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CHAPTER5 COST BEHAVIOR

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

and the per unit fixed cost.

2. The reluctance of managers to lay off employees when activity declines in the short-

run leads to an increase in the ratio of variable to fixed costs.

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

unit basis over the relevant range.

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

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

5. Fixed costs remain constant in total, but vary inversely with changes in activity when

expressed on a per unit basis.

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

7. The following costs are all examples of committed fixed costs: depreciation on

buildings, advertising, insurance, and management development and training.

8. The time frame in which discretionary fixed costs are controllable is usually much

shorter than the time frame for committed fixed costs.

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

method in analyzing cost behavior.

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

omitted from the analysis.

11. The high and low points used in the high-low method tend to be unusual and therefore

the cost formula may not accurately represent all of the data.

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

13. Contribution margin equals revenue minus all variable costs.

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

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.


CHAPTER6 CVP

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

operating income.

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

the total cost line.

3. In two companies making the same product and with the same total sales and total

expenses, the contribution margin ratio will be lower in the company with a higher

proportion of fixed expenses in its cost structure.

4. If the variable expense per unit increases, and all other factors remain constant, the

contribution margin ratio will increase.

5. The impact on net operating income of any given dollar change in total sales can be

estimated by multiplying the CM ratio by the dollar change in total sales.

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

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

$20,000.

7. The formula for the break-even point is the same as the formula to attain a given target

profit for the special case where the target profit is zero.

8. An increase in total fixed expenses will not affect the break-even point so long as the

contribution margin ratio remains unchanged.

9. All other things the same, a reduction in the variable expense per unit will cause the

break-even point to rise.

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

target profit by the contribution margin per unit.

11. All other things the same, the margin of safety in dollars at a given level of sales will

tend to be lower for a capital-intensive company than for a labor-intensive company

with high variable expenses.

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

break-even volume of sales.


13. A company with high operating leverage will experience a lower reduction in net

operating income in a period of declining sales than will a company with low

operating leverage.

14. If Q is the quantity of a product sold, P is the price per unit, V is the variable expense

per unit, and F is the total fixed expense, then the degree of operating leverage is equal

to: [Q(P-V)] ÷ [Q(P-V)- F]

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.

CHAPTER8 ABC

1.If a manufacturing company is using activity-based costing for internal purposes only,

then organization-sustaining overhead costs should not be allocated to any of the

products.

2. Batch-level activities are performed each time a batch of goods is handled or

processed.

3. Organization-sustaining activities are carried out regardless of how many units are

made, how many batches are run, or how many different products are made.

4. Direct labor-hours or direct labor cost should not be used as a measure of activity in an

activity-based costing system.

5. Activity-based costing is a costing method that is designed to provide managers with

cost information for strategic and other decisions that potentially affect capacity and

therefore “fixed” costs.

6. Activity-based costing is a costing method that is designed to provide managers with

cost information for strategic and other decisions that potentially affect only variable

costs.

7. A duration driver provides a measure of the amount of time required to perform an

activity.

8. In general, transaction drivers are more accurate measures of the consumption of

resources than duration drivers.


9. The costs of idle capacity should not be assigned to products in activity-based costing.

10. In traditional costing systems, all manufacturing costs are assigned to products-- even

manufacturing costs that are not caused by the products.

11. Activity-based costing involves a two-stage allocation in which overhead costs are

first assigned to departments and then to jobs on the basis of direct labor hours.

12. In activity-based costing, some costs may be broken down and assigned to two activity

cost pools. For example, part of a supervisor's salary may be classified as a product-

level activity and part of it may be classified as a batch-level activity.

13. Activity rates in activity-based costing are computed by dividing costs from the first-

stage allocations by the activity measure for each activity cost pool.

14. In the second-stage allocation in activity-based costing, activity rates are used to apply

costs to products, customers, and other cost objects.

15. When a company shifts from a traditional cost system in which manufacturing

overhead is applied based on direct labor-hours to an activity-based costing system in

which there are batch-level and product-level costs, the unit product costs of high

volume products typically decrease whereas the unit product costs of low volume

products typically increase.

CHAPTER10 STANDARD COST

1. Ideal standards do not allow for machine breakdowns and other normal inefficiencies.

2. The standard price per unit for direct materials should reflect the final, delivered cost

of the materials, net of any discounts taken.

3. The standard quantity or standard hours allowed refers to the amount of the input that

should have been used to produce the actual output of the period.

4. In developing a direct material price standard, the expected freight cost on the

materials should be included.

5. Material price variances are often isolated at the time materials are purchased, rather

than when they are placed into production, to facilitate earlier recognition of

variances.
6. Waste on the production line will result in a materials price variance.

7. It is best to isolate the material quantity variance when the materials are purchased.

8. When the material price variance is recorded at the time of purchase, raw materials are

recorded as inventory at actual cost.

9. If improvement in a performance measure on a balanced scorecard should lead to

improvement in another performance measure, but does not, then employees must

work harder.

10. A manufacturing cycle efficiency (MCE) of greater than one is impossible.

11. Inspection Time is generally considered to be value-added time.

12. A manager would generally like to see a trend indicating an increase in setup time.

13. A manufacturing cycle efficiency (MCE) of 0.3 means that 70% of throughput time is

spent on non-value- added activities.

14. If standard costs exceed actual costs, a credit entry would be made in the appropriate

variance account to record the variance.

15. If a favorable variance is recorded in the accounting records, it will be recorded as a

credit.