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FS ANALYSIS THEORIES:

True/False Questions

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


size.

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

2. One limitation of vertical analysis is that it cannot be used to compare two


companies that are significantly different in size.

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

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


total assets.

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

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

Ans: False
AACSB: Analytic
AICPA FN: Reporting
LO: 2

AICPA BB: Critical Thinking


Level: Medium

5. Earnings per share is computed by dividing net income (after deducting


preferred dividends) by the average number of common shares outstanding.

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

6. The dividend payout ratio divided by the dividend yield ratio equals the priceearnings ratio.

Ans: True
AACSB: Analytic
AICPA FN: Reporting
LO: 2

AICPA BB: Critical Thinking


Level: Hard

7. An increase in the number of shares of common stock outstanding will


decrease a company's price-earnings ratio if the market price per share
remains unchanged.

Ans: False
AACSB: Analytic
AICPA FN: Reporting
LO: 2

AICPA BB: Critical Thinking


Level: Hard

8. A company's financial leverage is negative when its return on total assets is


less than its return on common stockholders' equity.

Ans: False
AACSB: Analytic
AICPA FN: Reporting
LO: 2

AICPA BB: Critical Thinking


Level: Hard

9. When computing return on common stockholders' equity, retained earnings


should be included as part of common stockholders' equity.

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

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

Ans: False
AACSB: Analytic
AICPA FN: Reporting
LO: 2

AICPA BB: Critical Thinking


Level: Medium

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

Ans: True
AACSB: Analytic
AICPA FN: Reporting
LO: 3

AICPA BB: Critical Thinking


Level: Medium

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

Ans: False
AACSB: Analytic
AICPA FN: Reporting
LO: 3

AICPA BB: Critical Thinking


Level: Medium

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


ratio should decrease.

Ans: False
AACSB: Analytic
AICPA FN: Reporting
LO: 3

AICPA BB: Critical Thinking


Level: Medium

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

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

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

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

Multiple Choice Questions

16. Common size financial statements help an analyst to:


A)

Evaluate financial statements of companies within a given industry of


the approximate same size.

B)

Determine which companies in a similar industry are at approximately


the same stage of development.

C)

Compare the mix of assets, liabilities, capital, revenue, and expenses


within a company over a period of time or between companies within a
given industry without respect to size.

D)

Ascertain the relative potential of companies of similar size in different


industries.

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

17. Which of the following ratios would be least useful in determining a


company's ability to pay its expenses and liabilities?
A)

current ratio

B)

acid-test ratio

C)

price-earnings ratio

D)

times interest earned ratio

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

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

following ratios:
A)

earnings per share.

B)

dividend yield ratio.

C)

price-earnings ratio.

D)

acid-test ratio.

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

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

Return on Total Assets


Increase
Increase
Decrease
Decrease

A)
B)
C)
D)

Debt-to-Equity Ratio
Increase
Decrease
Increase
Decrease

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

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

increase.

B)

decrease.

C)

remain unchanged.

D)

impossible to determine.

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

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


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

Return on total assets.

B)

Return on total liabilities.

C)

Return on common stockholders' equity.

D)

Cannot be determined.

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

22. Clark Company issued bonds with an interest rate of 10%. The company's

return on assets is 12%. The company's return on common stockholders'


equity would most likely:
A)

increase.

B)

decrease.

C)

remain unchanged.

D)

cannot be determined.

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

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

acquiring assets through the issuance of long-term debt.

B)

acquiring assets through the use of accounts payable.

C)

acquiring assets through the issuance of common stock.

D)

both A and B above

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

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

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

B)

Book value per common share is based on past transactions whereas


the market price of a share of stock mainly reflects what investors
expect to happen in the future.

C)

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

D)

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

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

25. The ratio of total cash, marketable securities, accounts receivable, and shortterm notes to current liabilities is:
A)

the debt-to-equity ratio.

B)

the current ratio.

C)

the acid-test ratio.

D)

working capital.

Ans: C

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Reporting

LO: 3,4

Level: Easy

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

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

B)

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

C)

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

D)

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

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

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

the purchase of inventory for cash.

B)

the collection of an account receivable.

C)

the payment of an account payable.

D)

none of the above.

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

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

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

B)

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

C)

a relaxation of credit policies in year 2.

D)

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

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

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

inventory turnover ratio would:


A)

increase.

B)

decrease.

C)

remain unchanged.

D)

impossible to determine.

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

COST ANALYSIS THEORIES:


True/False Questions

1. Within the relevant range, a change in activity results in a change in total


variable cost and the per unit fixed cost.

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

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

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

3. A variable cost fluctuates in total as activity changes but remains constant on


a per unit basis over the relevant range.

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

4. A cost that is classified as variable with respect to one measure of activity


could be classified as fixed with respect to a different measure of activity.

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

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

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

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

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

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

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

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

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

9. The high-low method is generally more accurate than the least-squares


regression method in analyzing cost behavior.

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

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

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

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

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

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

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

13. Contribution margin equals revenue minus all variable costs.

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

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

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

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

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

Multiple Choice Questions

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

The cost per unit of A has remained unchanged.

B)

The cost per unit of B has decreased.

C)

The cost per unit of A has decreased.

D)

The cost per unit of B has remained unchanged.

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

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

Unit fixed cost and total fixed cost

B)

Unit variable cost and total variable cost

C)

Unit fixed cost and total variable cost

D)

Unit fixed cost and unit variable cost

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

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

fixed cost

B)

step-variable cost

C)

mixed cost

D)

curvilinear cost

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

19. Limousine Conversion Company purchases ordinary Cadillacs, cuts them in


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

fixed cost

B)

mixed cost

C)

step-variable cost

D)

variable cost

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

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

fixed cost.

B)

mixed cost.

C)

step-variable cost.

D)

variable cost.

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

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

an increase in fixed cost per unit.

B)

a proportionate increase in total fixed costs.

C)

an unchanged fixed cost per unit.

D)

a decrease in fixed cost per unit.

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

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

total cost

B)

total fixed cost

C)

total variable cost

D)

variable cost per unit

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

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

total cost

B)

total fixed cost

C)

total variable cost

D)

variable cost per unit

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

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

total cost

B)

total fixed cost

C)

total variable cost

D)

variable cost per unit

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

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

total cost

B)

total fixed cost

C)

units of activity

D)

variable cost per unit

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

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

the cost of advertising its products

B)

the cost of fire insurance on its factory building

C)

depreciation on its manufacturing equipment

D)

both a and b above

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

27. Which of the following is a weakness of the quick-and-dirty scattergraph


method of analyzing mixed cost?
A)

It is impossible to determine variable cost per unit.

B)

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

C)

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

D)

Both B and C above

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

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

The high-low method has no major weaknesses.

B)

The high-low method is very hard to apply.

C)

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

D)

None of the above is true.

Ans: C
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
LO: 3
Level: Easy

29. Contribution margin is computed as sales revenue minus:


A)

fixed expenses

B)

variable expenses

C)

cost of goods sold

D)

cost of goods manufactured

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

30. Which of the following approaches to preparing an income statement


calculates gross margin?

A)
B)
C)
D)

Traditional
Approach
Yes
Yes
No
No

Contribution
Approach
Yes
No
Yes
No

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

31. The least-squares regression method:


A)

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

B)

is generally less accurate than the scattergraph method.

C)

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

D)

is the only method acceptable under generally accepted accounting


principles.

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

32. Multiple regression analysis is used when:


A)

more than one cost category must be analyzed.

B)

when more than one factor causes variation in a cost.

C)

the high-low method cannot be used because there is only one


observation.

D)

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

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

1. Which of the following statements is true?


A. The word "cost" has the same meaning in all situations in which it is used.
B. Cost data, once classified and recorded for a specific application, are
appropriate for use in any application.
C. Different cost concepts and classifications are used for different purposes.
D. All organizations incur the same types of costs.
E. Costs incurred in one year are always meaningful in the following year.

Answer: C LO: 1 Type: RC

2. Product costs are:


A. expensed when incurred.
B. inventoried.
C. treated in the same manner as period costs.
D. treated in the same manner as advertising costs.
E. subtracted from cost of goods sold.

Answer: B LO: 2 Type: RC

3. Which of the following is a product cost?


A. Glass in an automobile.
B. Advertising.
C. The salary of the vice president-finance.
D. Rent on a factory.
E. Both "A" and "D."

Answer: E LO: 2 Type: N

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

A. Direct materials.
B. Direct labor.
C. Indirect materials.
D. Insurance on the manufacturing plant.
E. Sales commissions.

Answer: E LO: 2 Type: RC, N

5. The accounting records of Tacoma Company revealed the following costs:


direct materials used, $170,000; direct labor, $350,000; manufacturing
overhead, $400,000; and selling and administrative expenses, $220,000.
Tacoma's product costs total:
A. $520,000.
B. $750,000.
C. $920,000.
D. $1,140,000.
E. some other amount.

