

6. The dividend payout ratio divided by the dividend yield ratio equals the price-earnings ratio.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard

7. An increase in the number of shares of common stock outstanding will decrease a company's price-earnings ratio if the market price per share remains unchanged.

Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard

8. A company's financial leverage is negative when its return on total assets is less than its return on common stockholders' equity.

Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard

9. When computing return on common stockholders' equity, retained earnings should be included as part of common stockholders' equity.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard

10. When a retailing company purchases inventory, the book value per share of the company increases.


11. If a company's acid-test ratio increases, its current ratio will also increase.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium

12. Assuming a current ratio greater than 1, acquiring land by issuing more of the company's common stock will increase the current ratio.


13. If a company successfully implements lean production, its inventory turnover ratio should decrease.


14. Short-term borrowing is not a source of working capital.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium

15. Working capital is computed by subtracting long-term liabilities from long-term assets.


Multiple Choice Questions

16. Common size financial statements help an analyst to:

A) Evaluate financial statements of companies within a given industry of the approximate same size.

B) Determine which companies in a similar industry are at approximately the same stage of development.

C) Compare the mix of assets, liabilities, capital, revenue, and expenses within a company over a period of time or between companies within a given industry without respect to size.

D) Ascertain the relative potential of companies of similar size in different industries.

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Source: CMA, adapted

17. Which of the following ratios would be least useful in determining a company's ability to pay its expenses and liabilities?

A) current ratio

B) acid-test ratio

C) price-earnings ratio

D) times interest earned ratio

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,3,4 Level: Medium

18. Most stockholders would ordinarily be least concerned with which of the following ratios:

A) earnings per share.

B) dividend yield ratio.

C) price-earnings ratio.

D) acid-test ratio.

Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,3 Level: Easy

19. What effect will the issuance of common stock for cash at year-end have on the following ratios?

Return on Total Assets Debt-to-Equity RatioA) Increase IncreaseB) Increase DecreaseC) Decrease IncreaseD) Decrease Decrease

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,4 Level: Medium

20. The market price of Friden Company's common stock increased from $15 to $18. Earnings per share of common stock remained unchanged. The company's price-earnings ratio would:

A) increase.

B) decrease.

C) remain unchanged.

D) impossible to determine.

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy

21. If a company is profitable and is effectively using leverage, which

one of the following ratios is likely to be the largest?

A) Return on total assets.

B) Return on total liabilities.

C) Return on common stockholders' equity.

D) Cannot be determined.

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium

22. Clark Company issued bonds with an interest rate of 10%. The company's return on assets is 12%. The company's return on common stockholders' equity would most likely:

A) increase.

B) decrease.


D) cannot be determined.

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy

23. Which of the following transactions could generate positive financial leverage for a corporation?

A) acquiring assets through the issuance of long-term debt.

B) acquiring assets through the use of accounts payable.

C) acquiring assets through the issuance of common stock.

D) both A and B above

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard

24. Book value per common share is the amount of stockholders' equity per outstanding share of common stock. Which one of the following statements about book value per common share is most correct?

A) Market price per common share usually approximates book value per common share.

B) Book value per common share is based on past transactions whereas the market price of a share of stock mainly reflects what investors expect to happen in the future.

C) A market price per common share that is greater than book value per common share is an indication of an overvalued stock.

D) Book value per common share is the amount that would be paid to stockholders if the company were sold to another company.

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy Source: CMA, adapted

25. The ratio of total cash, marketable securities, accounts receivable, and short-term notes to current liabilities is:

A) the debt-to-equity ratio.

B) the current ratio.

C) the acid-test ratio.

D) working capital.

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3,4 Level: Easy

26. A company has just converted a long-term note receivable into a short-term note receivable. The company's acid-test and current ratios are both greater than 1. This transaction will:

A) increase the current ratio and decrease the acid-test ratio.

B) increase the current ratio and increase the acid-test ratio.

C) decrease the current ratio and increase the acid-test ratio.

D) decrease the current ratio and decrease the acid-test ratio.

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Hard

27. Broca Corporation has a current ratio of 2.5. Which of the following transactions will increase Broca's current ratio?

A) the purchase of inventory for cash.

B) the collection of an account receivable.

C) the payment of an account payable.

D) none of the above.

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Hard

28. Allen Company's average collection period for accounts receivable was 25 days in year 1, but increased to 40 days in year 2. Which of the following would most likely be the cause of this change:

A) a decrease in accounts receivable relative to sales in year 2.

B) an increase in credit sales in year 2 as compared to year 1.

C) a relaxation of credit policies in year 2.

D) a decrease in accounts receivable in year 2 as compared to year 1.

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Hard

29. Wolbers Company wrote off $100,000 in obsolete inventory. The company's inventory turnover ratio would:

A) increase.

B) decrease.


D) impossible to determine.

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium

COST ANALYSIS THEORIES:

True/False Questions

1. Within the relevant range, a change in activity results in a change in total variable cost and the per unit fixed cost.


2. The reluctance of managers to lay off employees when activity declines in the short-run leads to an increase in the ratio of variable to fixed costs.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard

3. A variable cost fluctuates in total as activity changes but remains constant on a per unit basis over the relevant range.


4. A cost that is classified as variable with respect to one measure of activity could be classified as fixed with respect to a different measure of activity.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard

5. Fixed costs remain constant in total, but vary inversely with changes in activity when expressed on a per unit basis.


6. Committed fixed costs have a short-term planning horizon--usually one year.


7. The following costs are all examples of committed fixed costs: depreciation on buildings, advertising, insurance, and management development and training.


8. The time frame in which discretionary fixed costs are controllable is usually much shorter than the time frame for committed fixed costs.


9. The high-low method is generally more accurate than the least-squares regression method in analyzing cost behavior.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3,5 Level: Easy

10. A major problem with the high-low method of cost estimation is that some data are omitted from the analysis.


11. The high and low points used in the high-low method tend to be unusual and therefore the cost formula may not accurately represent all of the data.


12. Contribution margin and gross margin mean the same thing.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Medium

13. Contribution margin equals revenue minus all variable costs.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

LO: 4 Level: Easy

14. The traditional income statement organizes costs on the basis of cost behavior.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement LO: 4 Level: Easy

15. It is necessary to break mixed costs into their variable and fixed cost components in order to construct an income statement using the contribution approach.



16. A is a fixed cost; B is a variable cost. During the current year the level of activity has decreased but is still within the relevant range. We would expect that:

A) The cost per unit of A has remained unchanged.

B) The cost per unit of B has decreased.

C) The cost per unit of A has decreased.

D) The cost per unit of B has remained unchanged.

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

17. Which costs will change with an increase in activity within the relevant range?

A) Unit fixed cost and total fixed cost

B) Unit variable cost and total variable cost

C) Unit fixed cost and total variable cost

D) Unit fixed cost and unit variable cost


18. Salaries of accounts receivable clerks when one clerical worker is needed for every 750 accounts receivable is an example of a:

A) fixed cost

B) step-variable cost

C) mixed cost

D) curvilinear cost

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

19. Limousine Conversion Company purchases ordinary Cadillacs, cuts them in half, and then adds a middle section to the vehicles to create stretch limousines. With respect to the number of cars converted, the cost of the Cadillacs purchased for conversion by Limousine Conversion Company would best be described as a:

A) fixed cost

B) mixed cost

C) step-variable cost

D) variable cost

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

20. For an automobile manufacturer, the cost of a driver's side air bag purchased from a supplier and installed in every automobile would best be described as a:

A) fixed cost.

B) mixed cost.

C) step-variable cost.

D) variable cost.


21. With respect to a fixed cost, an increase in the activity level within the relevant range results in:

A) an increase in fixed cost per unit.

B) a proportionate increase in total fixed costs.

C) an unchanged fixed cost per unit.

D) a decrease in fixed cost per unit.


22. In the standard cost formula Y = a + bX, what does the “Y” represent?

A) total cost

B) total fixed cost

C) total variable cost

D) variable cost per unit

Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

23. In the standard cost formula Y = a + bX, what does the “a” represent?

A) total cost

B) total fixed cost



Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

24. In the standard cost formula Y = a + bX, what does the “b” represent?

A) total cost

B) total fixed cost



Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

25. In the standard cost formula Y = a + bX, what does the “X” represent?

A) total cost

B) total fixed cost

C) units of activity


Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

26. Which of the following would usually be considered a discretionary fixed cost for a soft drink bottling company?

A) the cost of advertising its products

B) the cost of fire insurance on its factory building

C) depreciation on its manufacturing equipment

D) both a and b above

Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

27. Which of the following is a weakness of the quick-and-dirty scattergraph method of analyzing mixed cost?

A) It is impossible to determine variable cost per unit.

B) Only two data points are used and the rest are ignored in drawing the scattergraph.

C) Different people will have different answers even though they are analyzing the same set of data.

D) Both B and C above


28. Which of the following statements is true when referring to the high-low method of cost analysis?

A) The high-low method has no major weaknesses.

