Chapter 1

1. Management accounting ________.

A) focuses on estimating future revenues, costs, and other measures to forecast activities and their
results
B) provides information about the company as a whole
C) reports information that has occurred in the past that is verifiable and reliable
D) provides information that is generally available only on a quarterly or annual basis
Answer: A

2. Managers use management accounting information to ________.

A) help external users such as investors, banks, regulators, and suppliers
B) communicate, develop, and implement strategies
C) communicate a firm's financial position to investors, banks, regulators, and other outside parties
D) ensure that financial statements are consistent with the SEC rules
Answer: B

3. Financial accounting ________.

A) focuses on the future and includes activities such as preparing next year's operating budget
B) must comply with GAAP (generally accepted accounting principles)
C) is the process of measuring, analyzing, and reporting financial and nonfinancial information
related to the costs of acquiring or using resources in an organization
D) is prepared for the use of department heads and other employees
Answer: B

4. The primary user of financial accounting information is a ________.

A) factory shift supervisor
B) distribution manager
C) current shareholder
D) department manager
Answer: C

5. The primary user of management accounting information is a(n) ________.

A) the controller
B) a shareholder evaluating a stock investment
C) bondholder
D) external regulator
Answer: A

6. Financial accounting provides the primary source of information for ________.

A) decision making in the finishing department
B) improving customer service
C) preparing the income statement for shareholders
D) planning next year's operating budget
Answer: C

7. Which of the following is true of management accounting information?

A) It focuses on documenting past business actions of a firm.
B) It is prepared based on SEC rules and FASB accounting principles.
C) It is prepared for shareholders.
D) It co-ordinates product design, production, and marketing decisions.
Answer: D
8. Which of the following statements refers to management accounting information?
A) There are no regulations governing the reports.
B) The reports are generally delayed and historical.
C) The audience tends to be stockholders, creditors, and tax authorities.
D) It primarily measures manager's compensation on reported financial results.
Answer: A

9. Which of the following groups would be least likely to receive detailed management accounting reports?
A) stockholders
B) sales managers
C) production supervisors
D) distribution managers
Answer: A

10. Management accounting information typically includes ________.

A) tabulated results of customer satisfaction surveys
B) the cost of producing a product
C) the percentage of units produced that are defective
D) All of these answers are correct.
Answer: D

11. Cost accounting ________.

A) measures the costs of acquiring or using resources in an organization
B) measures the financial and nonfinancial information that helps managers make decisions to fulfill
the goals of an organization
C) coordinates product design, production, and marketing decisions and evaluate a company's
performance
D) communicates information to investors, banks, regulators, and other outside parties
Answer: A

12. Which of the following differentiates cost accounting and financial accounting?
A) The primary users of cost accounting are the investors, whereas the primary users of financial
accounting are the managers.
B) Cost accounting deals with product design, production, and marketing strategies, whereas
financial accounting deals mainly with pricing of the products.
C) Cost accounting measures only the financial information related to the costs of acquiring fixed
assets in an organization, whereas financial accounting measures financial and nonfinancial
information of a company's business transactions.
D) Cost accounting measures information related to the costs of acquiring or using resources in an
organization, whereas financial accounting measures a financial position of a company to
investors, banks, and external parties.
Answer: D

13. Which of the following is true of financial accounting information?

A) It is prepared based on cost-benefit analysis.
B) It is primarily used by managers to make internal business decisions.
C) It focuses on the past-oriented financial performance of a company.
D) It only measures the cash transactions of a company.
Answer: C
14. Which of the following is true of cost accounting?
A) It provides financial information about cash-based transactions only.
B) It accounts only the financial information of business transactions, not the nonfinancial

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 information.
C) It provides financial information regarding the cost of acquiring resources.
D) It must be prepared in accordance with GAAP.
Answer: C

15. Which of the following deals with management accounting?

A) identifying the costs of acquiring the resources of the company
B) developing budgets
C) preparing the income statement
D) preparing the statement of cash flows
Answer: B

16. Financial accounting is concerned primarily with ________.

A) external reporting to investors, creditors, and government authorities
B) cost planning and cost controls
C) product design and marketing strategies
D) providing information for strategic and tactical decisions
Answer: A

17. Financial accounting provides a historical perspective, whereas management accounting emphasizes
________.
A) the future
B) past transactions
C) a current perspective
D) reports to shareholders
Answer: A

18. The approaches and activities of managers in short-run and long-run planning and control decisions that
increase value for customers and lower costs of products and services are known as ________.
A) value chain management
B) enterprise resource planning
C) cost management
D) customer value management
Answer: C

19. Financial accounting information focuses on internal reporting.

Answer: FALSE
Explanation: Management accounting information focuses on internal reporting and financial accounting
focuses on

20. Cost accounting provides information for both management accounting and financial accounting
professionals.
Answer: TRUE

21. Management accounting information and reports do not have to follow set principles or rules such as
GAAP.
Answer: TRUE

22. Management accounting ensures communication of an organization's financial position to investors,

banks, and regulators.
Answer: FALSE
Explanation: Financial accounting, not management accounting, ensures communication of an

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 organization's financial position to investors, banks, and regulators.

23. The balance sheet, income statement, and statement of cash flows are used for financial accounting, and
also for management accounting.
Answer: TRUE

24. Financial accounting is broader in scope than management accounting.

Answer: FALSE
Explanation: Management accounting is broader in scope than financial accounting.

25. Cost accounting measures and reports short-term, long-term, financial, and non financial information.
Answer: TRUE

26. Cost accounting is the process of measuring, analyzing, and reporting financial and nonfinancial
information related to the costs of acquiring or using resources in an organization.
Answer: TRUE

27. Management accounting has to strictly follow the rules of generally accepted accounting principles for
the purposes of measurement and reporting.
Answer: FALSE
Explanation: Internal measures and reports do not have to follow GAAP.

28. For management accounting, internal measurement and reporting are based on cost-benefit analysis.
Answer: TRUE

29. Financial accounting provides an organization's past-oriented information such as the previous years'
financial statements.
Answer: TRUE

30. Which of the following statements concerning an organization's strategy is true?

A) Strategy specifies how an organization matches its own capabilities with the opportunities in the
marketplace to accomplish its objectives.
B) Cost accountants formulate strategy in an organization since they have more inputs about costs.
C) A good strategy will always overcome poor implementation.
D) Businesses usually follow one of two broad strategies: offering a quality product at a high price,
or offering a unique product or service priced lower than the competition.
Answer: A

31. The two broad strategies that companies follow are cost leadership strategy and product differentiation
strategy.
Answer: TRUE

32. The best-designed strategies are valuable whether or not they are effectively implemented.
Answer: FALSE

33. The key to a company's success is creating value for customers while differentiating itself from its
competitors.
Answer: TRUE

34. Companies can decide on an appropriate strategy based strictly on internally available information.
Answer: FALSE
Explanation: Companies must obtain external information as well as internal information to decide on an

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 appropriate strategy.

35. Place the four business functions in the order they appear along the value chain:

Customer service
Design
Marketing
Production
A) Customer Service, Design, Production, Marketing
B) Customer Service, Marketing, Production, Design
C) Design, Production, Marketing, Customer Service
D) Design, Customer Service, Production, Marketing
Answer: C

36. R&D, production, and customer service are business functions that are all included as part of ________.
A) the value chain
B) benchmarking
C) customer relationship management
D) the supply chain
Answer: A

37. The value chain is the sequence of business functions in which ________.
A) value is deducted from the products or services of an organization
B) producing and delivering the product or service is of prime importance
C) products and services are evaluated with respect to their value to the supply chain
D) usefulness is added to the products or services of an organization
Answer: D

38. ________ is the generation of, and experimentation with, ideas related to new products, services, or
processes.
A) Research and development
B) Design of products, services, or processes
C) Production
D) Marketing
Answer: A

39. ________ is the detailed planning and engineering and testing of products, services, or processes.
A) Plan of implementation
B) Design
C) Production
D) Research and development
Answer: B

40. Production is the ________.

A) generation of, and experimentation with, ideas related to new products, services, or processes
B) processing orders and shipping products or services to customers
C) acquisition, coordination, and assembly of resources to produce a product or deliver a service
D) detailed planning and engineering of products, services, or processes
Answer: C
41. Marketing is the ________.
A) generation of, and experimentation with, ideas related to new products, services, or processes
B) detailed planning and engineering of products, services, or processes
C) acquisition, coordination, and assembly of resources to produce a product or deliver a service

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 D) the manner by which companies promote and sell their products or services to customers or
perspective customers
Answer: D

42. Which of the following differentiates marketing from customer service?

A) Marketing is the process of promoting and selling products or services to customers or prospective
customers, whereas customer service is the process of providing after-sales service to customers.
B) Marketing is the process of processing orders and shipping products or services to customers,
whereas customer service is the process of providing additional information to customers about
the product.
C) Marketing is the process of detailed planning, engineering, and testing of products and processes,
whereas customer service concentrates on existing customers.
D) Marketing is the process of processing orders and shipping products or services to customers,
whereas customer service is concerned with choosing the right customer for the product.
Answer: A

43. ________ is an after-sale support provided to customers.

