Test Bank Ma

Chapter 01 Testbank Key
1. What type of accounting system is part of an organisation's management information system for internal use only?
A. Financial accounting
B. Management accounting
C. Governmental accounting
D. All of the given answers
AACSB: Reflectnve
Dnffnculty: Easy
Learnnng Objectnve: 1.03 Descrnbe the major dnfferences between management accountnng and fnnancnal accountnng nnformatnon
2. Which of the following statement/s about management accounting is/are true?

i. It is a part of an organisation's management information system.
ii. It is relied on by managers to plan and control an organisation's operations.
iii. It is relied on by external users to make investment decisions.
A. i and ii
B. i, ii and iii
C. iii
D. ii
AACSB: Reflectnve
Dnffnculty: Easy
Learnnng Objectnve: 1.02 Defnne management accountnng nn terms of value creatnon
3. Which of the following statement/s about management accounting is/are true?

i. It is concerned only with information obtained from the accounting records.
ii. It is concerned with financial and non-financial information.
iii. It can provide information useful for making decisions.
A. i
B. i and ii
C. ii and iii
D. ii
AACSB: Reflectnve
Dnffnculty: Mednum
4. A strategy is:
i. another name for a long-term objective
ii. the same as an objective
iii. a means by which an organisation plans to meet its mission and achieve its objectives
A. i
B. ii
C. iii
D. i and ii
AACSB: Reflectnve
Dnffnculty: Mednum
Learnnng Objectnve: 1.06 Explann the basnc concepts of strategy and how management accountnng systems can support strategnes
5. Which of the following is not an objective of management accounting?

A. Providing information for making decisions
B. Providing information for planning
C. Providing information for control
D. Providing information for profit and loss statements
AACSB: Reflectnve
Dnffnculty: Mednum
6. Planning is:
A. comparing actual performance against targets
B. setting objectives and formulating plans for future operations
C. measuring the performance of managers against preset targets
D. motivating managers towards achieving organisational goals
AACSB: Reflectnve
Dnffnculty: Easy
Learnnng Objectnve: 1.08 Explann how plannnng and control mechannsms can be used to support resource management
7. 'Control' involves:
A. formulating details of operations and finances for the next financial year
B. comparing actual performance against targets
C. deciding whether to expand activities
AACSB: Reflectnve
Dnffnculty: Mednum
8. Part of the planning process involves:
A. formulating details of operations and finances for the next financial year
B. comparing actual performance against targets
C. making a choice between available alternatives
D. measuring the performance of managers against preset targets
AACSB: Reflectnve
Dnffnculty: Mednum
9. The role of management accounting is to:

A. provide information to parties outside the organisation
B. provide information to managers within the organisation.
C. provide information to government agencies.
AACSB: Reflectnve
Dnffnculty: Easy
10. Budgeting can be used in an organisation to:

A. motivate managers to achieve organisational goals.
B. control operations.
C. provide managers with information for making decisions and planning.
AACSB: Reflectnve
Dnffnculty: Mednum
11. The benefits of management accounting information include:

A. improved decisions.
B. more effective planning.
C. greater efficiency of operations.
AACSB: Reflectnve
Dnffnculty: Easy
Learnnng Objectnve: 1.10 Descrnbe the factors that may nnfluence the desngn of management accountnng systems nncludnng behavnoural nssues, cost–
benefnt trade-offs and the nmplncatnons of contnngency and nnstntutnonal theornes
12. Management accounting:

A. must comply with Australian accounting standards.
B. focuses primarily on the needs of managers internal to the organisation.
C. provides information for parties external to the organisation.
D. involves reports focusing on the enterprise in its entirety.
AACSB: Reflectnve
Dnffnculty: Easy
13. Which of the following is necessary for management accounting information to be useful?
A. It must report to external users.
B. It must develop a framework of principles and guidelines.
C. It must adapt to accommodate changes in the business environment.
D. It must focus on the enterprise in its entirety.
AACSB: Reflectnve
Dnffnculty: Easy
Learnnng Objectnve: 1.11 Identnfy the organnsatnonal responses and management accountnng responses to changes nn the busnness envnronment
14. Both financial and management accounting:

A. draw on data from the organisation's basic information system.
B. provide information for external users.
C. must comply with Australian accounting standards.
D. rely exclusively on historical data.
AACSB: Reflectnve
Dnffnculty: Easy
15. Which of the following statements regarding management accounting information is false?
A. The cost of providing the information must be considered in the light of the benefits received from the information.
B. All information derived is necessary despite the cost.
C. The information entails both costs and benefits.
D. The cost of the information includes the time spent by the user to read, understand and use the information.
AACSB: Reflectnve
Dnffnculty: Easy
16. A management accountant should be concerned with:

A. providing daily information on physical measures of operational performance.
B. assisting in interdepartmental communications.
C. developing and implementing information systems.
AACSB: Reflectnve
Dnffnculty: Mednum
Learnnng Objectnve: 1.04 Explann where management accountants are located nn organnsatnons
17. The largest professional organisation for management accountants in Australia is the:
A. CPA Australia.
B. Australian Accounting Association.
C. Institute of Chartered Accountants in Australia.
D. Certified Institute of Management Accountants.
AACSB: Reflectnve
Dnffnculty: Easy
Learnnng Objectnve: 1.13 Dnscuss the professnonal qualnfncatnons that are relevant to becomnng an accountant, and the ethncal standards to whnch
accountants must adhere
18. Which of the following does not represent the ethics of professional accountants?
A. Competence and confidentiality
B. Integrity and objectivity
C. Professional scepticism and efficiency
D. Objectivity and confidentiality
AACSB: Ethncs
Dnffnculty: Easy
19. Which of the following statements regarding the competence of an accountant is true? The accountant must:
A. strive continually to improve technical services and keep knowledge up-to-date.
B. not breach the trust of clients and employers.
C. not disclose information acquired in the course of professional work, except where there is a legal or professional duty
to disclose.
D. at all times safeguard the interest of the clients and employers, provided it does not conflict with their duty to the
community.
AACSB: Ethncs
Dnffnculty: Easy
20. Which of the following statements is an element of confidentiality?

i. Accountants must not disclose information acquired in the course of their work.
ii. Accountants must disclose information if there is a professional duty to do so.
iii. Accountants may not use information gained in the course of their work for their own or another's personal advantage.
A. i
B. ii
C. iii
D. i, ii and iii
AACSB: Ethncs
Dnffnculty: Easy
21. The focus of management accounting over time has changed. Which is the correct historical order for the following
foci?
i. Cost
ii. Profitability
iii. Resource management
iv. Waste reduction
A. i, ii, iii and iv
B. ii, iii, i and iv
C. i, ii, iv and iii
D. i, iii, iv and ii
AACSB: Reflectnve
Dnffnculty: Easy
Learnnng Objectnve: 1.12 Descrnbe how the focus of management accountnng has evolved
22. Which of the following statement/s is/are false? Management accountants should:
i. help in the provision of physical data to managers.
ii. be included in the management of information systems.
iii. present their information in monetary terms only.
iv. help to ensure effective interdepartmental communications.
A. i and ii
B. iii and iv
C. iii
D. iv
AACSB: Reflectnve
Dnffnculty: Mednum
23. Which of the following are management accounting responses to the changing business environment?
A. Activity-based costing.
B. E-commerce.
C. Supplier cost analysis.
D. A and C.
AACSB: Reflectnve
Dnffnculty: Easy
24. Which of the following are ethical standards for management accountants?
i. Competence
ii. Objectivity
iii. Confidentiality
iv. Integrity
A. i, ii, iii and iv
B. ii, iii and iv
C. i, ii and iv
D. i, iii and iv
AACSB: Ethncs
Dnffnculty: Easy
25. The costs of providing information to management should be less than the benefits. Which of the following are costs of
management accounting information?
i. Salary cost of management accounting personnel
ii. Computer operating costs
iii. Managers' time in reading and acting on the information
A. i, ii and iii
B. ii and iii only
C. i and iii only
D. None of the given answers
AACSB: Reflectnve
Dnffnculty: Easy
26. Which of the following statements is correct?
A. The primary objective of a firm's management is to increase the firm's value.
B. The management accounting system needs to accumulate information from both internal and external sources.
C. Managers may be faced with a conflict between increasing customer value and increasing shareholder value.
D. All the given statements are correct.
AACSB: Reflectnve
Dnffnculty: Easy
27. Strategies:
A. are directions that a firm intend to take in the long term.
B. describe the way the firm competes.
C. are the same as objectives and goals.
D. are independent of the firm's mission statement.
AACSB: Reflectnve
Dnffnculty: Easy

A. Management accounting is a subset of cost accounting.
B. Cost accounting is a subset of management accounting.
C. Cost accounting is no longer required in today's competitive environment.
D. Management accounting in today's environment is the same as it was many years ago.
AACSB: Reflectnve
Dnffnculty: Mednum
29.
Which of the following is the most logical sequence for a commencnng organisation?
A. Control, feedback, planning

B. Planning, control, feedback
C. Feedback (feedforward), planning, control, feedback
D. Control, planning, feedback
AACSB: Reflectnve
Dnffnculty: Mednum
30. Choose the statement that best completes this sentence: 'Traditional management accounting focuses on '
A. budgets, financial performance measures and cost control.
B. financial performance measures, external reporting and cost elimination.
C. non-financial performance measures, external reporting and cost control.
D. external reporting, labour-related activity measures and cost elimination.
AACSB: Reflectnve
Dnffnculty: Easy
31.
Which of the following would not be likely as a consistent focus for a firm following a product differentiation strategy?
A. Quality
B. Delivery
C. Product innovation
D. Cost reduction
AACSB: Reflectnve
Dnffnculty: Easy
32. Choose the statement that best completes this sentence: 'All management accounting information '
A. has a focus on past costs.
B. has a focus on future costs.
C. is collected as required by internal management of the firm.
D. is constrained by the requirements of the Australian Accounting Standards.
AACSB: Reflectnve
Dnffnculty: Easy