B) The high-low method is very hard to apply.

C) In essence, the high-low method draws a straight line through two data points.

D) None of the above is true.


29. Contribution margin is computed as sales revenue minus:

A) fixed expenses

B) variable expenses

C) cost of goods sold

D) cost of goods manufactured

Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Easy

30. Which of the following approaches to preparing an income statement calculates gross margin?

Traditional ContributionApproach Approach

A) Yes YesB) Yes NoC) No YesD) No No

Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement LO: 4 Level: Medium

31. The least-squares regression method:

A) fits a regression line by minimizing the sum of the squared errors from the regression line.

B) is generally less accurate than the scattergraph method.

C) can be used only if the fixed cost element is larger than the variable cost element.

D) is the only method acceptable under generally accepted accounting principles.


32. Multiple regression analysis is used when:

A) more than one cost category must be analyzed.

B) when more than one factor causes variation in a cost.

C) the high-low method cannot be used because there is only one observation.

D) all of the points on a scattergraph fall exactly on a regression line.

Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium

MULTIPLE CHOICE QUESTIONS

1. Which of the following statements is true?

A. The word "cost" has the same meaning in all situations in which it is used.

B. Cost data, once classified and recorded for a specific application, are appropriate for use in any application.

C. Different cost concepts and classifications are used for different purposes.

D. All organizations incur the same types of costs.

E. Costs incurred in one year are always meaningful in the following year.

Answer: C LO: 1 Type: RC

2. Product costs are:

A. expensed when incurred.

B. inventoried.

C. treated in the same manner as period costs.

D. treated in the same manner as advertising costs.

E. subtracted from cost of goods sold.

Answer: B LO: 2 Type: RC

3. Which of the following is a product cost?

A. Glass in an automobile.

B. Advertising.

C. The salary of the vice president-finance.

D. Rent on a factory.

E. Both "A" and "D."

Answer: E LO: 2 Type: N

4. Which of the following would not be classified as a product cost?

A. Direct materials.

B. Direct labor.

C. Indirect materials.

D. Insurance on the manufacturing plant.

E. Sales commissions.

Answer: E LO: 2 Type: RC, N

5. The accounting records of Tacoma Company revealed the following costs: direct materials used, $170,000; direct labor, $350,000; manufacturing overhead, $400,000; and selling and administrative expenses, $220,000. Tacoma's product costs total:

A. $520,000.

B. $750,000.

C. $920,000.

D. $1,140,000.

E. some other amount.

Answer: C LO: 2 Type: A

6. Costs that are expensed when incurred are called:

A. product costs.

B. direct costs.

C. inventoriable costs.

D. period costs.

E. indirect costs.

Answer: D LO: 2 Type: RC

7. Which of the following is a period cost?

A. Direct material.

B. Advertising expense.

C. Depreciation on cars driven by a firm's president and treasurer.

D. Miscellaneous supplies used in production activities.

E. Both "B" and "C."


8. Which of the following is not a period cost?

A. Legal costs.

B. Public relations costs.

C. Sales commissions.

D. Wages of assembly-line workers.

E. The salary of a company's chief financial officer (CFO).

Answer: D LO: 2 Type: RC, N

9. The accounting records of Hill Corporation revealed the following selected costs: Sales commissions, $40,000; plant supervision, $94,000; and administrative expenses, $185,000. Hill's period costs total:

A. $40,000.

B. $94,000.

C. $185,000.

D. $225,000.

E. $319,000.

Answer: D LO: 2 Type: A

10. Which of the following entities would most likely have raw materials, work in process, and finished goods?

A. Exxon Corporation.

B. Macy's Department Store.

C. Wendy's.

D. Southwest Airlines.

E. Columbia University.

Answer: A LO: 3 Type: N

11. Selling and administrative expenses would likely appear on the balance sheet of:

A. The Gap.

B. Texas Instruments.

C. Turner Broadcasting System.

D. all of the above firms.

E. none of the above firms.


12. Which of the following inventories would a discount retailer such as Wal-Mart report as an asset?

A. Raw materials.

B. Work in process.

C. Finished goods.

D. Merchandise inventory.

E. All of the above.


13. Which of the following inventories would a company ordinarily hold for sale?

A. Raw materials.

B. Work in process.

C. Finished goods.

D. Raw materials and finished goods.

E. Work in process and finished goods.


14. Zeno Corporation engages in mass customization and direct sales, the latter by accepting customer orders over the Internet. As a result, Zeno:

A. would probably begin the manufacturing process upon receipt of a customer's order.

B. would typically have fairly low inventory levels for the amount of sales revenue generated.

C. would typically have fairly high inventory levels for the amount of sales revenue generated.

D. would likely find choices "A" and "B" to be applicable.

E. would likely find choices "A" and "C" to be applicable.


15. Companies that engage in mass customization:

A. tend to have a relatively low production volume.

B. tend to have a high production volume that involves highly standardized end-products.

C. tend to have a high production volume, many standardized components, and customer-specified combinations of components.

D. tend to have a high production volume, many unique components, and customer-specified combinations of components.

E. could be typified by the refining operations of Shell Oil.


16. Midwest Motors manufactures automobiles. Which of the following would not be classified as direct materials by the company?

A. Sheet metal used in the automobile's body.

B. Tires.

C. Interior leather.

D. CD player.

E. Wheel lubricant.


17. Which of the following employees of a commercial printer/publisher would be classified as direct labor?

A. Book binder.

B. Plant security guard.

C. Sales representative.

D. Plant supervisor.

E. Payroll supervisor.


18. Norwood Appliance produces washers and dryers in an assembly-line process. Labor costs incurred during a recent period were: corporate executives, $100,000; assembly-line workers, $80,000; security guards, $18,000; and plant supervisor, $30,000. The total of Norwood's direct labor cost was:

A. $80,000.

B. $98,000.

C. $110,000.

D. $128,000.

E. $228,000.

Answer: A LO: 5 Type: A

19. Which of the following employees would not be classified as indirect labor?

A. Custodian.

B. Salesperson.

C. Assembler of wooden furniture.

D. Plant security guard.

E. Choices "B" and "C."

Answer: E LO: 5 Type: RC, N

20. Depreciation of factory equipment would be classified as:

A. operating cost.

B. "other" cost.

C. manufacturing overhead.

D. depreciation expense.

E. administrative cost.


21. Which of the following costs is not a component of manufacturing overhead?

A. Indirect materials.

B. Factory utilities.

C. Factory equipment.

D. Indirect labor.

E. Property taxes on the manufacturing plant.


22. The accounting records of Westcott Company revealed the following costs:

Factory utilities $ 35,000

Wages of assembly-line personnel 170,000

Customer entertainment 45,000

Indirect materials used 19,000

Depreciation on salespersons' cars 51,000

Production equipment rental costs 110,000

Costs that would be considered in the calculation of manufacturing overhead total:

A. $164,000.

B. $215,000.

C. $385,000.

D. $430,000.



23. Which of the following statements is (are) correct?

A. Overtime premiums should be treated as a component of manufacturing overhead.

B. Overtime premiums should be treated as a component of direct labor.

C. Idle time should be treated as a component of direct labor.

D. Idle time should be accounted for as a special type of loss.

E. Both "B" and "C" are correct.

Answer: A LO: 5 Type: RC

24. Conversion costs are:

A. direct material, direct labor, and manufacturing overhead.

B. direct material and direct labor.

C. direct labor and manufacturing overhead.

D. prime costs.

E. period costs.


25. Prime costs are comprised of:

A. direct materials and manufacturing overhead.

B. direct labor and manufacturing overhead.

C. direct materials, direct labor, and manufacturing overhead.

D. direct materials and direct labor.

E. direct materials and indirect materials.


26. Which of the following statements is true?

A. Product costs affect only the balance sheet.

B. Product costs affect only the income statement.

C. Period costs affect only the balance sheet.

D. Period costs affect both the balance sheet and the income statement.

E. Product costs eventually affect both the balance sheet and the income statement.


27. In a manufacturing company, the cost of goods completed during the period would include which of the following elements?

