Brewer Managerial Accounting Test Bank Concepts

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Chapter 02 Managerial Accounting and Cost Concepts Answer Key True / False Questions 1. Direct material costs are generally variable costs. TRUE AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories Learning Objective: 02-03 Understand cost behavior patterns including variable costs; fixed costs; and mixed costs Level: Easy 2. Property taxes and insurance premiums paid on a factory building are examples of manufacturing overhead. TRUE AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories Level: Easy

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Transcript of Brewer Managerial Accounting Test Bank Concepts

Chapter 02 Managerial Accounting and Cost Concepts Answer Key

True / False Questions1.Direct material costs are generally variable costs.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categoriesLearning Objective: 02-03 Understand cost behavior patterns including variable costs; fixed costs; and mixed costsLevel: Easy2.Property taxes and insurance premiums paid on a factory building are examples of manufacturing overhead.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categoriesLevel: Easy3.Manufacturing overhead combined with direct materials is known as conversion cost.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categoriesLevel: Easy

4.All costs incurred in a merchandising firm are considered to be period costs.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-02 Distinguish between product costs and period costs and give examples of eachLevel: Easy5.Depreciation is always considered a product cost for external financial reporting purposes in a manufacturing firm.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 02-02 Distinguish between product costs and period costs and give examples of eachLevel: Medium6.In external financial reports, factory utilities costs may be included in an asset account on the balance sheet at the end of the period.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 02-02 Distinguish between product costs and period costs and give examples of eachLevel: Hard7.Advertising costs are considered product costs for external financial reports because they are incurred in order to promote specific products.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 02-02 Distinguish between product costs and period costs and give examples of eachLevel: Medium

8.Selling and administrative expenses are product costs under generally accepted accounting principles.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-02 Distinguish between product costs and period costs and give examples of eachLevel: Easy9.A variable cost is a cost whose cost per unit varies as the activity level rises and falls.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-03 Understand cost behavior patterns including variable costs; fixed costs; and mixed costsLevel: Easy10.When the level of activity increases, total variable cost will increase.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-03 Understand cost behavior patterns including variable costs; fixed costs; and mixed costsLevel: Easy11.A decrease in production will ordinarily result in an increase in fixed production costs per unit.TRUE

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-03 Understand cost behavior patterns including variable costs; fixed costs; and mixed costsLevel: Easy

12.Automation results in a shift away from variable costs toward more fixed costs.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-03 Understand cost behavior patterns including variable costs; fixed costs; and mixed costsLevel: Easy13.In order for a cost to be variable it must vary with either units produced or units sold.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 02-03 Understand cost behavior patterns including variable costs; fixed costs; and mixed costsLevel: Medium14.The concept of the relevant range does not apply to fixed costs.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-03 Understand cost behavior patterns including variable costs; fixed costs; and mixed costsLevel: Easy15.Indirect costs, such as manufacturing overhead, are always fixed costs.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 02-03 Understand cost behavior patterns including variable costs; fixed costs; and mixed costsLevel: Medium

16.Discretionary fixed costs arise from annual decisions by management to spend in certain fixed cost areas.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-03 Understand cost behavior patterns including variable costs; fixed costs; and mixed costsLevel: Easy17.Even if operations are interrupted or cut back, committed fixed costs remain largely unchanged in the short term because the costs of restoring them later are likely to be far greater than any short-run savings that might be realized.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-03 Understand cost behavior patterns including variable costs; fixed costs; and mixed costsLevel: Easy18.Committed fixed costs are fixed costs that are not controllable.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 02-03 Understand cost behavior patterns including variable costs; fixed costs; and mixed costsLevel: Hard19.A mixed cost is partially variable and partially fixed.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-03 Understand cost behavior patterns including variable costs; fixed costs; and mixed costsLevel: Easy

20.Traditional format income statements are prepared primarily for external reporting purposes.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-05 Prepare income statements for a merchandising company using the traditional and contribution formatsLevel: Easy21.In a contribution format income statement, sales minus cost of goods sold equals the gross margin.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-05 Prepare income statements for a merchandising company using the traditional and contribution formatsLevel: Easy22.In a traditional format income statement for a merchandising company, the cost of goods sold reports the product costs attached to the merchandise sold during the period.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-05 Prepare income statements for a merchandising company using the traditional and contribution formatsLevel: Easy

23.Although the contribution format income statement is useful for external reporting purposes, it has serious limitations when used for internal purposes because it does not distinguish between fixed and variable costs.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-05 Prepare income statements for a merchandising company using the traditional and contribution formatsLevel: Easy24.In a contribution format income statement for a merchandising company, cost of goods sold is a variable cost that gets included in the "Variable expenses" portion of the income statement.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-05 Prepare income statements for a merchandising company using the traditional and contribution formatsLevel: Easy25.The traditional format income statement is used as an internal planning and decision-making tool. Its emphasis on cost behavior aids cost-volume-profit analysis, management performance appraisals, and budgeting.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-05 Prepare income statements for a merchandising company using the traditional and contribution formatsLevel: Easy

26.The following would typically be considered indirect costs of manufacturing a particular Boeing 747 to be delivered to Singapore Airlines: electricity to run production equipment, the factory manager's salary, and the cost of the General Electric jet engines installed on the aircraft.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-06 Understand the differences between direct and indirect costsLevel: Medium27.The following costs should be considered direct costs of providing delivery room services to a particular mother and her baby: the costs of drugs administered in the operating room, the attending physician's fees, and a portion of the liability insurance carried by the hospital to cover the delivery room.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 02-06 Understand the differences between direct and indirect costsLevel: Hard28.The following costs should be considered by a law firm to be indirect costs of defending a particular client in court: rent on the law firm's offices, the law firm's receptionist's wages, the costs of heating the law firm's offices, and the depreciation on the personal computer in the office of the attorney who has been assigned the client.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 02-06 Understand the differences between direct and indirect costsLevel: Hard

29.In any decision making situation, sunk costs are irrelevant and should be ignored.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: KnowledgeLearning Objective: 02-07 Understand cost classifications used in making decisions: differential costs; opportunity costs; and sunk costsLevel: Easy