A) Distribution
B) Customer service
C) Production
D) Marketing
Answer: B

44. Customer relationship management initiatives use technology to coordinate all ________.
A) advertising and marketing techniques to attract customers
B) research activities
C) customer-facing activities
D) quality control management activities
Answer: C

45. ________ describes the flow of goods, services, and information from the purchase of materials to the
delivery of products to consumers, regardless of whether those activities occur in the same organization
or with other organizations.
A) Supply chain
B) Production process
C) Quality control
D) Customer relationship management
Answer: A

46. Processing orders and shipping products or providing services to customers is known as ________.
A) after-sales services
B) distribution
C) marketing
D) supply chain
Answer: B

47. Which of the following is an area that customers want to see improved levels of performance?
A) higher sales margin
B) quality of the product
C) lower marginal costs
D) profit margins
Answer: B
48. Which of the following statements about a company's supply chain is true?

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 A) A company's supply chain is always internal to a firm.
B) A company's supply chain is always external to a firm.
C) A company's supply chain is the same thing as a company's value chain.
D) Management accountants provide information to enhance a company's supply chain.
Answer: D

49. The ________ function supports the six functions of value-chain analysis.
A) administration
B) controlling
C) planning
D) direction
Answer: B

50. New-product development time is the time taken by companies to ________.

A) test the prototype and start the large scale production of a product
B) design and develop the prototype product
C) create new products and bring them to market
D) improvise existing products and re-launch them to market
Answer: C

51. The supply chain refers to the sequence of business functions in which customer usefulness is added to
products or services.
Answer: FALSE

52. For best results, cost management emphasizes independently coordinating supply chain activities within
your company and with other companies that act as suppliers and customers.
Answer: TRUE

53. The supply chain describes the flow of goods, services, and information from the initial sources of
materials and services to the delivery of products to consumers.
Answer: TRUE

54. The supply chain always occurs within a single organization.

Answer: FALSE

55. Distribution refers to promoting and selling products or services to customers or prospective customers.
Answer: FALSE

56. The design of products, services, and processes component of the supply chain refers to the detailed
planning, engineering, and testing of products and processes.
Answer: TRUE

57. Management accountants might provide information on decisions on whether to buy a product from
outside or manufacture it in-house.
Answer: TRUE

58. The parts of the value chain associated with producing and delivering a product or service–production
and distribution–are referred to as the supply chain.
Answer: TRUE

59. Value chain refers to its value to the employee.

Answer: FALSE
Explanation: Value chain refers to its value to the customer.

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60. Managers track the costs incurred in each value-chain category is to reduce costs and to improve
efficiency.
Answer: TRUE

61. Managers rely on management accounting information to evaluate alternative investment and R&D
decisions.
Answer: TRUE

62. Classify each cost item into one of the business functions of the value chain, either (1) R&D, (2) design,
(3) production, (4) marketing, (5) distribution, or (6) customer service.

Item:
a. cost of samples mailed to promote sales of a new product
b. labor cost of workers in the manufacturing plant
c. bonus paid to a person with a 90% satisfaction rating in handling customers with
complaints
d. transportation costs for shipping products to retail outlets
Answer:
a. (4) marketing
b. (3) production
c. (6) customer service
d. (5) distribution

63. Classify each cost item of Ripon Printers given below into one of the business functions of the value
chain, either (1) R&D, (2) design of products and processes, (3) production, (4) marketing (including
sales), (5) distribution, or (6) customer service.

Item:
a. cost of customer order forms
b. cost of paper used in manufacture of books
c. cost of paper used in packing cartons to ship books
d. cost of paper used in display at national trade show
e. depreciation of trucks used to transport books to college bookstores
f. cost of the wood used to manufacture paper
g. salary of the scientists attempting to find another source of printing ink
h. cost of designing the book size so that a standard-sized box is filled to capacity
Answer:
a. (4) marketing (including sales)
b. (3) production
c. (5) distribution
d. (4) marketing (including sales)
e. (5) distribution
f. (3) production
g. (1) research and development
h. (2) design of products and processes
64. Value chain and classification of costs, car company.
General Motors incurs the following costs:
a. Electricity costs for the plant assembling the Chevrolet Camaro
b. Transportation costs for shipping the Camaro to dealers
c. Payment to Shelby Designs for the design of the Camaro.
d. Salary of an engineer working on the next generation of Camaros
e. Cost of GM employees' visit to an auto show to demonstrate the Camaro

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 f. Testing the Camaro at the GM track
g. Payment to television network for running Camaro advertisements
h. Cost of brake pads purchased from outside supplier to be installed on the Camaro

Required:
Classify each of the cost items (a-h) into one of the business functions of the value chain.
Answer:
a. 3) Production
b. 5) Distribution
c. 2) Design of products and processes
d. 1) Research and development
e. 4) Marketing and sales
f. 2) Design of products and processes
g. 4) Marketing and sales
h. 3) Production

65. Place the five steps in the decision-making process in the correct order:

A = Obtain information
B = Make decisions by choosing among alternatives
C = Identify the problem and uncertainties
D = Implement the decision, evaluate performance, and learn
E = Make predictions about the future
A) C D B E A
B) E D A B C
C) C A E B D
D) A E B D C
Answer: C

66. Which of the following is true of planning in decision making?

A) It helps an organization to select goals and strategies.
B) It improves the quality of products.
C) It helps in evaluating performance.
D) It helps in the analysis of actual performance.
Answer: A

67. Which of the following is a guideline used by management accountants to assist in strategic and
operational decision making?
A) employing a cost-benefit approach
B) employing a supply chain approach
C) employing a six sigma approach
D) employing a regression approach
Answer: A
68. In a cost-benefit approach, managers should spend resources if the ________.
A) marginal costs to the company exceed the marginal benefits
B) expected benefits to the company exceed the expected costs
C) marginal costs to the company equal the marginal benefits
D) expected benefits to the company equal the expected costs
Answer: B

69. The Standards of Ethical Conduct for management accountants include concepts related to ________.
A) competence, performance, diligence, and reporting
B) competence, confidentiality, integrity, and credibility

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 C) experience, diligence, reporting, and objectivity
D) diligence, objectivity, conflicts of interest, and credibility
Answer: B

70. Which item is an indication of competence under the Standards of Ethical Conduct?
A) Maintain an appropriate level of professional expertise by continually developing knowledge and
skills.
B) Keep information confidential except when disclosure is authorized or legally required.
C) Abstain from engaging in or supporting any activity that might discredit the profession.
D) Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
Answer: A

71. Ethical challenges for management accountants include ________.

A) whether to accept gifts from suppliers, knowing it is an effort to indirectly influence decisions
B) adhering to the principles of accounting
C) whether to file a tax return this year
D) whether to accept gifts higher incentives from the company for their performance
Answer: A

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 Chapter 2
1. Which of the following would be considered an actual cost of a current period?
A) The $25 of materials in a manufactured chair that is ready to be shipped to the customer
B) The $22 of direct material cost per unit assumed in the actual budget of a manufacturer of chairs
C) The expected cost of materials for a chair as a result of engineering specifications
D) The average of historical material cost data for a chair manufactured in several past accounting
periods
Answer: A

2. Comparing budgeted costs to actual costs helps managers to improve ________.

A) coordination
B) control
C) implementation
D) planning
Answer: B

3. Cost assignment ________.

A) includes future and arbitrary costs
B) encompasses allocating indirect costs to a cost object
C) is the same as cost accumulation
D) is the difference between budgeted and actual costs
Answer: B

4. A cost system determines the cost of a cost object by ________.

A) accumulating and then assigning costs
B) accumulating costs
C) assigning and then accumulating costs
D) assigning costs
Answer: A
5. A cost object is anything for which a cost measurement is desired.
Answer: TRUE

6. Costs are accounted for in two basic stages: assignment followed by accumulation.
Answer: FALSE
Explanation: Costs are accounted for in two basic stages: accumulation followed by assignment.