A. Raw materials used.

B. Beginning finished goods inventory.

C. Marketing costs.

D. Depreciation of delivery trucks.

E. More than one of the above.


28. Which of the following equations is used to calculate cost of goods sold during the period?

A. Beginning finished goods + cost of goods manufactured + ending finished goods.

B. Beginning finished goods - ending finished goods.

C. Beginning finished goods + cost of goods manufactured.

D. Beginning finished goods + cost of goods manufactured - ending finished goods.

E. Beginning finished goods + ending finished goods - cost of goods manufactured.


29. Work-in-process inventory is composed of:

A. direct material and direct labor.

B. direct labor and manufacturing overhead.

C. direct material and manufacturing overhead.

D. direct material only.

E. direct material, direct labor, and manufacturing overhead.

Answer: E LO: 6 Type: RC

30. Fort Walton Industries began July with a finished-goods inventory of $48,000. The finished-goods inventory at the end of July was $41,000 and the cost of goods sold during the month was $125,000. The cost of goods manufactured during July was:

A. $77,000.

B. $84,000.

C. $118,000.

D. $132,000.



31. Kansas Plating Company reported a cost of goods manufactured of $260,000, with the firm's year-end balance sheet revealing work in process and finished goods of $35,000 and $67,000, respectively. If supplemental information disclosed raw materials used in production of $40,000, direct labor of $70,000, and manufacturing overhead of $120,000, the company's beginning work in process must have been:

A. $5,000.

B. $37,000.

C. $65,000.

D. $97,000.



32. The accounting records of Bronco Company revealed the following information:

Raw materials used $ 60,000

Direct labor 125,000

Manufacturing overhead 360,000

Work-in-process inventory, 1/1 50,000

Finished-goods inventory, 1/1 189,000

Work-in-process inventory, 12/31 76,000

Finished-goods inventory, 12/31 140,000

Bronco's cost of goods manufactured is:

A. $519,000.

B. $522,000.

C. $568,000.

D. $571,000.



33. The accounting records of Dolphin Company revealed the following information:

Total manufacturing costs $530,000

Work-in-process inventory, Jan. 1 56,000

Work-in-process inventory, Dec. 31 78,000

Finished-goods inventory, Jan. 1 146,000

Finished-goods inventory, Dec. 31 123,000

Dolphin's cost of goods sold is:

A. $508,000.

B. $529,000.

C. $531,000.

D. $553,000.



34. For the year just ended, Cole Corporation's manufacturing costs (raw materials used, direct labor, and manufacturing overhead) totaled $1,500,000. Beginning and ending work-in-process inventories were $60,000 and $90,000, respectively. Cole's balance sheet also revealed respective beginning and ending finished-goods inventories of $250,000 and $180,000. On the basis of this information, how much would the company report as cost of goods manufactured (CGM) and cost of goods sold (CGS)?

A. CGM, $1,430,000; CGS, $1,460,000.

B. CGM, $1,470,000; CGS, $1,540,000.

C. CGM, $1,530,000; CGS, $1,460,000.

D. CGM, $1,570,000; CGS, $1,540,000.

E. Some other amounts.

Answer: B LO: 6 Type: A

35. Leggio Industries reported the following data for the year just ended: sales revenue, $950,000; cost of goods sold, $420,000; cost of goods manufactured, $330,000; and selling and administrative expenses, $170,000. Leggio's gross margin would be:

A. $30,000.

B. $200,000.

C. $360,000.

D. $530,000.

E. $620,000.


36. Pumpkin Enterprises began operations on January 1, 20x1, with all of its activities conducted from a single facility. The company's accountant concluded that the year's building depreciation should be allocated as follows: selling activities, 20%; administrative activities, 35%; and manufacturing activities, 45%. If Pumpkin sold 60% of 20x1 production during that year, what percentage of the depreciation would appear (either directly or indirectly) on the 20x1 income statement?

A. 27%.

B. 45%.

C. 55%.

D. 82%.

E. 100%.


37. An employee accidentally overstated the year's advertising expense by $50,000. Which of the following correctly depicts the effect of this error?

A. Cost of goods manufactured will be overstated by $50,000.

B. Cost of goods sold will be overstated by $50,000.

C. Both cost of goods manufactured and cost of goods sold will be overstated by $50,000.

D. Cost of goods sold will be overstated by $50,000, and cost of goods manufactured will be understated by $50,000.

E. None of the above.

Answer: E LO: 6 Type: A

38. Which of the following would likely be a cost driver for the amount of direct materials used?

A. The number of units sold.

B. The number of direct labor hours worked.

C. The number of machine hours worked.

D. The number of employees working in the factory.

E. The number of units produced.


39. The choices below depict five costs of Benton Corporation and a possible driver for each cost. Which of these choices likely contains an inappropriate cost driver?

A. Gasoline consumed; number of miles driven.

B. Manufacturing overhead incurred in a heavily automated facility; direct labor hours.

C. Sales commissions; gross sales revenue.

D. Building maintenance cost; building square footage.

E. Personnel department cost; number of employees.

Answer: B LO: 7 Type: N

40. Variable costs are those costs that:

A. vary inversely with changes in activity.

B. vary directly with changes in activity.

C. remain constant as activity changes.

D. decrease on a per-unit basis as activity increases.

E. increase on a per-unit basis as activity increases.


41. As activity decreases, unit variable cost:

A. increases proportionately with activity.

B. decreases proportionately with activity.

C. remains constant.

D. increases by a fixed amount.

E. decreases by a fixed amount.


42. Which of the following is not an example of a variable cost?

A. Straight-line depreciation on a machine that has a five-year service life.

B. Wages of manufacturing workers whose pay is based on hours worked.

C. Tires used in the production of tractors.

D. Aluminum used to make patio furniture.

E. Commissions paid to sales personnel.


43. Fixed costs are those costs that:

A. vary directly with changes in activity.

B. vary inversely with changes in activity.

C. remain constant on a per-unit basis.

D. increase on a per-unit basis as activity increases.

E. remain constant as activity changes.


44. The fixed cost per unit:

A. will increase as activity increases.

B. will increase as activity decreases.

C. will decrease as activity increases.

D. will remain constant.

E. will exhibit the behavior described in choices "B" and "C."


45. Which of the following is an example of a fixed cost?

A. Paper used in the manufacture of textbooks.

B. Property taxes paid by a firm to the City of Los Angeles.

C. The wages of part-time workers who are paid $8 per hour.

D. Gasoline consumed by salespersons' cars.

E. Surgical supplies used in a hospital's operating room.


46. The variable costs per unit are $4 when a company produces 10,000 units of product. What are the variable costs per unit when 8,000 units are produced?

A. $4.00.

B. $4.50.

C. $5.00.

D. $5.50.

E. Some other amount.


47. The fixed costs per unit are $10 when a company produces 10,000 units of product. What are

the fixed costs per unit when 12,500 units are produced?

A. $4.

B. $6.

C. $8.

D. $10.



48. Total costs are $120,000 when 10,000 units are produced; of this amount, variable costs are $48,000. What are the total costs when 12,000 units are produced?

A. $57,600.

B. $72,000.

C. $120,000.

D. $129,600.

E. $144,000.


49. Baxter Company, which pays a 10% commission to its salespeople, reported sales revenues of $210,000 for the period just ended. If fixed and variable sales expenses totaled $56,000, what would these expenses total at sales of $168,000?

A. $16,800.

B. $35,000.

C. $44,800.

D. $51,800.



50. Which of the following would not be characterized as a cost object?A. An automobile manufactured by General Motors.B. The New York Fire Department.C. A Burger King restaurant located in Cleveland, Ohio.D. A Delta Airlines flight from Atlanta to Miami.E. All of the above are examples of cost objects.


51. Costs that can be easily traced to a specific department are called:

A. direct costs.

B. indirect costs.

C. product costs.

D. manufacturing costs.

E. processing costs.


52. Which of the following would not be considered a direct cost with respect to the service department of a new car dealership?

A. Wages of repair techniques.

B. Property taxes paid by the dealership.

C. Repair parts consumed.

D. Salary of the department manager.

E. Depreciation on new equipment used to analyze engine problems.


53. Indirect costs:

A. can be traced to a cost object.

B. cannot be traced to a particular cost object.

C. are not important.

D. are always variable costs.

E. may be indirect with respect to Disney World but direct with respect to one its major components, Epcot Center.

Answer: B LO: 9 Type: RC, N

54. The salary that is sacrificed by a college student who pursues a degree full time is a(n):

A. sunk cost.

B. out-of-pocket cost.

C. opportunity cost.

D. differential cost.

E. marginal cost.

Answer: C LO: 10 Type: N

55. The tuition that will be paid next semester by a college student who pursues a degree is a(n):

A. sunk cost.

B. out-of-pocket cost.

C. indirect cost.

D. average cost.

E. marginal cost.


56. Which of the following costs should be ignored when choosing among alternatives?

A. Opportunity costs.

B. Sunk costs.

C. Out-of-pocket costs.

D. Differential costs.

E. None of the above.


57. If the total cost of alternative A is $50,000 and the total cost of alternative B is $34,000, then $16,000 is termed the:

A. opportunity cost.

B. average cost.

C. sunk cost.

D. out-of-pocket cost.

E. differential cost.


Use the following to answer questions 58-59:

Wee Care is a nursery school for pre-kindergarten children. The school has determined that the following biweekly revenues and costs occur at different levels of enrollment:

Number of

Students Enrolled Total Revenue Total Costs

10 $3,000 $2,10015 4,500 2,70016 4,800 2,80020 6,000 3,20021 6,300 3,255

58. The marginal cost when the twenty-first student enrolls in the school is:

A. $55.

B. $155.

C. $300.

D. $3,045.

E. $3,255.


59. The average cost per student when 16 students enroll in the school is:

A. $100.

B. $125.

C. $175.

D. $300.

E. $400.


60. The costs that follow all have applicability for a manufacturing enterprise. Which of the choices listed correctly denotes the costs’ applicability for a service provider?