Multiple Choice Questions30.For a lamp manufacturing company, the cost of the insurance on its vehicles that deliver lamps to customers is best described as a:A.prime cost.B.manufacturing overhead cost.C.period cost.D.differential (incremental) cost of a lamp.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categoriesLearning Objective: 02-02 Distinguish between product costs and period costs and give examples of eachLearning Objective: 02-07 Understand cost classifications used in making decisions: differential costs; opportunity costs; and sunk costsLevel: Hard

31.The cost of leasing production equipment is classified as:A.Option AB.Option BC.Option CD.Option D

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categoriesLearning Objective: 02-02 Distinguish between product costs and period costs and give examples of eachLevel: Medium32.The wages of factory maintenance personnel would usually be considered to be:A.Option AB.Option BC.Option CD.Option D

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categoriesLearning Objective: 02-06 Understand the differences between direct and indirect costsLevel: Medium

33.Manufacturing overhead consists of:A.all manufacturing costs.B.indirect materials but not indirect labor.C.all manufacturing costs, except direct materials and direct labor.D.indirect labor but not indirect materials.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categoriesLevel: Medium34.Which of the following should NOT be included as part of manufacturing overhead at a company that makes office furniture?A.Sheet steel in a file cabinet made by the company.B.Manufacturing equipment depreciation.C.Idle time for direct labor.D.Taxes on a factory building.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categoriesLevel: Medium35.Which of the following costs would not be included as part of manufacturing overhead?A.Insurance on sales vehicles.B.Depreciation of production equipment.C.Lubricants for production equipment.D.Direct labor overtime premium.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categoriesLevel: Easy

36.Conversion cost consists of which of the following?A.Manufacturing overhead cost.B.Direct materials and direct labor cost.C.Direct labor cost.D.Direct labor and manufacturing overhead cost.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categoriesLevel: Easy37.The advertising costs that Pepsi incurred to air its commercials during the Super Bowl can best be described as a:A.variable cost.B.fixed cost.C.product cost.D.prime cost.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 02-02 Distinguish between product costs and period costs and give examples of eachLearning Objective: 02-03 Understand cost behavior patterns including variable costs; fixed costs; and mixed costsLevel: Medium38.Each of the following would be a period cost except:A.the salary of the company president's secretary.B.the cost of a general accounting office.C.depreciation of a machine used in manufacturing.D.sales commissions.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-02 Distinguish between product costs and period costs and give examples of eachLevel: Easy

39.Which of the following costs is an example of a period rather than a product cost?A.Depreciation on production equipment.B.Wages of salespersons.C.Wages of production machine operators.D.Insurance on production equipment.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-02 Distinguish between product costs and period costs and give examples of eachLevel: Easy40.Which of the following would be considered a product cost for external financial reporting purposes?A.Cost of a warehouse used to store finished goods.B.Cost of guided public tours through the company's facilities.C.Cost of travel necessary to sell the manufactured product.D.Cost of sand spread on the factory floor to absorb oil from manufacturing machines.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 02-02 Distinguish between product costs and period costs and give examples of eachLevel: Medium41.Which of the following would NOT be treated as a product cost for external financial reporting purposes?A.Depreciation on a factory building.B.Salaries of factory workers.C.Indirect labor in the factory.D.Advertising expenses.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-02 Distinguish between product costs and period costs and give examples of eachLevel: Easy

42.The salary of the president of a manufacturing company would be classified as which of the following?A.Product costB.Period costC.Manufacturing overheadD.Direct labor

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-02 Distinguish between product costs and period costs and give examples of eachLevel: Easy43.Conversion costs do NOT include:A.depreciation.B.direct materials.C.indirect labor.D.indirect materials.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 02-02 Distinguish between product costs and period costs and give examples of eachLevel: MediumSource: CMA, adapted44.Last month, when 10,000 units of a product were manufactured, the cost per unit was $60. At this level of activity, variable costs are 50% of total unit costs. If 10,500 units are manufactured next month and cost behavior patterns remain unchanged the:A.total variable cost will remain unchanged.B.fixed costs will increase in total.C.variable cost per unit will increase.D.total cost per unit will decrease.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 02-03 Understand cost behavior patterns including variable costs; fixed costs; and mixed costsLevel: Hard

45.Variable cost:A.increases on a per unit basis as the number of units produced increases.B.remains constant on a per unit basis as the number of units produced increases.C.remains the same in total as production increases.D.decreases on a per unit basis as the number of units produced increases.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-03 Understand cost behavior patterns including variable costs; fixed costs; and mixed costsLevel: Medium46.Which of the following statements regarding fixed costs is incorrect?A.Expressing fixed costs on a per unit basis usually is the best approach for decision making.B.Fixed costs expressed on a per unit basis will decrease with increases in activity.C.Total fixed costs are constant within the relevant range.D.Fixed costs expressed on a per unit basis will increase with decreases in activity.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 02-03 Understand cost behavior patterns including variable costs; fixed costs; and mixed costsLevel: Medium47.The salary paid to the production manager in a factory is:A.a variable cost.B.part of prime cost.C.part of conversion cost.D.both a variable cost and a prime cost.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 02-03 Understand cost behavior patterns including variable costs; fixed costs; and mixed costsLevel: Hard

48.Within the relevant range, variable cost per unit will:A.increase as the level of activity increases.B.remain constant.C.decrease as the level of activity increases.D.none of these.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 02-03 Understand cost behavior patterns including variable costs; fixed costs; and mixed costsLevel: Easy49.The term "relevant range" means the range of activity over which:A.relevant costs are incurred.B.costs may fluctuate.C.production may vary.D.the assumptions about fixed and variable cost behavior are reasonably valid.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-03 Understand cost behavior patterns including variable costs; fixed costs; and mixed costsLevel: Easy50.An example of a committed fixed cost is:A.a training program for salespersons.B.executive travel expenses.C.property taxes on the factory building.D.new product research and development.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 02-03 Understand cost behavior patterns including variable costs; fixed costs; and mixed costsLevel: Easy