7. Accountants define a cost as a resource to be sacrificed to achieve a specific objective.

8. Answer: TRUE
9. The general term used to identify both the tracing and the allocation of accumulated costs to a cost object
is ________.
A) cost accumulation
B) cost assignment
C) cost tracing
D) conversion costing
Answer: B

10. Cost accumulation is ________.

A) the collection of cost data in some organized way by means of an accounting system
B) anything for which a cost measurement is desired
C) anything for which a profit measurement is desired
D) the collection of profit data in some organized way by means of an accounting system
Answer: A

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11. Which of the following statements about the direct/indirect cost classification is true?
A) Indirect costs are always traced.
B) Indirect costs are always allocated.
C) The design of sales target affects the direct/indirect classification.
D) The direct/indirect classification depends on the cost control measures.
Answer: B

12. Cost tracing is ________.

A) the assignment of direct costs to the chosen cost object
B) a function of cost allocation
C) the process of tracking both direct and indirect costs associated with a cost object
D) the process of determining the actual cost of the cost object
Answer: A

13. Cost allocation is ________.

A) the process of tracking both direct and indirect costs associated with a cost object
B) the process of determining the opportunity cost of a cost object chosen
C) the assignment of indirect costs to the chosen cost object
D) made based on material acquisition document
Answer: C

14. The determination of a cost as either direct or indirect depends upon the ________.
A) accounting standards
B) tax system chosen
C) inventory valuation
D) cost object chosen
Answer: D

15. Classifying a cost as either direct or indirect depends upon ________.

A) the behavior of the cost in response to volume changes
B) whether the cost is expensed in the period in which it is incurred
C) whether the cost can be easily traced with the cost object
D) whether a cost is fixed or variable
Answer: C

16. Which one of the following items is a direct cost?

A) Customer-service costs of a multiproduct firm; Product A is the cost object.
B) Printing costs incurred for payroll check processing; payroll check processing is the cost object.
C) The salary of a maintenance supervisor in a multiproduct manufacturing plant; Product B is the
cost object.
D) Utility costs of the administrative offices; the accounting department is the cost object.
Answer: B

17. Indirect manufacturing costs ________.

A) can be traced to the product that created the costs
B) can be easily identified with the cost object
C) generally include the cost of material and the cost of labor
D) may include both variable and fixed costs
Answer: D

18. Which of the following is true of indirect costs?

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 A) Indirect costs are always considered sunk costs.
B) All indirect costs are included in cost of goods sold.
C) Indirect costs always vary in direct proportion to the level of production.
D) Indirect costs cannot be traced to a particular cost object in an economically feasible way.
Answer: D

19. Which of the following statements is true?

A) A direct cost of one cost object will always be a direct cost of another cost object.
B) Because of a cost-benefit tradeoff, some direct costs may be treated as indirect costs.
C) All fixed costs are indirect costs.
D) All direct costs are variable costs.
Answer: B

20. A cost may be direct for one cost object and indirect for another cost object.
Answer: TRUE

21. Assigning indirect costs is easier than assigning direct costs.

Answer: FALSE
Explanation: Tracing direct costs is quite straightforward, whereas assigning indirect costs to a number
of different cost objects can be very challenging.

22. Improvements in information-gathering technologies are making it possible to trace more costs as direct.
Answer: TRUE

23. The smaller the amount of a cost the more likely it is economically feasible to trace it to a particular cost
object.
Answer: FALSE
Explanation: The smaller the amount of a cost the less likely it is economically feasible to trace it to a
particular cost object.

24. A direct cost of one cost object can be an indirect cost of another cost object.
Answer: TRUE

25. The cost of electricity used in the production of multiple products would be classified as a indirect cost.
Answer: TRUE

26. The distinction between direct and indirect costs is clearly set forth in Generally Accepted Accounting
Principles (GAAP).
Answer: FALSE

27. The cost of natural gas used to heat a production facility that makes three products (A,B, and C) would be
classified as an indirect cost when the cost object is one of the products (either A, B, or C).
Answer: TRUE

28. The broader the cost object definition (i.e., plant versus product), the more confident the manager will be
about the accuracy of the direct cost amounts.
Answer: TRUE

29. Which of the following is true if the volume of sales increases (within a relevant range)?
A) fixed cost increases
B) variable cost decreases
C) variable cost increases
D) fixed cost decreases

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 Answer: C

30. Which of the following is a fixed cost?

A) monthly rent payment
B) electricity expenses
C) travel expenses
D) direct material costs
Answer: A

31. Cost behavior refers to ________.

A) how costs react to a change in the level of activity
B) whether a cost is incurred in a manufacturing, merchandising, or service company
C) classifying costs as either perpetual or period costs
D) whether a particular expense is expensed in the same or the following period
Answer: A

32. Which of the following is true if the production volume decreases?

A) fixed cost per unit increases
B) average cost per unit decreases
C) variable cost per unit increases
D) variable cost per unit decreases
Answer: A

33. Variable costs ________.

A) are always indirect costs
B) increase in total when the actual level of activity increases
C) include most personnel costs and depreciation on machinery
D) are never considered a part of prime cost
Answer: B

34. Maize Plastics manufactures and sells 50 bottles per day. Fixed costs are $30,000 and the variable costs
for manufacturing 50 bottles are $10,000. Each bottle is sold for $1,000. How would the daily profit be
affected if the daily volume of sales drop by 10%?
A) profits are reduced by $4,000
B) profits are reduced by $1,000
C) profits are reduced by $5,000
D) profits are reduced by $6,000
Answer: A
Explanation: A) Variable cost per unit = $10,000 / 50 = $200
Profit for 50 bottles = ($1,000 × 50) - ($30,000 + $10,000) = $10,000
Sales after 10% drop = 50 × (1 - 0.10) = 45
Profit for 45 bottles = ($1,000 × 45) - ($30,000 + (45 × 200))= $6,000
Change in profit = $10,000 - $6,000 = $4,000. Hence, the profit has decreased by $4,000.

35. Fixed costs depend on the ________.

A) amount of resources used
B) amount of unchanged costs for a given time period
C) volume of production
D) total number of units sold
Answer: B

36. Which one of the following is a variable cost for an insurance company?
A) rent of the building

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 B) CEO's salary
C) electricity expenses
D) property taxes
Answer: C

37. Which of the following is a fixed cost for an automobile manufacturing plant?
A) administrative salaries
B) electricity used by assembly-line machines
C) sales commissions
D) tires
Answer: A

38. If each motorcycle requires a belt that costs $20 and 2,000 motorcycles are produced for the month, the
total cost for belts is ________.
A) considered to be a direct fixed cost
B) considered to be a direct variable cost
C) considered to be an indirect fixed cost
D) considered to be an indirect variable cost
Answer: B

39. The most likely cost driver of distribution costs is the ________.
A) number of parts within the product
B) number of miles driven
C) number of products manufactured
D) number of production hours
Answer: B
40. The most likely cost driver of direct labor costs is the ________.
A) number of machine setups for the product
B) number of miles driven
C) number of production hours
D) number of machine hours
Answer: C

41. Which of the following statements is true?

A) There is a cause-and-effect relationship between the cost driver and the amount of cost.
B) Fixed costs have cost drivers over the short run.
C) Over the short run all costs have cost drivers.
D) Volume of production is a cost driver of distribution costs.
Answer: A

42. A band of normal activity or volume in which specific cost-volume relationships are maintained is
referred to as the ________.
A) average range
B) cost-allocation range
C) cost driver range
D) relevant range
Answer: D

43. Within the relevant range, if there is a change in the level of the cost driver, then ________.
A) total fixed costs and total variable costs will change
B) total fixed costs and total variable costs will remain the same
C) total fixed costs will remain the same and total variable costs will change
D) total fixed costs will change and total variable costs will remain the same

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 Answer: C

44. Outside the relevant range, variable costs, such as direct material costs ________.
A) will decrease proportionately with changes in sales volumes
B) will remain the same with changes in production volumes
C) will not change proportionately with changes in production volumes
D) will increase proportionately with changes in sales volumes
Answer: C

Answer the following questions using the information below:

Zephyr Apparels is a clothing retailer. Unit costs associated with one of its products, Product DCT121, are as
follows:
Direct materials $ 70
Direct manufacturing labor 20
Variable manufacturing overhead 15
Fixed manufacturing overhead 32
Sales commissions (2% of sales) 5
Administrative salaries 16
Total $158

45. What are the direct variable manufacturing costs per unit associated with Product DCT121?
A) $142
B) $90
C) $105
D) $110
Answer: B

46. What are the indirect nonmanufacturing variable costs per unit associated with Product DCT121?
A) $5
B) $21
C) $90
D) $142
Answer: A

47. The East Company manufactures several different products. Unit costs associated with Product ORD105
are as follows:
Direct materials $92
Direct manufacturing labor 32
Variable manufacturing overhead 12
Fixed manufacturing overhead 32
Sales commissions (2% of sales) 26
Administrative salaries 6
Total $200

What is the percentage of the total variable costs per unit associated with Product ORD105 with respect
to total cost?
A) 81%
B) 68%
C) 84%
D) 71%
Answer: A

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 Explanation: $92 + $32 + $12 + $26 = $162 ÷ 200 = 81%

48. A fixed cost is fixed only in relation to a given wide range of total activity or volume and only for a given
time span, usually a particular budget period.
Answer: TRUE

49. A cost driver is a variable, such as the level of activity or volume that causally affects costs over a given
time span.
Answer: TRUE

50. Fixed cost per unit reduces with an increase in production volume.
Answer: TRUE

51. Variable costs per unit vary with the level of production or sales volume.
Answer: FALSE
Explanation: Variable costs per unit are constant with the level of production or sales volume.

