Practice Exam with Answers

1. Which term describes difference between the actual price of inputs and the standard price of
inputs?
A) Price variance
B) Standard cost variance
C) Inflation index adjustment
D) Materials price index

Answer: A
Rationale: The difference between the actual price of actual inputs and the standard price of actual
inputs is the price variance for the input component. The price variance is calculated typically for raw
materials and direct labor.

2. Using cost-volume-profit analysis, we can conclude that a 20 percent reduction in variable costs will:
A) Not affect the break-even sales volume if there is an offsetting 20 percent increase in fixed costs
B) Reduce the break-even sales volume by 20 percent
C) Reduce total costs by 20 percent
D) Reduce the slope of the total costs line by 20 percent

Answer: D
Rationale: The slope of the total cost line is equal to the variable cost per unit of activity; therefore, if
the variable cost per unit is decreased by 20%, the slope of the total cost line will decrease by 20%.

3. As volume increases, which of the following statements is not correct?

A) Variable cost per unit will remain the same.
B) Total fixed will remain the same.
C) Average cost per unit will increase.
D) Total variable costs will increase.

Answer: C

4. Which of the following mathematical expressions best describes a mixed cost?

A) Y = bX
B) Y = a
C) Y = a + bX
D) Y = ai

Answer: C

5. Which budgeting approach is often used when the relationships between inputs and outputs are weak
or nonexistent?
A) Incremental approach
B) Input/output approach
C) Activity-based approach
D) Minimum level approach

Answer: A
6. Over the short term, which type of costs is indifferent to activity level changes?
A) Variable costs
B) Fixed costs
C) Mixed costs
D) Step costs

Answer: B

7. A unit contribution margin measures:

A) The difference between unit selling price and variable cost per unit
B) The difference between sales and cost of goods sold on a unit basis
C) The difference between unit sales and total costs per unit
D) The percentage difference between sales and cost of goods sold

Answer: A
Rationale: Unit selling price minus unit variable cost is the definition of unit contribution margin.

8. Comparing least-squares regression to high-low estimation:

A) Least-squares regression is preferred to high-low estimation because with this method, the
computer can make all the decisions after data entry
B) Least-squares regression provides superior estimates to high-low estimation when using
unreliable data
C) Least-squares regression provides a means of estimating how well the data fit the model
D) All of the above

Answer: C
Rationale: Least-squares regression is a mathematical model that not only uses the data points to
determine the cost curve, but it provides statistics to enable the user to know how well the data fit the
cost curve and how reliable the model is in estimating costs.

9. What is the purpose for using predetermined overhead rates?

A) Delays in product costing can be avoided
B) Variation in cost assignment due to seasonality can be prevented
C) Variation in cost assignment due to short-term variations in volume can be prevented
D) Use of predetermined overhead rates serves all the above purposes

Answer: D
Rationale: As stated in the text, predetermined overhead rates serve to (a) enable accountants to
determine costs earlier than if using actual costs, (b) prevent variations in costs due to the uneven
occurrence of cost throughout the year, and (c) prevent short-term variations in unit cost due to
volume variations.

10. Which of the following results in an increase in work-in-process inventory?

A) Purchasing raw materials
B) Using direct manufacturing labor hours
C) Finishing a job in process
D) Selling finished goods inventory

Answer: B
Rationale: The use of direct labor hours during the period is recorded as an increase in the balance
the Work-in-Process Inventory account. Direct materials used and factory overhead applied also
increase the account.
Rationale: The continuous improvement approach to budgeting provides for declining budgeted
amounts
11. Which budgeting approach is used most often for service, manufacturing, and distribution activities
where there exists a clearly defined relationship between effort and accomplishment?
A) The continuous budgeting approach
B) The input/output approach
C) The activity based approach
D) Participation budgeting

Answer: B

Rationale: The input/output approach projects budgeted costs of inputs based on budgeted
production outputs

12. Which of the following statements concerning the cash budget is true?
A) The cash budget summarizes all economic activities during the budget period.
B) The cash budget summarizes all cash receipts and disbursements during the budget period.
C) The cash budget summarizes all sales and expenses during the budget period.
D) The cash budget summarizes all revenues and expenses during the budget period.

Answer: B
Rationale: As the name implies, the cash budget shows the planned cash receipts and disbursements
for the budget period.

13. A balanced scorecard typically includes:

A) Financial measures
B) Customer satisfaction measures
C) Internal processes measures
D) All of the above

Answer: D
Rationale: Although a balanced scorecard could include other categories, the typical categories are
financial, customer satisfaction, and internal processes.

