ACCA107: Strategic Cost Management

PRELIMINARY EXAMINATION
September 6, 2021

1. Sam Corp. produces a single product. The following cost structure applied to its first year of
operations, 2021:

Variable costs:
SG&A $2 per unit
Production $4 per unit
Fixed costs (total cost incurred for the year):
SG&A $14,000
Production $20,000

Assume for this question only that during 2021 Sam Corp. manufactured 5,000 units and sold 3,800.
There was no beginning or ending work-in-process inventory. How much larger or smaller would
Sam Corp.’s income be if it uses absorption rather than variable costing?

a. The absorption costing income would be $6,000 larger

b. The absorption costing income would be $6,000 smaller
c. The absorption costing income would be $4,800 larger
d. The absorption costing income would be $4,000 smaller

2. The following information was extracted from the first year absorption-based accounting records of
Charm Co.

Total fixed costs incurred $100,000

Total variable costs incurred 50,000
Total period costs incurred 70,000
Total variable period costs incurred 30,000
Units produced 20,000
Units sold 12,000
Unit sales price $12

If Charm Co. had used variable costing in its first year of operations, how much income (loss) before
income taxes would it have reported?

a. ($6,000)
b. $54,000
c. $26,000
d. $2,000
3. Zenith Corp. incurred the following costs in 2021 (its first year of operations) based on production of
10,000 units:

Direct material $5 per unit

Direct labor $3 per unit
Variable product costs $2 per unit
Fixed product costs (in total) $100,000

When Zenith Corp. prepared its 2021 financial statements, its Cost of Goods Sold was listed at
$100,000. Based on this information, which of the following statements must be true:

a. Zenith Corp. sold all 10,000 units that it produced.

b. Zenith Corp. sold 5,000 units
c. Zenith Corp. had a very profitable year.
d. From the information given, one cannot tell whether Zenith Corp.’s financial statements were
prepared based on variable or absorption costing.

4. The following information has been extracted from Vision Co.’s financial records for its first year of
operations:

Units produced 10,000

Units sold 7,000
Variable costs per unit:
Direct material $8
Direct labor 9
Manufacturing overhead 3
SG&A 4
Fixed costs:
Manufacturing overhead $70,000
SG&A 30,000

Based on absorption costing, what amount of period costs will Vision Co. deduct?

a. $70,000
b. $79,000
c. $30,000
d. $58,000
5. For its most recent fiscal year, a firm reported that its contribution margin was equal to 40 percent of
sales and that its net income amounted to 10 percent of sales. If its fixed costs for the year were
$60,000, how much were sales?

a. $150,000
b. $200,000
c. $600,000
d. can’t be determined from the information given

6. At its present level of operations, a small manufacturing firm has total variable costs equal to 75
percent of sales and total fixed costs equal to 15 percent of sales. Based on variable costing, if sales
change by $1.00, income will change by

a. $0.25
b. $0.10
c. $0.75
d. can’t be determined from the information given.

7. Consider the following information:

Net operating income under variable costing: $25,000

Increase in inventory during the period: 2,000 units
Fixed manufacturing overhead: $50,000
Number of units produced during the period: 10,000 units

Based on the above information, the net operating income under absorption costing is:

a. $15,000
b. $35,000
c. $75,000
d. $10,000

8. A company manufactures 1,000 units of product X per year. The cost data is given below:

Direct materials: $5 per unit

Direct labor: $4 per unit
Variable manufacturing overhead: $3 per unit
Fixed manufacturing overhead: $6,000 per year

Based on the above information, the variable cost to manufacture one unit of product X is:
 a. $18
b. $9
c. $15
d. $12

9. Consider the following information:

Number of units produced: 2,000 units

Direct materials cost: $8 per unit
Direct labor cost: $12 per unit
Variable manufacturing overhead: $6 per unit
Fixed manufacturing overhead: $8,000
Variable selling and administrative cost: $2 per unit
Fixed selling and administrative cost: $6,000

Based on the above information, what is the unit product cost under absorption costing system?

a. $26
b. $30
c. $28
d. $32

10. You obtain the following information regarding fixed production costs from a manufacturing firm
for fiscal year 2021:

Fixed costs in the beginning inventory $ 16,000

Fixed costs incurred this period 100,000

Which of the following statements is not true:

a. The maximum amount of fixed production costs that this firm could deduct using absorption
costs in 2021 is $116,000.
b. If the firm sold more units than it produced, the maximum difference between this firm’s 2021
income based on absorption costing and its income based on variable costing is $16,000.
c. Using variable costing, this firm will deduct no more than $16,000 for fixed production costs.
d. If this firm produced substantially more units than it sold in 2021, variable costing will probably
yield a lower income than absorption costing.
11. ABM Company makes a variety of backpacks. The activity centers and budgeted information for
factory overhead for the year are:

Two styles of backpacks were produced in December, A and B. The quantities and
other operating data for the month are:

Calculate the cost per unit for each product

a. A – P620; B – P783
b. A – P783; B – P620
c. A – P1,232; B – P1,240
d. A – P710; B – P1,033
12. The ABM Company produces two products, A and B. The company president is concerned about the
fierce competition in the market for product A. He notes that competitors are selling A for a price
well below ABM’s price of P12.70. At the same time, he notes that competitors are pricing product
B almost twice as high as ABM’s price of P12.50.