52. Wood used to manufacture chairs is considered a direct variable cost.

Answer: TRUE

53. Variable costs depend on the resources used.

Answer: FALSE
Explanation: Variable costs changes in total in proportion to changes in the related level of total activity or
volume of output produced.
54. Cost drivers casually affect total costs of a cost object over a given time span.
Answer: TRUE

55. A unit cost is computed by ________.

A) multiplying total cost by the number of units produced
B) dividing total cost by the number of units produced
C) dividing variable cost by the number of units produced
D) dividing fixed cost by the number of units produced
Answer: B

56. When 20,000 units are produced, fixed costs are $16 per unit. Therefore, when 16,000 units are produced,
fixed costs will ________.
A) increase to $20 per unit
B) remain at $16 per unit
C) decrease to $10 per unit
D) total $160,000
Answer: A
Explanation: A) Fixed costs are $320,000 ($16 × 20,000 units). Dividing $320,000 by 16,000 units =
$20.

57. When 20,000 units are produced, variable costs are $8 per unit. Therefore, when 10,000 units are
produced ________.
A) variable costs will remain at $8 per unit
B) variable costs will total $60,000
C) variable unit costs will increase to $12 per unit
D) variable unit costs will decrease to $3 per unit
Answer: A

58. Eigen Manufacturing Corp. provided the following information for last month:

16
 Sales $40,000
Variable costs 14,000
Fixed costs 10,000
Operating income $16,000

If sales reduce to half of the amount in the next month, what is the projected operating income?
A) $15,000
B) $6,000
C) $16,000
D) $3,000
Answer: D

59. Grip Manufacturing currently produces 1,000 tires per month. The following per unit data for 1,000 tires
apply for sales to regular customers:

Direct materials $30

Direct manufacturing labor 5
Variable manufacturing overhead 8
Fixed manufacturing overhead 12
Total manufacturing costs $55

The plant has capacity for 3,000 tires and is considering expanding production to 2,000 tires. What is the
total cost of producing 2,000 tires?
A) $110,000
B) $98,000
C) $68,000
D) $88,000
Answer: B
Explanation: B) Total cost of producing 2,000 tires = [($30 + $5 + $8) × 2,000 units] + ($12 × 1,000
units) = $98,000

60. XIAN Manufacturing produces a unique valve, and has the capacity to produce 50,000 valves annually.
Currently XIAN produces 40,000 valves and is thinking about increasing production to 45,000 valves
next year. What is the most likely behavior of total manufacturing costs and unit manufacturing costs
given this change?
A) Total manufacturing costs will increase and unit manufacturing costs will stay the same.
B) Total manufacturing costs will increase and unit manufacturing costs will decrease.
C) Total manufacturing costs will stay the same and unit manufacturing costs will stay the same.
D) Total manufacturing costs will increase and unit manufacturing costs will also increase.
Answer: B

61. Ridez Manufacturing currently produces 1,000 bicycles per month. The following per unit data apply for
sales to regular customers:

Direct materials $50

Direct manufacturing labor 8
Variable manufacturing overhead 12
Fixed manufacturing overhead 15
Total manufacturing costs $85

The plant has capacity for 3,000 bicycles and is considering expanding production to 2,000 bicycles.
What is the per unit cost of producing 2,000 bicycles?

17
 A) $78.50 per unit
B) $170 per unit
C) $72.50 per unit
D) $77.50 per unit
Answer: D
Explanation: D) Cost of producing 2,000 bicycles = [($50 + $8 + $12) × 2,000 units] + ($15 × 1,000
units) = $155,000 / 2,000 units = $77.50

Answer the following questions using the information below:

Buildz Manufacturing currently produces 1,000 tables per month. The following per unit data for 1,000 tables
apply for sales to regular customers:

Direct materials $50

Direct manufacturing labor 10
Variable manufacturing overhead 15
Fixed manufacturing overhead 30
Total manufacturing costs $105

62. The plant has capacity for 3,000 tables and is considering expanding production to 3,000 tables. What is
the total cost of producing 3,000 tables?
A) $255,000
B) $225,000
C) $175,000
D) $235,000
Answer: A
Explanation: A) [($50 + $10 + $15) × 3,000 units] + ($30 × 1,000 units) = $255,000

63. What is the per unit cost when producing 3,000 tables?
A) $58.33
B) $175.00
C) $85.00
D) $125.45
Answer: C
Explanation: C) $255,000 / 3,000 = $85

Answer the following questions using the information below:

Pederson Company reported the following:

Manufacturing costs $150,000

Units manufactured 5,000
Units sold 4,700 units sold for $75 per unit
Beginning inventory 100 units

64. What is the average manufacturing cost per unit?

A) $40.00
B) $42.00
C) $30.00
D) $32.00

18
 Answer: C
Explanation: C) $150,000 / 5,000 = $30.00

65. What is the manufacturing cost for the ending finished goods inventory?
A) $12,000
B) $8,000
C) $11,000
D) $5,000
Answer: A
Explanation: A) (100 + 5,000 - 4,700 ) × 30 = $12,000

66. Although unit costs are regularly used in financial reports and for making product mix and pricing
decisions, managers should think in terms of total costs rather than unit costs for making decisions.
Answer: TRUE

67. A unit cost is computed by dividing total cost by the number of units.
Answer: TRUE

68. A unit cost is also called an average cost.

Answer: TRUE

69. Glass House Manufacturing currently produces 1,000 glasses per month. The following per unit data for
thousand apply for sales to regular customers:

Direct materials $250

Direct manufacturing labor 40
Variable manufacturing overhead 70
Fixed manufacturing overhead 50
Total manufacturing costs $410
The plant has capacity for 2,000 glasses. Plant supervisor's salary is $15,000.

Required:
a. What is the total cost of producing 1,000 glasses?
b. What is the total cost of producing 1,500 glasses?
c. What is the per unit cost when producing 1,500 glasses?

Answer:
a. [($250 + $40 + $70) × 1,000 units] + ($50 × 1,000 units) = $410,000
Plant supervisor's salary is already included in fixed manufacturing overhead hence not added.
b. [($250 + $40 + $70) × 1,500 units] + $50,000 = $590,000
c. $590,000 / 1,500 = $393.33 per unit

70. Pederson Company reported the following:

Manufacturing costs $2,000,000

Units manufactured 50,000
Units sold 47,000 units sold for $75 per unit
Beginning inventory 0 units

What is the amount of gross profit margin?