Period Cost Uncontrollable Cost Opportunity CostA. Applicable Applicable Not applicableB. Applicable Not applicable ApplicableC. Applicable Applicable ApplicableD. Not applicable Applicable ApplicableE. Not applicable Applicable Not applicable

VARIABLE COSTING THEORIES:


1. Under variable costing, only variable production costs are treated as product costs.


2. Under variable costing, variable selling and administrative costs are included in product costs.


3. Absorption costing treats all manufacturing costs as product costs.


4. In the preparation of financial statements using variable costing, fixed manufacturing overhead is treated as a period cost.


5. Absorption costing treats fixed manufacturing overhead as a period cost.


6. When the number of units in work in process and finished goods inventories increase, absorption costing net operating income will typically be greater than variable costing net operating income.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,3 Level: Easy

7. Net operating income computed using absorption costing will always be greater than net operating income computed using variable costing.

Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy

8. When reconciling variable costing and absorption costing net operating income, fixed manufacturing overhead costs released from inventory under absorption costing should be added to variable costing net operating income to arrive at the absorption costing net operating income.


9. When production exceeds sales for the period, absorption costing net operating income will exceed variable costing net operating income.


10. Under variable costing it may be possible to report a profit even if the company sells less than the break-even volume of sales.


11. Absorption costing net operating income is closer to the net cash flow of a period than is variable costing net operating income.


12. Variable costing is not permitted for income tax purposes, but it is widely accepted for external financial reports.


13. A basic concept of the contribution approach and variable costing is that fixed costs are not

important in an organization.


14. Variable costing is better suited to cost-volume-profit calculations than absorption costing.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy

15. When lean production is introduced, the difference in net operating income computed under the absorption and variable costing methods is reduced.



16. How would the following costs be classified (product or period) under variable costing at a retail clothing store?

Cost of purchasing clothing Sales commissionsA) Product ProductB) Product PeriodC) Period ProductD) Period Period


17. The principal difference between variable costing and absorption costing centers on:

A) whether variable manufacturing costs should be included as product costs.

B) whether fixed manufacturing costs should be included as product costs.

C) whether fixed manufacturing costs and fixed selling and administrative costs should be included as product costs.

D) none of these.

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

18. Which of the following costs at a manufacturing company would be treated as a product cost under the variable costing method?

A) direct material cost

B) property taxes on the factory building

C) sales manager's salary

D) all of the above


19. Assuming that direct labor is a variable cost, the primary difference between the absorption and variable costing is that:

A) variable costing treats only direct materials and direct labor as product cost while absorption costing treats direct materials, direct labor, and the variable portion of manufacturing overhead as product costs.

B) variable costing treats direct materials, direct labor, the variable portion of manufacturing overhead, and an allocated portion of fixed manufacturing overhead as product costs while absorption costing treats only direct materials, direct labor, and the variable portion of manufacturing overhead as product costs.

C) variable costing treats only direct materials, direct labor, the variable portion of manufacturing overhead, and the variable portion of selling and administrative expenses as product cost while absorption costing treats direct materials, direct labor, the variable portion of manufacturing overhead, and an allocated portion of fixed manufacturing overhead as product costs.

D) variable costing treats only direct materials, direct labor, and the variable portion of manufacturing overhead as product costs while absorption costing treats direct materials, direct labor, the variable portion of manufacturing overhead, and an allocated portion of fixed manufacturing overhead as product costs.


20. The costing method that treats all fixed costs as period costs is:

A) absorption costing.

B) job-order costing.

C) variable costing.

D) process costing.


21. In its first year of operations, Bronfren Corporation produced 800,000 sets and sold 780,000 sets of artificial tan lines. What would have happened to net operating income in this first year under the following costing methods if Bronfren had produced 20,000 fewer sets? (Assume that Bronfren has both variable and fixed production costs.)

Variable costing Absorption costing

A) Increase IncreaseB) Decrease IncreaseC) Decrease DecreaseD) No effect Decrease


22. When sales are constant, but the production level fluctuates, net operating income determined by the variable costing method will:

A) fluctuate in direct proportion to changes in production.

B) remain constant.

C) fluctuate inversely with changes in production.

D) be greater than net operating income under absorption costing.


23. Under the variable costing method, which of the following is always expensed in its entirety in the period in which it is incurred?

A) fixed manufacturing overhead cost

B) fixed selling and administrative expense

C) variable selling and administrative expense

D) all of the above

Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard

24. Which of the following will usually be found on an income statement prepared using the absorption costing method?

Contribution Margin Gross Margin

A) Yes YesB) Yes NoC) No YesD) No No


25. Net operating income under variable and absorption costing will generally:

A) always be equal.

B) never be equal.

C) be equal only when production and sales are equal.

D) be equal only when production exceeds sales.


26. When production exceeds sales, net operating income reported under variable costing generally will be:

A) greater than net operating income reported under absorption costing.

B) less than net operating income reported under absorption costing

C) equal to net operating income reported under absorption costing.

D) higher or lower because no generalization can be made.


27. Net operating income under absorption costing may differ from net operating income determined under variable costing. How is this difference calculated?

A) change in the quantity of units in inventory times the fixed manufacturing overhead rate per unit.

B) number of units produced during the period times the fixed manufacturing overhead rate per unit.

C) change in the quantity of units in inventory times the variable manufacturing cost per unit.

D) number of units produced during the period times the variable manufacturing cost per unit.

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Hard Source: CMA, adapted

28. When sales are constant, but the production level fluctuates, net operating income determined by the absorption costing method will:

A) tend to fluctuate in the same direction as fluctuations in the level of production.

B) tend to remain constant.

C) tend to fluctuate inversely with fluctuations in the level of production.

D) none of these


29. A reason why absorption costing income statements are sometimes difficult for the manager to interpret is that:

A) they omit variable expenses entirely in computing net operating income.

B) they shift portions of fixed manufacturing overhead from period to period according to changing levels of inventories.

C) they include all fixed manufacturing overhead on the income statement each year as a period cost.

D) they ignore inventory levels in computing income charges.

30. Under the theory of constraints (TOC), which of the following is treated as a period cost?

Direct labor Direct materialA) Yes YesB) Yes NoC) No YesD) No No

Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium

31. Fleet Corporation produces a single product. The company manufactured 700 units last year. The ending inventory consisted of 100 units. There was no beginning inventory. Variable manufacturing costs were $6.00 per unit and fixed manufacturing costs were $2.00 per unit. What would be the change in the dollar amount of ending inventory if variable costing was used instead of absorption costing?

A) $800 decrease

B) $200 decrease

C) $0

D) $200 increase

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Source: CMA, adapted

Solution:

Change in inventory × Fixed manufacturing costs per unit

= 100 × $2 = $200 decrease


1. Under variable costing, fixed manufacturing overhead is:

A. expensed immediately when incurred.

B. never expensed.

C. applied directly to Finished-Goods Inventory.

D. applied directly to Work-in-Process Inventory.

E. treated in the same manner as variable manufacturing overhead.


2. All of the following are inventoried under variable costing except:

A. direct materials.

B. direct labor.

C. variable manufacturing overhead.

D. fixed manufacturing overhead.

E. items "C" and "D" above.


3. All of the following are expensed under variable costing except:

A. variable manufacturing overhead.

B. fixed manufacturing overhead.

C. variable selling and administrative costs.

D. fixed selling and administrative costs.

E. items "C" and "D" above.


4. All of the following costs are inventoried under absorption costing except:

A. direct materials.

B. direct labor.

C. variable manufacturing overhead.

D. fixed manufacturing overhead.

E. fixed administrative salaries.


5. All of the following are inventoried under absorption costing except:

A. direct labor.

B. raw materials used in production.

C. utilities cost consumed in manufacturing.

D. sales commissions.

E. machine lubricant used in production.

Answer: D LO: 1 Type: N

6. The underlying difference between absorption costing and variable costing lies in the treatment of:

A. direct labor.

B. variable manufacturing overhead.

C. fixed manufacturing overhead.

D. variable selling and administrative expenses.

E. fixed selling and administrative expenses.


7. Which of the following costs would be treated differently under absorption costing and variable costing?

Direct

Labor

Variable

Manufacturing

Overhead

Fixed

Administrative

ExpensesA. Yes No Yes

B. Yes Yes Yes

C. No Yes No

D. No No Yes

E. No No No


8. Lone Star has computed the following unit costs for the year just ended:

Direct material used $12

Direct labor 18

Variable manufacturing overhead 25

Fixed manufacturing overhead 29

Variable selling and administrative cost 10

Fixed selling and administrative cost 17

Under variable costing, each unit of the company's inventory would be carried at:

A. $35.

B. $55.

C. $65.

D. $84.



9. Prescott Corporation has computed the following unit costs for the year just ended:


Direct labor 27





Under absorption costing, each unit of the company's inventory would be carried at:

A. $75.

B. $107.

C. $116.

D. $133.



10. Santa Fe Corporation has computed the following unit costs for the year just ended:


Direct labor 19





Which of the following choices correctly depicts the per-unit cost of inventory under variable costing and absorption costing?