51.In describing the cost formula equation Y = a + bX, which of the following statements is correct?A."X" is the dependent variable.B."a" is the fixed component.C.In the high-low method, "b" equals change in activity divided by change in costs.D.As "X" increases "Y" decreases.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 02-03 Understand cost behavior patterns including variable costs; fixed costs; and mixed costsLevel: Hard52.Which one of the following costs should NOT be considered a direct cost of serving a particular customer who orders a customized personal computer by phone directly from the manufacturer?A.The cost of the hard disk drive installed in the computer.B.The cost of shipping the computer to the customer.C.The cost of leasing a machine on a monthly basis that automatically tests hard disk drives before they are installed in computers.D.The cost of packaging the computer for shipment.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 02-06 Understand the differences between direct and indirect costsLevel: Hard53.The term differential cost refers to:A.a difference in cost which results from selecting one alternative instead of another.B.the benefit forgone by selecting one alternative instead of another.C.a cost which does not involve any dollar outlay but which is relevant to the decision-making process.D.a cost which continues to be incurred even though there is no activity.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: ComprehensionLearning Objective: 02-07 Understand cost classifications used in making decisions: differential costs; opportunity costs; and sunk costsLevel: Medium

54.Which of the following costs is often important in decision making, but is omitted from conventional accounting records?A.Fixed cost.B.Sunk cost.C.Opportunity cost.D.Indirect cost.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: KnowledgeLearning Objective: 02-07 Understand cost classifications used in making decisions: differential costs; opportunity costs; and sunk costsLevel: Easy55.When a decision is made among a number of alternatives, the benefit that is lost by choosing one alternative over another is the:A.realized cost.B.opportunity cost.C.conversion cost.D.accrued cost.Chapter 03 Job-Order Costing Answer Key

True / False Questions1.The use of predetermined overhead rates in a job-order cost system makes it possible to estimate the total cost of a given job as soon as production is completed.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 03-01 Compute a predetermined overhead rateLevel: Easy2.A job cost sheet is used to accumulate costs charged to a job.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 03-03 Compute the total cost and average cost per unit of a jobLevel: Easy3.The following journal entry would be made to apply overhead cost to jobs in a job-order costing system:FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 03-02 Apply overhead cost to jobs using a predetermined overhead rateLearning Objective: 03-04 Understand the flow of costs in a job-order costing system and prepare appropriate journal entries to record costsLevel: Medium

4.Under a job-order cost system the Work in Process account is debited with the cost of materials purchased.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 03-04 Understand the flow of costs in a job-order costing system and prepare appropriate journal entries to record costsLevel: Medium5.The process of assigning overhead cost to jobs is known as overhead application.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 03-02 Apply overhead cost to jobs using a predetermined overhead rateLevel: Easy6.The cost of a completed job in a job-order costing system typically consists of the actual direct materials cost of the job, the actual direct labor cost of the job, and the actual manufacturing overhead cost of the job.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 03-02 Apply overhead cost to jobs using a predetermined overhead rateLevel: Medium

7.A debit balance in the Manufacturing Overhead account at the end of the year means that manufacturing overhead is overapplied.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 03-05 Use T-accounts to show the flow of costs in a job-order costing systemLearning Objective: 03-07 Compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accountsLevel: Medium8.Period costs are expensed as incurred, rather than going into the Work in Process account.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 03-05 Use T-accounts to show the flow of costs in a job-order costing systemLevel: Medium9.Advertising costs should be charged to the Manufacturing Overhead account.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 03-05 Use T-accounts to show the flow of costs in a job-order costing systemLevel: Easy10.When a job has been completed, the goods are transferred from the production department to the finished goods warehouse and the journal entry would include a credit to Work in Process.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 03-05 Use T-accounts to show the flow of costs in a job-order costing systemLevel: Easy

11.Underapplied or overapplied manufacturing overhead represents the difference between actual overhead costs and applied overhead costs.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 03-07 Compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accountsLevel: Easy12.Top management salaries should not go into the Manufacturing Overhead account.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 03-04 Understand the flow of costs in a job-order costing system and prepare appropriate journal entries to record costsLevel: Easy13.If manufacturing overhead applied exceeds the actual manufacturing overhead costs of the period, then manufacturing overhead is overapplied.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 03-07 Compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accountsLevel: Easy

Multiple Choice Questions

14.In computing its predetermined overhead rate, Marple Company inadvertently left its indirect labor costs out of the computation. This oversight will cause:A.Manufacturing Overhead to be overapplied.B.the Cost of Goods Manufactured to be understated.C.the debits to the Manufacturing Overhead account to be understated.D.the ending balance in Work in Process to be overstated.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 03-01 Compute a predetermined overhead rateLearning Objective: 03-05 Use T-accounts to show the flow of costs in a job-order costing systemLevel: Hard15.Which of the following is the correct formula to compute the predetermined overhead rate?A.Estimated total units in the allocation base divided by estimated total manufacturing overhead costs.B.Estimated total manufacturing overhead costs divided by estimated total units in the allocation base.C.Actual total manufacturing overhead costs divided by estimated total units in the allocation base.D.Estimated total manufacturing overhead costs divided by actual total units in the allocation base.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 03-01 Compute a predetermined overhead rateLevel: Easy

16.Which of the following would probably be the least appropriate allocation base for allocating overhead in a highly automated manufacturer of specialty valves?A.Machine-hoursB.Power consumptionC.Direct labor-hoursD.Machine setups

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 03-01 Compute a predetermined overhead rateLevel: Hard17.What document is used to determine the actual amount of direct labor to record on a job cost sheet?A.Time ticketB.Payroll registerC.Production orderD.Wages payable account

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 03-03 Compute the total cost and average cost per unit of a jobLevel: Easy

18.A proper journal entry to close overapplied manufacturing overhead to Cost of Goods Sold would be:A.Option AB.Option BC.Option CD.Option D

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 03-04 Understand the flow of costs in a job-order costing system and prepare appropriate journal entries to record costsLearning Objective: 03-07 Compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accountsLevel: Medium19.In a job-order costing system, direct labor cost is ordinarily debited to:A.Manufacturing Overhead.B.Cost of Goods Sold.C.Finished Goods.D.Work in Process.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 03-04 Understand the flow of costs in a job-order costing system and prepare appropriate journal entries to record costsLevel: Medium