A) $1,750,000
B) $3,525,000
C) $5,405,000

19
 D) $1,645,000
Answer: D
Explanation: D) 47,000 × ($75 - ($2,000,000 / $50,000)) = $1,645,000

71. ________ sector companies purchase materials and components and convert them into finished goods.
A) Merchandising
B) Service
C) Manufacturing
D) Professional
Answer: C
72. Merchandising-sectors ________.
A) purchase and then sell tangible products without changing their basic form
B) provide intangible products
C) purchase materials and components and convert them into finished goods
D) purchase and then sell tangible products by changing their basic form
Answer: A

73. Service-sector companies ________.

A) provide intangible products
B) purchase and then sell tangible products without changing their basic form
C) purchase and then sell tangible products by changing their basic form
D) purchase materials and components and convert them into finished goods
Answer: A

74. Wages paid to machine operators on an assembly line are classified as a ________.
A) direct material cost
B) direct manufacturing labor cost
C) manufacturing overhead cost
D) period cost
Answer: B

75. Service-sector companies report ________.

A) work-in-process inventory, and finished goods inventory accounts
B) only finished goods inventory
C) direct materials inventory, work-in-process inventory, and finished goods inventory accounts
D) no inventory accounts
Answer: D

76. Manufacturing-sector companies report ________.

A) only merchandise inventory
B) only finished goods inventory
C) direct materials inventory, work-in-process inventory, and finished goods inventory accounts
D) direct materials inventory and finished goods inventory accounts only
Answer: C

77. For a manufacturing-sector company, the cost of factory depreciation is classified as a ________.
A) direct material cost
B) direct manufacturing labor cost
C) manufacturing overhead cost
D) period cost
Answer: C

78. Which of the following cost is included in cost of goods sold?

20
 A) customer service cost
B) manufacturing labor cost
C) distribution cost
D) marketing cost
Answer: B
79. Manufacturing overhead costs in an automobile manufacturing plant most likely include ________.
A) labor costs of the painting department
B) indirect material costs such as lubricants
C) leather seat costs
D) tyre costs
Answer: B

80. Manufacturing overhead costs are also referred to as ________.

A) indirect manufacturing costs
B) prime costs
C) direct manufacturing costs
D) direct material
Answer: A

81. Direct materials inventory would normally include ________.

A) direct materials in stock and awaiting use in the manufacturing process
B) goods partially worked on but not yet fully completed
C) goods fully completed but not yet sold
D) products in their original form intended to be sold without changing their basic form
Answer: A

82. Work-in-process inventory would normally include ________.

A) direct materials in stock and awaiting use in the manufacturing process
B) goods partially worked on but not yet fully completed
C) goods fully completed but not yet sold
D) goods returned after being sold to be re-worked on further improvements and quality
Answer: B

83. Finished goods inventory would normally include ________.

A) direct materials in stock and awaiting use in the manufacturing process
B) goods partially worked on but not yet fully completed
C) goods fully completed but not yet sold
D) goods returned after being sold to be re-worked on further improvements and quality
Answer: C

84. For a manufacturing company, direct material costs may be included in ________.
A) only the direct materials inventory account
B) only in the merchandise inventory account reflecting the inventory on hand
C) only in both work-in-process inventory and finished goods inventory
D) direct materials inventory, work-in-process inventory, and finished goods inventory accounts
Answer: D

85. For a manufacturing company, direct labor costs would be included in ________.
A) only the direct materials inventory to reflect the cost of labor that has worked using those
materials
B) only in the merchandise inventory to reflect the value added in the production process
C) only in both work-in-process inventory and finished goods inventory
D) direct materials inventory, work-in-process inventory, and finished goods inventory accounts

21
 Answer: C

86. For a manufacturing company, indirect manufacturing costs would be included in ________.
A) direct materials inventory only
B) merchandise inventory only
C) both work-in-process inventory and finished goods inventory
D) direct materials inventory, work-in-process inventory, and finished goods inventory accounts
Answer: C
87. Which of the following is a period cost?
A) sales promotion expenses
B) direct material cost
C) direct labor cost
D) indirect manufacturing costs like plant insurance
Answer: A

88. ________ are all manufacturing costs that are related to the cost object but cannot be traced to that cost
object.
A) Indirect manufacturing costs
B) Marketing costs incurred
C) Variable manufacturing costs
D) Custom duties paid for the materials
Answer: A

89. The income statement of a manufacturing firm reports ________.

A) sales promotion costs only
B) inventoriable costs only
C) cost of goods sold
D) only manufacturing overhead costs
Answer: C

90. Which of the following is an inventoriable cost?

A) manufacturing overhead cost
B) customer service costs
C) distribution costs
D) marketing costs
Answer: A

91. Inventoriable costs ________.

A) include administrative and marketing costs
B) are expensed in the accounting period in which the products are sold
C) are expensed in the accounting period in which the products are manufactured
D) are also referred to as nonmanufacturing costs
Answer: B

92. Inventoriable costs are expensed on the income statement ________.

A) when direct materials for the product are purchased
B) after the products are manufactured
C) when the products are sold
D) when the goods move from work-in process to finished goods account
Answer: C

93. Costs that are initially recorded as assets and expensed when goods sold are called ________.
A) period costs

22
 B) inventoriable costs
C) irrelevant costs
D) research and development costs
Answer: B

94. For manufacturing firms, inventoriable costs include ________.

A) plant supervisor salaries
B) research and development costs
C) costs of dealing with customers after the sale
D) distribution costs
Answer: A

95. A plant manufactures several different products. The wages of the plant supervisor can be classified as
a(n) ________.
A) direct cost
B) inventoriable cost
C) variable cost
D) period cost
Answer: B

96. Period costs ________.

A) include only fixed costs
B) seldom influence financial success or failure
C) include the cost of selling, delivering, and after-sales support for customers
D) should be treated as an indirect cost rather than as a direct manufacturing cost
Answer: C

97. Period costs ________.

A) are treated as expenses in the period they are incurred
B) are directly traceable to products
C) are treated as expenses in the following period they are incurred
D) are also referred to as manufacturing overhead costs
Answer: A

98. Costs expensed on the income statement in the accounting period incurred are called ________.
A) direct costs
B) indirect costs
C) period costs
D) inventoriable costs
Answer: C

99. The income statement of a service-sector firm reports ________.

A) period costs only
B) cost of goods sold
C) both period costs and cost of of goods sold
D) direct labor costs
Answer: A

100. Costs that are initially recorded as assets and expensed when goods sold are called ________.
A) period costs
B) inventoriable costs
C) irrelevant costs
D) research and development costs

23
 Answer: B

101. For merchandising companies, inventoriable costs include ________.

A) selling expenses
B) shipping (incoming) costs to acquire merchandise
C) distribution costs
D) outgoing freight and handling costs
Answer: B
102. For manufacturing firms, inventoriable costs include ________.
A) plant supervisor salaries
B) advertising costs to promote the sale of finished goods
C) costs of dealing with customer questions about warranties after the sale
D) distribution costs such the cost of operating a fleet of delivery vehicles
Answer: A
Answer the following questions using the information below:
Zephyr Apparels is a clothing retailer. Unit costs associated with one of its products, Product DCT121, are as
follows:
Direct materials $ 70
Direct manufacturing labor 20
Variable manufacturing overhead 15
Fixed manufacturing overhead 32
Sales commissions (2% of sales) 5
Administrative salaries 16
Total $158

103. What are the inventoriable costs per unit associated with Product DCT121?
A) $137
B) $140
C) $143
D) $88
Answer: A
Explanation: A) $70 + $20 + $15 + $32 = $137

104. What are the period costs per unit associated with Product DCT121?
A) $4
B) $16
C) $21
D) $52
Answer: C

105. Leslie Manufacturing reported the following:

Revenue $450,000
Beginning inventory of direct materials, January 1,
2015 20,000
Purchases of direct materials 156,000
Ending inventory of direct materials, December 31,
2015 18,000
Direct manufacturing labor 21,000
Indirect manufacturing costs 42,000
Beginning inventory of finished goods, January 1, 2015 40,000

24
Cost of goods manufactured 114,000
Ending inventory of finished goods, December 31,
2015 45,000
Operating costs 150,000

How much of the above would be considered period costs for Leslie Manufacturing?
A) $104,000
B) $140,000
C) $150,000
D) $147,000
Answer: C

106. Merchandising companies hold only one type of inventory: direct material.
Answer: FALSE
Explanation: Merchandising companies normally hold only one type of inventory: merchandise
inventory.

107. Manufacturing sector firms normally hold three types of inventory: direct materials inventory,
work-in-process inventory, and finished goods inventory.
Answer: TRUE

108. Work-in-process inventory are goods partially worked on but not yet completed.
Answer: TRUE

109. Indirect manufacturing costs include the compensation of all manufacturing labor that can be
traced to the cost object in an economically feasible way.
Answer: FALSE
Explanation: Direct manufacturing labor costs include the compensation of all manufacturing labor that
can be traced to the cost object.

110. Direct manufacturing labor includes plant rent and salaries paid to plant supervisors.
Answer: FALSE

111. Inventoriable costs are reported as a liability in balance sheet when incurred and expensed on the
income statement when the product is sold.
Answer: FALSE
Explanation: Inventoriable costs are reported as an asset when incurred and expensed on the income
statement when the product is sold.