Answer: C LO: 2 Type: A

6. Costs that are expensed when incurred are called:


A. product costs.
B. direct costs.
C. inventoriable costs.
D. period costs.
E. indirect costs.

Answer: D LO: 2 Type: RC

7. Which of the following is a period cost?


A. Direct material.
B. Advertising expense.
C. Depreciation on cars driven by a firm's president and treasurer.
D. Miscellaneous supplies used in production activities.
E. Both "B" and "C."

Answer: E LO: 2 Type: N

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

A. Legal costs.
B. Public relations costs.
C. Sales commissions.
D. Wages of assembly-line workers.
E. The salary of a company's chief financial officer (CFO).

Answer: D LO: 2 Type: RC, N

9. The accounting records of Hill Corporation revealed the following selected


costs: Sales commissions, $40,000; plant supervision, $94,000; and
administrative expenses, $185,000. Hill's period costs total:
A. $40,000.
B. $94,000.
C. $185,000.
D. $225,000.
E. $319,000.

Answer: D LO: 2 Type: A

10. Which of the following entities would most likely have raw materials, work in
process, and finished goods?
A. Exxon Corporation.
B. Macy's Department Store.
C. Wendy's.
D. Southwest Airlines.
E. Columbia University.

Answer: A LO: 3 Type: N

11. Selling and administrative expenses would likely appear on the balance sheet
of:
A. The Gap.
B. Texas Instruments.
C. Turner Broadcasting System.
D. all of the above firms.
E. none of the above firms.

Answer: E LO: 3 Type: N

12. Which of the following inventories would a discount retailer such as Wal-Mart
report as an asset?
A. Raw materials.
B. Work in process.
C. Finished goods.
D. Merchandise inventory.
E. All of the above.

Answer: D LO: 3 Type: RC

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

A. Raw materials.
B. Work in process.
C. Finished goods.
D. Raw materials and finished goods.
E. Work in process and finished goods.

Answer: C LO: 3 Type: RC

14. Zeno Corporation engages in mass customization and direct sales, the latter
by accepting customer orders over the Internet. As a result, Zeno:
A. would probably begin the manufacturing process upon receipt of a
customer's order.
B. would typically have fairly low inventory levels for the amount of sales
revenue generated.
C. would typically have fairly high inventory levels for the amount of sales
revenue generated.
D. would likely find choices "A" and "B" to be applicable.
E. would likely find choices "A" and "C" to be applicable.

Answer: D LO: 4 Type: RC

15. Companies that engage in mass customization:


A. tend to have a relatively low production volume.
B. tend to have a high production volume that involves highly standardized
end-products.
C. tend to have a high production volume, many standardized components,
and customer-specified combinations of components.
D. tend to have a high production volume, many unique components, and
customer-specified combinations of components.
E. could be typified by the refining operations of Shell Oil.

Answer: C LO: 4 Type: RC

16. Midwest Motors manufactures automobiles. Which of the following would not
be classified as direct materials by the company?
A. Sheet metal used in the automobile's body.
B. Tires.
C. Interior leather.
D. CD player.
E. Wheel lubricant.

Answer: E LO: 5 Type: N

17. Which of the following employees of a commercial printer/publisher would be


classified as direct labor?
A. Book binder.
B. Plant security guard.
C. Sales representative.
D. Plant supervisor.
E. Payroll supervisor.

Answer: A LO: 5 Type: N

18. Norwood Appliance produces washers and dryers in an assembly-line process.


Labor costs incurred during a recent period were: corporate executives,
$100,000; assembly-line workers, $80,000; security guards, $18,000; and
plant supervisor, $30,000. The total of Norwood's direct labor cost was:
A. $80,000.
B. $98,000.
C. $110,000.
D. $128,000.
E. $228,000.

Answer: A LO: 5 Type: A

19. Which of the following employees would not be classified as indirect labor?
A. Custodian.
B. Salesperson.
C. Assembler of wooden furniture.
D. Plant security guard.
E. Choices "B" and "C."

Answer: E LO: 5 Type: RC, N

20. Depreciation of factory equipment would be classified as:


A. operating cost.
B. "other" cost.
C. manufacturing overhead.
D. depreciation expense.
E. administrative cost.

Answer: C LO: 5 Type: RC

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


A. Indirect materials.
B. Factory utilities.
C. Factory equipment.
D. Indirect labor.
E. Property taxes on the manufacturing plant.

Answer: C LO: 5 Type: RC

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

Factory utilities

35,000
Wages of assembly-line personnel

170,00
0

Customer entertainment

45,000

Indirect materials used

19,000

Depreciation on salespersons' cars

51,000

Production equipment rental costs

110,00
0

Costs that would be considered in the calculation of manufacturing overhead


total:
A. $164,000.
B. $215,000.
C. $385,000.
D. $430,000.
E. some other amount.

Answer: A LO: 5 Type: A

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


A. Overtime premiums should be treated as a component of manufacturing
overhead.
B. Overtime premiums should be treated as a component of direct labor.
C. Idle time should be treated as a component of direct labor.
D. Idle time should be accounted for as a special type of loss.
E. Both "B" and "C" are correct.

Answer: A LO: 5 Type: RC

24. Conversion costs are:


A. direct material, direct labor, and manufacturing overhead.
B. direct material and direct labor.
C. direct labor and manufacturing overhead.
D. prime costs.
E. period costs.

Answer: C LO: 5 Type: RC

25. Prime costs are comprised of:


A. direct materials and manufacturing overhead.
B. direct labor and manufacturing overhead.
C. direct materials, direct labor, and manufacturing overhead.
D. direct materials and direct labor.
E. direct materials and indirect materials.

Answer: D LO: 5 Type: RC

26. Which of the following statements is true?


A. Product costs affect only the balance sheet.

B. Product costs affect only the income statement.


C. Period costs affect only the balance sheet.
D. Period costs affect both the balance sheet and the income statement.
E. Product costs eventually affect both the balance sheet and the income
statement.

Answer: E LO: 6 Type: N

27. In a manufacturing company, the cost of goods completed during the period
would include which of the following elements?
A. Raw materials used.
B. Beginning finished goods inventory.
C. Marketing costs.
D. Depreciation of delivery trucks.
E. More than one of the above.

Answer: A LO: 6 Type: RC

28. Which of the following equations is used to calculate cost of goods sold
during the period?
A. Beginning finished goods + cost of goods manufactured + ending finished
goods.
B. Beginning finished goods - ending finished goods.
C. Beginning finished goods + cost of goods manufactured.
D. Beginning finished goods + cost of goods manufactured - ending finished
goods.
E. Beginning finished goods + ending finished goods - cost of goods
manufactured.

Answer: D LO: 6 Type: RC

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


A. direct material and direct labor.
B. direct labor and manufacturing overhead.
C. direct material and manufacturing overhead.
D. direct material only.
E. direct material, direct labor, and manufacturing overhead.

Answer: E LO: 6 Type: RC

30. Fort Walton Industries began July with a finished-goods inventory of $48,000.
The finished-goods inventory at the end of July was $41,000 and the cost of
goods sold during the month was $125,000. The cost of goods manufactured
during July was:
A. $77,000.
B. $84,000.
C. $118,000.
D. $132,000.
E. some other amount.

Answer: C LO: 6 Type: A

31. Kansas Plating Company reported a cost of goods manufactured of $260,000,


with the firm's year-end balance sheet revealing work in process and finished
goods of $35,000 and $67,000, respectively. If supplemental information
disclosed raw materials used in production of $40,000, direct labor of
$70,000, and manufacturing overhead of $120,000, the company's beginning
work in process must have been:
A. $5,000.
B. $37,000.
C. $65,000.
D. $97,000.
E. some other amount.

Answer: C LO: 6 Type: A

32. The accounting records of Bronco Company revealed the following


information:

Raw materials used

$
60,000

Direct labor

125,000

Manufacturing overhead

360,000

Work-in-process inventory, 1/1


Finished-goods inventory, 1/1
Work-in-process inventory, 12/31
Finished-goods inventory, 12/31

50,000
189,000
76,000
140,000

Bronco's cost of goods manufactured is:


A. $519,000.
B. $522,000.
C. $568,000.
D. $571,000.
E. some other amount.

Answer: A LO: 6 Type: A

33. The accounting records of Dolphin Company revealed the following


information:

Total manufacturing costs

$530,00
0

Work-in-process inventory, Jan. 1

56,000

Work-in-process inventory, Dec. 31

78,000

Finished-goods inventory, Jan. 1

146,000

Finished-goods inventory, Dec. 31

123,000

Dolphin's cost of goods sold is:

A. $508,000.
B. $529,000.
C. $531,000.
D. $553,000.
E. some other amount.

Answer: C LO: 6 Type: A

34. For the year just ended, Cole Corporation's manufacturing costs (raw
materials used, direct labor, and manufacturing overhead) totaled
$1,500,000. Beginning and ending work-in-process inventories were $60,000
and $90,000, respectively. Cole's balance sheet also revealed respective
beginning and ending finished-goods inventories of $250,000 and $180,000.
On the basis of this information, how much would the company report as cost
of goods manufactured (CGM) and cost of goods sold (CGS)?
A. CGM, $1,430,000; CGS, $1,460,000.
B. CGM, $1,470,000; CGS, $1,540,000.
C. CGM, $1,530,000; CGS, $1,460,000.
D. CGM, $1,570,000; CGS, $1,540,000.
E. Some other amounts.