The president has obtained the following data for a recent time period:

He has learned that overhead costs are assigned to products on the basis of direct labor hours. The
overhead costs for this time period consisted of the following items:

Using the direct labor hours to allocate overhead costs, determine the gross margin per unit for
Product A.

a. P1.394
b. P1.454
c. P4.505
d. P1.926
13. The ABM Company produces two products, A and B. The company president is concerned about the
fierce competition in the market for product A. He notes that competitors are selling A for a price
well below ABM’s price of P12.70. At the same time, he notes that competitors are pricing product
B almost twice as high as ABM’s price of P12.50.

The president has obtained the following data for a recent time period:

He has learned that overhead costs are assigned to products on the basis of direct labor
hours. The overhead costs for this time period consisted of the following items:

Using the activity-based costing, determine the gross margin per unit for Product A.

a. P1.454
b. P1.394
c. P4.505
d. P1.926
14. James Corp. produces 50,000 units of Product Q and 6,000 units of Product Z during a period. In
that period, four set-ups were required for color changes. All units of Product Q are black, which is
the color in the process at the beginning of the period. A set-up was made for 1,000 blue units of
Product Z; a set-up was made for 4,500 red units of Product Z; a set-up was made for 500 green
units of Product Z. A set-up was then made to return the process to its standard black coloration and
the units of Product Q were run. Each set-up costs $500. Assume that James Corp. has decided to
allocate overhead costs using levels of cost drivers. What would be the approximate per-unit set-up
cost for the blue units of Product Z?

a. $.04
b. $.25
c. $.50

15. James Corp. produces 50,000 units of Product Q and 6,000 units of Product Z during period. In that
period, four set-ups were required for color changes. All units of Product Q are black, which is the
color in the process at the beginning of the period. A set-up was made for 1,000 blue units of
Product Z; a set-up was made for 4,500 red units of Product Z; a set-up was made for 500 green
units of Product Z. A set-up was then made to return the process to its standard black coloration and
the units of Product Q were run. Each set-up costs $500. Assume that James Corp. has decided to
allocate overhead costs using levels of cost drivers. What would be the approximate per-unit set-up
cost for the green units of Product Z?

a. $1.00
b. $0.25
c. $0.04
16. Pinky Florists uses an activity-based costing system to compute the cost of making floral bouquets
and delivering the bouquets to its commercial customers. Company personnel who earn $180,000
typically perform both tasks; other firm-wide overhead is expected to total $70,000. These costs are
allocated as follows:
Bouquet Production Delivery Other
Wages and salaries 60% 30% 10%
Other overhead 50% 35% 15%

Pinky anticipates making 20,000 bouquets and 4,000 deliveries in the upcoming year.
The cost of wages and salaries and other overhead that would be charged to each bouquet made is:

a. $7.15
b. $8.75
c. $12.50
d. $13.75

17. Pinky Florists uses an activity-based costing system to compute the cost of making floral bouquets
and delivering the bouquets to its commercial customers. Company personnel who earn $180,000
typically perform both tasks; other firm-wide overhead is expected to total $70,000. These costs are
allocated as follows:
Bouquet Production Delivery Other
Wages and salaries 60% 30% 10%
Other overhead 50% 35% 15%

Pinky anticipates making 20,000 bouquets and 4,000 deliveries in the upcoming year.
The cost of wages and salaries and other overhead that would be charged to each delivery is:

a. $19.63
b. $20.31
c. $26.75
d. $40.63
18. VTech Products manufactures three types of remote-control devices: Economy, Standard, and
Deluxe. The company, which uses activity-based costing, has identified five activities (and related
cost drivers). Each activity, its budgeted cost, and related cost driver is identified below.

The following information pertains to the three product lines for next year:

Under an activity-based costing system, what is the per-unit cost of Economy?

a. $141
b. $164
c. $225
d. $228
19. Centaur Inc currently uses traditional costing procedures, applying $400,000 of overhead to products
X and Y on the basis of direct labor hours. The firm is considering a shift to activity-based costing
and the creation of individual cost pools that will use the direct labor hours (DLH), production
setups (SU) and number of parts components (PC) as cost drivers. Data on the cost pools and
respective driver volumes follow:

The overhead cost allocated to product X by using activity-based costing procedures would be:

a. $120,000
b. $184,500
c. $215,500
d. $280,000

20. Centaur Inc currently uses traditional costing procedures, applying $400,000 of overhead to products
X and Y on the basis of direct labor hours. The firm is considering a shift to activity-based costing
and the creation of individual cost pools that will use the direct labor hours (DLH), production
setups (SU) and number of parts components (PC) as cost drivers. Data on the cost pools and
respective driver volumes follow:

The overhead cost allocated to product Y by using activity-based costing procedures would be:

a. $120,000.
b. $184,500.
c. $215,500.
d. $280,000.
21. The reports generated by variable costing system of a company is mostly used by:

a. Lenders and creditors

b. Internal management
c. Government and tax agencies
d. Investors and stockholders

22. Absorption costing is also known as:

a. External costing
b. Direct costing
c. Full costing
d. Operational costing

23. The reason of difference in net operating income under variable costing and absorption costing is:

a. Change in selling price

b. Change in fixed cost
c. Change in variable cost
d. Change in inventory

24. Under absorption costing, when inventory decreases the fixed manufacturing overhead is:

a. Deferred in inventory
b. Added to inventory
c. Subtracted from inventory
d. Released from inventory

25. When inventory increases, the net operating income under absorption costing is:

a. Always equal to variable costing

b. Always higher than variable costing
c. Always lower than variable costing
d. Always equal to break even point
26. Profit under absorption costing may differ from profit determined under variable costing. How is this
difference calculated?

a. Change in the quantity of all units in inventory times the relevant fixed costs per unit.
b. Change in the quantity of all units produced times the relevant fixed costs per unit.
c. Change in the quantity of all units in inventory times the relevant variable cost per unit.
d. Change in the quantity of all units produced times the relevant variable cost per unit.

27. What factor, related to manufacturing costs, causes the difference in net earnings computed using
absorption costing and net earnings computed using variable costing?

a. Absorption costing considers all costs in the determination of net earnings, whereas variable
costing considers fixed costs to be period costs.
b. Absorption costing allocates fixed overhead costs between cost of goods sold and inventories,
and variable costing considers all fixed costs to be period costs.
c. Absorption costing “inventories” all direct costs, but variable costing considers direct costs to be
period costs.
d. Absorption costing “inventories” all fixed costs for the period in ending finished goods
inventory, but variable costing expenses all fixed costs.

28. Under variable costing, which of the following are costs that can be inventoried?

a. variable selling and administrative expense

b. variable manufacturing overhead
c. fixed manufacturing overhead
d. fixed selling and administrative expense

29. If a firm uses variable costing, fixed manufacturing overhead will be included

a. only on the balance sheet.

b. only on the income statement.
c. on both the balance sheet and income statement.
d. on neither the balance sheet nor income statement.
30. On the variable costing income statement, the difference between the “contribution margin” and
“income before income taxes” is equal to

a. the total variable costs.

b. the Cost of Goods Sold.
c. total fixed costs.
d. the gross margin.

31. Activity-based costing systems:

a. use a single, volume-based cost driver.

b. assign overhead to products based on the products' relative usage of direct labor.
c. often reveal products that were under- or overcosted by traditional costing systems.
d. typically use fewer cost drivers than more traditional costing systems.
e. have a tendency to distort product costs.

32. Vanguard combines all manufacturing overhead into a single cost pool and allocates this overhead to
products by using machine hours. Activity-based costing would likely show that with Vanguard's
current procedures,

a. all of the company's products are undercosted.

b. the company's high-volume products are undercosted.
c. all of the company's products are overcosted.
d. the company's high-volume products are overcosted.
e. the company's low-volume products are overcosted.

33. The term cost driver refers to

a. any activity that can be used to predict cost changes.

b. the attempt to control expenditures at a reasonable level.
c. the person who gathers and transfers cost data to the management accountant.
d. any activity that causes costs to be incurred.

34. Today, traditional accounting methods are

a. still appropriate for financial reporting.

b. still appropriate for providing useful cost information to internal managers.
c. still appropriate for both internal and external financial reporting.
d. outdated for all purposes.
35. Traditional overhead allocations result in which of the following situations?

a. Overhead costs are assigned as period costs to manufacturing operations.

b. High-volume products are assigned too much overhead, and low-volume products are assigned
too little overhead.
c. Low-volume products are assigned too much, and high-volume products are assigned too little
overhead.
d. The resulting allocations cannot be used for financial reports.

36. Traditionally, overhead has been assigned based on direct labor hours or machine hours. What effect
does this have on the cost of a high-volume item?

a. over-costs the product

b. under-costs the product
c. has no effect the product cost
d. cost per unit is unaffected by product volume

37. Relative to traditional product costing, activity-based costing differs in the way costs are

a. processed
b. allocated
c. benchmarked
d. incurred

38. In activity-based costing, preliminary cost allocations assign costs to

a. departments
b. processes
c. products
d. activities
39. Of the following, which is the best reason for using activity-based costing?

a. to keep better track of overhead costs

b. to more accurately assign overhead costs to cost pools so that these costs are better controlled
c. to better assign overhead costs to products
d. to assign indirect service overhead costs to direct overhead cost pools

40. ABC should be used in which of the following situations?

a. single-product firms with multiple steps

b. multiple-product firms with only a single process
c. multiple-product firms with multiple processing steps
d. in all manufacturing firms