112. Period costs are included in the cost of goods sold.

Answer: FALSE

113. Indirect manufacturing costs are also referred to as manufacturing overhead costs or factory
overhead costs.
Answer: TRUE

114. Acquisition costs of direct materials include freight-in charges, sales taxes, and custom duties.
Answer: TRUE

115. All costs reported on the income statement of a service-sector company are inventoriable costs.
Answer: FALSE
Explanation: None of the costs reported on the income statement of a service-sector company are
inventoriable costs. All costs shown on the income statement for a service business are period costs.

25
 116. The following information pertains to Max Corporation:
Beginning work-in-process inventory $ 20,000
Ending work-in-process inventory 23,000
Beginning finished goods inventory 36,000
Ending finished goods inventory 34,000
Cost of goods manufactured 246,000
Sales 300,000
What is the gross profit margin earned by the company?
A) $52,000
B) $50,000
C) $48,500
D) $53,500
Answer: A
Explanation: A) $36,000 + $246,000 − $34,000 = $248,000
Sales = $300,000
Profit = $300,000 - 248,000 = $52,00

Answer the following questions using the information below:

Beginning finished goods, 1/1/2015 $ 92,000

Ending finished goods, 12/31/2015 75,000
Cost of goods sold 300,000
Sales revenue 450,000
Operating expenses 95,000

117. What is the cost of goods manufactured for 2015?

A) $285,000
B) $277,000
C) $283,000
D) $350,000
Answer: C
Explanation: C) $300,000 + $75,000 − $92,000 = $283,000

118. What is the gross margin for 2015?

A) $163,000
B) $177,000
C) $170,000
D) $150,000
Answer: D
Explanation: D) $450,000 − $300,000 = $150,000

119. What is the operating income for 2015?

A) $75,000
B) $55,000
C) $62,000
D) $68,000
Answer: B
Explanation: B) $450,000 − $300,000 − $95,000 = $55,000

26
Answer the following questions using the information below:

Beginning finished goods, 1/1/2015 $ 46,000

Ending finished goods, 12/31/2015 38,000
Cost of goods sold 250,000
Sales revenue 488,000
Operating expenses 112,000

120. What is the cost of goods manufactured for 2015?

A) $242,000
B) $252,000
C) $245,000
D) $250,000
Answer: A
Explanation: A) $250,000 + $38,000 − $46,000 = $242,000

121. What is gross margin for 2015?

A) $243,000
B) $238,000
C) $318,000
D) $228,000
Answer: B
Explanation: B) $488,000 − $250,000 = $238,000

122. What is operating income for 2015?

A) $116,000
B) $137,000
C) $126,000
D) $144,000
Answer: C
Explanation: C) $488,000 − $250,000 − $112,000 = $126,000

123. Designing, marketing, customer services, research and development expenses are operating costs.
Answer: TRUE

124. Operating income is sales revenue minus operating expenses.

Answer: FALSE
Explanation: Operating income = sales revenue - cost of goods sold - operating expenses

125. Conversion costs include all direct manufacturing costs and some of the period costs including
research and development costs and customer service.
Answer: FALSE
Explanation: Conversion costs are production costs necessary to convert materials to finished goods
which include direct labor and manufacturing overhead (indirect production costs.)

27
 Chapter 3
1. Managers use cost-volume-profit (CVP) analysis to ________.
A) forecast the cost of capital for a given period of time
B) to study the behavior of and relationship among the elements such as total revenues, total costs,
and income
C) estimate the risks associated with a given job
D) analyse a firm's profitability and help to decide wealth distribution among its stakeholders
Answer: B

2. One of the first steps to take when using CVP analysis to help make decisions is ________.
A) calculating the break-even point
B) identifying the variable and fixed costs
C) calculation of the degree of operating leverage for the company
D) estimating the volume of sales to make a good profit
Answer: B

3. Which of the following is true of cost-volume-profit analysis?

A) The theory assumes that all costs are variable.
B) The theory assumes that units manufactured equal units sold.
C) The theory states that total variable costs remain the same over a relevant range.
D) The theory states that total costs remain the same over the relevant range.
Answer: B

4. The selling price per unit less the variable cost per unit is the ________.
A) fixed cost per unit
B) gross margin
C) margin of safety
D) contribution margin per unit
Answer: D

5. Which of the following is true of CVP analysis?

A) Costs may be separated into separate inventoriable and period components with respect to the
level of output.
B) Total revenues and total costs are linear in relation to output units.
C) Unit selling price, unit variable costs, and unit fixed costs are known and remain constant.
D) Proportion of different products will vary according to demand and supply when multiple
products are sold.
Answer: B

6. As per CVP, operating income calculations use ________.

A) net income and dividends
B) income tax expense and net income
C) contribution margins and fixed costs
D) nonoperating revenues and nonoperating expenses
Answer: C

7. Which of the following is true about the assumptions underlying basic CVP analysis?
A) Selling price varies with demand and supply of the product.
B) Only selling price and variable cost per unit are known and constant.
C) Only selling price, variable cost per unit, and total fixed costs are known and constant.
D) Selling price, variable cost per unit, fixed cost per unit, and total fixed costs are known and
constant.

28
 Answer: C

8. The contribution margin income statement ________.

A) reports gross margin
B) is allowed for external reporting to shareholders
C) categorizes costs as either direct or indirect
D) can be used to predict future profits at different levels of activity
Answer: D

9. Contribution margin equals ________.

A) revenues minus period costs
B) revenues minus product costs
C) revenues minus variable costs
D) revenues minus fixed costs
Answer: C

Answer the following questions using the information below:

10. Shine Jewelry sells 400 units resulting in $7,000 of sales revenue, $3,000 of variable costs, and $1,500 of
fixed costs.
Contribution margin per unit is ________.
A) $4.00
B) $11.00
C) $10.00
D) $8.00
Answer: C
Explanation: C) ($7,000 − $3,000) / 400 units = $10 per unit

11. Calculate the variable cost per unit.

A) $11.00
B) $7.00
C) $8.00
D) $7.50
Answer: D
Explanation: D) $3,000 / 400 = $7.50

Answer the following questions using the information below:

Tally Corp. sells softwares during the recruiting seasons. During the current year, 11,000 softwares were
sold resulting in $440,000 of sales revenue, $110,000 of variable costs, and $48,000 of fixed costs.

12. Contribution margin per software is ________.

A) $10.00
B) $30.00
C) $40.00
D) $36.00
Answer: B
Explanation: B) ($440,000 − $110,000) / 11,000 = $30 per software

13. If sales increase by $60,000, operating income will increase by ________.

A) $10,000
B) $40,000
C) $45,000

29
 D) $60,000
Answer: C

14. Pacific Company sells only one product for $11 per unit, variable production costs are $3 per unit, and
selling and administrative costs are $1.50 per unit. Fixed costs for 10,000 units are $5,000. The operating
income is ________.
A) $6.50 per unit
B) $6.00 per unit
C) $5.50 per unit
D) $5.00 per unit
Answer: B

15. The contribution income statement highlights ________.

A) gross margin
B) the segregation of costs into period costs and inventoriable costs
C) different product lines
D) variable and fixed costs
Answer: D

16. Fixed costs equal $15,000, unit contribution margin equals $25, and the number of units sold equal 1,150.
Operating income is ________.
A) $28,750
B) $13,750
C) $15,000
D) $14,750
Answer: B

Answer the following questions using the information below:

Bell Company sells several products. Information of average revenue and costs is as follows:

Selling price per unit $28.50

Variable costs per unit:
Direct material $5.25
Direct manufacturing labor $1.15
Manufacturing overhead $0.25
Selling costs $1.85
Annual fixed costs $110,000
The company sells 10,000 units.

17. The contribution margin per unit is ________.

A) $15
B) $20
C) $22
D) $125
Answer: B
Explanation: B) Contribution margin per unit = $28.50 − $5.25 − $1.15 −$0.25 − $1.85 = $20.00

18. What is the proportion of variable costs to total costs?

A) 45.00%
B) 48.56%
C) 53.56%
D) 43.56%

30
 Answer: D
Explanation: D) Total variable costs = $5.25 + $1.15 + $0.25 + $1.85 = $8.50 × 10,000 = $85,000
Total costs = $85,000 + $110,000 = $195,000.
Variable cost proportion = $85,000 / $195,000 = 43.56%

Answer the following questions using the information below:

Alex Furniture sells a table for $850. His fixed costs are $25,000, while his variable costs are $500 per
table. He currently plans to sell 175 tables this month.