Answer: B LO: 6 Type: A

35. Leggio Industries reported the following data for the year just ended: sales
revenue, $950,000; cost of goods sold, $420,000; cost of goods
manufactured, $330,000; and selling and administrative expenses, $170,000.
Leggio's gross margin would be:
A. $30,000.
B. $200,000.
C. $360,000.
D. $530,000.
E. $620,000.

Answer: D LO: 6 Type: A

36. Pumpkin Enterprises began operations on January 1, 20x1, with all of its
activities conducted from a single facility. The company's accountant
concluded that the year's building depreciation should be allocated as
follows: selling activities, 20%; administrative activities, 35%; and
manufacturing activities, 45%. If Pumpkin sold 60% of 20x1 production
during that year, what percentage of the depreciation would appear (either
directly or indirectly) on the 20x1 income statement?
A. 27%.
B. 45%.
C. 55%.
D. 82%.
E. 100%.

Answer: D LO: 6 Type: A

37. An employee accidentally overstated the year's advertising expense by


$50,000. Which of the following correctly depicts the effect of this error?
A. Cost of goods manufactured will be overstated by $50,000.
B. Cost of goods sold will be overstated by $50,000.
C. Both cost of goods manufactured and cost of goods sold will be
overstated by $50,000.
D. Cost of goods sold will be overstated by $50,000, and cost of goods
manufactured will be understated by $50,000.
E. None of the above.

Answer: E LO: 6 Type: A

38. Which of the following would likely be a cost driver for the amount of direct
materials used?
A. The number of units sold.
B. The number of direct labor hours worked.
C. The number of machine hours worked.

D. The number of employees working in the factory.


E. The number of units produced.

Answer: E LO: 7 Type: N

39. The choices below depict five costs of Benton Corporation and a possible
driver for each cost. Which of these choices likely contains an inappropriate
cost driver?
A. Gasoline consumed; number of miles driven.
B. Manufacturing overhead incurred in a heavily automated facility; direct
labor hours.
C. Sales commissions; gross sales revenue.
D. Building maintenance cost; building square footage.
E. Personnel department cost; number of employees.

Answer: B LO: 7 Type: N

40. Variable costs are those costs that:


A. vary inversely with changes in activity.
B. vary directly with changes in activity.
C. remain constant as activity changes.
D. decrease on a per-unit basis as activity increases.
E. increase on a per-unit basis as activity increases.

Answer: B LO: 8 Type: RC

41. As activity decreases, unit variable cost:


A. increases proportionately with activity.
B. decreases proportionately with activity.
C. remains constant.
D. increases by a fixed amount.
E. decreases by a fixed amount.

Answer: C LO: 8 Type: RC

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

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


B. Wages of manufacturing workers whose pay is based on hours worked.
C. Tires used in the production of tractors.
D. Aluminum used to make patio furniture.
E. Commissions paid to sales personnel.

Answer: A LO: 8 Type: N

43. Fixed costs are those costs that:


A. vary directly with changes in activity.
B. vary inversely with changes in activity.
C. remain constant on a per-unit basis.
D. increase on a per-unit basis as activity increases.
E. remain constant as activity changes.

Answer: E LO: 8 Type: RC

44. The fixed cost per unit:


A. will increase as activity increases.
B. will increase as activity decreases.
C. will decrease as activity increases.
D. will remain constant.
E. will exhibit the behavior described in choices "B" and "C."

Answer: E LO: 8 Type: N

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


A. Paper used in the manufacture of textbooks.
B. Property taxes paid by a firm to the City of Los Angeles.
C. The wages of part-time workers who are paid $8 per hour.
D. Gasoline consumed by salespersons' cars.
E. Surgical supplies used in a hospital's operating room.

Answer: B LO: 8 Type: N

46. The variable costs per unit are $4 when a company produces 10,000 units of
product. What are the variable costs per unit when 8,000 units are
produced?
A. $4.00.
B. $4.50.
C. $5.00.
D. $5.50.
E. Some other amount.

Answer: A LO: 8 Type: A

47. The fixed costs per unit are $10 when a company produces 10,000 units of
product. What are the fixed costs per unit when 12,500 units are produced?

A. $4.
B. $6.
C. $8.
D. $10.
E. Some other amount.

Answer: C LO: 8 Type: A

48. Total costs are $120,000 when 10,000 units are produced; of this amount,
variable costs are $48,000. What are the total costs when 12,000 units are
produced?
A. $57,600.
B. $72,000.
C. $120,000.
D. $129,600.
E. $144,000.

Answer: D LO: 8 Type: A

49. Baxter Company, which pays a 10% commission to its salespeople, reported
sales revenues of $210,000 for the period just ended. If fixed and variable
sales expenses totaled $56,000, what would these expenses total at sales of
$168,000?
A. $16,800.
B. $35,000.
C. $44,800.
D. $51,800.
E. Some other amount.

Answer: D LO: 8 Type: A

50.Which of the following would not be characterized as a cost object?


A. An automobile manufactured by General Motors.
B. The New York Fire Department.
C. A Burger King restaurant located in Cleveland, Ohio.
D. A Delta Airlines flight from Atlanta to Miami.
E. All of the above are examples of cost objects.
Answer: E LO: 9 Type: N

51. Costs that can be easily traced to a specific department are called:
A. direct costs.
B. indirect costs.
C. product costs.
D. manufacturing costs.
E. processing costs.

Answer: A LO: 9 Type: RC

52. Which of the following would not be considered a direct cost with respect to
the service department of a new car dealership?
A. Wages of repair techniques.
B. Property taxes paid by the dealership.

C. Repair parts consumed.


D. Salary of the department manager.
E. Depreciation on new equipment used to analyze engine problems.

Answer: B LO: 9 Type: N

53. Indirect costs:


A. can be traced to a cost object.
B. cannot be traced to a particular cost object.
C. are not important.
D. are always variable costs.
E. may be indirect with respect to Disney World but direct with respect to
one its major components, Epcot Center.

Answer: B LO: 9 Type: RC, N

54. The salary that is sacrificed by a college student who pursues a degree full
time is a(n):
A. sunk cost.
B. out-of-pocket cost.
C. opportunity cost.
D. differential cost.
E. marginal cost.

Answer: C LO: 10 Type: N

55. The tuition that will be paid next semester by a college student who pursues
a degree is a(n):
A. sunk cost.
B. out-of-pocket cost.
C. indirect cost.
D. average cost.
E. marginal cost.

Answer: B LO: 10 Type: N

56. Which of the following costs should be ignored when choosing among
alternatives?
A. Opportunity costs.
B. Sunk costs.
C. Out-of-pocket costs.
D. Differential costs.
E. None of the above.

Answer: B LO: 10 Type: RC

57. If the total cost of alternative A is $50,000 and the total cost of alternative B

is $34,000, then $16,000 is termed the:


A. opportunity cost.
B. average cost.
C. sunk cost.
D. out-of-pocket cost.
E. differential cost.

Answer: E LO: 10 Type: N

Use the following to answer questions 58-59:

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

Number of
Students
Enrolled

Total Revenue

Total Costs

10

$3,000

$2,100

15

4,500

2,700

16

4,800

2,800

20

6,000

3,200

21

6,300

3,255

58. The marginal cost when the twenty-first student enrolls in the school is:
A. $55.
B. $155.
C. $300.
D. $3,045.
E. $3,255.

Answer: A LO: 10 Type: A

59. The average cost per student when 16 students enroll in the school is:
A. $100.
B. $125.
C. $175.
D. $300.
E. $400.

Answer: C LO: 10 Type: A

60. The costs that follow all have applicability for a manufacturing enterprise. Which of
the choices listed correctly denotes the costs applicability for a service provider?
Period Cost
Uncontrollable Cost
Opportunity Cost
Applicable
Applicable
Not applicable
Applicable
Not applicable
Applicable
Applicable
Applicable
Applicable
Not applicable
Applicable
Applicable
Not applicable
Applicable
Not applicable

VARIABLE COSTING THEORIES:


True/False Questions

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

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

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

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

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

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

4. In the preparation of financial statements using variable costing, fixed


manufacturing overhead is treated as a period cost.