14. Which of the following statements about a balanced scorecard is true?

A) The advantage of a balanced scorecard approach is that it leads management to focus
exclusively on critical downstream issues such as consumer demand, and away from lesser
upstream issues such as design and production.
B) The advantage of a balanced scorecard approach is that it can best be used as a single,
comprehensive measure of corporate performance.
C) The advantage of a balanced scorecard approach is that it eliminates the need for management
accounting data.
D) The balanced scorecard gives managers a perspective of the organization’s performance using a
recurring set of criteria.

Answer: D
Rationale: Balance scorecard provides an evaluation of an organization using multiple criteria,
financial and non-financial, as opposed to ROI, EVA, and Residual Income which are single
measures of performance.
15. Which of the following is not a period cost?
A) The president’s salary
B) Sales commissions
C) Depreciation on the mainframe computer in the Information Systems Department
D) Subsidy of the plant cafeteria

Answer: D
Rationale: Items A through C are not related to the manufacturing function; therefore, they are not a
product cost. The cafeteria in the plant is related to the manufacturing function, so the subsidy of the
cafeteria is a product cost.

for expenses over time in order to promote continuous improvement.

16. Both investment center and cost center managers are responsible for managing:
A) Revenues
B) Net income
C) Costs
D) Contribution margins

Answer: C

17. The following is a disadvantage of the payback period method:

A) It is more complicated to calculate with unequal annual cash flows
B) There is no consideration of cash flows after the payback period
C) There is no consideration of the timing of cash flows
D) Both A and B are disadvantages of this method

Answer: D

Rationale: Payback period will accommodate unequal cash flows, but the calculation is more
complicated. It does not take into account cash flows received after the recovery of the initial
investment. The accounting rate of return (not the payback period) does not consider the timing of
cash flows

18. The scatter diagram method of cost estimation:

A) Is influenced by extreme observations
B) Is superior to other methods in its ability to distinguish between discretionary and committed fixed
costs
C) Requires the use of judgment
D) Provides a measure of the goodness of fit

Answer: C
Rationale: The scatter diagram method depends of visual observation of the data points on a graph to
fit the cost curve to the data. The position of the curve on the graph depends on the judgment of the
person observing the data points.
19. The range of operations that falls within the capacity of the current level of fixed costs is referred to as
the:
A) Linear average
B) Relevant range
C) Marginal range
D) Operating range

Answer: B
Rationale: When developing a cost model for a firm or segment of a firm, that model is only relevant
within the range of capacity of the fixed costs. For example if the current level of fixed cost of $10
million represents a capacity of 2 million units of output, that cost model cannot be used to estimate
the cost of producing more than 2 million units.

20. In a cost-volume-profit graph:

A) An increase in unit variable costs would decrease the slope of the total costs line
B) An increase in the unit selling price would shift the break-even sales point to the left
C) An increase in the unit selling price would shift the break-even sales point to the right
D) The total revenues line crosses the horizontal axis at the break-even point

Answer: B
Rationale: An increase in selling price increases the slope of the total revenue line, thereby causing
its intersection with the total cost line to shift to the left.

21. In a manufacturing setting, the purchase budget is based on:

A) The sales budget
B) The production budget
C) The manufacturing labor budget
D) The cash disbursements

Answer: B

Rationale: Cost centers are responsible for managing costs, and investment centers are responsible
for managing revenues, costs, and asset investments.

22. Which of the following capital budgeting techniques provides the decision maker with answers
expressed in dollars?
A) Accounting rate of return
B) Internal rate of return
C) Net present value
D) Payback method

Answer: C

Rationale: Techniques labeled rate of return provide statistics in a decimal or percentage form.
Payback period gives an answer in time periods. Net present value is expressed in dollars or other
currency.
23. Tod Table Company manufactures tables. The estimated number of table sales for each of the last
three months of Year 1 is as follows:

Month Unit Sales

October 10,000
November 14,000
December 7,500

Finished goods inventory at the end of November was 2,000 units. Desired ending finished goods
inventory is equal to 25 percent of the next month's sales. Tod Table expects to sell the tables for
$100 each. January sales for Year 2 are projected at 16,000 tables.

How many tables should Tod produce in December?

A) 15,000
B) 14,000
C) 9,500
D) 7,500

Answer: C
Rationale: Production needs to cover December sales of 7,500 units plus a desired ending inventory
of 4,000 units (16,000 x 0.25) adjusted for the beginning inventory of 2,000 units.
7,500 + 4,000 – 2,000 = 9,500 units.