19. What is the budgeted revenue for the month assuming that Alex sells 175 tables?
A) $145,750
B) $148,750
C) $150,000
D) $142,250
Answer: B
Explanation: B) Budgeted revenue = 175 × $850 = $148,750

20. What is the budgeted operating income for the month assuming that Alex sells 175 tables?
A) $45,250
B) $37,000
C) $36,250
D) $36,750
Answer: C
Explanation: C) Budgeted operating income = $148,750 − [(175 × $500) + $25,000] = $148,750 −
$112,500 = $36,250
21. Winnz sells 8,000 units resulting in $100,000 of sales revenue, $35,000 of variable costs, and $45,000 of
fixed costs. The contribution margin percentage is ________.
A) 66.67%
B) 65.0%
C) 37.5%
D) 75.0%
Answer: B
Explanation: B) ($100,000 − $35,000) / $100,000 = 65%

Answer the following questions using the information below:

Northern Star sells several products. Information of average revenue and costs is as follows:

Selling price per unit $20.00

Variable costs per unit:
Direct material $4.00
Direct manufacturing labor $1.60
Manufacturing overhead $0.40
Selling costs $2.00
Annual fixed costs $96,000
The company sells 12,000 units at the end of the year.

22. The contribution margin per unit is ________.

A) $11.00
B) $12.00
C) $4.00
D) $14.00

31
 Answer: B
Explanation: B) Contribution margin per unit = ($20 − $4 − $1.60 − $0.40 − $2) = $12

23. If direct labor and direct material costs increase by $1 each, contribution margin ________.
A) increases by $20,000
B) increases by $14,000
C) decreases by $24,000
D) decreases by $14,000
Answer: C
Explanation: C) Contribution margin = ($20 − $5 − $2.60 − $0.40 − $2) × 12,000 = $120,000.

24. Which of the following is the mathematical expression of contribution margin ratio?
A) Contribution margin ratio = Contribution margin percentage × Revenues (in dollars)
B) Contribution margin ratio = Contribution margin percentage × Fixed costs (in dollars)
C) Contribution margin ratio = Contribution margin percentage × Variable costs (in dollars)
D) Contribution margin ratio = Contribution margin percentage × Operating leverage
Answer: A

25. While doing cost-volume-profit analysis, a company should separate costs into fixed and variable
components.
Answer: TRUE

26. Sales margin = Contribution margin percentage × Revenues (in dollars).

Answer: FALSE
Explanation: "Contribution margin" = Contribution margin percentage × Revenues (in dollars).
27. It is assumed in CVP analysis that the unit selling price, unit variable costs, and unit fixed costs are
known and constant.
Answer: FALSE
Explanation: It is assumed in CVP analysis that the unit selling price, unit variable costs, and total fixed
costs are known and constant.

28. The difference between total revenues and total variable costs is called profit margin.
Answer: FALSE

29. The shorter the time horizon, the lower the percentage of total costs considered fixed.
Answer: FALSE
Explanation: The shorter the time horizon, the higher the percentage of total costs considered fixed.

30. The three methods used to study CVP analysis are graphical method, contribution method, and equation
method.
Answer: TRUE

31. Operating income plus total fixed costs equals the contribution margin.
Answer: TRUE

32. The difference between total revenues and total variable costs is called contribution margin.
Answer: TRUE

33. Contribution margin per unit is a useful tool for calculating contribution margin and operating income.
Answer: TRUE

34. The classification of costs as variable and fixed depends on the relevant range, the length of the time
horizon, and the specific decision situation.

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 Answer: TRUE

35. Winnz sells 8,000 units resulting in $100,000 of sales revenue, $35,000 of variable costs, and $45,000 of
fixed costs. To achieve $150,000 in operating income, sales must total ________.
A) $440,000
B) $160,000
C) $130,000
D) $300,000
Answer: D
Explanation: D) ($150,000 + $45,000) / 65% = $300,000 in sales

Answer the following questions using the information below:

Star Jewelry sells 500 units resulting in $75,000 of sales revenue, $28,000 of variable costs, and $18,000
of fixed costs.

36. Breakeven point in units is ________.

A) 196 units
B) 203 units
C) 185 units
D) 192 units
Answer: D
Explanation: D) Contribution margin per unit = ($75,000 − $28,000) / 500 = $94
Breakeven point = $18,000 / $94 = 191.49 units. Hence breakeven is approximately 192 units.
37. The number of units that must be sold to achieve $40,000 of operating income is ________.
A) 677 units
B) 717 units
C) 617 units
D) 650 units
Answer: C
Explanation: C) ($75,000 − $28,000) / 500 = $94

38. At the breakeven point of 2,000 units, variable costs total $4,000 and fixed costs total $6,000. The 2,001st
unit sold will contribute ________ to profits.
A) $1
B) $2
C) $3
D) $5
Answer: C
Explanation: C) Fixed costs of $6,000/2,000 units = Contribution Margin of $3 per unit.

39. The breakeven point is the activity level where ________.

A) revenues equal fixed costs
B) revenues equal variable costs
C) contribution margin equals total costs
D) revenues equal the sum of variable and fixed costs
Answer: D

40. Sales total $400,000 when variable costs total $300,000 and fixed costs total $50,000. The breakeven
point in sales dollars is ________.
A) $200,000
B) $120,000
C) $170,000

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 D) $210,000
41. Answer: A
Explanation: A) Contribution margin percentage = ($400,000 − $300,000) / $400,000 = 25%;
BE sales = $50,000 / 0.25 = $200,000

42. The breakeven point revenues is calculated by dividing ________.

A) fixed costs by total revenues
B) fixed costs by contribution margin percentage
C) total revenues by fixed costs
D) contribution margin percentage by fixed costs
Answer: B

43. At breakeven point, ________.

A) operating income is equal to zero
B) contribution margin minus fixed costs is equal to profits earned
C) revenues equal fixed costs minus variable costs
D) breakeven revenues equal fixed costs divided by the variable cost per unit
Answer: A

44. The breakeven point decreases if ________.

A) the variable cost per unit increases
B) the total fixed costs decrease
C) the contribution margin per unit decreases
D) the selling price per unit decreases

45. If unit outputs exceed the breakeven point ________.

A) there will be an increase in fixed costs
B) total sales revenue will exceed fixed costs
C) total sales revenue will exceed variable costs
D) there will be a profit
Answer: D

46. When fixed costs are $50,000 and variable costs are 60% of the selling price, then breakeven sales are
________.
A) $115,000
B) $125,000
C) $175,000
D) $275,000
Answer: B
Explanation: B) $50,000 / (1 − 0.60) = $125,000 in BE sales

47. If the breakeven point is 1,000 units and each unit sells for $50, then ________.
A) selling 1,040 units will result in a loss
B) selling $60,000 will result in a loss
C) selling $50,000 will result in zero profit
D) selling $45,000 will result in profit
Answer: C

48. Bovous Stores, Inc., sells several products. Information of average revenue and costs is as follows:

Selling price per unit $20.00

Variable costs per unit:
Direct material $4.00

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 Direct manufacturing labor $1.60
Manufacturing overhead $0.40
Selling costs $2.00
Annual fixed costs $96,000

The revenues that the company must earn annually to make a profit of $144,000 are ________.
A) $378,000
B) $425,000
C) $400,000
D) $450,000
Answer: C
Explanation: C) Desired sales = ($96,000 + $144,000) / 0.60 = $400,000

49. Frazer Corp sells several products. Information of average revenue and costs is as follows:

Selling price per unit $28.50

Variable costs per unit:
Direct material $5.50
Direct manufacturing labor $1.15
Manufacturing overhead $0.85
Selling costs $2.50
Annual fixed costs $125,000
What is the operating income earned if the company sells 15,000 units?
A) $162,750
B) $150,000
C) $148,500
D) $152,500
Answer: D
Explanation: D) Contribution = $28.5 - $5.50 − $1.15 − $0.85 - $2.50 = $18.50 × 15,000 = $277,500

50. Frazer Corp sells several products. Information of average revenue and costs is as follows:

Selling price per unit $28.50

Variable costs per unit:
Direct material $5.50
Direct manufacturing labor $1.15
Manufacturing overhead $0.85
Selling costs $2.50
Annual fixed costs $125,000

If the company decides to lower its selling price by 12.25%, the operating income is reduced by
________.
A) $52,500
B) $50,500
C) $55,500
D) $29,500
Answer: A
Explanation: A) $28.50 × 12.25% = $3.50. Therefore the new selling price is $25.00 ($28.50 - $3.50).
Contribution = ($25.00 - $5.50 − $1.15 − $0.85 - $2.50) × 15,000 = $225,000
Operating income = $225,000 - $125,000 = $100,000.