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

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

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

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

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

7. Net operating income computed using absorption costing will always be


greater than net operating income computed using variable costing.

Ans: False
AACSB: Analytic
AICPA FN: Reporting
LO: 2

AICPA BB: Critical Thinking


Level: Easy

8. When reconciling variable costing and absorption costing net operating


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

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

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

Ans: True
AACSB: Analytic
AICPA FN: Reporting
LO: 3

AICPA BB: Critical Thinking


Level: Medium

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

Ans: False
AACSB: Analytic
AICPA FN: Reporting
LO: 4

AICPA BB: Critical Thinking


Level: Medium

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

Ans: False
AACSB: Analytic
AICPA FN: Reporting
LO: 4

AICPA BB: Critical Thinking


Level: Medium

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

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

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

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

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


absorption costing.

Ans: True
AACSB: Analytic
AICPA FN: Reporting
LO: 4

AICPA BB: Critical Thinking


Level: Easy

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

Ans: True
AACSB: Analytic
AICPA FN: Reporting
LO: 5

AICPA BB: Critical Thinking


Level: Easy

Multiple Choice Questions

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

A)
B)
C)
D)

Cost of purchasing clothing


Product
Product
Period
Period

Sales commissions
Product
Period
Product
Period

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

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

whether variable manufacturing costs should be included as product


costs.

B)

whether fixed manufacturing costs should be included as product costs.

C)

whether fixed manufacturing costs and fixed selling and administrative


costs should be included as product costs.

D)

none of these.

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

18. Which of the following costs at a manufacturing company would be treated as


a product cost under the variable costing method?

A)

direct material cost

B)

property taxes on the factory building

C)

sales manager's salary

D)

all of the above

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

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

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

B)

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

C)

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

D)

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

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

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

absorption costing.

B)

job-order costing.

C)

variable costing.

D)

process costing.

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

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

A)
B)
C)
D)

Variable costing
Increase
Decrease
Decrease
No effect

Absorption costing
Increase
Increase
Decrease
Decrease

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

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

fluctuate in direct proportion to changes in production.

B)

remain constant.

C)

fluctuate inversely with changes in production.

D)

be greater than net operating income under absorption costing.

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

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

fixed manufacturing overhead cost

B)

fixed selling and administrative expense

C)

variable selling and administrative expense

D)

all of the above

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

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

Contribution Margin
Yes
Yes
No
No

A)
B)
C)
D)

Gross Margin
Yes
No
Yes
No

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

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

always be equal.

B)

never be equal.

C)

be equal only when production and sales are equal.

D)

be equal only when production exceeds sales.

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

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

greater than net operating income reported under absorption costing.

B)

less than net operating income reported under absorption costing

C)

equal to net operating income reported under absorption costing.

D)

higher or lower because no generalization can be made.

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

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

change in the quantity of units in inventory times the fixed


manufacturing overhead rate per unit.

B)

number of units produced during the period times the fixed


manufacturing overhead rate per unit.

C)

change in the quantity of units in inventory times the variable


manufacturing cost per unit.

D)

number of units produced during the period times the variable


manufacturing cost per unit.

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

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

tend to fluctuate in the same direction as fluctuations in the level of


production.

B)

tend to remain constant.

C)

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

D)

none of these

Ans: A
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting
LO: 4
Level: Medium

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

they omit variable expenses entirely in computing net operating


income.

B)

they shift portions of fixed manufacturing overhead from period to


period according to changing levels of inventories.

C)

they include all fixed manufacturing overhead on the income statement


each year as a period cost.

D)

they ignore inventory levels in computing income charges.

Ans: B
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting
LO: 4
Level: Medium

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

Direct labor
Yes
Yes
No
No

A)
B)
C)
D)

Direct material
Yes
No
Yes
No

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

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

$800 decrease

B)

$200 decrease

C)

$0

D)

$200 increase

Ans: B
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting
LO: 1
Level: Easy
Source: CMA, adapted
Solution:
Change in inventory Fixed manufacturing costs per unit
= 100 $2 = $200 decrease

MULTIPLE CHOICE QUESTIONS


1. Under variable costing, fixed manufacturing overhead is:
A. expensed immediately when incurred.
B. never expensed.
C. applied directly to Finished-Goods Inventory.

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


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

Answer: A LO: 1 Type: RC

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


A. direct materials.
B. direct labor.
C. variable manufacturing overhead.
D. fixed manufacturing overhead.
E. items "C" and "D" above.

Answer: D LO: 1 Type: RC

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


A. variable manufacturing overhead.
B. fixed manufacturing overhead.
C. variable selling and administrative costs.
D. fixed selling and administrative costs.
E. items "C" and "D" above.

Answer: A LO: 1 Type: RC

4. All of the following costs are inventoried under absorption costing except:
A. direct materials.
B. direct labor.
C. variable manufacturing overhead.
D. fixed manufacturing overhead.
E. fixed administrative salaries.

Answer: E LO: 1 Type: RC

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


A. direct labor.
B. raw materials used in production.
C. utilities cost consumed in manufacturing.
D. sales commissions.
E. machine lubricant used in production.

Answer: D LO: 1 Type: N

6. The underlying difference between absorption costing and variable costing


lies in the treatment of:
A. direct labor.
B. variable manufacturing overhead.
C. fixed manufacturing overhead.
D. variable selling and administrative expenses.
E. fixed selling and administrative expenses.

Answer: C LO: 1 Type: RC

7. Which of the following costs would be treated differently under absorption


costing and variable costing?

Direct
Labor

Variable

Fixed

Manufacturi
ng

Administrat
ive

A.

Yes

Overhead
No

Expenses
Yes

B.

Yes

Yes

Yes

C.

No

Yes

No

D.

No

No

Yes

E.

No

No

No

Answer: E LO: 1 Type: RC

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

Direct material used

$12

Direct labor

18

Variable manufacturing overhead

25

Fixed manufacturing overhead

29

Variable selling and administrative


cost

10

Fixed selling and administrative


cost

17

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


carried at:
A. $35.
B. $55.
C. $65.
D. $84.
E. some other amount.

Answer: B LO: 1 Type: A

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

Direct material used

$18

Direct labor

27

Variable manufacturing overhead

30

Fixed manufacturing overhead

32

Variable selling and administrative


cost
Fixed selling and administrative
cost

9
17

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


carried at:
A. $75.
B. $107.
C. $116.
D. $133.
E. some other amount.

Answer: B LO: 1 Type: A

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

Direct material used

$25

Direct labor

19

Variable manufacturing overhead

35

Fixed manufacturing overhead

40

Variable selling and administrative


cost

17

Fixed selling and administrative


cost

32

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

Absorption
Costing

A.

Costing
$79

$119

B.

$79

$151

C.

$96

$119

D
.

$96

$151

E.

Some other combination of figures not listed


above.

Answer: A LO: 1 Type: A

11.

Delaware has computed the following unit costs for the year just ended:
Variable manufacturing cost
Fixed manufacturing cost
Variable selling and administrative cost
Fixed selling and administrative cost

$85
20
18
11

Which of the following choices correctly depicts the per-unit cost of inventory
under variable costing and absorption costing?
A.
B.
C.
D.
E.

Variable, $85; absorption, $105.


Variable, $85; absorption, $116.
Variable, $103; absorption, $105.
Variable, $103; absorption, $116.
Some other combination of figures not listed above.
Answer: A LO: 1 Type: A

Use the following to answer questions 12-13:

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

Direct materials used

$280,00
0

Direct labor

120,000

Variable manufacturing overhead

160,000

Fixed manufacturing overhead

100,000

Variable selling and administrative


costs

60,000

Fixed selling and administrative costs

90,000

12. If Indiana uses variable costing, the total inventoriable costs for the year
would be:
A. $400,000.
B. $460,000.
C. $560,000.

D. $620,000.
E. $660,000.

Answer: C LO: 1 Type: A

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


A. $9.50.
B. $25.00.
C. $28.00.
D. $33.00.
E. $40.50.

Answer: D LO: 1 Type: A

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


income statements:

I.
II.
III.

A variable-costing income statement discloses a firm's contribution


margin.
Cost of goods sold on an absorption-costing income statement includes
fixed costs.
The amount of variable selling and administrative cost is the same on
absorption- and variable-costing income statements.

Which of the above statements is (are) true?