20.In a job-order costing system, the use of direct materials that have been previously purchased is recorded as a debit to:A.Raw Materials inventory.B.Work in Process inventory.C.Finished Goods inventory.D.Manufacturing Overhead.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 03-04 Understand the flow of costs in a job-order costing system and prepare appropriate journal entries to record costsLevel: Easy21.The journal entry to record the incurrence of indirect labor costs is:A.Option AB.Option BC.Option CD.Option D

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 03-04 Understand the flow of costs in a job-order costing system and prepare appropriate journal entries to record costsLevel: Easy

22.Which of the following accounts is debited when direct labor is recorded?A.Work in processB.Salaries and wages expenseC.Salaries and wages payableD.Manufacturing overhead

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 03-04 Understand the flow of costs in a job-order costing system and prepare appropriate journal entries to record costsLevel: Easy23.The balance in the Work in Process account equals:A.the balance in the Finished Goods inventory account.B.the balance in the Cost of Goods Sold account.C.the balances on the job cost sheets of uncompleted jobs.D.the balance in the Manufacturing Overhead account.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 03-05 Use T-accounts to show the flow of costs in a job-order costing systemLevel: Easy24.In a job-order costing system, indirect materials that have been previously purchased and that are used in production are recorded as a debit to:A.Work in Process inventory.B.Manufacturing Overhead.C.Finished Goods inventory.D.Raw Materials inventory.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 03-05 Use T-accounts to show the flow of costs in a job-order costing systemLevel: Easy

25.Martinez Aerospace Company uses a job-order costing system. The direct materials for Job #045391 were purchased in July and put into production in August. The job was not completed by the end of August. At the end of August, in what account would the direct material cost assigned to Job #045391 be located?A.Raw materials inventoryB.Work in process inventoryC.Finished goods inventoryD.Cost of goods manufactured

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 03-05 Use T-accounts to show the flow of costs in a job-order costing systemLevel: Easy26.Which terms will make the following statement true? When manufacturing overhead is overapplied, the Manufacturing Overhead account has a __________ balance and applied manufacturing overhead is greater than __________ manufacturing overhead.A.debit, actualB.credit, actualC.debit, estimatedD.credit, estimated

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 03-07 Compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accountsLevel: Medium

27.Which of the following is correct with respect to closing out overapplied manufacturing overhead to Cost of Goods Sold versus closing it out to Cost of Goods Sold and Finished Goods and Work in Process inventories?A.The balance in the Work in Process account after allocation will be higher if the overapplied manufacturing overhead is closed out by allocating it to all appropriate accounts.B.The balance in the Work in Process account after allocation will be the same under either method.C.Net operating income will be higher if all of the overapplied manufacturing overhead is closed out to Cost of Goods Sold.D.Cost of Goods Sold will be lower if the overapplied manufacturing overhead is closed out by allocating it to the inventory accounts as well as to Cost of Goods Sold.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 03-07 Compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accountsLevel: Hard28.Overapplied manufacturing overhead occurs when:A.applied overhead exceeds actual overhead.B.applied overhead exceeds estimated overhead.C.actual overhead exceeds estimated overhead.D.budgeted overhead exceeds actual overhead.Chapter 04 Process Costing Answer Key

True / False Questions1.The following journal entry would be made in a processing costing system when units that have been completed with respect to the work done in Processing Department Z are transferred from Processing Department Z to Processing Department Y:TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 04-01 Record the flow of materials; labor; and overhead through a process costing systemLevel: Easy2.In a process costing system, overhead costs are traced to units of product as they are incurred.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 04-01 Record the flow of materials; labor; and overhead through a process costing systemLevel: Easy3.A process cost system would be used to account for the cost of manufacturing an oil tanker.FALSE

AACSB: Reflective ThinkingAICPA BB: IndustryAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 04-01 Record the flow of materials; labor; and overhead through a process costing systemLevel: Easy

4.A process costing system would be best suited for production of a large quantity of a homogeneous product.TRUE

AACSB: Reflective ThinkingAICPA BB: IndustryAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 04-01 Record the flow of materials; labor; and overhead through a process costing systemLevel: Easy5.In process costing, costs are accumulated in processing departments, rather than by job.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 04-01 Record the flow of materials; labor; and overhead through a process costing systemLevel: Easy6.Process costing would be used by companies producing the following items: bricks, bolts, pharmaceutical items, natural gas, and electricity.TRUE

AACSB: Reflective ThinkingAICPA BB: IndustryAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 04-01 Record the flow of materials; labor; and overhead through a process costing systemLevel: Easy7.The job cost sheet is used in both job-order and process costing.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 04-01 Record the flow of materials; labor; and overhead through a process costing systemLevel: Easy

8.In process costing, the equivalent units computed for materials is generally the same as that computed for direct labor.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 04-02 Compute the equivalent units of production using the weighted-average methodLevel: Medium9.The weighted-average method of process costing can only be used if materials are added at the beginning of the production process.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 04-02 Compute the equivalent units of production using the weighted-average methodLevel: Medium10.Under the weighted-average method, the cost of materials in the beginning work in process inventory is not used in the computation of the cost per equivalent unit for materials.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 04-03 Compute the cost per equivalent unit using the weighted-average methodLevel: Medium

11.When computing the cost per equivalent unit, it is not necessary to consider the percentage completion of the units in beginning inventory under the weighted-average method.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 04-03 Compute the cost per equivalent unit using the weighted-average methodLevel: Medium12.When assigning costs to partially completed units in the ending work in process inventory, it is not necessary to consider the percentage completion of the units under the weighted-average method.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 04-04 Assign costs to units using the weighted-average methodLevel: Medium

Multiple Choice Questions13.In a process costing system, manufacturing overhead applied is usually recorded as a debit to:A.Finished goods.B.Work in process.C.Manufacturing overhead.D.Cost of goods sold.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 04-01 Record the flow of materials; labor; and overhead through a process costing systemLevel: Easy

14.A company has two processing departments: A and B. Which of the following entries or sets of journal entries would be used to record the transfer between processing departments and from the final processing department to finished goods?A.Option AB.Option BC.Option CD.Option D