Variable

Costing

Absorption

CostingA. $79 $119

B. $79 $151

C. $96 $119

D. $96 $151

E. Some other combination of figures not listed above.


11. Delaware has computed the following unit costs for the year just ended:

Variable manufacturing cost $85Fixed manufacturing cost 20Variable selling and administrative cost 18Fixed selling and administrative cost 11

Which of the following choices correctly depicts the per-unit cost of inventory under variable costing and absorption costing?

A. Variable, $85; absorption, $105.B. Variable, $85; absorption, $116.C. Variable, $103; absorption, $105.D. Variable, $103; absorption, $116.E. Some other combination of figures not listed above.



Indiana Company incurred the following costs during the past year when planned production and actual production each totaled 20,000 units:

Direct materials used $280,000

Direct labor 120,000

Variable manufacturing overhead 160,000

Fixed manufacturing overhead 100,000

Variable selling and administrative costs 60,000

Fixed selling and administrative costs 90,000

12. If Indiana uses variable costing, the total inventoriable costs for the year would be:

A. $400,000.

B. $460,000.

C. $560,000.

D. $620,000.

E. $660,000.


13. The per-unit inventoriable cost under absorption costing is:

A. $9.50.

B. $25.00.

C. $28.00.

D. $33.00.

E. $40.50.


14. Consider the following comments about absorption- and variable-costing income statements:

I. A variable-costing income statement discloses a firm's contribution margin.II. Cost of goods sold on an absorption-costing income statement includes fixed costs.III. The amount of variable selling and administrative cost is the same on absorption- and

variable-costing income statements.

Which of the above statements is (are) true?

A. I only.

B. II only.

C. I and II.

D. II and III.

E. I, II, and III.

Answer: E LO: 2, 3 Type: N

15. Roberts, which began business at the start of the current year, had the following data:

Planned and actual production: 40,000 units

Sales: 37,000 units at $15 per unit

Production costs:

Variable: $4 per unit

Fixed: $260,000

Selling and administrative costs:


Fixed: $32,000

The gross margin that the company would disclose on an absorption-costing income statement is:

A. $97,500.

B. $147,000.

C. $166,500.

D. $370,000.



16. McAfee, which began business at the start of the current year, had the following data:



Production costs:


Fixed: $260,000



Fixed: $32,000

The contribution margin that the company would disclose on an absorption-costing income statement is:

A. $0.

B. $147,000.

C. $166,500.

D. $370,000.



17. Chicago began business at the start of the current year. The company planned to produce 25,000 units, and actual production conformed to expectations. Sales totaled 22,000 units at $30 each. Costs incurred were:

Fixed manufacturing overhead $150,000

Fixed selling and administrative cost 100,000

Variable manufacturing cost per unit 8

Variable selling and administrative cost per unit 2

If there were no variances, the company's absorption-costing net income would be:

A. $190,000.

B. $202,000.

C. $208,000.

D. $220,000.



18. Norton, which began business at the start of the current year, had the following data:



Production costs:


Fixed: $260,000



Fixed: $32,000

The contribution margin that the company would disclose on a variable-costing income statement is:

A. $97,500.

B. $147,000.

C. $166,500.

D. $370,000.



19. Madison began business at the start of the current year. The company planned to produce 30,000 units, and actual production conformed to expectations. Sales totaled 28,000 units at $32 each. Costs incurred were:

Fixed manufacturing overhead $150,000

Fixed selling and administrative cost 90,000

Variable manufacturing cost per unit 11

Variable selling and administrative cost per unit 2

If there were no variances, the company's variable-costing net income would be:

A. $270,000.

B. $292,000.

C. $308,000.

D. $532,000.



20. The following data relate to Lobo Corporation for the year just ended:

Sales revenue $750,000Cost of goods sold:

Variable portion 370,000Fixed portion 110,000

Variable selling and administrative cost 50,000Fixed selling and administrative cost 75,000

Which of the following statements is correct?

A. Lobo’s variable-costing income statement would reveal a gross margin of $270,000.B. Lobo’s variable costing income statement would reveal a contribution margin of $330,000.C. Lobo’s absorption-costing income statement would reveal a contribution margin of

$330,000.D. Lobo’s absorption costing income statement would reveal a gross margin of $330,000.E. Lobo’s absorption-costing income statement would reveal a gross margin of $145,000.

Answer: B LO: 2, 3 Type: A


Franz began business at the start of this year and had the following costs: variable manufacturing cost per unit, $9; fixed manufacturing costs, $60,000; variable selling and administrative costs per unit, $2; and fixed selling and administrative costs, $220,000. The company sells its units for $45 each. Additional data follow.

Planned production in units 10,000

Actual production in units 10,000

Number of units sold 8,500

There were no variances.

21. The net income (loss) under absorption costing is:

A. $(7,500).

B. $9,000.

C. $15,000.

D. $18,000.



22. The net income (loss) under variable costing is:

A. $(7,500).

B. $9,000.

C. $15,000.

D. $18,000.



23. Income reported under absorption costing and variable costing is:

A. always the same.

B. typically different.

C. always higher under absorption costing.

D. always higher under variable costing.

E. always the same or higher under absorption costing.


24. Gomez's inventory increased during the year. On the basis of this information, income reported under absorption costing:

A. will be the same as that reported under variable costing.

B. will be higher than that reported under variable costing.

C. will be lower than that reported under variable costing.

D. will differ from that reported under variable costing, the direction of which cannot be determined from the information given.

E. will be less than that reported in the previous period.


25. Which of the following conditions would cause absorption-costing net income to be lower than variable-costing net income?

A. Units sold exceeded units produced.

B. Units sold equaled units produced.

C. Units sold were less than units produced.

D. Sales prices decreased.

E. Selling expenses increased.


26. Which of the following situations would cause variable-costing net income to be lower than absorption-costing net income?

A. Units sold equaled 39,000 and units produced equaled 42,000.

B. Units sold and units produced were both 42,000.

C. Units sold equaled 55,000 and units produced equaled 49,000.

D. Sales prices decreased by $7 per unit during the accounting period.

E. Selling expenses increased by 10% during the accounting period.


27. Consider the following statements about absorption- and variable-costing net income:

I. Yearly income reported under absorption costing will differ from income reported under variable costing if production and sales volumes differ.

II. Long-run, total income reported under absorption costing will often be close to that reported under variable costing.

III. Differences in income under absorption and variable costing can often be reconciled by multiplying the change in inventory (in units) by the variable manufacturing overhead cost per unit.


A. I only.

B. II only.

C. III only.

D. I and II.

E. II and III.


28. Which of the following formulas can often reconcile the difference between absorption- and variable-costing net income?

A. Change in inventory units x predetermined variable-overhead rate per unit.

B. Change in inventory units ÷ predetermined variable-overhead rate per unit.

C. Change in inventory units x predetermined fixed-overhead rate per unit.

D. Change in inventory units ÷ predetermined fixed-overhead rate per unit.

E. (Absorption-costing net income - variable-costing net income) x fixed-overhead rate per unit.


29. Monex reported $65,000 of net income for the year by using absorption costing. The company had no beginning inventory, planned and actual production of 20,000 units, and sales of 18,000 units. Standard variable manufacturing costs were $20 per unit, and total budgeted fixed

manufacturing overhead was $100,000. If there were no variances, net income under variable costing would be:

A. $15,000.

B. $55,000.

C. $65,000.

D. $75,000.

E. $115,000.


30. Canyon reported $106,000 of net income for the year by using variable costing. The company had no beginning inventory, planned and actual production of 50,000 units, and sales of 47,000 units. Standard variable manufacturing costs were $15 per unit, and total budgeted fixed manufacturing overhead was $150,000. If there were no variances, net income under absorption costing would be:

A. $52,000.

B. $97,000.

C. $106,000.

D. $115,000.

E. $160,000.


31. Consider the following statements about absorption costing and variable costing:

I. Variable costing is consistent with contribution reporting and cost-volume-profit analysis.II. Absorption costing must be used for external financial reporting. III. A number of companies use both absorption costing and variable costing.


A. I only.

B. II only.

C. III only.

D. I and II.

E. I, II, and III.

Answer: E LO: 5, 6 Type: RC

32. Consider the following statements about absorption costing and variable costing:

I. Variable costing is consistent with contribution reporting and cost-volume-profit analysis.II. Variable costing must be used for external financial reporting.

III. A number of companies use both absorption costing and variable costing.


A. I only.

B. II only.

C. III only.

D. I and II.

E. I and III.

Answer: E LO: 5, 6 Type: RC

33. For external-reporting purposes, generally accepted accounting principles require that net income be based on:

A. absorption costing.

B. variable costing.

C. direct costing.

D. semivariable costing.

E. activity-based costing.


34. Under throughput costing, the cost of a unit typically includes:

A. selling costs.

B. fixed manufacturing overhead.

C. the direct costs incurred whenever a unit is manufactured.

D. administrative costs.

E. all of the above.


35. Which of the following methods defines product cost as the unit-level cost incurred each time a unit is manufactured?