A. I only.
B. II only.
C. I and II.
D. II and III.
E. I, II, and III.

Answer: E LO: 2, 3 Type: N

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

Planned and actual production: 40,000


units
Sales: 37,000 units at $15 per unit
Production costs:
Variable: $4 per unit
Fixed: $260,000
Selling and administrative costs:
Variable: $1 per unit
Fixed: $32,000

The gross margin that the company would disclose on an absorption-costing


income statement is:

A. $97,500.
B. $147,000.
C. $166,500.
D. $370,000.
E. some other amount.

Answer: C LO: 2 Type: A

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

Planned and actual production:


40,000 units
Sales: 37,000 units at $15 per unit
Production costs:
Variable: $4 per unit
Fixed: $260,000
Selling and administrative costs:
Variable: $1 per unit
Fixed: $32,000

The contribution margin that the company would disclose on an absorptioncosting income statement is:
A. $0.
B. $147,000.
C. $166,500.
D. $370,000.
E. some other amount.

Answer: A LO: 2 Type: A

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

Fixed manufacturing overhead

$150,00
0

Fixed selling and administrative cost

100,00
0

Variable manufacturing cost per unit

Variable selling and administrative cost


per unit

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


would be:
A. $190,000.
B. $202,000.
C. $208,000.
D. $220,000.
E. some other amount.

Answer: C LO: 2 Type: A

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

Planned and actual production:


40,000 units
Sales: 37,000 units at $15 per unit
Production costs:
Variable: $4 per unit
Fixed: $260,000
Selling and administrative costs:
Variable: $1 per unit
Fixed: $32,000

The contribution margin that the company would disclose on a variablecosting income statement is:
A. $97,500.
B. $147,000.
C. $166,500.
D. $370,000.
E. some other amount.

Answer: D LO: 3 Type: A

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

Fixed manufacturing overhead

$150,0
00

Fixed selling and administrative cost

90,000

Variable manufacturing cost per unit

11

Variable selling and administrative cost


per unit

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


be:
A. $270,000.
B. $292,000.
C. $308,000.
D. $532,000.
E. some other amount.

Answer: B LO: 3 Type: A

20.

The following data relate to Lobo Corporation for the year just ended:
Sales revenue
Cost of goods sold:
Variable portion
Fixed portion
Variable selling and administrative cost
Fixed selling and administrative cost

$750,000
370,000
110,000
50,000
75,000

Which of the following statements is correct?


A.

D.
E.

Lobos variable-costing income statement would reveal a gross margin of $270,000.


B. Lobos variable costing income statement would reveal a contribution
margin of $330,000.
C. Lobos absorption-costing income statement would reveal a contribution
margin of $330,000.
Lobos absorption costing income statement would reveal a gross margin of
$330,000.
Lobos absorption-costing income statement would reveal a gross margin of
$145,000.
Answer: B LO: 2, 3 Type: A

Use the following to answer questions 21-22:

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

Planned production in
units

10,00
0

Actual production in units

10,00
0

Number of units sold

8,500

There were no variances.

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


A. $(7,500).

B. $9,000.
C. $15,000.
D. $18,000.
E. some other amount.

Answer: D LO: 2 Type: A

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


A. $(7,500).
B. $9,000.
C. $15,000.
D. $18,000.
E. some other amount.

Answer: B LO: 3 Type: A

23. Income reported under absorption costing and variable costing is:
A. always the same.
B. typically different.
C. always higher under absorption costing.
D. always higher under variable costing.
E. always the same or higher under absorption costing.

Answer: B LO: 4 Type: RC

24. Gomez's inventory increased during the year. On the basis of this
information, income reported under absorption costing:
A. will be the same as that reported under variable costing.
B. will be higher than that reported under variable costing.
C. will be lower than that reported under variable costing.
D. will differ from that reported under variable costing, the direction of which
cannot be determined from the information given.
E. will be less than that reported in the previous period.

Answer: B LO: 4 Type: N

25. Which of the following conditions would cause absorption-costing net income
to be lower than variable-costing net income?
A. Units sold exceeded units produced.
B. Units sold equaled units produced.
C. Units sold were less than units produced.
D. Sales prices decreased.
E. Selling expenses increased.

Answer: A LO: 4 Type: N

26. Which of the following situations would cause variable-costing net income to

be lower than absorption-costing net income?


A. Units sold equaled 39,000 and units produced equaled 42,000.
B. Units sold and units produced were both 42,000.
C. Units sold equaled 55,000 and units produced equaled 49,000.
D. Sales prices decreased by $7 per unit during the accounting period.
E. Selling expenses increased by 10% during the accounting period.

Answer: A LO: 4 Type: N

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

I.
II.
III.

Yearly income reported under absorption costing will differ from income
reported under variable costing if production and sales volumes differ.
Long-run, total income reported under absorption costing will often be
close to that reported under variable costing.
Differences in income under absorption and variable costing can often
be reconciled by multiplying the change in inventory (in units) by the
variable manufacturing overhead cost per unit.

Which of the above statements is (are) true?


A. I only.
B. II only.
C. III only.
D. I and II.
E. II and III.

Answer: D LO: 4 Type: RC

28. Which of the following formulas can often reconcile the difference between
absorption- and variable-costing net income?
A. Change in inventory units x predetermined variable-overhead rate per
unit.
B. Change in inventory units predetermined variable-overhead rate per
unit.
C. Change in inventory units x predetermined fixed-overhead rate per unit.
D. Change in inventory units predetermined fixed-overhead rate per unit.
E. (Absorption-costing net income - variable-costing net income) x fixedoverhead rate per unit.

Answer: C LO: 4 Type: RC

29. Monex reported $65,000 of net income for the year by using absorption
costing. The company had no beginning inventory, planned and actual

production of 20,000 units, and sales of 18,000 units. Standard variable


manufacturing costs were $20 per unit, and total budgeted fixed
manufacturing overhead was $100,000. If there were no variances, net
income under variable costing would be:
A. $15,000.
B. $55,000.
C. $65,000.
D. $75,000.
E. $115,000.

Answer: B LO: 4 Type: A

30. Canyon reported $106,000 of net income for the year by using variable
costing. The company had no beginning inventory, planned and actual
production of 50,000 units, and sales of 47,000 units. Standard variable
manufacturing costs were $15 per unit, and total budgeted fixed
manufacturing overhead was $150,000. If there were no variances, net
income under absorption costing would be:
A. $52,000.
B. $97,000.
C. $106,000.
D. $115,000.
E. $160,000.

Answer: D LO: 4 Type: A

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

I.
II.
III.

Variable costing is consistent with contribution reporting and costvolume-profit analysis.


Absorption costing must be used for external financial reporting.
A number of companies use both absorption costing and variable
costing.

Which of the above statements is (are) true?


A. I only.
B. II only.
C. III only.
D. I and II.
E. I, II, and III.

Answer: E LO: 5, 6 Type: RC

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

I.
II.
III.

Variable costing is consistent with contribution reporting and costvolume-profit analysis.


Variable costing must be used for external financial reporting.
A number of companies use both absorption costing and variable
costing.

Which of the above statements is (are) true?


A. I only.
B. II only.
C. III only.
D. I and II.
E. I and III.

Answer: E LO: 5, 6 Type: RC

33. For external-reporting purposes, generally accepted accounting principles


require that net income be based on:
A. absorption costing.
B. variable costing.
C. direct costing.
D. semivariable costing.
E. activity-based costing.

Answer: A LO: 6 Type: RC

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


A. selling costs.
B. fixed manufacturing overhead.
C. the direct costs incurred whenever a unit is manufactured.
D. administrative costs.
E. all of the above.

Answer: C LO: 7 Type: RC

35. Which of the following methods defines product cost as the unit-level cost
incurred each time a unit is manufactured?
A. Throughput costing.
B. Indirect costing.
C. Process costing.
D. Absorption costing.
E. Back-flush costing.

Answer: A LO: 7 Type: RC

36. Orion's management recently committed to incurring direct labor and all
manufacturing overhead charges regardless of the number of units produced.

Under throughput costing, the company's cost of goods sold would include
charges for:
A. selling and administrative costs.
B. direct materials.
C. direct labor and manufacturing overhead.
D. direct materials, direct labor, and manufacturing overhead.
E. direct materials, direct labor, manufacturing overhead, and selling and
administrative costs.

Answer: B LO: 8 Type: N

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

Throughput manufacturing costs

$180,00
0

Non-throughput manufacturing
costs

600,000

Selling and administrative costs

125,00
0

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

Net

Goods Sold
$180,00
0

Income
$45,000

B.

$180,00
0

$645,000

C.

$305,00
0

$45,000

D
.

$305,00
0

$645,000

E.

Some other combination of figures not listed


above.

A.

Answer: A LO: 8 Type: A

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


A. coincides with the fixed manufacturing overhead that was applied to
production.
B. is deducted on the income statement.
C. does not exist.
D. will equal the fixed-overhead budget variance.
E. must be unfavorable.