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 04-01 Record the flow of materials; labor; and overhead through a process costing systemLevel: Medium15.A process costing system:A.uses a separate Work in Process account for each processing department.B.uses a single Work in Process account for the entire company.C.uses a separate Work in Process account for each type of product produced.D.does not use a Work in Process account in any form.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 04-01 Record the flow of materials; labor; and overhead through a process costing systemLevel: Medium

16.A company should use process costing, rather than job order costing, if:A.production is only partially completed during the accounting period.B.the product is manufactured in batches only as orders are received.C.the product is composed of mass-produced homogeneous units.D.the product goes through several steps of production.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 04-01 Record the flow of materials; labor; and overhead through a process costing systemLevel: Easy17.Which of the following characteristics applies to process costing, but does not apply to job order costing?A.The need for averaging.B.The use of equivalent units of production.C.Separate, identifiable jobs.D.The use of predetermined overhead rates.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 04-01 Record the flow of materials; labor; and overhead through a process costing systemLevel: Easy18.Equivalent units for a process costing system using the weighted-average method would be equal to:A.units completed during the period and transferred out.B.units started and completed during the period plus equivalent units in the ending work in process inventory.C.units completed during the period less equivalent units in the beginning inventory, plus equivalent units in the ending work in process inventory.D.units completed during the period plus equivalent units in the ending work in process inventory.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 04-02 Compute the equivalent units of production using the weighted-average methodLevel: Medium

19.The cost of beginning inventory under the weighted-average method is:A.added in with current period costs in determining costs per equivalent unit for a given period.B.ignored in determining the costs per equivalent unit for a given period.C.considered separately from costs incurred during the current period.D.subtracted from current period costs in determining costs per equivalent unit for a given period.Chapter 05 Cost-Volume-Profit Relationships Answer Key

True / False Questions1.Reynold Enterprises sells a single product for $25. The variable expense per unit is $15 and the fixed expense per unit is $5 at the current level of sales. The company's net operating income will increase by $5 if one more unit is sold.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 05-01 Explain how changes in activity affect contribution margin and net operating incomeLevel: Medium2.Incremental analysis is an analytical approach that focuses only on those revenues and costs that will change as a result of a decision.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 05-01 Explain how changes in activity affect contribution margin and net operating incomeLevel: Easy3.To facilitate decision-making, fixed expenses should be expressed on a per-unit basis.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 05-01 Explain how changes in activity affect contribution margin and net operating incomeLevel: Medium

4.On a CVP graph for a profitable company, the total revenue line will be steeper than the total expense line.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 05-02 Prepare and interpret a cost-volume-profit (CVP) graph and a profit graphLevel: Medium5.On a CVP graph for a profitable company, the total expense line will be steeper than the line representing fixed costs.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 05-02 Prepare and interpret a cost-volume-profit (CVP) graph and a profit graphLevel: Easy6.For a given level of sales, a low contribution margin ratio will produce less net operating income than a high contribution margin ratio.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 05-03 Use the contribution margin ratio (cm ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volumeLevel: Medium

7.The impact on net operating income of a given dollar change in sales can be computed by applying the contribution margin ratio to the dollar change in sales.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 05-03 Use the contribution margin ratio (cm ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volumeLevel: Medium8.The variable expense per unit is $12 and the selling price per unit is $40. Then the contribution margin ratio is 70%.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 05-03 Use the contribution margin ratio (cm ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volumeLevel: Easy9.Mark Company currently sells a video recorder with a selling price of $300 per unit. The variable expense per unit is $175 and fixed expenses are $100,000. If the company reduces variable expenses by $20 per unit and increases the fixed expenses by $10,000, the break-even point will increase.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 05-04 Show the effects on net operating income of changes in variable costs; fixed costs; selling price; and volumeLearning Objective: 05-06 Determine the break-even pointLevel: Medium

10.The total volume in sales dollars that would be required to attain a given target profit is determined by dividing the sum of the fixed expenses and the target profit by the contribution margin ratio.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 05-05 Determine the level of sales needed to achieve a desired target profitLevel: Easy11.The break-even point in units can be obtained by dividing total fixed expenses by the contribution margin ratio.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 05-06 Determine the break-even pointLevel: Medium12.At the break-even point: Sales - Variable expenses = Fixed expenses.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 05-06 Determine the break-even pointLevel: Easy13.If fixed expenses increase by $10,000 per year, then the level of sales needed to break even will also increase by $10,000.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 05-06 Determine the break-even pointLevel: Medium

14.If the fixed expenses increase in a company, and all other factors remain unchanged, then one would expect the margin of safety to decrease.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 05-07 Compute the margin of safety and explain its significanceLevel: Medium15.The margin of safety percentage is equal to the margin of safety in dollars divided by total sales in dollars.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 05-07 Compute the margin of safety and explain its significanceLevel: Easy16.If two companies produce the same product and have the same total sales and same total expenses, operating leverage will be lower in the company with a higher proportion of fixed expenses in its cost structure.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 05-08 Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating incomeLevel: Medium

17.A company with a degree of operating leverage of 4 would expect net operating income to increase by 200% if sales increased from $100,000 to $150,000.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 05-08 Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating incomeLevel: Easy18.If two companies have the same total sales and total expenses and make the same product, the volatility of net operating income with changes in sales will tend to be greater in the company with a higher proportion of fixed expenses in its cost structure.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 05-08 Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating incomeLevel: Medium19.A shift in the sales mix from products with a low contribution margin ratio toward products with a high contribution margin ratio will lower the break-even point in the company as a whole.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 05-09 Compute the break-even point for a multiproduct company and explain the effects of shifts in the sales mix on contribution margin and the break-even pointLevel: Medium

Multiple Choice Questions

20.The difference between total sales in dollars and total variable expenses is called:A.net operating income.B.net profit.C.the gross margin.D.the contribution margin.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 05-01 Explain how changes in activity affect contribution margin and net operating incomeLevel: EasySource: CMA, adapted21.With regard to the CVP graph, which of the following statements is not correct?A.The CVP graph assumes that volume is the only factor affecting total cost.B.The CVP graph assumes that selling prices do not change.C.The CVP graph assumes that variable costs go down as volume goes up.D.The CVP graph assumes that fixed expenses are constant in total within the relevant range.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 05-02 Prepare and interpret a cost-volume-profit (CVP) graph and a profit graphLevel: Easy