A. A financial controller is only responsible for financial accounting.
B. The primary role of the finance function of an organisation is to liaise with banks and financial intuitions to obtain
finance to fund operations.
C. In some organisations, management accountants are located in factories.
D. Management accountants are responsible for external reporting as well as providing information to internal managers.
AACSB: Reflectnve
Dnffnculty: Mednum
34. The 'vision' of an organisation:
A. refers to the desired future state of an organisation.
B. refers to a statement that defines the purpose of the organisation.
C. refers to specific statements of objective, upon which goals can be set.
D. is only useful for non profit organisations.
AACSB: Reflectnve
Dnffnculty: Mednum
35. Animus Ltd is a mining company. Which of the following is an example of a decision relating to formulating Animus
Ltd's corporate strategy?
A. Should Animus Ltd operate in the mining industry only, or expand to heavy machinery manufacturing and distribution?
B. Should Animus Ltd compete based on price or product differentiation?
C. Should Animus Ltd hire a new financial controller?
D. Should Animus Ltd develop a new management accounting system?
AACSB: Reflectnve
Dnffnculty: Mednum
36. Animus Ltd is a mining company. Which of the following is an example of a business strategy decision?
A. Should Animus Ltd operate in the mining industry only or expand to heavy machinery manufacturing and distribution?
B. Should Animus Ltd compete based on price or product differentiation?
C. Should Animus Ltd hire a new financial controller?
D. Should Animus Ltd develop a new management accounting system?
AACSB: Reflectnve
Dnffnculty: Mednum
37. Animus Ltd is a mining company. Which of the following is an example of 'planning'?
A. Awarding bonuses to Aimus Ltd's top performing executives
B. Setting production targets for the company's new mines
C. Developing correction actions to respond to lower-than-expected production levels in the existing mines
D. Pursuing legal actions against environmental activists who stole mining equipment
AACSB: Reflectnve
Dnffnculty: Mednum
38. Animus Ltd is a mining company. Which of the following is an example of 'control'?
A. Awarding bonuses to Aimus Ltd's top performing executives
B. Setting production targets for the company's new mines
C. Developing correction actions to respond to lower-than-expected production levels in the existing mines.
D. Pursuing legal actions against environmental activists who stole mining equipment.
AACSB: Reflectnve
Dnffnculty: Mednum
39. Animus Ltd is a mining company operating in Australia. The company has recently developed a new environmental
management accounting system. According to institutional theory:
A. the new system is likely to be the result of the Australian culture of being environmentally conscious and the fact that
negative environmental impacts can result in significant fines to the company.
B. the new system is likely to be the result of gaining legitimacy and to imitate other mining companies who are 'doing the
right thing'.
C. the new system is likely to be the result of stringent government regulations.
D. the new system is likely to be the result of careful, rational, cost-benefit analysis.
AACSB: Reflectnve
Dnffnculty: Mednum
40. Eddy Gunn is a management accountant. Which of the following is most likely to be Eddy's responsibility?
A. Providing an environmental assurance report for his company's shareholders
B. Compiling the company tax return
C. Ensuring that the internal accounting system is compliant with generally accepted accounting standards
D. Developing a production cost report for each of the company's three production lines
AACSB: Reflectnve
Dnffnculty: Mednum
41. Which of the following is not a widely recognised professional accounting body?
A. The Institute of Production Accountants
B. CPA Australia
C. The Institute of Chartered Accountants
D. The Institute of Management Accountants
AACSB: Reflectnve
Dnffnculty: Mednum
42. Which of the following changes in the business environment have led to the emergence of virtual organisations?
A. Rapid advances in technology
B. Increases in outsourcing and reliance on various forms of business networks
C. Increased global mobility in labour
D. Reliance on creating mutually strategic business alliances
AACSB: Reflectnve
Dnffnculty: Mednum
Learnnng Objectnve: 1.01 Descrnbe the changes that have taken place nn the busnness envnronment nn recent years
43. Which of the following changes in the business environment have led to more complicated relationships and business
structures?
A. Rapid advances in technology
B. Increases in outsourcing and reliance on various forms of business networks
C. Increased global mobility in labour
D. Reliance on creating mutually strategic business alliances
AACSB: Reflectnve
Dnffnculty: Mednum
44. Management accounting focuses on:

A. compliance with the accounting standards.
B. meeting the needs of external users.
C. effective and efficient management of resources.
D. financial data only.
AACSB: Reflectnve
Dnffnculty: Easy
Learnnng Objectnve: 1.05 Descrnbe the major processes that management accountnng systems use to create value and manage resources
45. Modern management accounting systems include techniques that support an organisation's:
A. strategy.
B. mission.
C. goals.
D. decisions.
AACSB: Reflectnve
Dnffnculty: Easy
Learnnng Objectnve: 1.07 Recognnse how varnous management accountnng technnques have been developed to support a fnrm's competntnve advantage
46. If a firm's senior management decide to follow a differentiation strategy, their focus should be to NOT concentrate on:
A. product quality.
B. product delivery.
C. product innovation.
D. product costs.
AACSB: Reflectnve
Dnffnculty: Easy
Learnnng Objectnve: 1.07 Recognnse how varnous management accountnng technnques have been developed to support a fnrm's competntnve advantage
47. The firm's primary accounting system that produces financial data for external users is governed by:
A. accounting standards.
B. all of the choices are correct.
C. generally accepted accounting principles.
D. traditional accounting conventions.
AACSB: Reflectnve
Dnffnculty: Easy
Learnnng Objectnve: 1.09 Explann how costnng systems can provnde nnformatnon to support a range of operatnonal and strategnc decnsnons
48. Objectivity in management accounting
What is meant by the following statement? 'The objectivity of the management accounting process is largely a myth.'
Accountants have wide areas of discretion in the selection, processing and recording of data. Various data can be used
for different purposes. In addition, the same data can be used simultaneously for different purposes such as planning,
decision making or controlling.
AACSB: Communncatnon
AACSB: Reflectnve
Dnffnculty: Hard
49. Management accounting and decision making

Give an example of management accounting information that could help a manager make each of the following decisions:
i. The managing director of a car rental company is deciding whether to add luxury cars to the rental car fleet.
ii. The production manager in an assembly plant is deciding whether to have routine maintenance performed on a
machine weekly or fortnightly.
iii. The manager of a department store is deciding on the number of security personnel to employ to reduce shoplifting.
iv. The local council is deciding whether to build an addition to the local library.
Note: any correct answers are possible since only one example is requested.
i. Estimates of any operating costs associated with the proposed luxury cars would be relevant. For example, estimates of
the cost of petrol, routine maintenance and insurance on the new vehicles would be useful.
ii. Data about the cost of maintaining the machine weekly or fortnightly would be relevant. In addition, the production
manager should consider information about the likely rates of defective products under each maintenance alternative.
iii. Estimates of the cost of lost merchandise due to shoplifting and the cost of employing security personnel would be
relevant to this decision.
iv. Estimates of the cost of building the library addition as well as estimated benefits to the population from having the
addition would be useful. In estimating the benefits, some value judgments may need to be made about the benefits to the
public from having additional library space and more books.
AACSB: Reflectnve
Dnffnculty: Hard
50. Explain how the management accountant, with the use of computer technology, can provide information that will be
useful for the management and control of operational tasks.
With the aid of computers, management accountants are able to provide information that is accurate, timely and relevant to the
managers they are serving. For example they can provide information such as number of units produced, number of rejects and time
lost on a daily basis, and ensure a regular flow of information between sales and production.
AACSB: Technncal
Dnffnculty: Hard
51. 'As global competition increases, businesses are being pressured to reach higher levels of productivity to price their
products and services competitively.' Explain how management accountants can play a role in helping management meet
these challenges.
The systems that management accountants can help to develop are:

i. Total quality management—builds a high level of quality into production and all management processes within an
organisation.
ii. Just-in-time management—an approach to inventory management whereby inventory that is required in production is
delivered just in time to be used in the production process.
iii. Activity-based management—focuses on identifying and eliminating activities that add no value to the product or
service from the customer's perspective (e.g. reworking, spoilage).
AACSB: Reflectnve
Dnffnculty: Hard
52. List and define four ethical standards that are part of the IFAC's Code of Professional Conduct.
Note: Answers may include any four of the following:

■ Integrnty. Members must be straightforward and honest in professional and business
relationships. Integrity also implies fair dealing and truthfulness.
■ Objectnvnty. Members must not compromise their professional or business judgement because of bias, conflict of interest or the
undue influence of others.
■ Professnonal competence and due care. Members must maintain professional knowledge and skill at the level required to ensure that
clients or employers receive competent professional service, and act diligently in accordance with applicable technical and professional
standards when providing their services.
■ Confndentnalnty. Members must not disclose outside the firm or employing organisation confidential information acquired as a result of
professional and business relationships without specific authority from the client or employer unless there is a legal duty to do so.
Members must not use confidential information acquired as a result of professional and business relationships to their personal
advantage or the advantage of third parties.
■ Professnonal behavnour. Members must comply with relevant laws and regulations and avoid any action or omission that may bring
discredit to the profession.
Dnffnculty: Hard
53.
Jasmine Dol is a junior management accountant at Hey Hey Toys Ltd. Jasmine is given the task of compiling a cost-benefit analysis
report on whether the company should purchase an expensive new machine from Beta Ltd, where her brother is the new sales
manager. Jasmine did not tell anyone in Hey Hey Toys about her brother's new job. In preparing her report, Jasmine overstates the
qualitative benefits and understates the costs associated with this new machine, in order to help her brother make his first sale as the
new sales manager.
Discuss why and how Jasmine has deviated from the IFAC's code of ethics.
The following are some key points:

Integrnty – Jasmine did not tell anyone about the conflict of interest, and therefore did not demonstrate 'integrity'
Objectnvnty – in overstating the benefits and understating the costs, Jasmine is clearly biased in her analysis, and is not acting in the
company's best interests.
AACSB: Ethncs
Dnffnculty: Mednum
54.
Identify and contrast management accounting and financial accounting information
AACSB: Reflectnve
Dnffnculty: Mednum
55. Behavioural issues are not taken into consideration when developing management accounting systems.
FALST
AACSB: Reflectnve
Dnffnculty: Mednum
56. Organisations prepare a mission statement that describes the desired future position and/or goals of the organisation.
FALST
AACSB: Reflectnve
Dnffnculty: Easy
57. The systems and procedures implemented to provide regular information to assist with control are called control
systems.
TRUT
AACSB: Reflectnve
Dnffnculty: Easy
58. When a firm adopts a strategy of being a low-cost producer and sells its products at a price lower than its competitors,
the firm is said to be using a strategy of cost leadership.
TRUT
AACSB: Reflectnve
Dnffnculty: Easy
59. The theory that suggests that a firm's management accounting system is influenced by factors such as the external
environment and technology is called contingency theory.
TRUT
AACSB: Reflectnve
Dnffnculty: Easy
60. There is no overlap between the two accounting streams management and financial accounting.
FALST
AACSB: Reflectnve
Dnffnculty: Easy
61. The increased information needs of modern organisations have meant that management accounting has had to
change its focus over the years.
TRUT
AACSB: Reflectnve
Dnffnculty: Easy
62. The costing system is the part of the accounting information system that is common to both financial and management
accounting.
TRUT
AACSB: Reflectnve
Dnffnculty: Easy
63. Accountants with a CPA qualification are only able to work as financial accountants.
FALST
AACSB: Reflectnve
Dnffnculty: Easy
64. Staff management and line management both have indirect responsibilities to the operations of an organisation.
FALST
AACSB: Reflectnve
Dnffnculty: Easy
65. Value creation is a central focus for managers and only refers to shareholder value.
FALST
AACSB: Reflectnve
Dnffnculty: Easy
66. Senior accountants are also known as the finance manager or financial controller.
TRUT
AACSB: Reflectnve
Dnffnculty: Easy
67.
Budgets provide information to help manage resources and are supported by the financial accounting function.
FALST
AACSB: Reflectnve
Dnffnculty: Easy
Learnnng Objectnve: 1.05 Descrnbe the major processes that management accountnng systems use to create value and manage resources
Chapter 01 Testbank Summary
Category # of Qu
estnons
AACSB: Communication 7
AACSB: Ethics 5
AACSB: Reflective 60
AACSB: Technical 1
Difficulty: Easy 38
Difficulty: Hard 5
Difficulty: Medium 24
Learning Objective: 1.01 Describe the changes that have taken place in the business environment in recent years 4
Learning Objective: 1.02 Define management accounting in terms of value creation 9
Learning Objective: 1.03 Describe the major differences between management accounting and financial accounting inform 8
ation
Learning Objective: 1.04 Explain where management accountants are located in organisations 3
Learning Objective: 1.05 Describe the major processes that management accounting systems use to create value and ma 2
nage resources
Learning Objective: 1.06 Explain the basic concepts of strategy and how management accounting systems can support str 9
ategies
Learning Objective: 1.07 Recognise how various management accounting techniques have been developed to support a fi 2
rm's competitive advantage
Learning Objective: 1.08 Explain how planning and control mechanisms can be used to support resource management 8
Learning Objective: 1.09 Explain how costing systems can provide information to support a range of operational and strate 1
gic decisions
Learning Objective: 1.10 Describe the factors that may influence the design of management accounting systems including 7
behavioural issues, cost–benefit trade-offs and the implications of contingency and institutional theories
Learning Objective: 1.11 Identify the organisational responses and management accounting responses to changes in the b 3
usiness environment
Learning Objective: 1.12 Describe how the focus of management accounting has evolved 3
Learning Objective: 1.13 Discuss the professional qualifications that are relevant to becoming an accountant, and the ethic 9
al standards to which accountants must adhere
1. Which of the following statements is false?

i. Qualitative information is not relevant for planning purposes.
ii. Production costs are important for planning purposes, but selling and administration costs are not.
iii. Information on revenues is not important for planning purposes.
A. i
B. iii
C. i and iii
D. i, ii and iii
AACSB: Reflective
Difficulty: Easy
Learning Objective: 2.01 Describe the components of traditional and modern management accounting systems
2. 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, can be used for any purpose.
C. Different cost concepts and classifications are used for different purposes.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 2.03 Explain what is meant by different costs for different purposes
3. Which of the following statements is true? A cost is:

A. always an expense.
B. always an asset.
C. can be either an expense or an asset.
D. always a liability.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 2.10 Describe the cost flows in a manufacturing business and prepare a schedule of cost of goods manufactured, a schedule of cost
of goods sold and an income statement for a manufacturer
4. Variable costs:
A. vary indirectly with changes in activity level.
B. vary directly with changes in activity level.
C. vary on a per unit basis.
D. vary indirectly with changes in activity level AND vary on a per unit basis.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 2.04 Classify costs according to their behaviour—that is, as variable or fixed
5. If production increases, variable cost will:
A. remain constant on a per unit basis.
B. increase by a variable amount.
D. remain unchanged.
AACSB: Reflective
Difficulty: Medium
6. As activity level decreases, unit variable cost:

A. increases proportionately with activity.
B. decreases proportionately with activity.
C. remains constant.
D. decreases by a fixed amount.
AACSB: Reflective
Difficulty: Medium
7. As activity level increases, total variable costs:

A. increase proportionately with activity.
B. decrease proportionately with activity.
C. increase by a fixed amount.
D. decrease by a fixed amount.
AACSB: Reflective
Difficulty: Easy
8. Fixed costs:
A. vary directly with changes in activity level.
B. in total remain unchanged as activity levels change.
D. B and C
AACSB: Reflective
Difficulty: Medium
9. Which of the following is not an example of a variable cost?

A. Straight-line depreciation on a machine expected to last 5 years.
B. Wages paid to assembly line workers at a local manufacturing plant.
C. Timber used to make outdoor furniture.
D. Commissions paid to sales personnel.
AACSB: Reflective
Difficulty: Medium
A. Costing is common to both traditional and modern management accounting.
B. Activity-based costing is common to both traditional and modern management accounting.
C. Performance measurement is common to both traditional and modern management accounting.
D. Modern performance measurement covers a range of critical success factors.
AACSB: Reflective
Difficulty: Easy
11. Which is the correct order of cost incurrence in the value chain?
A. R&D, Product design, Manufacturing, Marketing, Distribution, Customer support
B. R&D, Product design, Customer support, Marketing, Distribution, Manufacturing
C. R&D, Product design, Manufacturing, Distribution, Customer support, Selling
D. R&D, Product design, Manufacturing, Distribution, Marketing, Customer support
AACSB: Reflective
Difficulty: Easy
Learning Objective: 2.07 Classify costs according to the segments of the value chain
12. Costs that can be traced to a particular cost object are called:
A. direct costs.
B. indirect costs.
C. product costs.
D. manufacturing costs.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 2.05 Classify costs as direct or indirect
13. Indirect costs:

A. cannot be traced to a particular cost object.
B. cannot be economically traced to a particular cost object.
C. are always variable costs.
D. are always fixed costs.
AACSB: Reflective
Difficulty: Medium
14. Whether a cost is classified as direct or indirect will depend on:

A. the nature of the cost object.
B. whether the cost can be economically traced to the cost object.
C. whether the organisation is in a manufacturing or service industry
D. the nature of the cost object AND whether the cost can be economically traced to the cost object.
AACSB: Reflective
Difficulty: Medium
15. Costs that can be significantly influenced by a particular manager are:
A. product costs.
B. period costs.
C. controllable costs.
D. administrative costs.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 2.06 Classify costs as controllable or uncontrollable
16. Which of the following is not an example of a manufacturing overhead?

A. Assembly line workers' wages
B. Factory rent
C. Depreciation of factory machinery
D. Factory lighting
AACSB: Reflective
Difficulty: Medium
Learning Objective: 2.08 Analyse costs using the classifications commonly used in manufacturing businesses
17. Product costs are:

A. expended as they are incurred.
B. inventoriable costs.
C. period costs.
D. expended as they are incurred AND inventoriable costs.
AACSB: Reflective
Difficulty: Medium
18. Costs that are expended during the period in which the costs are incurred are called:
A. product costs.
B. inventoriable costs.
C. period costs.
D. indirect costs.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 2.09 Explain the different definitions of product cost used in external accounting reports and for decision making
19. Which of the following costs of a manufactured product is a period cost?

A. Direct material
B. Manufacturing overhead
C. Indirect material
D. Sales commission
AACSB: Reflective
Difficulty: Medium
20. Which of the following is not a period cost?
A. Marketing costs
B. Administrative costs
C. Research and development
D. Factory overheads
AACSB: Reflective
Difficulty: Medium
21. Cost of goods purchased includes the:

A. purchase cost.
B. transportation inward cost.
C. storage cost.
D. purchase cost AND transportation inward cost.
AACSB: Reflective
Difficulty: Medium
22. Product costs comprise:

A. direct materials, direct labour and manufacturing overhead.
B. direct materials and manufacturing overhead.
C. direct labour and manufacturing overhead.
D. direct materials and direct labour.
AACSB: Reflective
Difficulty: Easy
23.
Refer to the following data.
The prime costs are:
A. $190 000.
B. $40 000. 150000+40000 = 190000
C. $150 000.
D. $142 000.
AACSB: Analytical
Difficulty: Medium
24.
The conversion costs are:
A. $150 000.
B. $142 000. conversion cost = direct labour + manufacturing overhead
C. $182 000.
D. $190 000.
AACSB: Analytical
Difficulty: Medium
25.
The product costs are:
A. $15 000
B. $182 000 product cost= cp sx trực + gián -administrative cost
C. $190 000
D. $332 000
AACSB: Analytical
Difficulty: Medium
26.
The period costs are:
A. $15 000
B. $20 000 Period costs are all costs not included in product costs
C. $190 000
D. $372 000
AACSB: Analytical
Difficulty: Medium
27.
The non-manufacturing costs are:
A. $15 000
B. $70 000 Period costs are all costs not included in product costs
C. $182 000
D. $372 000 Selling Expenses - also called Selling and Distribution Expenses.
General Expenses - also called General and Administrative Expenses.
AACSB: Analytical
Difficulty: Medium
28. Indirect material, indirect labour and other manufacturing costs that are neither direct labour nor direct material costs
are classified as:
A. manufacturing overhead.
B. product costs.
C. prime costs.
D. manufacturing overhead AND product costs.
AACSB: Reflective
Difficulty: Medium
29. Indirect materials include:

A. materials that are incorporated into the finished product.
B. materials required for the production process, which do not become an integral part of the finished product.
C. direct materials that are so insignificant in cost that it becomes unimportant to trace their costs to specific products.
D. materials required for the production process, which do not become an integral part of the finished product AND direct
materials that are so insignificant in cost that it becomes unimportant to trace their costs to specific products.
AACSB: Reflective
Difficulty: Medium
30. On-costs on direct labour are classified as:
A. direct labour.
B. indirect labour.
C. manufacturing overhead.
D. either direct labour or indirect labour depending on the decision made by the firm.
AACSB: Reflective
Difficulty: Easy
31. Depreciation of factory equipment would be classified as:

A. indirect material.
B. indirect labour.
D. a sundry expense.
AACSB: Reflective
Difficulty: Easy
32. Idle time is:

A. frequently an avoidable cost.
B. classified as overhead.
C. caused by events such as equipment breakdown and new set-ups of production runs.
D. All of the given answers.
AACSB: Reflective
Difficulty: Easy
33. Unless overtime and idle time are caused by a particular job, they are treated as:
A. a part of direct labour expense.
B. a part of manufacturing overhead.
C. associated with a particular product.
D. a part of manufacturing overhead AND associated with a particular product.
AACSB: Reflective
Difficulty: Easy
34. The flow of manufacturing costs through the system is:

A. raw materials inventory; work in process inventory; finished goods inventory; cost of goods sold.
B. raw materials inventory; work in process inventory; cost of goods sold; finished goods inventory.
C. work in process inventory; raw materials inventory; finished goods inventory; cost of goods sold.
D. raw materials inventory; finished goods inventory; work in process inventory; cost of goods sold.
AACSB: Reflective
Difficulty: Easy
35.
The Casual Furniture Company manufactures outdoor furniture and incurred the following costs during the month of January:
The product costs are: Material (direct + indirect) + MAterial (dr indr)+OH factory related
A. $90 000.
B. $83 000.
C. $65 000.
D. $63 000.
AACSB: Analytical
Difficulty: Hard
36.
The period costs are:
A. $0. sales commissions+ Admin + depreciation -sales offices+ utilities of sales+ advertising
B. $7000.
C. $25 000.
D. $30 500.
AACSB: Analytical
Difficulty: Hard
37.
The prime costs are:
A. $30 000.
B. $50 000.
C. $65 000.
D. $50 500.
AACSB: Analytical
Difficulty: Hard
38.
The conversion costs are:
A. $34 500. DL + Manufacturing OH(Indirect mat+ indirect labour + factory related)

B. $29 500.
C. $20 000.
D. $35 000.
AACSB: Analytical
Difficulty: Hard
39.
The manufacturing overhead is: indirect mat+labor+factory related

=500+3500+3000+6000+2000
A. $14 500.
B. $15 000.
C. $9500.
D. $9000.
AACSB: Analytical
Difficulty: Hard
40. In the manufacturing firm, inventories consist of:

A. raw materials, cost of goods manufactured during the period and finished goods.
B. raw materials, work in process and finished goods.
C. raw materials, finished goods and cost of goods sold.
D. cost of goods manufactured and cost of goods sold.
AACSB: Reflective
Difficulty: Easy
41. To calculate the cost of goods sold during the period, you would use which of the following equations?
A. Beginning finished goods + cost of goods manufactured + ending finished goods
B. Ending finished goods + cost of goods manufactured – beginning finished goods
C. Beginning finished goods + cost of goods manufactured – ending finished goods
D. Beginning finished goods + ending finished goods – cost of goods manufactured
AACSB: Reflective
Difficulty: Easy
42. Work in process inventories are composed of:

A. direct materials.
B. direct labour.
AACSB: Reflective
Difficulty: Easy
43. Barrett Industries began the month of June with a finished goods inventory of $15 000. The finished goods inventory at
the end of June was $10 000 and the cost of goods sold during the month was $20 000.
The cost of goods manufactured during the month of June was:
A. $15 000
B. $25 000
C. $20 000
D. $5000
AACSB: Analytical
Difficulty: Medium
44. Fairchild Pty Ltd began April with a finished goods inventory of $25 000. The cost of goods manufactured during the
month was $40 000 and the cost of goods sold during April was $50 000.
The inventory remaining in finished goods at the end of April was:
A. $35 000.
B. $25 000. inventory remaining in finished goods = cost of goods manufactured - COGS +
C. $20 000. began finished goods inventory
D. $15 000.
AACSB: Analytical
Difficulty: Medium
45. Barrister and Company began July with a finished goods inventory of $10 000. The cost of goods manufactured during
the month was $85 000 and the ending finished goods inventory was $20 000.
The cost of goods sold during July was:
A. $55 000.
B. $75 000.
C. $95 000. 20= 85 - X + 10 --> X = 75
D. $105 000.
AACSB: Analytical
Difficulty: Medium
46. Lenco Industries has cost of goods manufactured of $65 000 in May. The finished goods inventory at the end of May
was $20 000 and the cost of goods sold during May was $75 000.
The inventory in finished goods at the beginning of May was:
A. $5000.
B. $30 000.
C. $10 000.
20 =65 - 75 + X --> X = 30
D. $20 000.
AACSB: Analytical
Difficulty: Medium
47. As manufacturing companies become more automated, their cost structure will change so that:
A. variable costs increase, fixed costs decrease.
B. variable costs decrease, fixed costs decrease.
C. variable costs decrease, fixed costs increase.
D. there is no change in the ratio of variable to fixed costs.
AACSB: Reflective
Difficulty: Medium
48. Traditional cost management systems use production volume as the measure of activity. Modern systems might use
which of the following as activity measures?
A. Number of batches
B. Number of customers
C. Number of product lines
AACSB: Reflective
Difficulty: Hard
49. Which of the following terms accurately describes all three manufacturing costs (i.e. direct materials, direct labour and
manufacturing overhead)?
A. Product costs
B. Variable costs
C. Direct costs
D. Both direct costs and product costs
AACSB: Reflective
Difficulty: Hard
50. The monthly cost of renting manufacturing equipment is:

A. part of conversion cost and a period cost.
B. part of prime cost and an inventoriable cost.
C. part of prime cost and a period cost.
D. part of conversion cost and an inventoriable cost.
AACSB: Reflective
Difficulty: Hard
51. With respect to the flow of manufacturing costs through the accounts, what does the ending balance of work in
process account show?
A. The total costs for completed jobs.
B. The total costs for incomplete jobs.
C. The amount of costs incurred for the period.
D. The amount of cost to be transferred to cost of goods sold.
AACSB: Reflective
Difficulty: Easy
52. Which of the following statements correctly completes this sentence? 'For a firm that manufactures floor tiles, when
the tiles are completed and ready for sale '
A. there is no change in the value of the firm's assets.
B. the firm's total assets are decreased.
C. the firm's total cost of the goods sold is increased.
D. the firm's work in process inventory is increased.
AACSB: Reflective
Difficulty: Medium
53. Which of the following statements is correct in relation to determining whether a cost is direct or indirect?
A. The wider the definition of the cost object, the more costs that will be indirect costs.
B. The number of cost items that can be classified as direct costs does not depend on the definition of cost objects.
C. The narrower the definition of the cost object, the more costs that will be direct costs.
D. The wider the definition of the cost object, the more costs that will be direct costs.
AACSB: Reflective
Difficulty: Hard
54. Choose the statement that best completes this sentence: 'Traditional management accounting focuses on '
A. budgeting systems, financial performance measures and cost control.
B. financial performance measures, external reporting and cost elimination.
C. non-financial performance measures, external reporting and cost control.
D. external reporting, labour-related activity measures and cost elimination.
AACSB: Reflective
Difficulty: Medium
55. Eldervale Winery is a producer of premium wine. Which of the following is an example of an upstream cost?
A. The costs associated with storing wine barrels.
B. The costs associated with designing the labels on a wine bottle.
C. The costs associated with delivering products to customers.
D. The costs associated with quality inspection.
AACSB: Reflective
Difficulty: Medium
56. Eldervale Winery is a producer of premium wine. Which of the following is NOT an example of an upstream cost?
A. The costs associated with marketing a new range of wine in an international trade fair
B. The costs associated with researching a new variety of grapes
C. The costs associated with testing a new wine barrel
D. The costs associated with negotiating with and managing the farmers who supply the grapes
AACSB: Reflective
Difficulty: Medium
57. Eldervale Winery is a producer of premium wine. Which of the following is an example of a downstream cost?
A. The costs associated with storing wine for customers
B. The costs associated with designing the labels on a wine bottle
C. The costs associated with researching a new variety of grapes
D. The costs associated with quality testing
AACSB: Reflective
Difficulty: Medium
58. Eldervale Winery is a producer of premium wine. Which of the following is NOT an example of a downstream cost?
A. The costs associated with random quality check during the wine production process
B. The costs associated with the sales team travelling to a wine show to promote Eldervale wine
C. The costs associated with delivering wine to customers
D. The costs associated with answering customer inquiries on the differences between wine varieties
AACSB: Reflective
Difficulty: Medium
59. Mydas Ltd operates a large factory which manufactures three types of motor vehicles, including family cars, sports
cars and motorcycles. If the cost object is a motorcycle, which of the following is a direct cost?
A. The costs of wheels on the motorcycle
B. The salary of the factory general manager
C. The salary of the factory quality inspector
D. The windscreen wipers on a family car
AACSB: Reflective
Difficulty: Medium
60. Mydas Ltd operates a large factory which manufactures three types of motor vehicles, including family sedans, sports
cars and motorcycles. If the cost object is a family car, which of the following is an indirect cost?
A. The costs of wheels on the motorcycle
B. The salary of the factory general manager
C. The wages of the quality inspector whose job is to inspect each family car
D. The windscreen wipers on a family car
AACSB: Reflective
Difficulty: Medium
61. A responsibility centre:

A. refers to a unit of business where all the associated costs are considered as 'direct costs'.
B. refers to a unit of a business where the manager is held accountable for activities and performance.
C. is another term for 'business division'.
D. is a term applicable only to manufacturing companies.
AACSB: Reflective
Difficulty: Medium
62. Sally Strong is the production manager of Eldervale Winery. Her role includes overseeing the production and bottling
processes of Eldervale Winery's three product lines: sparkling wine, red wine and white wine. Which of the following is
most likely an example of an uncontrollable cost for Sally?
A. The costs associated with bottling wine
B. The costs associated with advertising Eldervale wine on national TV
C. The costs associated with moving wine from the barrels to the bottling area
D. The costs associated with quality testing
AACSB: Reflective
Difficulty: Medium
63. Sally Strong is the production manager of Eldervale Winery. Her role includes overseeing the production and bottling
processes of Eldervale Winery's three product lines: sparkling wine, red wine and white wine. Which of the following is
most likely to be an example of a controllable cost for Sally?
A. The costs associated with bottling wine
B. The costs associated with advertising Eldervale wine on national TV
C. The costs associated with liaising with distributors to export wine to China
D. The costs associated with obtaining finance from banks
AACSB: Reflective
Difficulty: Medium
64. Production costs assist management to determine:

A. sales revenue.
B. cost of goods sold.
C. gross profit.
D. net profit.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 2.02 Explain why management accountants focus particularly on costs
65. When raw materials are purchased by a manufacturer, those costs will be recorded in the general ledger as:
A. cost of goods sold.
B. manufacturing costs.
C. inventory.
D. conversion costs.
AACSB: Reflective
Difficulty: Easy
66.
In the short term, which of the following costs would be classified as uncontrollable?
A. Raw materials
B. Stationery expenses
C. Loan interest
D. Entertainment expenses
AACSB: Reflective
Difficulty: Medium
67. Classifying responsibility centre costs as controllable or uncontrollable can enhance:

A. performance evaluation.
B. cost accounting.
C. budget reporting.
D. financial reporting.
AACSB: Reflective
Difficulty: Easy
68. Resources that are surrendered to achieve a particular objective in business are known as:
A. resources.
B. expenses.
C. assets.
D. costs.
AACSB: Reflective
Difficulty: Medium
69. Costs that are incurred to obtain future benefits beyond 12 months are known as:
A. assets.
B. liabilities.
C. revenue.
D. expenses.
AACSB: Reflective
Difficulty: Easy
70.
Behaviour of fixed and variable costs.
Compare and contrast the behaviour of fixed and variable costs in total and per unit.
Total fixed costs remain unchanged with changes in the volume of activity. Total variable costs will change proportionately
with changes in volume. On the other hand, while fixed costs per unit of volume will decline as volume increases,. the
variable cost per unit will remain constant as volume changes. All of these behaviour patterns are restricted to the relevant
range of operating volume.
AACSB: Communication
Difficulty: Easy
71. Describe how the value chain can help a business analyse its cost structures. What is meant by upstream costs and
downstream costs? Give examples.
By analysing the business's value chain, the firm can focus on non-manufacturing as well as manufacturing costs; that is, all the costs
that occur across the business. This will enable the business to identify where costs are being incurred and thus enable the elimination
of unnecessary costs. The non-manufacturing costs could include selling and distribution costs, administrative costs, as well as other
upstream and downstream costs.
Upstream costs are those costs that occur prior to production commencing and could include research and development costs such as
the cost of running laboratories, building prototypes of new products and testing new products. Product design costs are also upstream
costs and could include the costs of designing the processes that will be used to produce the new product.
Downstream costs are those costs that occur after production and include selling and distribution, administrative and customer service
costs.
Difficulty: Medium
72.
Kevin Smith is the production manager of Mydas Ltd, a company that manufactures a range of motor vehicles. His role includes
overseeing the entire production process of Mydas Ltd's three product lines: family cars, sports cars, and motor cycles. Once
completed, all the cars are shipped within Australia and to China and Korea by the company's shipping and transportation department.
Identify two examples of controllable costs and two examples of uncontrollable costs for Kevin. Explain your answer.
Controllable costs include: direct labour, some overhead costs, such as quality inspection and machine set ups. In answering this
question, it is important to explain why these costs are controllable; for example, Kevin oversees the entire production process so he is
likely to be involved in hiring workers. As such, he has control over wages of both factory workers (direct labour) and supervisors
(indirect labour).
Uncontrollable costs include advertising (Kevin is only the production manager so he is not involved in advertising) and shipping costs
(the question suggests that Kevin has to use the company's shipping and transportation department, so he does not have control over
shipping costs).
AACSB: Reflective
Difficulty: Hard
73.
Components of a management accounting system
Management accounting systems are made up of four interrelated systems. Identify those four systems, explain their function and
describe how they collectively assist management in their decision making.
Management accounting systems are tailored to an organisation's needs but they often include the following:
costing system (or cost accounting system) that estimates the cost of goods or services, as well as the cost of organisational units,
such as departments
budgeting system that is used to prepare a detailed plan, which shows the financial consequences of the organisation's operating
activities, for a specific future time period. The system estimates planned revenues and costs
performance measurement system that measures performance by comparing actual results with a target
cost management system that focuses on improving the organisation's cost effectiveness through understanding and managing the real
causes of costs.
Management accountants also provide information from a variety of other sources to help managers with non-routine planning and
decision making.
An examination of the components of both traditional and modern management accounting systems reveals that costs are an important
source of information for managers. The systems include information about product costs, the costs of departments and activities, as
well as both budgeted costs and actual costs. Modern management accounting systems also provide information about the causes of
costs.
With the availability of financial and non-financial information about costs, their causes and effects, managers are better able to achieve
their targets.
AACSB: Reflective
Difficulty: Medium
74.
Manufacturing costs
Manufacturing costs are costs that are incurred within the factory area. Describe the three components of manufacturing costs. Identify
the costs that might be incurred in the manufacture of a Levi Strauss shirt.
Manufacturing costs are usually divided into three categories: direct material, direct labour and manufacturing overhead (or indirect
manufacturing costs).
DIRECT MATERIAL
Raw material that is consumed in the manufacturing process, is physically incorporated into the finished product and can be traced to
products in an economic manner is called direct material. Examples include the cost of shirt material, buttons, cotton thread, bindings
and trimmings used in manufacturing the shirt.
DIRECT LABOUR
The cost of salaries and wages and labour on-costs for personnel who work directly on the manufactured product is usually classified
as direct labour. Examples include the wages of personnel who cut the fabric, sew the shirt and sew buttons, bindings and trimmings.
Labour on-costs are the additional labour-related costs that businesses have to incur to employ personnel, such as payroll tax,
workers' compensation insurance and the employer's superannuation contributions. Where labour on-costs relate to direct labour
employees, they should be classified as part of direct labour costs, as they are as much a part of the cost of labour as are employees'
wages.
Sometimes contractual arrangements and union agreements mean that labour is a committed cost that does not vary with the level of
production. In this situation, it may not always be possible to trace labour costs directly to specific products, in which case these costs
will be classified as indirect product costs.
MANUFACTURING OVERHEAD
All other costs of manufacturing are classified as manufacturing overhead, sometimes called indirect manufacturing costs or factory
burden costs. Manufacturing overhead covers all manufacturing costs other than direct material and direct labour costs. It includes the
cost of indirect materials and indirect labour, which covers any material and labour used in production that is not classified as direct.
Manufacturing overhead also includes the costs of depreciation and insurance of the factory and manufacturing equipment, utilities
such as electricity, as well as the costs of manufacturing support departments. Support departments (or service departments) are
departments that do not work directly on producing products but are necessary for the manufacturing process to occur. Examples
include cutting machine and sewing machine maintenance, depreciation on machines and/or equipment, electricity and production
scheduling departments.
AACSB: Reflective
Difficulty: Medium
75. Only long-term decisions require an understanding of costs.

FALSE
AACSB: Analytical
Difficulty: Easy
76. Direct and indirect cost classification is based on cost behaviour in relation to changes in the level of activity.
FALSE
AACSB: Reflective
Difficulty: Easy
77. 'Prime costs' is the term given to direct labour and direct materials, as they are the major costs directly associated with
the manufacture of a product.
TRUE
AACSB: Reflective
Difficulty: Easy
78. Costs that managers cannot significantly influence are classified as uncontrollable costs.
TRUE
AACSB: Reflective
Difficulty: Easy
79. A courier company may view kilometres driven as a possible cost driver.
TRUE
AACSB: Reflective
Difficulty: Medium
80. In relation to the activities of the value chain of a manufacturing company, primary processes include accounting and
legal activities.
FALSE
AACSB: Reflective
Difficulty: Medium
81. Manufacturing organisations have four inventory accounts―raw materials, work in process, cost of goods sold and
finished goods.
FALSE
AACSB: Reflective
Difficulty: Easy
82. Inventoriable costs include direct materials, direct labour, manufacturing overheads and period costs for that
accounting period.
FALSE
AACSB: Reflective
Difficulty: Easy
83. Fixed costs per unit decrease as activity levels increase.
TRUE
AACSB: Reflective
Difficulty: Easy
84. The equation to calculate total manufacturing costs = cost of goods manufactured – beginning work in process +
ending work in process.
TRUE
AACSB: Reflective
Difficulty: Easy
85. Modern management accounting places a much greater emphasis on non-financial information.
TRUE
AACSB: Reflective
Difficulty: Easy
86. The value chain begins with providing products that will be valued by customers.
FALSE
AACSB: Reflective
Difficulty: Easy
87. During the year, any inventory that is sold is transferred to the finished goods account.
FALSE
AACSB: Reflective
Difficulty: Easy
Category # of Qu
estions
AACSB: Analytical 15
Difficulty: Easy 34
Difficulty: Hard 10
Learning Objective: 2.01 Describe the components of traditional and modern management accounting systems 7
Learning Objective: 2.02 Explain why management accountants focus particularly on costs 3
Learning Objective: 2.03 Explain what is meant by different costs for different purposes 5
Learning Objective: 2.04 Classify costs according to their behaviour—that is, as variable or fixed 7
Learning Objective: 2.05 Classify costs as direct or indirect 14
Learning Objective: 2.06 Classify costs as controllable or uncontrollable 4
Learning Objective: 2.07 Classify costs according to the segments of the value chain 7
Learning Objective: 2.08 Analyse costs using the classifications commonly used in manufacturing businesses 18
Learning Objective: 2.09 Explain the different definitions of product cost used in external accounting reports and for decisi 9
on making
Learning Objective: 2.10 Describe the cost flows in a manufacturing business and prepare a schedule of cost of goods ma 14
nufactured, a schedule of cost of goods sold and an income statement for a manufacturer
1. The relationship between cost and activity is called:

A. cost prediction.
B. cost behaviour.
C. cost analysis.
D. cost approximation.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 3.01 Explain the relationships between cost estimation, cost behaviour and cost prediction
2. Forecasting a cost at a particular level of activity is called:

A. cost estimation.
B. cost prediction.
C. cost behaviour.
D. cost functions.
AACSB: Reflective
Difficulty: Easy
3. A cost that has both a fixed and variable component is called a:

A. step-fixed cost.
B. step-variable cost.
C. semivariable cost.
D. discretionary cost.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 3.05 Define and analyse the behaviour of the following types of costs: variable, fixed, step-fixed, semivariable (or mixed) and
curvilinear
4. A cost that remains unchanged in total as the activity level (or cost driver) changes is called a:
A. fixed cost.
B. variable cost.
C. step-fixed cost.
D. step-variable cost.
AACSB: Reflective
Difficulty: Easy
curvilinear
5. A cost that changes in total in direct proportion to a change in the cost driver is a:
A. variable cost.
B. fixed cost.
C. semivariable cost.
D. step-variable cost.
AACSB: Reflective
Difficulty: Easy
curvilinear
6.
A manufacturer plans to increase producion within the relevant range of acivity. What behaviour can the company
expect for each of the following?
Fixed cost per unit Variable cost per unit
A.
No change Increase
B.
Increase No change
C.
Decrease Increase
D.
Decrease No change
AACSB: Analytical
Difficulty: Medium
curvilinear
7. Variable cost per unit:

A. increases in direct proportion to changes in the cost driver.
B. decreases in direct proportion to changes in the cost driver.
C. remains unchanged as the level of the cost driver changes.
D. increases, but not in direct proportion to changes in the cost driver.
AACSB: Reflective
Difficulty: Easy
curvilinear
8. Fixed costs per unit:
A. is unrelated to activity levels.
B. change as activity varies.
C. remain unchanged as activity level changes.
AACSB: Reflective
Difficulty: Easy
curvilinear
9. Costs that remain fixed over wide ranges of activity but jump to a different amount outside that range are called:
A. step-fixed costs.
B. step-variable costs.
C. semivariable costs.
D. curvilinear costs.
AACSB: Reflective
Difficulty: Easy
curvilinear
10. The fixed costs per unit are $10 when a company makes 10 000 units. What are the per unit fixed costs when 12 500
units are produced?
A. $6.00
B. $12.00 Fixed cost per unit = fixed costs/units
C. $10.00 $10 = X/10000 --> x = 100000
D. $ 8.00 ==> Y = 100000/12500 = 8
AACSB: Analytical
Difficulty: Medium
curvilinear
11. The variable costs per unit are $4 when a company makes 10 000 units. What are the per unit variable costs when
8000 units are produced?
A. $6.00
B. $4.00 No change
C. $4.50
D. $5.00
AACSB: Analytical
Difficulty: Medium
curvilinear
12. Total costs are $140 000 when 10 000 units are made. Of this amount, variable costs are $4 per unit. What are the
total costs when 8000 units are produced?
A. $140 000
B. $136 000
Total costs = total fixed cost + total variable cost
C. $132 000 140000 = X + (4*10000) --> X = 100000
D. $124 000 Total costs = 100000 + (4*8000) = 132000
AACSB: Analytical
Difficulty: Medium
curvilinear
13. Total costs are $80 000 when 8000 units are made. Of this amount, variable costs are $48 000. What are the total
costs when 10 000 units are produced?
A. $ 92 000
B. $ 98 000 Total costs = total fixed cost + total variable cost
C. $100 000 80000 = X + 48000 --> X = 32000
D. $108 000 Total costs = 32000 + (6 *10000) = 92000 (variable costs are $6 per unit)
AACSB: Analytical
Difficulty: Medium
curvilinear
14. Which per unit cost does the slope of the total cost line represent?
A. Fixed
B. Variable
C. Semivariable
D. Step-variable
AACSB: Analytical
Difficulty: Medium
curvilinear
15. The level of activity within which fixed costs remain unchanged is called the:
A. extreme range.
B. relevant range.
C. activity range.
D. relevant range AND activity range.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 3.06 Explain the importance of the relevant range when using a cost behaviour pattern for cost prediction
16. The relevant range is that range of activity where:
A. management may not find it important to concern itself.
B. management does not expect the firm to operate.
C. fixed costs remain unchanged.
D. the expected costs exceed the benefits from the activity.
AACSB: Reflective
Difficulty: Easy
17. Within the relevant range of activity, costs:

A. can be estimated with reasonable accuracy.
B. exhibit decreasing marginal cost patterns.
C. exhibit increasing marginal cost patterns.
AACSB: Analytical
Difficulty: Medium
18.
As a irm begins to operate outside the relevant range, the accuracy of cost esimates for ixed and variable costs:
Fixed Variable
A.
Increase Increase
B.
Increase Decrease
C.
Decrease Decrease
D. Do not change
AACSB: Analytical
Difficulty: Medium
19. Which of the following describes a cost-estimation method that involves a careful examination of the ledger accounts?
A. Least squares regression
B. Visual fit
C. Account classification
D. Multiple regression
AACSB: Reflective
Difficulty: Easy
Learning Objective: 3.08 Describe the following approaches to cost estimation: managerial judgment (including account classification), the engineering
method, and quantitative analysis (including high–low, and simple and multiple regression)
20. Which of the following describes a method of cost estimation in which a cost line is drawn through a scatter diagram to
help the analyst visualise the relationship between cost and activity?
A. Least squares regression
B. High–low
C. Visual fit
D. Multiple regression
AACSB: Reflective
Difficulty: Easy
Learning Objective: 3.09 Estimate cost functions using the high–low method and regression analysis
21. Within the relevant range, a curvilinear cost function can be graphed as a:
A. straight line.
B. set of straight lines.
C. solid line.
D. curved line.
AACSB: Reflective
Difficulty: Easy
curvilinear
22. The method of cost estimation that fits a cost line between two data points is:
A. least squares regression.
B. high–low.
C. account classification.
D. multiple regression.
AACSB: Reflective
Difficulty: Easy
23. The method of cost estimation that minimises the sum of the squared deviations between the cost line and the data
points is:
A. least squares regression.
B. visual fit.
C. account classification.
AACSB: Reflective
Difficulty: Easy
24. In regression analysis, the variable that is being predicted is:
A. the independent variable.
B. the dependent variable.
C. the explanatory variable.
D. the dependent variable AND the explanatory variable.
AACSB: Reflective
Difficulty: Easy
25. Technical Engineering presently leases a copying machine on a monthly basis. The lease agreement requires a fixed
fee each month in addition to a charge per copy. Technical Engineering made 2400 copies and paid a total of $162 in rent
in September and in October they paid $195 for 3500 copies. Determine Technical Engineering's variable cost per copy.
A. $0.06
B. $0.04
Fixed cost = cost at high activity - (Vc/copy × high act)
C. $0.03 VC per copy = ( 195 - 162)/(3500-2400)
D. $0.01 =$ 0.03
AACSB: Analytical
Difficulty: Medium
fee each month in addition to a charge per copy. Technical Engineering made 2400 copies and paid a total of $162 in rent
in September and in October they paid $195 for 3500 copies. Determine Technical's monthly fixed fee.
A. $138
B. $ 90 Total fixed cost = 195 - (0.03× 3500)
C. $ 66 = 195 - 105
D. $ 55 =$90
AACSB: Analytical
Difficulty: Medium
fee each month in addition to a charge per copy. Technical made 2400 copies and paid a total of $162 in rent in
September and in October they paid $195 for 3500 copies. Determine the total amount that would be paid for 1800
copies.
A. $120
B. $138
C. $144
D. $163
AACSB: Analytical
Difficulty: Hard
28. Yang Manufacturing makes a product called Yin. The relevant range of operations is between 2500 units and 10 000
units of Yin per month. Per unit costs at two activity levels are as follows: 5000 units at $17.00 per unit; 7500 units at
$13.00 per unit. Determine the cost formula that expresses the behaviour of Yang's total costs:
A.
Y $60 000 + $5X
B.
Y $20 000 + $13X
C.
Y $45 000 + $4X
D.
Y $40 000 + $9X
AACSB: Analytical
Difficulty: Hard
29. Yang Manufacturing makes a product called Yin. The relevant range of operations is between 2500 units and 10 000
units of Yin per month. Per unit costs at two activity levels are as follows: 5000 units at $17.00 per unit; 7500 units at
$13.00 per unit. Determine their total cost if Yang produces 10 000 units.
A. $130 000
B. $125 000
C. $110 000
D. $100 000
AACSB: Analytical
Difficulty: Hard
30.
The Longreach Toy Factory has determined machine hours to be the cost driver of the company's electricity costs. During the first six
months of the year, the company incurred the following electricity costs:
Using the high–low method, estimate the variable cost per machine hour.
A. $8.38
B. $7.44
C. $5.50
AACSB: Analytical
Difficulty: Medium
31.
The Longreach Toy Factory has determined machine hours to be the cost driver of the company's electricity costs. During the first six
months of the year, the company incurred the following electricity costs:
Using the high–low method, determine the cost formula that expresses the cost behaviour of the company's electricity costs.
A.
Y = $3735 + $6.20X
B.
Y = $1664 + $8.38X
C.
Y = $4760 + $5.00X
D.
Y = $4400 + $5.50X
AACSB: Analytical
Difficulty: Medium
32. A regression model in which more than one independent variable is used to predict the dependent variable is called a:
A. simple regression model.
B. multiple regression model.
C. dependent model.
D. B and C
AACSB: Reflective
Difficulty: Easy
33. Which of the following are problems frequently encountered in data collection?
A. Outliers
B. Missing data
C. Mismatched time periods
AACSB: Reflective
Difficulty: Easy
Learning Objective: 3.10 Explain some of the issues that arise in estimating cost functions in practice, including data collection problems, learning curve
effects, and cost–benefit evaluations
34. Which of the following statements is true concerning cost estimation methods?
A. Cost behaviour is always assumed to depend on more than one cost driver.
B. Cost behaviour patterns are curvilinear.
C. Costs and benefits of using sophisticated and costly cost-estimation methods must be evaluated.
D. Cost behaviour is always assumed to depend on more than one cost driver AND costs and benefits of using
sophisticated and costly cost-estimation methods must be evaluated.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 3.03 Introduce the unit, batch, product and facility level hierarchy of costs and cost drivers
35. If a very short time period, such as a week, is used for a regression study, rather than a longer period such as a
month:
A. coping with inflation becomes more difficult.
B. accounting measurement errors are more likely.
C. time and motion studies will be required to supplement the cost and volume data.
D. coping with inflation becomes more difficult AND time and motion studies will be required to supplement the cost and
volume data.
AACSB: Reflective
Difficulty: Medium
36. In assessing the costs and benefits of using a particular cost driver, which of the following must be taken into account?
i. The availability of cost data.