Answer: C LO: 9 Type: RC

39. Which of the following differs between absorption costing and variable
costing?
A. The number of units produced.
B. The fixed-overhead volume variance.
C. Sales revenues.
D. The treatment of variable manufacturing overhead.
E. Income tax rates.

Answer: B LO: 9 Type: RC

COST VOLUME PROFIT ANALYSIS THEORIES:


True/False Questions

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

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

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

Ans: True
AACSB: Analytic
AICPA FN: Reporting
LO: 2

AICPA BB: Critical Thinking


Level: Easy

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

Ans: False
AACSB: Analytic
AICPA FN: Reporting
LO: 3

AICPA BB: Critical Thinking


Level: Medium

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

Ans: False
AACSB: Analytic
AICPA FN: Reporting
LO: 3

AICPA BB: Critical Thinking


Level: Medium

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

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

6. A company with sales of $70,000 and variable expenses of $40,000 should


spend $10,000 on increased advertising if the increased advertising will
increase sales by $20,000.

Ans: False
AACSB: Analytic
AICPA FN: Reporting
LO: 4

AICPA BB: Critical Thinking


Level: Medium

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

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

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

Ans: False
AACSB: Analytic
AICPA FN: Reporting
LO: 5

AICPA BB: Critical Thinking


Level: Medium

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

Ans: False
AACSB: Analytic
AICPA FN: Reporting
LO: 5

AICPA BB: Critical Thinking


Level: Medium

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

Ans: False
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
LO: 6
Level: Medium

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

Ans: True
AACSB: Analytic
AICPA FN: Reporting
LO: 7

AICPA BB: Critical Thinking


Level: Medium

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

Ans: True
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
LO: 7
Level: Easy

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

Ans: False
AACSB: Analytic
AICPA FN: Reporting
LO: 8

AICPA BB: Critical Thinking


Level: Medium

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

Ans: True
AACSB: Analytic
AICPA FN: Reporting
LO: 8

AICPA BB: Critical Thinking


Level: Hard

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

Ans: True
AACSB: Analytic
AICPA FN: Reporting
LO: 9

AICPA BB: Critical Thinking


Level: Medium

Multiple Choice Questions

16. Contribution margin can be defined as:


A)

the amount of sales revenue necessary to cover variable expenses.

B)

sales revenue minus fixed expenses.

C)

the amount of sales revenue necessary to cover fixed and variable


expenses.

D)

sales revenue minus variable expenses.

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

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

A CVP graph shows the maximum possible profit.

B)

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

C)

A CVP graph assumes that total expense varies in direct proportion to


unit sales.

D)

A CVP graph shows the operating leverage as the gap between total

sales revenue and total expense at the actual level of sales.

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

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

Contribution margin ratio Break-even point


A
)
B)
C)
D
)

Decrease
Increase
Decrease

Increase
Decrease
Decrease

Increase

Increase

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

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

As fixed expenses decrease, the contribution margin ratio increases.

B)

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

C)

The contribution margin ratio will decline as unit sales decline.

D)

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

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

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


A)

its contribution margin will be equal to its variable expenses.

B)

its margin of safety will be equal to zero.

C)

its fixed expenses will be equal to its variable expenses.

D)

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

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

21. At the break-even point:


A)

sales would be equal to contribution margin.

B)

contribution margin would be equal to fixed expenses.

C)

contribution margin would be equal to net operating income.

D)

sales would be equal to fixed expenses.

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

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


A)

a decrease in total fixed expenses.

B)

a decrease in the ratio of variable expenses to sales.

C)

an increase in the contribution margin ratio.

D)

none of these.

Ans: D
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting
LO: 5
Level: Medium

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

A)
B)
C)
D)

Fixed expenses
Increase
Decrease
Decrease
Increase

Contribution margin
Increase
Decrease
Increase
Decrease

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

24. Break-even analysis assumes that:


A)

Total revenue is constant.

B)

Unit variable expense is constant.

C)

Unit fixed expense is constant.

D)

Selling prices must fall in order to generate more revenue.

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

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

What sales volume is needed to cover all expenses?

B)

What sales volume is needed to cover fixed expenses?

C)

What sales volume is needed to earn a specific amount of net operating


income?

D)

What sales volume is needed to avoid a loss?

Ans: C
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
LO: 6
Level: Easy

26. The margin of safety can be calculated by:


A)

Sales (Fixed expenses/Contribution margin ratio).

B)

Sales (Fixed expenses/Variable expense per unit).

C)

Sales (Fixed expenses + Variable expenses).

D)

Sales Net operating income.

Ans: A
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
LO: 7
Level: Medium

27. If the degree of operating leverage is 4, then a one percent change in


quantity sold should result in a four percent change in:
A)

unit contribution margin.

B)

revenue.

C)

variable expense.

D)

net operating income.

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

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

net operating income divided by total expenses.

B)

net operating income divided by total contribution margin.

C)

total contribution margin divided by net operating income.

D)

variable expense divided by total contribution margin.

Ans: C
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
LO: 8
Level: Easy

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


A)

In multiproduct companies, the sales mix is constant.

B)

In manufacturing companies, inventories always change.

C)

The price of a product or service is expected to change as volume


changes.

D)

Fixed expenses will change as volume increases.

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

MULTIPLE CHOICE QUESTIONS

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


A. changes in selling prices on a company's profitability.
B. changes in variable costs on a company's profitability.
C. changes in fixed costs on a company's profitability.
D. changes in product sales mix on a company's profitability.
E. all of the above.

Answer: E LO: 1 Type: RC

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


A. total revenue equals total cost.
B. variable cost equals fixed cost.
C. total contribution margin equals the sum of variable cost plus fixed cost.
D. sales revenue equals total variable cost.
E. profit is greater than zero.

Answer: A LO: 1 Type: RC

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


A. selling price and fixed cost per unit.
B. selling price and variable cost per unit.

C. selling price and product cost per unit.


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

Answer: B LO: 1 Type: RC

4. Which of the following would produce the largest increase in the contribution
margin per unit?
A. A 7% increase in selling price.
B. A 15% decrease in selling price.
C. A 14% increase in variable cost.
D. A 17% decrease in fixed cost.
E. A 23% increase in the number of units sold.

Answer: A LO: 1 Type: N

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

A.
B.
C.
D.
E.

Contribution
Margin
Increase
Increase
Decrease
Decrease
Increase

Break-even
Point
Increase
Decrease
Increase
Decrease
No effect

Answer: B LO: 1 Type: N

6. Which of the following would take place if a company experienced an


increase in fixed costs?
A. Net income would increase.
B. The break-even point would increase.
C. The contribution margin would increase.
D. The contribution margin would decrease.
E. More than one of the above events would occur.

Answer: B LO: 1 Type: N

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


contribution margin would:
A. increase net income.
B. decrease net income.
C. have no effect on net income.
D. increase fixed costs.
E. decrease fixed costs.

Answer: A LO: 1 Type: N

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

B. reduce variable costs.


C. increase fixed costs.
D. sell more units.
E. pursue more than one of the above actions.

Answer: B LO: 1 Type: N

9. A company has fixed costs of $900 and a per-unit contribution margin of $3.
Which of the following statements is (are) true?
A. Each unit "contributes" $3 toward covering the fixed costs of $900.
B. The situation described is not possible and there must be an error.
C. Once the break-even point is reached, the company will make money at
the rate of $3 per unit.
D. The firm will definitely lose money in this situation.
E. Statements "A" and "C" are true.

Answer: E LO: 1 Type: N

10. Sanderson sells a single product for $50 that has a variable cost of $30.
Fixed costs amount to $5 per unit when anticipated sales targets are met. If
the company sells one unit in excess of its break-even volume, the bottomline profit will be:
A. $15.
B. $20.
C. $50.
D. an amount that cannot be derived based on the information presented.
E. an amount other than those in choices "A," "B," and "C" but one that can
be derived based on the information presented.

Answer: B LO: 1 Type: A

11. At a volume of 15,000 units, Boston reported sales revenues of $600,000,


variable costs of $225,000, and fixed costs of $120,000. The company's
contribution margin per unit is:
A. $17.
B. $25.
C. $47.
D. $55.
E. an amount other than those above.

Answer: B LO: 1 Type: A

12.

A recent income statement of Banks Corporation reported the following


data:

Sales revenue
Variable costs
Fixed costs

$8,000,000
5,000,000
2,200,000

If these data are based on the sale of 20,000 units, the contribution margin
per unit would be:
A. $40.

B.

$150.

C.

$290.

D.

$360.

E. an amount other than those above.

Answer: B LO: 1 Type: A

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

Sales revenue
Variable costs
Fixed costs

$3,600,000
1,600,000
1,000,000

If these data are based on the sale of 10,000 units, the break-even point
would be:
A. 2,000 units.
B. 2,778 units.
C. 3,600 units.
D. 5,000 units.
E. an amount other than those above.