22.East Company manufactures and sells a single product with a positive contribution margin. If the selling price and the variable expense per unit both increase 5% and fixed expenses do not change, what is the effect on the contribution margin per unit and the contribution margin ratio?A.Option AB.Option BC.Option CD.Option D

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 05-03 Use the contribution margin ratio (cm ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volumeLearning Objective: 05-04 Show the effects on net operating income of changes in variable costs; fixed costs; selling price; and volumeLevel: MediumSource: CMA, adapted

23.Which of the following formulas is used to calculate the contribution margin ratio?A.(Sales - Fixed expenses) SalesB.(Sales - Cost of goods sold) SalesC.(Sales - Variable expenses) SalesD.(Sales - Total expenses) Sales

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 05-03 Use the contribution margin ratio (cm ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volumeLevel: Easy

24.Brasher Company manufactures and sells a single product that has a positive contribution margin. If the selling price and variable expenses both decrease by 5% and fixed expenses do not change, then what would be the effect on the contribution margin per unit and the contribution margin ratio?A.Option AB.Option BC.Option CD.Option D

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 05-04 Show the effects on net operating income of changes in variable costs; fixed costs; selling price; and volumeLevel: HardSource: CMA, adapted25.The break-even point in unit sales is found by dividing total fixed expenses by:A.the contribution margin ratio.B.the variable expenses per unit.C.the sales price per unit.D.the contribution margin per unit.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 05-06 Determine the break-even pointLevel: Easy

26.Break-even analysis assumes that:A.total costs are constant.B.the average fixed expense per unit is constant.C.the average variable expense per unit is constant.D.variable expenses are nonlinear.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 05-06 Determine the break-even pointLevel: Easy27.If Q equals the level of output, P is the selling price per unit, V is the variable expense per unit, and F is the fixed expense, then the break-even point in units is:A.Q (P-V).B.F (P-V).C.V (P-V).D.F [Q(P-V)].

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 05-06 Determine the break-even pointLevel: Medium28.The break-even point in unit sales increases when variable expenses:A.increase and the selling price remains unchanged.B.decrease and the selling price remains unchanged.C.decrease and the selling price increases.D.remain unchanged and the selling price increases.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 05-06 Determine the break-even pointLevel: EasySource: CMA, adapted

29.The margin of safety percentage is computed as:A.Break-even sales Total sales.B.Total sales - Break-even sales.C.(Total sales - Break-even sales) Break-even sales.D.(Total sales - Break-even sales) Total sales.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 05-07 Compute the margin of safety and explain its significanceLevel: Easy30.The amount by which a company's sales can decline before losses are incurred is called the:A.contribution margin.B.degree of operating leverage.C.margin of safety.D.contribution margin ratio.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 05-07 Compute the margin of safety and explain its significanceLevel: Easy31.The degree of operating leverage can be calculated as:A.contribution margin divided by sales.B.gross margin divided by net operating income.C.net operating income divided by sales.D.contribution margin divided by net operating income.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 05-08 Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating incomeLevel: Easy

32.All other things the same, which of the following would be true of the contribution margin and variable expenses of a company with high fixed costs and low variable costs as compared to a company with low fixed costs and high variable costs?A.Option AB.Option BC.Option CD.Option D

Chapter 06 Variable Costing and Segment Reporting: Tools for Management Answer Key

True / False Questions1.Under variable costing, all variable costs are treated as product costs.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each methodLevel: Medium2.Under variable costing, fixed manufacturing overhead cost is treated as a product cost.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each methodLevel: Easy3.The unit product cost under absorption costing does not include fixed manufacturing overhead cost.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each methodLevel: Medium

4.Variable manufacturing overhead costs are treated as period costs under both absorption and variable costing.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each methodLevel: Easy5.When reconciling variable costing and absorption costing net operating income, fixed manufacturing overhead costs deferred in inventory under absorption costing should be added to variable costing net operating income to arrive at the absorption costing net operating income.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differLevel: Medium6.When production is less than sales for the period, absorption costing net operating income will generally be less than variable costing net operating income.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differLevel: Medium

7.Absorption costing is more compatible with cost-volume-profit analysis than is variable costing.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: Other topicsLevel: Medium8.Contribution margin and segment margin mean the same thing.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisionsLevel: Medium9.Assuming that a segment has both variable expenses and traceable fixed expenses, an increase in sales should increase profits by an amount equal to the sales times the segment margin ratio.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisionsLevel: Hard

10.The salary of the treasurer of a corporation is an example of a common cost which normally cannot be traced to product segments.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisionsLevel: Medium11.The salary paid to a store manager is a traceable fixed expense of the store.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisionsLevel: Medium12.Segmented statements for internal use should be prepared in the contribution format.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisionsLevel: Easy13.Fixed costs that are traceable to a segment may become common if the segment is divided into smaller units.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisionsLevel: Medium

14.The contribution margin is viewed as a better gauge of the long run profitability of a segment than the segment margin.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisionsLevel: Easy15.In responsibility accounting, each segment in an organization should be charged with the costs for which it is responsible and over which it has control plus its share of common organizational costs.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisionsLevel: Medium16.The contribution margin tells us what happens to profits as volume changes if a segment's capacity and fixed costs change as well.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisionsLevel: Medium

17.Only those costs that would disappear over time if a segment were eliminated should be considered traceable costs of the segment.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisionsLevel: Easy18.In segment reporting, sales dollars is usually an appropriate allocation base for selling, general, and administrative expenses.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisionsLevel: Medium19.A segment is any portion or activity of an organization about which a manager seeks revenue, cost, or profit data.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisionsLevel: Easy

Multiple Choice Questions

20.Routsong Company had the following sales and production data for the past four years:Selling price per unit, variable cost per unit, and total fixed cost are the same in each year. Which of the following statements is not correct?A.Under variable costing, net operating income for Year 1 and Year 2 would be the same.B.Because of the changes in production levels, under variable costing the unit product cost will change each year.C.The total net operating income for all four years combined would be the same under variable and absorption costing.D.Under absorption costing, net operating income in Year 4 would be less than the net operating income in Year 2.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each methodLearning Objective: 06-02 Prepare income statements using both variable and absorption costingLevel: Hard21.Would the following costs be classified as product or period costs under variable costing at a retail clothing store?A.Option AB.Option BC.Option CD.Option D