ii. The time frame for analysing the cost behaviour.
iii. Whether it is a fixed or variable cost.
A. i
B. ii
C. i and ii
D. i and iii
AACSB: Reflective
Difficulty: Medium
37. In activity-based costing analysis, the manufacturing manager's salary is classified as a:
A. unit cost.
B. batch cost.
C. product cost.
D. facility cost.
AACSB: Analytical
Difficulty: Medium
38. In activity-based costing analysis, direct materials are classified as a:

A. unit cost.
B. batch cost.
C. product cost.
D. facility cost.
AACSB: Analytical
Difficulty: Easy
39. In activity-based costing analysis, set-up costs are classified as a:

A. unit cost.
B. batch cost.
C. product cost.
D. facility cost.
AACSB: Reflective
Difficulty: Easy
40. In activity-based costing analysis, package design is classified as a:

A. unit cost.
B. batch cost.
C. product cost.
D. facility cost.
AACSB: Reflective
Difficulty: Medium
41. In which approach to costs estimation, is task analysis used?

A. Account classification
B. Engineering method
C. High–low method
D. Managerial judgement
AACSB: Reflective
Difficulty: Easy
42. In which approach to cost estimation, is least squares used?
A. Engineering method
B. High–low method
C. Regression analysis
D. Managerial judgement
AACSB: Reflective
Difficulty: Easy
43. Which of the following statements are assumptions underlying cost estimation?
A. Cost behaviour depends on one or a few activities.
B. All costs are production driven.
C. There is a strong correlation between the cost and the cost driver.
D. Cost behaviour depends on one or a few activities AND there is a strong correlation between the cost and the cost
driver.
AACSB: Reflective
Difficulty: Medium
44. Which of the following are valid reasons for a firm not using objective techniques?
i. Data may not be available.
ii. Cost estimates are sufficiently accurate for the firm's purposes.
iii. Accountants may be ignorant of appropriate techniques.
iv. The firm gives low priority to cost estimation.
A. i and ii
B. i, ii and iii
C. ii, iii and iv
D. i, ii and iv
AACSB: Reflective
Difficulty: Medium
45. Which of the following are important in estimating the cost of machine maintenance?
A. The relevant range
B. The time period selected
C. The cost driver selected
AACSB: Reflective
Difficulty: Medium
46. When using regression analysis to determine estimated costs, what criteria are necessary to evaluate a particular
regression line?
A. Closeness to pre-analysis guess
B. Goodness of fit
C. Coefficient of determination
D. Goodness of fit AND coefficient of determination
AACSB: Reflective
Difficulty: Medium
47.
In the regression formula Y = a + bX, b is:
A. the slope of the line.

B. the cost driver.
C. the intercept on the vertical axis.
D. the dependent variable.
AACSB: Reflective
Difficulty: Easy
48. Which of the following statements is most complete and correct?

A. Activity-based costing uses non-volume-based cost drivers only.
B. Activity-based costing uses volume-based cost drivers.
C. Activity-based costing recognises that both volume-based and non-volume-based cost drivers may be appropriate.
D. None of the given answers.
AACSB: Reflective
Difficulty: Easy
49. For a fixed cost, as volume increases:

A. the cost behaviour depends on the type of fixed cost involved.
B. total fixed costs remain constant and fixed costs per unit increase.
C. both total fixed costs and fixed costs per unit remain constant.
D. total fixed costs remain constant and fixed costs per unit decrease.
AACSB: Reflective
Difficulty: Medium
curvilinear
50. Consider the following equation:
Total cost = fixed costs + (cost driver rate  cost driver quantity)
If a cost can be estimated using this equation, it is probably a:
A. fixed cost.
B. variable cost.
C. mixed or semivariable cost.
D. non-linear cost.
AACSB: Reflective
Difficulty: Medium
curvilinear
51.
Lawson Lumber uses the high–low method to estimate electricity cost, which varies in relation to machine hours. Based on the following
data, how would the cost function be stated if ‘X' is the number of machine hours?
A.
$525 + $0.35 X
B.
$300 + $0.50 X
C.
$500 + $0.50 X
D.
$470 + $0.35 X
AACSB: Analytical
Difficulty: Medium
52. For a manufacturer of kitchens, which of the following would you expect to be a fixed cost?
A. Hourly labour cost of employee installing kitchens
B. Material for kitchen benchtops
C. Adhesive for benchtops
D. Rent of factory premises
AACSB: Reflective
Difficulty: Medium
curvilinear
53. For a manufacturer of kitchens, which of the following would you expect to be a direct cost?
A. Hourly labour cost of employees installing kitchens
B. Material for kitchen benchtops
C. Hourly labour cost of employees installing kitchens AND material for kitchen benchtops
D. Rent of factory premises
AACSB: Reflective
Difficulty: Medium
curvilinear
54. Which of the following increases as volume of activity decreases?

A. Fixed cost per unit
B. Variable cost per unit
C. Total fixed cost
D. Total variable cost
AACSB: Reflective
Difficulty: Medium
curvilinear
55. Which of the following is not an example of a cost driver for a delivery truck?
A. Location of customers
B. Depreciation
C. Litres of fuel used
D. Number of customers
AACSB: Reflective
Difficulty: Medium
Learning Objective: 3.02 Explain the concept of cost drivers, including volume-based and non-volume-based cost drivers
56. Which of the following is an example of an engineered cost?
A. Direct materials
B. Advertising
C. Insurance
D. Factory supervisor's salary
AACSB: Reflective
Difficulty: Easy
Learning Objective: 3.07 Define and provide examples of engineered, committed and discretionary costs
57. Which term describes a cost resulting from the existence of the organisational structure and premises used by the
firm?
A. Discretionary
B. Fixed
C. Committed
D. Engineered
AACSB: Reflective
Difficulty: Easy
58. Which of the following would always be a mixed (semivariable) cost for a firm?
A. Raw materials because it includes direct and indirect materials
B. Direct labour
C. Manufacturing overhead
D. Raw materials AND manufacturing overhead
AACSB: Reflective
Difficulty: Medium
curvilinear
59. An example of a discretionary cost for a firm that manufactures furniture is:
A. direct material.
B. advertising.
C. labour.
D. glue and nails.
AACSB: Reflective
Difficulty: Medium
60. Eldervale Winery is a producer of premium wine. Which of the following is an example of a unit level cost?
A. The cost of the labels on each bottle of wine
B. The cost of designing the labels on a wine bottle
C. Advertising costs
D. Costs of delivering wine to customers
AACSB: Reflective
Difficulty: Easy
61.
Which of the following statements about the coefficient of determination (R2) is correct?
A.
R2 is a measure of economic plausibility.
B.
The higher the R2, the more confident we are when using a regression model to predict costs.
C.
R2 is a measure of data accuracy.
D.
R2 is a useful measure only for simple regressions.
AACSB: Reflective
Difficulty: Easy
62.
The results of the regression analysis to estimate delivery costs are as follows:
Which of the following statements represent a valid conclusion based on the above regression analysis output?
A. 54.4% of transportation cost can be explained by the number of cargos.

B. The F-statistic is considered significant; therefore, the relationship in the regression is unlikely to happen by chance.
C. The p-value associated with the intercept suggests that the delivery costs are entirely variable.
D. Given the t-statistic, number of cargos is a poor cost driver of delivery cost.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 3.11 After studying the appendix, use Microsoft Excel® to estimate and evaluate a regression equation
63.
The results of the regression analysis to estimate delivery costs are as follows:
Which of the following is an appropriate cost equation based on the above regression output?
A.
Delivery costs = $366.39 + $0.58 X1, where X1 is the number of cargos.
B.
C.
D.