Answer: D LO: 1 Type: A

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

Sales revenue
Variable costs
Fixed costs

$2,500,000
1,500,000
800,000

If these data are based on the sale of 5,000 units, the break-even sales would
be:
A. $2,000,000.
B. $2,206,000.
C. $2,500,000.
D. $10,000,000.
E. an amount other than those above.

Answer: A LO: 1 Type: A

15. Lawton, Inc., sells a single product for $12. Variable costs are $8 per unit and

fixed costs total $360,000 at a volume level of 60,000 units. Assuming that
fixed costs do not change, Lawton's break-even point would be:
A. 30,000 units.
B. 45,000 units.
C. 90,000 units.
D. negative because the company loses $2 on every unit sold.
E. a positive amount other than those given above.

Answer: C LO: 1 Type: A

16. Green, Inc., sells a single product for $20. Variable costs are $8 per unit and
fixed costs total $120,000 at a volume level of 5,000 units. Assuming that
fixed costs do not change, Green's break-even sales would be:
A. $160,000.
B. $200,000.
C. $300,000.
D. $480,000.
E. an amount other than those above.

Answer: B LO: 1 Type: A

17. Orion recently reported sales revenues of $800,000, a total contribution


margin of $300,000, and fixed costs of $180,000. If sales volume amounted
to 10,000 units, the company's variable cost per unit must have been:
A. $12.
B. $32.
C. $50.
D. $92.
E. an amount other than those above.

Answer: C LO: 1 Type: A

18. Strand has a break-even point of 120,000 units. If the firm's sole product
sells for $40 and fixed costs total $480,000, the variable cost per unit must
be:
A. $4.
B. $36.
C. $44.
D. an amount that cannot be derived based on the information presented.
E. an amount other than those in choices "A," "B," and "C" but one that can
be derived based on the information presented.

Answer: B LO: 1 Type: A

19. Ribco Co., makes and sells only one product. The unit contribution margin is
$6 and the break-even point in unit sales is 24,000. The company's fixed
costs are:
A. $4,000.
B. $14,400.
C. $40,000.
D. $144,000.
E. an amount other than those above.

Answer: D LO: 1 Type: A

20. The contribution-margin ratio is:


A. the difference between the selling price and the variable cost per unit.
B. fixed cost per unit divided by variable cost per unit.
C. variable cost per unit divided by the selling price.
D. unit contribution margin divided by the selling price.
E. unit contribution margin divided by fixed cost per unit.

Answer: D LO: 2 Type: RC

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


information:

Sales price
Variable cost per unit
Fixed cost per unit

$60
20
4

The company's contribution-margin ratio is:


A. 0.33.
B. 0.40.
C. 0.60.
D. 0.67.
E. an amount other than those above.

Answer: D LO: 2 Type: A

22. Which of the following expressions can be used to calculate the break-even
point with the contribution-margin ratio (CMR)?
A. CMR fixed costs.
B. CMR x fixed costs.
C. Fixed costs CMR.
D. (Fixed costs + variable costs) x CMR.
E. (Sales revenue - variable costs) CMR.

Answer: C LO: 2 Type: RC

Use the following to answer questions 23-30:

C o s t- V o lu m e - P ro fi t G ra p h

$ 1 0 0 ,0 0 0
G

8 0 ,0 0 0

6 0 ,0 0 0
F

4 0 ,0 0 0

2 0 ,0 0 0

1 ,0 0 0

2 ,0 0 0

3 ,0 0 0

4 ,0 0 0

23. Line A is the:


A. total revenue line.
B. fixed cost line.
C. variable cost line.
D. total cost line.
E. profit line.

Answer: A LO: 3 Type: RC

24. Line C represents the level of:


A. fixed cost.
B. variable cost.
C. semivariable cost.
D. total cost.
E. mixed cost.

Answer: A LO: 3 Type: RC

5 ,0 0 0

U n its

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


A. fixed cost per unit.
B. selling price per unit.
C. profit per unit.
D. semivariable cost per unit.
E. unit contribution margin.

Answer: B LO: 3 Type: RC

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


A. fixed cost per unit.
B. selling price per unit.
C. variable cost per unit.
D. profit per unit.
E. unit contribution margin.

Answer: C LO: 3 Type: RC

27. The vertical distance between the total cost line and the total revenue line
represents:
A. fixed cost.
B. variable cost.
C. profit or loss at that volume.
D. semivariable cost.
E. the safety margin.

Answer: C LO: 3 Type: RC

28. Assume that the firm whose cost structure is depicted in the figure expects to
produce a loss for the upcoming period. The loss would be shown on the
graph:
A. by the area immediately above the break-even point.
B. by the area immediately below the total cost line.
C. by the area diagonally to the right of the break-even point.
D. by the area diagonally to the left of the break-even point.
E. in some other area not mentioned above.

Answer: D LO: 3 Type: RC

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

the total cost line represents:


A. fixed cost.
B. variable cost.
C. profit or loss at that volume.
D. semivariable cost.
E. the safety margin.

Answer: B LO: 3 Type: RC

30. Assume that the firm whose cost structure is depicted in the figure expects to
produce a profit for the upcoming accounting period. The profit would be
shown on the graph by the letter:
A. D.
B. E.
C. F.
D. G.
E. H.

Answer: D LO: 3 Type: RC

Use the following to answer questions 31-32:

P ro fi t- V o lu m e G ra p h
$ 4 0 ,0 0 0

2 0 ,0 0 0

2 ,0 0 0

4 ,0 0 0

6 ,0 0 0

U n it s

2 0 ,0 0 0

4 0 ,0 0 0

6 0 ,0 0 0

31. Line A is the:


A. fixed cost line.
B. variable cost line.
C. total cost line.
D. total revenue line.
E. profit line.

Answer: E LO: 3 Type: N

32. The triangular area between the horizontal axis and Line A, to the right of
4,000, represents:
A. fixed cost.
B. variable cost.
C. profit.
D. loss.
E. sales revenue.

Answer: C LO: 3 Type: RC

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

Units sold
Sales revenue
Variable costs
Fixed costs

8,000
$7,200,000
4,000,000
1,600,000

If the company desired to earn a target net profit of $480,000, it would have
to sell:
A. 1,200 units.
B. 2,800 units.
C. 4,000 units.
D. 5,200 units.
E. an amount other than those above.

Answer: D LO: 4 Type: A

34. Yellow, Inc., sells a single product for $10. Variable costs are $4 per unit and
fixed costs total $120,000 at a volume level of 10,000 units. What dollar
sales level would Yellow have to achieve to earn a target net profit of
$240,000?
A. $400,000.
B. $500,000.
C. $600,000.
D. $750,000.
E. $900,000.

Answer: C LO: 4 Type: A

Use the following to answer questions 35-37:

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

35. Archie:
A. will break-even by selling 8,000 units.
B. will break-even by selling 13,333 units.
C. will break-even by selling 20,000 units.
D. will break-even by selling 1,000,000 units.
E. cannot break-even because it loses money on every unit sold.

Answer: C LO: 1 Type: A

36. Each unit that the company sells will:


A. increase overall profitability by $20.
B. increase overall profitability by $30.
C. increase overall profitability by $50.
D. increase overall profitability by some other amount.
E. decrease overall profitability by $5.

Answer: A LO: 1 Type: A

37. In order to produce a target profit of $22,000, Archie's dollar sales must total:
A. $8,440.
B. $21,100.
C. $1,000,000.
D. $1,055,000.
E. an amount other than those above.

Answer: D LO: 4 Type: A

38. The difference between budgeted sales revenue and break-even sales
revenue is the:
A. contribution margin.
B. contribution-margin ratio.
C. safety margin.
D. target net profit.
E. operating leverage.

Answer: C LO: 4 Type: RC

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

Sales revenue
Contribution margin
Net income

$840,000
504,000
54,000

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


would be:
A. $(90,000).
B. $90,000.
C. $246,000.
D. $336,000.
E. $696,000.

Answer: B LO: 4 Type: A

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


A. increase fixed costs.
B. decrease the contribution margin.
C. decrease selling prices, assuming the price change will have no effect on
demand.
D. stimulate sales volume.
E. attempt to raise the break-even point.

Answer: D LO: 4 Type: N

41. Dana sells a single product at $20 per unit. The firm's most recent income
statement revealed unit sales of 100,000, variable costs of $800,000, and
fixed costs of $400,000. If a $4 drop in selling price will boost unit sales
volume by 20%, the company will experience:
A. no change in profit because a 20% drop in sales price is balanced by a
20% increase in volume.
B. an $80,000 drop in profitability.
C. a $240,000 drop in profitability.
D. a $400,000 drop in profitability.
E. a change in profitability other than those above.