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each methodLevel: Medium

22.Fixed manufacturing overhead is included in product costs under:A.Option AB.Option BC.Option CD.Option D

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each methodLevel: Easy23.Which of the following are considered to be product costs under variable costing?I. Variable manufacturing overhead. II. Fixed manufacturing overhead.III. Selling and administrative expenses.A.I.B.I and II.C.I and III.D.I, II, and III.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each methodLevel: Easy

24.Which of the following are considered to be product costs under absorption costing?I. Variable manufacturing overhead. II. Fixed manufacturing overhead.III. Selling and administrative expenses.A.I, II, and III.B.I and II.C.I and III.D.I.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each methodLevel: Easy25.Under variable costing, costs that are treated as period costs include:A.only fixed manufacturing costs.B.both variable and fixed manufacturing costs.C.all fixed costs.D.only fixed selling and administrative costs.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each methodLevel: Easy26.Selling and administrative expenses are considered to be:A.a product cost under variable costing.B.a product cost under absorption costing.C.part of fixed manufacturing overhead under variable costing.D.a period cost under variable costing.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each methodLevel: Easy

27.A portion of the total fixed manufacturing overhead cost incurred during a period may:A.be excluded from cost of goods sold under absorption costing.B.be charged as a period cost with the remainder deferred under variable costing.C.never be excluded from cost of goods sold under absorption costing.D.never be excluded from cost of goods sold under variable costing.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 06-02 Prepare income statements using both variable and absorption costingLevel: Hard28.A company using lean production methods likely would show approximately the same net operating income under both absorption and variable costing because:A.ending inventory would be valued in the same manner for both methods under lean production.B.production is geared to sales under lean production and thus there would be little or no ending inventory.C.under lean production fixed manufacturing overhead costs are charged to the period incurred rather than to the product produced.D.there is no distinction made under lean production between fixed and variable costs.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differLevel: Medium

29.Dull Corporation has been producing and selling electric razors for the past ten years. Shown below are the actual net operating incomes for the last three years of operations at Dull:Dull Corporation's cost structure and selling price has not changed during its ten years of operations. Based on the information presented above, which of the following statements are true?A.Dull Corporation operated above the breakeven point in each of the three years presented.B.For the three years presented in total, Dull Corporation sold more units than it produced.C.In Year 10, Dull Corporation produced fewer units than it sold.D.In Year 9, Dull Corporation produced more units than it sold.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differLevel: Hard30.Net operating income reported under absorption costing will exceed net operating income reported under variable costing for a given period if:A.production equals sales for that period.B.production exceeds sales for that period.C.sales exceed production for that period.D.the variable manufacturing overhead exceeds the fixed manufacturing overhead.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differLevel: MediumSource: CMA, adapted

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

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differLevel: Medium32.Over an extended period of time in which the final ending inventories are zero, the accumulated net operating income figures reported under absorption costing will be:A.greater than those reported under variable costing.B.less than those reported under variable costing.C.the same as those reported under variable costing.D.higher or lower since no generalization can be made.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differLevel: Hard33.In an income statement segmented by product line, a fixed expense that cannot be allocated among product lines on a cause-and-effect basis should be:A.classified as a traceable fixed expense and not allocated.B.allocated to the product lines on the basis of sales dollars.C.allocated to the product lines on the basis of segment margin.D.classified as a common fixed expense and not allocated.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisionsLevel: Medium

34.A common cost that should not be assigned to a particular product on a segmented income statement is:A.the product's advertising costs.B.the salary of the corporation president.C.direct materials costs.D.the product manager's salary.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisionsLevel: Easy35.All other things being equal, if a division's traceable fixed expenses increase:A.the division's contribution margin ratio will decrease.B.the division's segment margin ratio will remain the same.C.the division's segment margin will decrease.D.the overall company profit will remain the same.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisionsLevel: Medium36.All other things equal, if a division's traceable fixed expenses decrease:A.the division's segment margin will increase.B.the overall company net operating income will decrease.C.the division's contribution margin will increase.D.the division's sales volume will increase.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisionsLevel: Medium

37.Segment margin is sales minus:A.variable expenses.B.traceable fixed expenses.C.variable expenses and common fixed expenses.D.variable expenses and traceable fixed expenses.Chapter 07 Activity-Based Costing: A Tool to Aid Decision Making Answer KeyTrue / False Questions1.Unit-level activities are performed each time a unit is produced.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 07-01 Understand activity-based costing and how it differs from a traditional costing system.Level: Easy2.Organization-sustaining activities are activities of the general organization that support specific products.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 07-01 Understand activity-based costing and how it differs from a traditional costing system.Level: Medium3.Costs classified as batch-level costs should depend on the number of batches processed rather than on the number of units produced, the number of units sold, or other measures of volume.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 07-01 Understand activity-based costing and how it differs from a traditional costing system.Level: Easy

4.Customer-level activities relate to specific customers and are not tied to any specific products.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 07-01 Understand activity-based costing and how it differs from a traditional costing system.Level: Easy5.Managing and sustaining product diversity requires many more overhead resources such as production schedulers and product design engineers than managing and sustaining a single product. The costs of these resources can be accurately allocated to products on the basis of direct labor-hours.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 07-01 Understand activity-based costing and how it differs from a traditional costing system.Level: Medium6.Activity-based costing is a costing method that is designed to provide managers with product cost information for external financial reports.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 07-01 Understand activity-based costing and how it differs from a traditional costing system.Level: Easy

7.Transaction drivers usually take more effort to record than duration drivers.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 07-01 Understand activity-based costing and how it differs from a traditional costing system.Level: Medium8.In general, duration drivers are more accurate measures of the consumption of resources than transaction drivers.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 07-01 Understand activity-based costing and how it differs from a traditional costing system.Level: Medium9.Even departmental overhead rates will not correctly assign overhead costs in situations where a company has a range of products that differ in volume, lot size, or complexity of production.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 07-01 Understand activity-based costing and how it differs from a traditional costing system.Level: Easy10.In activity-based costing, some manufacturing costs may be excluded from product costs.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 07-01 Understand activity-based costing and how it differs from a traditional costing system.Level: Easy