A. Throughput costing.

B. Indirect costing.

C. Process costing.

D. Absorption costing.

E. Back-flush costing.


36. Orion's management recently committed to incurring direct labor and all manufacturing overhead charges regardless of the number of units produced. Under throughput costing, the company's cost of goods sold would include charges for:

A. selling and administrative costs.

B. direct materials.

C. direct labor and manufacturing overhead.

D. direct materials, direct labor, and manufacturing overhead.

E. direct materials, direct labor, manufacturing overhead, and selling and administrative costs.


37. Highline Company reported the following costs for the year just ended:

Throughput manufacturing costs $180,000

Non-throughput manufacturing costs 600,000

Selling and administrative costs 125,000

If Highline uses throughput costing and had sales revenues for the period of $950,000, which of the following choices correctly depicts the company's cost of goods sold and net income?

Cost of

Goods Sold

Net

IncomeA. $180,000 $45,000

B. $180,000 $645,000

C. $305,000 $45,000

D. $305,000 $645,000

E. Some other combination of figures not listed above.


38. The fixed-overhead volume variance under variable costing:

A. coincides with the fixed manufacturing overhead that was applied to production.

B. is deducted on the income statement.

C. does not exist.

D. will equal the fixed-overhead budget variance.

E. must be unfavorable.


39. Which of the following differs between absorption costing and variable costing?

A. The number of units produced.

B. The fixed-overhead volume variance.

C. Sales revenues.

D. The treatment of variable manufacturing overhead.

E. Income tax rates.


COST VOLUME PROFIT ANALYSIS THEORIES:


1. One way to compute the total contribution margin is to add total fixed expenses to net operating income.


2. On a CVP graph for a profitable company, the total revenue line will be steeper than the total cost line.


3. In two companies making the same product and with the same total sales and total expenses, the contribution margin ratio will be lower in the company with a higher proportion of fixed expenses in its cost structure.


4. If the variable expense per unit increases, and all other factors remain constant, the contribution margin ratio will increase.


5. The impact on net operating income of any given dollar change in total sales can be estimated by multiplying the CM ratio by the dollar change in total sales.


6. A company with sales of $70,000 and variable expenses of $40,000 should spend $10,000 on increased advertising if the increased advertising will increase sales by $20,000.


7. The formula for the break-even point is the same as the formula to attain a given target profit for the special case where the target profit is zero.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5; 6 Level: Medium

8. An increase in total fixed expenses will not affect the break-even point so long as the contribution margin ratio remains unchanged.


9. All other things the same, a reduction in the variable expense per unit will cause the break-even point to rise.


10. The unit sales volume necessary to reach a target profit is determined by dividing the target profit by the contribution margin per unit.


11. All other things the same, the margin of safety in dollars at a given level of sales will tend to be lower for a capital-intensive company than for a labor-intensive company with high variable expenses.


12. The margin of safety in dollars equals the excess of budgeted (or actual) sales over the break-even volume of sales.


13. A company with high operating leverage will experience a lower reduction in net operating income in a period of declining sales than will a company with low operating leverage.


14. If Q is the quantity of a product sold, P is the price per unit, V is the variable expense per unit, and F is the total fixed expense, then the degree of operating leverage is equal to: [Q(P-V)] ÷ [Q(P-V)-F]

Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Hard

15. A shift in the sales mix from products with high contribution margin ratios toward products with low contribution margin ratios will raise the break-even point.



16. Contribution margin can be defined as:

A) the amount of sales revenue necessary to cover variable expenses.

B) sales revenue minus fixed expenses.

C) the amount of sales revenue necessary to cover fixed and variable expenses.

D) sales revenue minus variable expenses.

Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

17. Which of the following statements is correct with regard to a CVP graph?

A) A CVP graph shows the maximum possible profit.

B) A CVP graph shows the break-even point as the intersection of the total sales revenue line and the total expense line.

C) A CVP graph assumes that total expense varies in direct proportion to unit sales.

D) A CVP graph shows the operating leverage as the gap between total sales revenue and total expense at the actual level of sales.

18. If both the fixed and variable expenses associated with a product decrease, what will be the effect on the contribution margin ratio and the break-even point, respectively?

Contribution margin ratio Break-even pointA) Decrease IncreaseB) Increase DecreaseC) Decrease DecreaseD) Increase Increase

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3; 5 Level: Medium Source: CMA; adapted

19. Which of the following is true regarding the contribution margin ratio of a single product company?

A) As fixed expenses decrease, the contribution margin ratio increases.

B) The contribution margin ratio multiplied by the selling price per unit equals the contribution margin per unit.

C) The contribution margin ratio will decline as unit sales decline.

D) The contribution margin ratio equals the selling price per unit less the variable expense ratio.


20. If a company is operating at the break-even point:

A) its contribution margin will be equal to its variable expenses.

B) its margin of safety will be equal to zero.

C) its fixed expenses will be equal to its variable expenses.

D) its selling price will be equal to its variable expense per unit.

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5; 7 Level: Medium

21. At the break-even point:

A) sales would be equal to contribution margin.

B) contribution margin would be equal to fixed expenses.

C) contribution margin would be equal to net operating income.

D) sales would be equal to fixed expenses.


22. The break-even point would be increased by:

A) a decrease in total fixed expenses.

B) a decrease in the ratio of variable expenses to sales.

C) an increase in the contribution margin ratio.

D) none of these.


23. Which of the following strategies could be used to reduce the break-even point?

Fixed expenses Contribution marginA) Increase IncreaseB) Decrease DecreaseC) Decrease IncreaseD) Increase Decrease

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy

24. Break-even analysis assumes that:

A) Total revenue is constant.

B) Unit variable expense is constant.

C) Unit fixed expense is constant.

D) Selling prices must fall in order to generate more revenue.


25. Target profit analysis is used to answer which of the following questions?

A) What sales volume is needed to cover all expenses?

B) What sales volume is needed to cover fixed expenses?

C) What sales volume is needed to earn a specific amount of net operating income?

D) What sales volume is needed to avoid a loss?


26. The margin of safety can be calculated by:

A) Sales − (Fixed expenses/Contribution margin ratio).

B) Sales − (Fixed expenses/Variable expense per unit).

C) Sales − (Fixed expenses + Variable expenses).

D) Sales − Net operating income.


27. If the degree of operating leverage is 4, then a one percent change in quantity sold should result in a four percent change in:

A) unit contribution margin.

B) revenue.

C) variable expense.

D) net operating income.

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Easy Source: CMA; adapted

28. Which of the following is the correct calculation for the degree of operating leverage?

A) net operating income divided by total expenses.

B) net operating income divided by total contribution margin.

C) total contribution margin divided by net operating income.

D) variable expense divided by total contribution margin.


29. Which of the following is an assumption underlying standard CVP analysis?

A) In multiproduct companies, the sales mix is constant.

B) In manufacturing companies, inventories always change.

C) The price of a product or service is expected to change as volume changes.

D) Fixed expenses will change as volume increases.

Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 9 Level: Easy


1. CVP analysis can be used to study the effect of:

A. changes in selling prices on a company's profitability.

B. changes in variable costs on a company's profitability.

C. changes in fixed costs on a company's profitability.

D. changes in product sales mix on a company's profitability.

E. all of the above.


2. The break-even point is that level of activity where:

A. total revenue equals total cost.

B. variable cost equals fixed cost.

C. total contribution margin equals the sum of variable cost plus fixed cost.

D. sales revenue equals total variable cost.

E. profit is greater than zero.


3. The unit contribution margin is calculated as the difference between:

A. selling price and fixed cost per unit.

B. selling price and variable cost per unit.

C. selling price and product cost per unit.

D. fixed cost per unit and variable cost per unit.

E. fixed cost per unit and product cost per unit.


4. Which of the following would produce the largest increase in the contribution margin per unit?

A. A 7% increase in selling price.

B. A 15% decrease in selling price.

C. A 14% increase in variable cost.

D. A 17% decrease in fixed cost.

E. A 23% increase in the number of units sold.


5. Which of the following would take place if a company were able to reduce its variable cost per unit?

ContributionMargin

Break-evenPoint

A. Increase Increase B. Increase Decrease C. Decrease Increase D. Decrease Decrease E. Increase No effect


6. Which of the following would take place if a company experienced an increase in fixed costs?

A. Net income would increase.

B. The break-even point would increase.

C. The contribution margin would increase.

D. The contribution margin would decrease.

E. More than one of the above events would occur.


7. Assuming no change in sales volume, an increase in a firm's per-unit contribution margin would:

A. increase net income.

B. decrease net income.

C. have no effect on net income.

D. increase fixed costs.

E. decrease fixed costs.


8. A company that desires to lower its break-even point should strive to:

A. decrease selling prices.

B. reduce variable costs.

C. increase fixed costs.

D. sell more units.

E. pursue more than one of the above actions.


9. A company has fixed costs of $900 and a per-unit contribution margin of $3. Which of the following statements is (are) true?