Answer: C LO: 4 Type: A

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

Fixed costs
Selling price
Variable cost
Sales (units)

Current
Operation
$38,000
$16
$10
9,000

Anticipated
Operation
$48,000
$22
$12
6,000

Should Grimes make the change?


A. Yes, the company will be better off by $6,000.
B. No, because sales will drop by 3,000 units.
C. No, because the company will be worse off by $4,000.
D. No, because the company will be worse off by $22,000.
E. It is impossible to judge because additional information is needed.

Answer: C LO: 4 Type: A

43. Gleason sells a single product at $14 per unit. The firm's most recent income
statement revealed unit sales of 80,000, variable costs of $800,000, and
fixed costs of $560,000. Management believes that a $3 drop in selling price

will boost unit sales volume by 20%. Which of the following correctly depicts
how these two changes will affect the company's break-even point?

A.
B.
C.
D.
E.

Drop in
Sales Price
Increase
Increase
Increase
Decrease
Decrease

Increase in
Sales Volume
Increase
Decrease
No effect
Increase
Decrease

Answer: C LO: 4 Type: A

44. All other things being equal, a company that sells multiple products should
attempt to structure its sales mix so the greatest portion of the mix is
composed of those products with the highest:
A. selling price.
B. variable cost.
C. contribution margin.
D. fixed cost.
E. gross margin.

Answer: C LO: 5 Type: N

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

Produc
t
R
S
T

Sales Volume (Units)

Selling Price

16,000
12,000
52,000

$14
10
11

Variable Cost
$9
6
8

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


A. $3.00.
B. $3.55.
C. $4.00.
D. $19.35.
E. an amount other than those above.

Answer: B LO: 5 Type: A

46. Wells Corporation has the following sales mix for its three products: A, 20%;
B, 35%; and C, 45%. Fixed costs total $400,000 and the weighted-average
contribution margin is $100. How many units of product A must be sold to
break-even?
A. 800.

B. 4,000.
C. 20,000.
D. An amount other than those above.
E. Cannot be determined based on the information presented.

Answer: A LO: 5 Type: A

Use the following to answer questions 47-50:

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

Plain

Fancy

Unit selling price

$20.
00

$35.0
0

Variable cost per unit

12.0
0

24.5
0

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

47. The weighted-average unit contribution margin is:


A. $4.80.
B. $9.00.
C. $9.25.
D. $17.00.
E. an amount other than those above.

Answer: B LO: 5 Type: A

48. Assuming that the sales mix remains constant, the total number of units that
the company must sell to break even is:
A. 2,432.
B. 2,647.
C. 4,737.
D. 5,000.
E. an amount other than those above.

Answer: D LO: 5 Type: A

49. Assuming that the sales mix remains constant, the number of units of Plain
that the company must sell to break even is:
A. 2,000.
B. 3,000.
C. 3,375.
D. 5,000.
E. 5,625.

Answer: B LO: 5 Type: A

50. Assuming that the sales mix remains constant, the number of units of Fancy
that the company must sell to break even is:
A. 2,000.
B. 3,000.
C. 3,375.
D. 5,000.
E. 5,625.

Answer: A LO: 5 Type: A

51. Which of the following underlying assumptions form(s) the basis for costvolume-profit analysis?
A. Revenues and costs behave in a linear manner.
B. Costs can be categorized as variable, fixed, or semivariable.
C. Worker efficiency and productivity remain constant.
D. In multiproduct organizations, the sales mix remains constant.
E. All of the above are assumptions that underlie cost-volume-profit analysis.

Answer: E LO: 6 Type: RC

52. Cost-volume-profit analysis is based on certain general assumptions. Which


of the following is not one of these assumptions?
A. Product prices will remain constant as volume varies within the relevant
range.
B. Costs can be categorized as fixed, variable, or semivariable.
C. The efficiency and productivity of the production process and workers will
change to reflect manufacturing advances.
D. Total fixed costs remain constant as activity changes.
E. Unit variable cost remains constant as activity changes.

Answer: C LO: 6 Type: RC

53. The assumptions on which cost-volume-profit analysis is based appear to be


most valid for businesses:
A. over the short run.
B. over the long run.
C. over both the short run and the long run.
D. in periods of sustained profits.
E. in periods of increasing sales.

Answer: A LO: 6 Type: N

54. The contribution income statement differs from the traditional income
statement in which of the following ways?
A. The traditional income statement separates costs into fixed and variable
components.
B. The traditional income statement subtracts all variable costs from sales to
obtain the contribution margin.
C. Cost-volume-profit relationships can be analyzed more easily from the
contribution income statement.
D. The effect of sales volume changes on profit is readily apparent on the
traditional income statement.
E. The contribution income statement separates costs into product and
period categories.

Answer: C LO: 7 Type: RC

55. Which of the following does not typically appear on a contribution income
statement?
A. Net income.
B. Gross margin.
C. Contribution margin.
D. Total variable costs.
E. Total fixed costs.

Answer: B LO: 7 Type: RC

56.

Which of the following does not typically appear on an income statement


prepared by using a traditional format?
A.
Cost of goods sold.
B.
Contribution margin.
C.
Gross margin.
D.
Selling expenses.
E.
Administrative expenses.
Answer: B LO: 7 Type: RC

57. The extent to which an organization uses fixed costs in its cost structure is
measured by:
A. financial leverage.
B. operating leverage.
C. fixed cost leverage.
D. contribution leverage.
E. efficiency leverage.

Answer: B LO: 8 Type: RC

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

B. gross margin.
C. operating leverage factor.
D. safety margin.
E. contribution-margin ratio.

Answer: C LO: 8 Type: RC

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


degree of operating leverage?
A. Contribution margin sales.
B. Contribution margin net income.
C. Sales contribution margin.
D. Sales net income.
E. Sales fixed costs.

Answer: B LO: 8 Type: RC

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

A.
B.
C.
D.
E.

Relative Use of Fixed


Costs as Opposed to
Variable Costs
Greater for Becker
Greater for Becker
Greater for Becker
Lower for Becker
Lower for Becker

Percentage Change in
Income Caused by
a Change in Sales
Greater for Becker
Lower for Becker
Equal for both
Greater for Becker
Lower for Becker

Answer: A LO: 8 Type: RC

61. The following information relates to Day Company:

Sales revenue
Contribution margin
Net income

$12,000,000
4,800,000
800,000

Day's operating leverage factor is:


A. 0.067.
B. 0.167.
C. 0.400.
D. 2.500.
E. 6.000.

Answer: E LO: 8 Type: A

62. The following information relates to Paterno Company:

Sales revenue
Contribution margin
Net income

$10,000,000
4,000,000
1,000,000

If a manager at Paterno desired to determine the percentage impact on net


income of a given percentage change in sales, the manager would multiply
the percentage increase/decrease in sales revenue by:
A. 0.25.
B. 0.40.
C. 2.50.
D. 4.00.
E. 10.00.

Answer: D LO: 8 Type: A, N

Use the following to answer questions 63-64:

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

Sales revenue

$1,350,000

Manufacturing costs:
Variable

585,000

Fixed

270,000

Selling costs:
Variable

40,500

Fixed

54,000

Administrative costs:
Variable

184,500

Fixed

108,000

63. Edco's operating leverage factor was:


A. 4.
B. 5.
C. 6.
D. 7.
E. 8.

Answer: B LO: 8 Type: A

64. If Edco's sales revenues increase 15%, what will be the percentage increase
in income before income taxes?
A. 15%.
B. 45%.
C. 60%.
D. 75%.

E. An amount other than those above.

Answer: D LO: 8 Type: A

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

Fixed Costs
Increase
Increase
Decrease
Decrease
Do not change

Break-even Point
Increase
Decrease
Increase
Decrease
Does not change

Answer: A LO: 8 Type: RC

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

I.
II.
III.

The company has erred, as these two practices used in conjunction with
one another will severely limit the firm's ability to analyze costs over the
relevant range.
Costs formerly viewed as fixed under traditional-costing systems may
now be considered variable with respect to changes in cost drivers such
as number of setups, number of material moves, and so forth.
As compared with the results obtained under a traditional-costing
system, the concept of break-even analysis loses meaning.

A. I only.
B. II only.
C. III only.
D. I and II.
E. II and III.

Answer: B LO: 10 Type: N

67. A company, subject to a 40% tax rate, desires to earn $500,000 of after-tax
income. How much should the firm add to fixed costs when figuring the sales
revenues necessary to produce this income level?
A. $200,000.
B. $300,000.
C. $500,000.
D. $833,333.
E. $1,250,000.

Answer: D LO: 11 Type: A

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

Sales revenue

$1,350,000

Variable costs
Fixed costs

810,000
432,000

How many units must Barney sell to earn an after-tax profit of $180,000?
A. 42,000.
B. 45,000.
C. 51,000.
D. 61,000.
E. An amount other than those above.