Answer the following questions using the information below:

35
 The following information is for High Corp:

Selling price $60 per unit

Variable costs $40 per unit
Total fixed costs $125,000

51. The number of units that High Corp must sell to reach targeted operating income of $25,000 is ________.
A) 6,000 units
B) 7,500 units
C) 3,334 units
D) 4,334 units
Answer: B
Explanation: B) ($125,000 + $25,000)/($60 − $40) = 7,500 units

52. If targeted operating income is $50,000, then targeted sales revenue is ________.
A) $525,052
B) $533,333
C) $498,133
D) $517,072
Answer: A
Explanation: A) ($125,000 + $50,000) / [($60 − $40) / $60] = $525,052
Answer the following questions using the information below:

53. Which of the following will increase a company's breakeven point?

A) increasing variable cost per unit
B) increasing contribution margin per unit
C) reducing its total fixed costs
D) increasing the selling price per unit
Answer: A

54. Lights Manufacturing produces a single product that sells for $125. Variable costs per unit equal $50. The
company expects total fixed costs to be $75,000 for the next month at the projected sales level of 1,000
units. What is the current breakeven point in terms of number of units?
A) 800 units
B) 1033 units
C) 667 units
D) 1,000 units
Answer: D
Explanation: D) $75,000/($125 − $50) = 1,000 units

55. Breakeven point is the point at which operating income is zero.

Answer: TRUE

56. The breakeven point is the quantity of output at which total revenues equal fixed costs.
Answer: FALSE
Explanation: The breakeven point is the quantity of output at which total contribution margin equal fixed
costs.

57. Stephanie's Bridal Shoppe sells wedding dresses. The average selling price of each dress is $1,000,
variable costs are $400, and fixed costs are $90,000. How many dresses must the Bridal Shoppe sell to
yield after-tax net income of $18,000, assuming the tax rate is 40%?
A) 200 dresses
B) 170 dresses

36
 C) 150 dresses
D) 145 dresses
Answer: A
Explanation: A) $1,000N - $400N - $90,000 = $18,000 / (1 - 0.4); $600N - $90,000 = $30,000; N = 200
units

58. The selling price per unit is $25, variable cost per unit $15, and fixed cost per unit is $4. When this
company operates above the breakeven point, the sale of one more unit will increase net income by $6.
Answer: FALSE

59. Which of the following statements about net income (NI) is true?
A) NI = operating income plus nonoperating revenue.
B) NI = operating income plus operating costs.
C) NI = operating income less income taxes.
D) NI = operating income less cost of goods sold.
Answer: C

Answer the following questions using the information below:

Assume the following cost information for Fernandez Company:

Selling price $120 per unit

Variable costs $80 per unit
Total fixed costs $80,000
Tax rate 40%

60. What minimum volume of sales dollars is required to earn an after-tax net income of $30,000?
A) $465,000
B) $330,000
C) $390,000
D) $165,000
Answer: C
Explanation: C) Minimum volume of sales dollars is required = [$80,000 + ($30,000/0.6)] / [($120 - $80)
/ $120] = $390,000

61. What is the number of units that must be sold to earn an after-tax net income of $42,000?
A) 3,750 units
B) 4,625 units
C) 3,050 units
D) 1,875 units
Answer: A
Explanation: A) Required number of units = [$80,000 + ($42,000 / 0.6)] / ($120 - $80) = 3,750 units

62. In CVP analysis, focusing on target net income rather than operating income ________.
A) will increase the breakeven point
B) will decrease the breakeven point
C) will not change the breakeven point
D) will help managers construct a better capital policy
Answer: C

63. If selling price per unit is $40, variable costs per unit are $25, total fixed costs are $20,000, the tax rate is

37
 30%, and the company sells 5,000 units, net income is ________.
A) $32,158
B) $26,548
C) $28,500
D) $38,500
Answer: D
Explanation: D) Net income = [(($40 − $25) × 5,000) − $20,000] × (1.0 − 0.3) = $38,500

64. The planned operating income is calculated by ________.

A) dividing net income by tax rate
B) dividing net income by 1 − tax rate
C) multiplying net income by tax rate
D) multiplying net income by 1 − tax rate
Answer: B

65. If Beta Corp's net income is $210,000 and the tax rate is 30%, then the company's planned operating
income is ________.
A) $325,000
B) $300,000
C) $273,000
D) $357,000
Answer: B
Explanation: B) Operating income = $210,000 / (0.70) = $300,000

66. The Marietta Company has fixed costs of $60,000 and variable costs are 75% of the selling price. To
realize profits of $10,000 from sales of 50,000 units, the selling price per unit ________.
A) must be $1.20
B) must be $6.00
C) must be $5.60
D) must be $4.23
Answer: C
Explanation: C) Breakeven sales = ($60,000 + $10,000) / 0.25 = $280,000
Selling price = $280,000 / 50,000 units = $5.60 per unit

67. An increase in the tax rate will increase the breakeven point.
Answer: FALSE
Explanation: A change in the tax rate will not change the breakeven point.

68. A firm operating at breakeven point will pay an income tax of 10%.
Answer: FALSE
Explanation: A firm operating at breakeven point will not pay income tax as operating income is $0

69. All else being constant, an increase in operating income will result in an increase in net income.
Answer: TRUE

70. If planned net income is $30,000 and the tax rate is 30%, then planned operating income would be
$39,000.
Answer: FALSE
Explanation: If planned net income is $30,000 and the tax rate is 30%, then planned operating income
would be $42,857, [$30,000 / (1.0 − 0.3) = $42,857].

71. The margin of safety is the difference between ________.

A) budgeted expenses and breakeven expenses

38
 B) budgeted revenues and breakeven revenues
C) actual operating income and budgeted operating income
D) actual sales margin and budgeted sales margin
Answer: B

72. Globus Autos sells a single product. 8,000 units were sold resulting in $80,000 of sales revenue, $20,000
of variable costs, and $10,000 of fixed costs. If variable costs decrease by $1 per unit, the new margin of
safety is ________.
A) $65,000
B) $73,567
C) $68,235
D) $66,765
Answer: C
Explanation: C) Variable cost per unit = $20,000 / 8,000 = $2.50
Contribution margin percentage = [$10 − ($2.50 − $1.00)] / $10 = 85%
New breakeven point = [$10 − ($2.50 − $1.00)] / $10 = 85%; $10,000 / 0.85 = $11,765
Old breakeven point = $10 - 2.50 = $7.50 / $10 = 75%; $10,000 / 0.75 = $13,333
Margin of safety = $80,000 - $11,765 = $68,235
73. Sensitivity analysis is a "what-if" technique that managers use to examine how a result will change if the
originally predicted data are not achieved or if an underlying assumption changes.
Answer: TRUE

74. Margin of safety measures the difference between budgeted revenues and breakeven revenues.
Answer: TRUE

75. Sensitivity analysis helps to evaluate the risk associated with decisions.
Answer: TRUE

76. If a company's breakeven revenue is $1,000 and its budgeted revenue is $1,250, then its margin of safety
percentage is 20%.
Answer: TRUE
Explanation: The margin of safety percentage is 20% as the denominator of the ratio is the budgeted
level and not the breakeven level.
1,250 - 1,000 = $250 / $1,250 = 20%

77. Sales margin = Contribution margin percentage × Revenues (in dollars).

Answer: FALSE
Explanation: "Contribution margin" = Contribution margin percentage × Revenues (in dollars).

78. Contribution margin and gross margin are terms that can be used interchangeably.
Answer: FALSE
Explanation: Contribution margin and gross margin refer to different amounts.
Revenues - all variable costs = contribution margin; Revenues - COGS = gross margin

79. The break-even point in CVP analysis is defined as:

a) The point where output units equal input units.
b) The point where unit contribution margin equals fixed costs divided by number of break-even units
c) Where revenues less variable costs equal operating income
d) Where the unit contribution margin equals the selling price less the unit variable cost
Answer: B

80. Which of the following is true about net income?

A) Net income is operating income divided by income tax rate

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 B) Net income is operating income plus operating revenues minus operating costs minus income taxes
C) Net income is operating income plus non-operating revenues minus non-operating cost minus income
taxes
D) Net income is operating income plus non-operating revenues minus non-operating cost minus sales
taxes
Answer C

81. Given that the selling price of a particular product is $25, the variable cost per unit is $15 and the fixed
cost per unit is $4. When this company operates above the break-even point, the sale of more unit will
increase the net income by $6.
Answer: False

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