A. Each unit "contributes" $3 toward covering the fixed costs of $900.

B. The situation described is not possible and there must be an error.

C. Once the break-even point is reached, the company will make money at the rate of $3 per unit.

D. The firm will definitely lose money in this situation.

E. Statements "A" and "C" are true.


10. Sanderson sells a single product for $50 that has a variable cost of $30. Fixed costs amount to $5 per unit when anticipated sales targets are met. If the company sells one unit in excess of its break-even volume, the bottom-line profit will be:

A. $15.

B. $20.

C. $50.

D. an amount that cannot be derived based on the information presented.

E. an amount other than those in choices "A," "B," and "C" but one that can be derived based on the information presented.


11. At a volume of 15,000 units, Boston reported sales revenues of $600,000, variable costs of $225,000, and fixed costs of $120,000. The company's contribution margin per unit is:

A. $17.

B. $25.

C. $47.

D. $55.

E. an amount other than those above.


12. A recent income statement of Banks Corporation reported the following data:

Sales revenue $8,000,000Variable costs 5,000,000Fixed costs 2,200,000

If these data are based on the sale of 20,000 units, the contribution margin per unit would be:

A. $40.

B. $150.

C. $290.

D. $360.



13. A recent income statement of Fox Corporation reported the following data:

Sales revenue $3,600,000Variable costs 1,600,000Fixed costs 1,000,000

If these data are based on the sale of 10,000 units, the break-even point would be:

A. 2,000 units.

B. 2,778 units.

C. 3,600 units.

D. 5,000 units.



14. A recent income statement of Yale Corporation reported the following data:

Sales revenue $2,500,000Variable costs 1,500,000Fixed costs 800,000

If these data are based on the sale of 5,000 units, the break-even sales would be:

A. $2,000,000.

B. $2,206,000.

C. $2,500,000.

D. $10,000,000.



15. Lawton, Inc., sells a single product for $12. Variable costs are $8 per unit and fixed costs total $360,000 at a volume level of 60,000 units. Assuming that fixed costs do not change, Lawton's

break-even point would be:

A. 30,000 units.

B. 45,000 units.

C. 90,000 units.

D. negative because the company loses $2 on every unit sold.

E. a positive amount other than those given above.


16. Green, Inc., sells a single product for $20. Variable costs are $8 per unit and fixed costs total $120,000 at a volume level of 5,000 units. Assuming that fixed costs do not change, Green's break-even sales would be:

A. $160,000.

B. $200,000.

C. $300,000.

D. $480,000.



17. Orion recently reported sales revenues of $800,000, a total contribution margin of $300,000, and fixed costs of $180,000. If sales volume amounted to 10,000 units, the company's variable cost per unit must have been:

A. $12.

B. $32.

C. $50.

D. $92.



18. Strand has a break-even point of 120,000 units. If the firm's sole product sells for $40 and fixed costs total $480,000, the variable cost per unit must be:

A. $4.

B. $36.

C. $44.

D. an amount that cannot be derived based on the information presented.

E. an amount other than those in choices "A," "B," and "C" but one that can be derived based on the information presented.


19. Ribco Co., makes and sells only one product. The unit contribution margin is $6 and the break-even point in unit sales is 24,000. The company's fixed costs are:

A. $4,000.

B. $14,400.

C. $40,000.

D. $144,000.



20. The contribution-margin ratio is:

A. the difference between the selling price and the variable cost per unit.

B. fixed cost per unit divided by variable cost per unit.

C. variable cost per unit divided by the selling price.

D. unit contribution margin divided by the selling price.

E. unit contribution margin divided by fixed cost per unit.


21. At a volume level of 500,000 units, Sullivan reported the following information:

Sales price $60Variable cost per unit 20Fixed cost per unit 4

The company's contribution-margin ratio is:

A. 0.33.

B. 0.40.

C. 0.60.

D. 0.67.



22. Which of the following expressions can be used to calculate the break-even point with the contribution-margin ratio (CMR)?

A. CMR ÷ fixed costs.

B. CMR x fixed costs.

C. Fixed costs ÷ CMR.

D. (Fixed costs + variable costs) x CMR.

E. (Sales revenue - variable costs) ÷ CMR.



C o st-Vo lum e -Pro fit G ra p h$100,000

80,000

60,000

40,000

20,000

0 1 ,000 2 ,000 3 ,000 4,000 5,000 Units

F

H

C

G

A

B

E

D

23. Line A is the:

A. total revenue line.

B. fixed cost line.

C. variable cost line.

D. total cost line.

E. profit line.


24. Line C represents the level of:

A. fixed cost.

B. variable cost.

C. semivariable cost.

D. total cost.

E. mixed cost.


25. The slope of line A is equal to the:

A. fixed cost per unit.

B. selling price per unit.

C. profit per unit.

D. semivariable cost per unit.

E. unit contribution margin.


26. The slope of line B is equal to the:

A. fixed cost per unit.

B. selling price per unit.

C. variable cost per unit.

D. profit per unit.

E. unit contribution margin.


27. The vertical distance between the total cost line and the total revenue line represents:

A. fixed cost.

B. variable cost.

C. profit or loss at that volume.

D. semivariable cost.

E. the safety margin.


28. Assume that the firm whose cost structure is depicted in the figure expects to produce a loss for the upcoming period. The loss would be shown on the graph:

A. by the area immediately above the break-even point.

B. by the area immediately below the total cost line.

C. by the area diagonally to the right of the break-even point.

D. by the area diagonally to the left of the break-even point.

E. in some other area not mentioned above.


29. At a given sales volume, the vertical distance between the fixed cost line and the total cost line

represents:

A. fixed cost.

B. variable cost.

C. profit or loss at that volume.

D. semivariable cost.

E. the safety margin.


30. Assume that the firm whose cost structure is depicted in the figure expects to produce a profit for the upcoming accounting period. The profit would be shown on the graph by the letter:

A. D.

B. E.

C. F.

D. G.

E. H.



2,000 4 ,000 6,000 Units

A$40,000

20,000

0

20,000

40,000

60,000

Pro fit-Vo lum e G ra p h

31. Line A is the:

A. fixed cost line.

B. variable cost line.

C. total cost line.

D. total revenue line.

E. profit line.


32. The triangular area between the horizontal axis and Line A, to the right of 4,000, represents:

A. fixed cost.

B. variable cost.

C. profit.

D. loss.

E. sales revenue.


33. A recent income statement of Oslo Corporation reported the following data:

Units sold 8,000Sales revenue $7,200,000Variable costs 4,000,000Fixed costs 1,600,000

If the company desired to earn a target net profit of $480,000, it would have to sell:

A. 1,200 units.

B. 2,800 units.

C. 4,000 units.

D. 5,200 units.



34. Yellow, Inc., sells a single product for $10. Variable costs are $4 per unit and fixed costs total $120,000 at a volume level of 10,000 units. What dollar sales level would Yellow have to achieve to earn a target net profit of $240,000?

A. $400,000.

B. $500,000.

C. $600,000.

D. $750,000.

E. $900,000.



Archie sells a single product for $50. Variable costs are 60% of the selling price, and the company has fixed costs that amount to $400,000. Current sales total 16,000 units.

35. Archie:

A. will break-even by selling 8,000 units.

B. will break-even by selling 13,333 units.

C. will break-even by selling 20,000 units.

D. will break-even by selling 1,000,000 units.

E. cannot break-even because it loses money on every unit sold.


36. Each unit that the company sells will:

A. increase overall profitability by $20.

B. increase overall profitability by $30.

C. increase overall profitability by $50.

D. increase overall profitability by some other amount.

E. decrease overall profitability by $5.


37. In order to produce a target profit of $22,000, Archie's dollar sales must total:

A. $8,440.

B. $21,100.

C. $1,000,000.

D. $1,055,000.



38. The difference between budgeted sales revenue and break-even sales revenue is the:

A. contribution margin.

B. contribution-margin ratio.

C. safety margin.

D. target net profit.

E. operating leverage.


39. Maxie's budget for the upcoming year revealed the following figures:

Sales revenue $840,000Contribution margin 504,000Net income 54,000

If the company's break-even sales total $750,000, Maxie's safety margin would be:

A. $(90,000).

B. $90,000.

C. $246,000.

D. $336,000.

E. $696,000.


40. If a company desires to increase its safety margin, it should:

A. increase fixed costs.

B. decrease the contribution margin.

C. decrease selling prices, assuming the price change will have no effect on demand.

D. stimulate sales volume.

E. attempt to raise the break-even point.

Answer: D LO: 4 Type: N

41. Dana sells a single product at $20 per unit. The firm's most recent income statement revealed unit sales of 100,000, variable costs of $800,000, and fixed costs of $400,000. If a $4 drop in selling price will boost unit sales volume by 20%, the company will experience:

A. no change in profit because a 20% drop in sales price is balanced by a 20% increase in volume.

B. an $80,000 drop in profitability.

C. a $240,000 drop in profitability.

D. a $400,000 drop in profitability.

E. a change in profitability other than those above.


42. Grimes is studying the profitability of a change in operation and has gathered the following information:

CurrentOperation

AnticipatedOperation

Fixed costs $38,000 $48,000Selling price $16 $22Variable cost $10 $12Sales (units) 9,000 6,000

Should Grimes make the change?