24. The following information pertains to Nichole Company’s weekly activity and total costs:

Volume of Activity Total Cost

55 units $600
60 units $750
80 units $800

What are Nichole’s weekly fixed costs?

A) $ -0-
B) $ 150
C) $ 160
D) $ 800

Answer: C
Rationale: ($800 – $600) / (80 – 55) = $8 variable cost per unit
$800 – (80 × $8) = $160 fixed costs
25. Herman’s income statement is as follows:

Sales (5,000 units) $75,000

Less variable costs (24,000)
Contribution margin $51,000
Less fixed costs (12,000)
Net income $ 39,000

If sales increase by 1,000 units, profits will:

A) Increase by $10,200
B) Increase by $12,000
C) Increase by $2,400
D) Increase by $5,000

Answer: A

Rationale: The unit contribution margin is the $51,000 Contribution Margin divided by 5,000 units, or
$10.20 per unit. If sales increase by 1,000 units, total contribution margin and total profits will
increase by 1,000 units times $10.20, or $10,200, because fixed costs will remain unchanged.

26. Determine the unit break-even point, assuming fixed costs are $30,000 per period, variable costs are
$19.00 per unit, and the sales price is $25.00 per unit.
A) 6,000
B) 6,667
C) 5,000
D) 12,000

Answer: C

Rationale: $30,000 / ($25 – $19) = 5,000 units at break-even

27. The Mighty Manufacturing Company expects to incur the following per unit costs for
1,000 units of production:

Direct materials 2 lb. @ $40 = $80

Direct labor 1 hr. @ $48= $48
Variable overhead 75% of direct labor costs
Fixed overhead 50% of direct labor costs

What is the total cost reported in the manufacturing cost budget?

A) $188,000
B) $147,000
C) $ 94,000
D) $ 80,000

Answer: A
Rationale: The total manufacturing cost of $188,000 equals direct materials of $80,000 (1,000 x $80),
plus direct labor of $48,000 (1,000 x $48), plus variable overhead of $36,000 ($48,000 direct labor x
 75%), plus fixed overhead of $24,000 ($48,000 direct labor x 50%).

28. Connell manufactures specialty electronic circuitry through a unique photo-electronic process.
One of the primary products, Model GT40, has a standard labor time of 0.5 hour and a standard labor
rate of $7.00 per hour. During March, the following activities pertaining to direct labor for GT40 were
recorded:

Direct labor hours used 2,000

Direct labor cost $12,000

Units of GT40 manufactured 3,000

The Labor rate variance and Labor efficiency variance are:

A) Labor rate variance $2,000 U, Labor efficiency variance $3,500 F

B) Labor rate variance $1,000 F, Labor efficiency variance $3,500 F
C) Labor rate variance $2,000 F, Labor efficiency variance $1,000 F
D) Labor rate variance $2,000 F, Labor efficiency variance $3,500 U

Answer: D

Rationale:

Actual cost of labor inputs (given) $12,000

Standard cost of actual inputs (2000 hours × $7.00) (14,000)

Labor rate variance $ 2,000 F

Standard cost of actual inputs (above) $14,000

Flexible budget cost (3,000 × 1/2 × $7.00) (10,500)

Labor efficiency variance $ 3,500 U

29. Exercise. Koshy Company is planning a cash budget for the next three months. Estimated sales
revenue is:

Month Revenue Month Revenue

January $175,000 March $125,000
February 150,000 April 100,000
Month Sales Revenue Month Sales Revenue

All sales are on credit; 60 percent is collected during the month of sale, and 40 percent is collected
during the next month. Cost of goods sold is 80 percent of sales. Payments for merchandise sold are
made in the month following the month of sale. Operating expenses total $26,000 per month and are
paid during the month incurred. The cash balance on February 1 is estimated to be $35,000.

Prepare monthly cash budgets for February, March, and April.

Answer:

KOSHY COMPANY

Cash Budgets

February, March, and April

  February March April

Cash balance, beginning $ 35,000 $ 29,000 $ 18,000

Cash receipts:      

60% of current month's sales 90,000 75,000 60,000

40% of previous month's sales 70,000 60,000 50,000

Total receipts 160,000 135,000 110,000

Cash available 195,000 164,000 128,000

       

Budgeted disbursements:      

80% of previous month's sales 140,000 120,000 100,000

Operating expenses 26,000 26,000 26,000

Total disbursements 166,000 146,000 126,000

Cash balance, ending $ 29,000 $ 18,000 $ 2,000