11.In activity-based costing, there are a number of activity cost pools, each of which is allocated to products and other costing objects using its own unique measure of activity.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 07-01 Understand activity-based costing and how it differs from a traditional costing system.Level: Easy12.The practice of assigning the costs of idle capacity to products can result in unstable unit product costs.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 07-01 Understand activity-based costing and how it differs from a traditional costing system.Level: Medium13.An activity-based costing system should include all of the activities carried out in an organization because any simplification will inevitably result in inaccuracy.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 07-01 Understand activity-based costing and how it differs from a traditional costing system.Level: Hard14.The costs of a particular department should not be split up among activity cost pools in an activity-based costing system.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 07-02 Assign costs to cost pools using a first-stage allocation.Level: Medium

Multiple Choice Questions15.Personnel administration is an example of (an):A.Unit-level activity.B.Batch-level activity.C.Product-level activity.D.Organization-sustaining activity.Organization-sustaining activities are carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 07-01 Understand activity-based costing and how it differs from a traditional costing system.Level: Medium16.Which of the following activities would be classified as a batch-level activity?A.Setting up equipment.B.Designing a new product.C.Training employees.D.Milling a part required for the final product.Batch-level activities are performed each time a batch of goods is handled or processed, regardless of how many units are in the batch. The amount of resource consumed depends on the number of batches run rather than on the number of units in the batch.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 07-01 Understand activity-based costing and how it differs from a traditional costing system.Level: Medium

17.Would the following activities at a manufacturer of canned soup be best classified as unit-level, batch-level, product-level, or organization-sustaining activities?A.Option AB.Option BC.Option CD.Option DProduct-level activities relate to specific products that must be carried out regardless of how many units are produced and sold or batches run. Batch-level activities are performed each time a batch of goods is handled or processed regardless of how many units are in the batch. The amount of resource consumed depends on the number of batches run rather than on the number of units in the batch.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 07-01 Understand activity-based costing and how it differs from a traditional costing system.Level: Medium18.A duration driver is:A.A simple count of the number of times an activity occurs.B.An activity measure that is used for the life of the company.C.A measure of the amount of time required to perform an activity.D.An activity measure that is used for the life of an activity-based costing system.A duration driver is a measure of the amount of time required to perform an activity.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 07-01 Understand activity-based costing and how it differs from a traditional costing system.Level: Easy

19.A transaction driver is:A.An event that causes a transaction to begin.B.A measure of the amount of time required to perform an activity.C.An event that causes a transaction to end.D.A simple count of the number of times an activity occurs.A transaction driver is a simple count of the number of times an activity occurs.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 07-01 Understand activity-based costing and how it differs from a traditional costing system.Level: Easy20.Which of the following is not a limitation of activity-based costing?A.Maintaining an activity-based costing system is more costly than maintaining a traditional direct labor-based costing system.B.Changing from a traditional direct labor-based costing system to an activity-based costing system changes product margins and other key performance indicators used by managers. Such changes are often resisted by managers.C.In practice, most managers insist on fully allocating all costs to products, customers, and other costing objects in an activity-based costing system. This results in overstated costs.D.More accurate product costs may result in increasing the selling prices of some products.An activity-based costing system is more costly to maintain than a traditional costing system. Activity-based costing produces numbers, such as product margins, that are at odds with the numbers produced by traditional costing systems.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 07-01 Understand activity-based costing and how it differs from a traditional costing system.Level: Easy

21.An activity-based costing system that is designed for internal decision-making will not conform to generally accepted accounting principles because:A.some manufacturing costs (i.e., the costs of idle capacity and organization-sustaining costs) will not be assigned to products.B.some non-manufacturing costs are assigned to products.C.first-stage allocations may be based on subjective interview data.D.all of the above are reasons why an activity-based costing system that is designed for internal decision-making will not conform to generally accepted accounting principles.An ABC system designed for internal decision-making does not conform to generally accepted accounting principles (GAAP). Product costs computed for external reports must include all of the manufacturing costs and only manufacturing costs; but in an ABC system, product costs exclude some manufacturing costs and include some nonmanufacturing costs. It is possible to adjust the ABC data at the end of the period to conform to GAAP, but that requires more work.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 07-01 Understand activity-based costing and how it differs from a traditional costing system.Level: Easy22.Designing a new product is an example of (an):A.Unit-level activity.B.Batch-level activity.C.Product-level activity.D.Organization-sustaining activity.Product-level activities relate to specific products that must be carried out regardless of how many units are produced and sold or batches run.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 07-01 Understand activity-based costing and how it differs from a traditional costing system.Level: Easy

23.Property taxes are an example of a cost that would be considered to be:A.Unit-level.B.Batch-level.C.Product-level.D.Organization-sustaining.Organization-sustaining activities are carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made.Chapter 08 Profit Planning Answer KeyTrue / False Questions1.The production budget is typically prepared prior to the sales budget.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 08-01 Understand why organizations budget and the processes they use to create budgetsLearning Objective: 08-02 Prepare a sales budget; including a schedule of expected cash collectionsLearning Objective: 08-03 Prepare a production budgetLevel: Medium2.One benefit of budgeting is that it coordinates the activities of the entire organization.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 08-01 Understand why organizations budget and the processes they use to create budgetsLevel: Easy3.Both planning and control are needed for an effective budgeting system.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 08-01 Understand why organizations budget and the processes they use to create budgetsLevel: Easy

4.One difficulty with self-imposed budgets is that they are not subject to any type of review.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionLearning Objective: 08-01 Understand why organizations budget and the processes they use to create budgetsLevel: Medium5.The master budget is a network consisting of many separate budgets that are interdependent.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 08-01 Understand why organizations budget and the processes they use to create budgetsLevel: Easy6.Planning and control are essentially the same thing.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeLearning Objective: 08-01 Understand why organizations budget and the processes they use to create budgetsLevel: Easy7.Sales forecasts are drawn up after the cash budget has been completed because only then are the funds available for marketing known.FALSE

AACSB: Reflecti