A. Yes, the company will be better off by $6,000.

B. No, because sales will drop by 3,000 units.

C. No, because the company will be worse off by $4,000.

D. No, because the company will be worse off by $22,000.

E. It is impossible to judge because additional information is needed.


43. Gleason sells a single product at $14 per unit. The firm's most recent income statement revealed unit sales of 80,000, variable costs of $800,000, and fixed costs of $560,000.

Management believes that a $3 drop in selling price will boost unit sales volume by 20%. Which of the following correctly depicts how these two changes will affect the company's break-even point?

Drop inSales Price

Increase inSales Volume

A. Increase IncreaseB. Increase DecreaseC. Increase No effectD. Decrease IncreaseE. Decrease Decrease


44. All other things being equal, a company that sells multiple products should attempt to structure its sales mix so the greatest portion of the mix is composed of those products with the highest:

A. selling price.

B. variable cost.

C. contribution margin.

D. fixed cost.

E. gross margin.

Answer: C LO: 5 Type: N

45. O'Dell sells three products: R, S, and T. Budgeted information for the upcoming accounting period follows.

Product Sales Volume (Units) Selling Price Variable CostR 16,000 $14 $9S 12,000 10 6T 52,000 11 8

The company's weighted-average unit contribution margin is:

A. $3.00.

B. $3.55.

C. $4.00.

D. $19.35.



46. Wells Corporation has the following sales mix for its three products: A, 20%; B, 35%; and C, 45%. Fixed costs total $400,000 and the weighted-average contribution margin is $100. How many units of product A must be sold to break-even?

A. 800.

B. 4,000.

C. 20,000.

D. An amount other than those above.

E. Cannot be determined based on the information presented.



Lamar & Co., makes and sells two types of shoes, Plain and Fancy. Data concerning these products are as follows:

Plain Fancy

Unit selling price $20.00 $35.00

Variable cost per unit 12.00 24.50

Sixty percent of the unit sales are Plain, and annual fixed expenses are $45,000.

47. The weighted-average unit contribution margin is:

A. $4.80.

B. $9.00.

C. $9.25.

D. $17.00.



48. Assuming that the sales mix remains constant, the total number of units that the company must sell to break even is:

A. 2,432.

B. 2,647.

C. 4,737.

D. 5,000.



49. Assuming that the sales mix remains constant, the number of units of Plain that the company must sell to break even is:

A. 2,000.

B. 3,000.

C. 3,375.

D. 5,000.

E. 5,625.


50. Assuming that the sales mix remains constant, the number of units of Fancy that the company must sell to break even is:

A. 2,000.

B. 3,000.

C. 3,375.

D. 5,000.

E. 5,625.


51. Which of the following underlying assumptions form(s) the basis for cost-volume-profit analysis?

A. Revenues and costs behave in a linear manner.

B. Costs can be categorized as variable, fixed, or semivariable.

C. Worker efficiency and productivity remain constant.

D. In multiproduct organizations, the sales mix remains constant.

E. All of the above are assumptions that underlie cost-volume-profit analysis.


52. Cost-volume-profit analysis is based on certain general assumptions. Which of the following is not one of these assumptions?

A. Product prices will remain constant as volume varies within the relevant range.

B. Costs can be categorized as fixed, variable, or semivariable.

C. The efficiency and productivity of the production process and workers will change to reflect manufacturing advances.

D. Total fixed costs remain constant as activity changes.

E. Unit variable cost remains constant as activity changes.


53. The assumptions on which cost-volume-profit analysis is based appear to be most valid for businesses:

A. over the short run.

B. over the long run.

C. over both the short run and the long run.

D. in periods of sustained profits.

E. in periods of increasing sales.


54. The contribution income statement differs from the traditional income statement in which of the following ways?

A. The traditional income statement separates costs into fixed and variable components.

B. The traditional income statement subtracts all variable costs from sales to obtain the contribution margin.

C. Cost-volume-profit relationships can be analyzed more easily from the contribution income statement.

D. The effect of sales volume changes on profit is readily apparent on the traditional income statement.

E. The contribution income statement separates costs into product and period categories.


55. Which of the following does not typically appear on a contribution income statement?

A. Net income.

B. Gross margin.

C. Contribution margin.

D. Total variable costs.

E. Total fixed costs.


56. Which of the following does not typically appear on an income statement prepared by using a traditional format?

A. Cost of goods sold.B. Contribution margin.C. Gross margin.D. Selling expenses.E. Administrative expenses.


57. The extent to which an organization uses fixed costs in its cost structure is measured by:

A. financial leverage.

B. operating leverage.

C. fixed cost leverage.

D. contribution leverage.

E. efficiency leverage.


58. A manager who wants to determine the percentage impact on net income of a given percentage change in sales would multiply the percentage increase/decrease in sales revenue by the:

A. contribution margin.

B. gross margin.

C. operating leverage factor.

D. safety margin.

E. contribution-margin ratio.


59. Which of the following calculations can be used to measure a company's degree of operating leverage?

A. Contribution margin ÷ sales.

B. Contribution margin ÷ net income.

C. Sales ÷ contribution margin.

D. Sales ÷ net income.

E. Sales ÷ fixed costs.


60. You are analyzing Becker Corporation and Newton Corporation and have concluded that Becker has a higher operating leverage factor than Newton. Which one of the following choices correctly depicts (1) the relative use of fixed costs (as opposed to variable costs) for the two companies and (2) the percentage change in income caused by a change in sales?

Relative Use of FixedCosts as Opposed to

Variable Costs

Percentage Change inIncome Caused bya Change in Sales

A. Greater for Becker Greater for Becker B. Greater for Becker Lower for Becker C. Greater for Becker Equal for both D. Lower for Becker Greater for Becker E. Lower for Becker Lower for Becker


61. The following information relates to Day Company:

Sales revenue $12,000,000Contribution margin 4,800,000Net income 800,000

Day's operating leverage factor is:

A. 0.067.

B. 0.167.

C. 0.400.

D. 2.500.

E. 6.000.

Answer: E LO: 8 Type: A

62. The following information relates to Paterno Company:

Sales revenue $10,000,000Contribution margin 4,000,000Net income 1,000,000

If a manager at Paterno desired to determine the percentage impact on net income of a given percentage change in sales, the manager would multiply the percentage increase/decrease in sales revenue by:

A. 0.25.

B. 0.40.

C. 2.50.

D. 4.00.

E. 10.00.

Answer: D LO: 8 Type: A, N


Edco Company produced and sold 45,000 units of a single product last year, with the following results:

Sales revenue $1,350,000

Manufacturing costs:

Variable 585,000

Fixed 270,000

Selling costs:

Variable 40,500

Fixed 54,000

Administrative costs:

Variable 184,500

Fixed 108,000

63. Edco's operating leverage factor was:

A. 4.

B. 5.

C. 6.

D. 7.

E. 8.


64. If Edco's sales revenues increase 15%, what will be the percentage increase in income before income taxes?

A. 15%.

B. 45%.

C. 60%.

D. 75%.

E. An amount other than those above.


65. When advanced manufacturing systems are installed, what effect does such installation usually have on fixed costs and the break-even point?

Fixed Costs Break-even PointA. Increase IncreaseB. Increase DecreaseC. Decrease IncreaseD. Decrease DecreaseE. Do not change Does not change


66. Which of the following statements is (are) true regarding a company that has implemented flexible manufacturing systems and activity-based costing?

I. The company has erred, as these two practices used in conjunction with one another will severely limit the firm's ability to analyze costs over the relevant range.

II. Costs formerly viewed as fixed under traditional-costing systems may now be considered variable with respect to changes in cost drivers such as number of setups, number of material moves, and so forth.

III. As compared with the results obtained under a traditional-costing system, the concept of break-even analysis loses meaning.

A. I only.

B. II only.

C. III only.

D. I and II.

E. II and III.


67. A company, subject to a 40% tax rate, desires to earn $500,000 of after-tax income. How much should the firm add to fixed costs when figuring the sales revenues necessary to produce this income level?

A. $200,000.

B. $300,000.

C. $500,000.

D. $833,333.

E. $1,250,000.


68. Barney, Inc., is subject to a 40% income tax rate. The following data pertain to the period just ended when the company produced and sold 45,000 units:

Sales revenue $1,350,000Variable costs 810,000Fixed costs 432,000

How many units must Barney sell to earn an after-tax profit of $180,000?

A. 42,000.

B. 45,000.

C. 51,000.

D. 61,000.

E. An amount other than those above.

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