AACSB: Reflective
Difficulty: Medium
64.
The following is an extract of a cost report for Big Whale Car Wash for the six months from June to November. Management considers
the activities in these six months as within the relevant range for the purpose of cost estimation.
The car washing labour cost is a:
A. variable cost.
B. fixed cost.
C. step-fixed cost.
D. Semi-variable cost.
AACSB: Analytical
Difficulty: Medium
curvilinear
65.
A. variable cost.
B. fixed cost.
C. step-fixed cost.
D. semi-variable.
AACSB: Analytical
Difficulty: Medium
curvilinear
66.
A. variable cost.
B. fixed cost.
C. step-fixed cost.
D. semi-variable.
AACSB: Analytical
Difficulty: Medium
curvilinear
67. ‘Time and motion studies' refers to:
A. the process in which managers use their judgment to estimate the time it takes to carry out each individual work task, in
order to estimate cost.
B. the process in which employees complete timesheets each day; the timesheets then form the basis for cost estimation.
C. the process in which employees are observed when they undertake work tasks; these observations are then used to
estimate cost.
D. the process in which the cost of work tasks are compared over time and across different divisions.
AACSB: Reflective
Difficulty: Medium
68. When a manager notices an outlier during the cost estimation process, the appropriate response is to:
A. no response is required, unless multiple outliers are observed.
B. attempt to identify the reasons for the outlier.
C. divide the outlier by the standard deviation, before including the outlier in the regression model
D. re-collect all the data, as an outlier indicates that the data has been corrupted.
AACSB: Reflective
Difficulty: Medium
69. An activity or factor that causes costs to be incurred is known as a

A. cost prediction.
B. cost estimation.
C. cost driver.
D. cost behaviour.
AACSB: Reflective
Difficulty: Easy
70. The main reason for analysing cost behaviour is to

A. provide estimates of cost behaviour.
B. provide estimates for cost predictions.
C. provide a timeframe for analysing cost behaviour.
D. provide estimates of cost behaviour for cost predictions.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 3.04 Describe the different roles that cost driver analysis can play in management accounting
71. When estimating cost behaviours, the appropriateness of the drivers can be tested by measuring the strength of the
relationship between
A. past costs and their selected cost driver.
B. past costs and future costs.
C. past costs and predicted costs.
D. predicted costs and their selected driver.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 3.04 Describe the different roles that cost driver analysis can play in management accounting
72. To test the significance of a result using the regression equation as a whole and to assess that the result is not due to
random factors, management would consider the result of the
A. F-statistic.
B.
adjusted R2.
C. p-value.
D. co-efficient.
AACSB: Reflective
Difficulty: Medium
73.
Truweight Ltd has introduced a new line of weight machines for the catering industry which has required additional steps in the
production line. During the first two months of production the labour time for the weight machines was as follows:
The learning curve percentage is
A. 10 per cent.
B. 90 per cent.
C. 100 per cent.
D. 110 per cent.
AACSB: Analytic
Difficulty: Medium
Learning Objective: 3.12 After studying the appendix, describe the impact of learning curve effects on the estimation of cost behaviour
74.
Truweight Ltd has introduced a new line of weight machines for the catering industry which has required additional steps in the
production line. During the first two months of production the labour time for the weight machines was as follows:
The average labour time per unit for February was
A. 1800 hours.
B. 100 hours.
C. 90 hours.
D. 80 hours.
AACSB: Analytic
Difficulty: Medium
Learning Objective: 3.12 After studying the appendix, describe the impact of learning curve effects on the estimation of cost behaviour
75. Define the term ‘relevant range' and explain its importance to understanding cost behaviour.
The relevant range is the range of activity within which management expects the organisation to operate. This can be
based on experience and/or sales projections.
The reason that this term is important is because management need not concern itself or waste precious time with
extremely high or low levels of activity that are unlikely to occur. Statistical measures such as regression also limit the
scope to an organisation's relevant range.
Difficulty: Medium
76. Compare and contrast the following types of costs:

i. Variable and step-variable
ii. Fixed and step-fixed
i. A variable cost changes in total in direct proportion to the change in activity level or cost drivers (direct material). A step-
variable cost is nearly variable, but it increases in small steps, instead of continuously (e.g. additional direct labour).
ii. A fixed cost remains unchanged as the activity level varies in total (e.g. rent). A step-fixed cost remains fixed over a
sizeable range of activity, but steps up for activities outside that range (e.g. the salaries of hiring additional employees).
Difficulty: Easy
curvilinear
77. Distinguish between least squares regression (simple) and multiple regression as cost estimation methods.
In the least squares regression (LSR) method, the cost line is positioned to minimise the sum of the squared deviations between the
cost line and the data points. The cost line fit to the data using LSR is called a regression line. The statistical equation for this line is
represented by the formula: Y = a + bX, with X denoting activity level (independent variable) and Y denoting the total cost (dependent
variable). The intercept of the line on the vertical axis is denoted as a and the slope of the line is denoted as b. The fixed cost
component a and b is an estimate of the variable cost per unit of activity.
The multiple regression line has all the same properties as the simple LSR line, but more than one independent variable is taken into
consideration. The equation is similar and looks like this: Y = a + b1X1 +b2X2. The use of more explanatory variables can explain more of
the cost behaviour than simple regression.
Difficulty: Easy
78. Describe how the learning effect will affect cost prediction.
In many production processes, production efficiency increases with experience. For example, as cumulative production
output increases, the average labour time required per unit declines. Therefore, as a manufacturer gains experience with
a product, estimates of the cost of direct labour should be adjusted downwards to consider this learning effect.
Difficulty: Medium
79.
The results of the regression analysis to estimate the operation costs of the polishing machine ('polishing cost per month') are as
follows:
Interpret the above regression output, and construct a regression equation to describe the relationship between polishing costs per
month and number of batches. Explain how confident you are with the cost equation in estimating future polishing costs.
The cost equation is:

Polishing costs = $298.764+ $7.226X1, where X1 is the number of batches.
When interpreting the regression output, the student should discuss the following points:
The F-statistic is significant (0.024) so the relationships depicted by the model did not happen by chance.
The p-value for number of batches is less than the benchmark 0.05 so the number of batches is a good cost driver.
However, adjusted R square is not high, suggesting that only 70% of variations can be explained by this cost model. The
sample size is also very small, with only 6 observations. (Note: small sample size means we should focus on adjusted R
square not the ‘regular' R square.). So overall, one should not be too confident with this model.
AACSB: Reflective
Difficulty: Hard
80. Explain why many businesses are finding that more and more of their costs no longer vary directly with the volume of
production.
One reason is that, as organisations become more automated, they tend to rely more on equipment and less on direct
labour when producing their products. Unlike labour costs, equipment costs, such as depreciation, maintenance and
insurance, do not vary with the volume of production. In the electronics industry, for example, small electronic components
were once placed onto circuit boards, wired and soldered by hand. Now, pick-and-place robots and auto-insertion
machines place electronic components on circuit boards with incredible speed and precision. Wash-and-dry machines
eliminate contaminants and wave solder machines solder the connections. A large part of the manufacturing process is
computerised, and much of the labour force is now regarded as indirect labour, being involved in computer programming
and maintenance rather than direct production activities. Many service organisations have also replaced most of their
clerical and data processing functions through IT developments. Depreciation, maintenance and upgrades for the
computerised equipment and the IT infrastructure are regarded as committed fixed costs, as are the costs of the labour
force.
In addition, in many industries, unions negotiate enterprise agreements that result in a relatively stable workforce.
Management is less able to adjust the numbers of employees when activity levels change. In recent times many
organisations have adapted their practices to increase the responsiveness of their direct labour costs to changes in the
level of activity.
Thus, changes in the commercial environment can have a major impact on cost behaviour. It is vital that management
accountants who work in these modern environments are fully aware of the impact of these changes on cost estimation.
More recent costing systems, such as activity-based costing, use both production volume and non-volume cost drivers.
Difficulty: Medium
81. Units produced 12 000 15 000

Direct materials $36 000 $45 000
Based on the above data, the direct material costs for producing 7000 units are $21 000.
TRUE
AACSB: Analytical
Difficulty: Easy
curvilinear
82. Units produced 12 000 15 000

Direct materials $36 000 $45 000
Based on the above data, at the production level of 10 000 units, the fixed costs per unit are $5 per unit and if the firm
produced 8000 units the fixed cost per unit would remain constant at $5.
FALSE
AACSB: Analytical
Difficulty: Easy
curvilinear
83. Relevant range is only important when determining fixed costs.

FALSE
AACSB: Reflective
Difficulty: Easy
84. Research and development costs are an example of discretionary costs.
TRUE
AACSB: Reflective
Difficulty: Easy
85. If the cost of a complaints department is driven by the number of calls taken, the calls are said to be the dependent
variable.
FALSE
AACSB: Reflective
Difficulty: Easy
86. Economic plausibility is one of the criteria used to evaluate a particular regression line.
TRUE
AACSB: Reflective
Difficulty: Easy
87. Regardless of the approach taken to cost estimation, data collection will affect how ‘good' the estimation is.
TRUE
AACSB: Reflective
Difficulty: Easy
88. Regression analysis is a superior statistical method to the high–low method because it utilises all data when
determining the line of best fit.
TRUE
AACSB: Reflective
Difficulty: Easy
89. A scatter diagram is most useful in providing insight into whether there is a relationship between a cost and a level of
activity.
TRUE
AACSB: Reflective
Difficulty: Easy
90. Assume the costs of a service department are driven by the number of service orders and the equation for calculating
the costs of a service department is y = $5000 + $3x. The cost of the department if there were 6000 orders would be $25
000.
FALSE
AACSB: Analytical
Difficulty: Easy
91. The relationship between a cost and the level of activity is known as the cost behaviour.
TRUE
AACSB: Reflective
Difficulty: Easy
92. Direct labour hours would be described as a volume-based cost driver for a clothing manufacturer.
TRUE
AACSB: Reflective
Difficulty: Easy
93. Activity based costing is a traditional approach to costing that has focused on analysing cost behaviour.
FALSE
AACSB: Reflective
Difficulty: Easy
Category # of Q
uestion
s
AACSB: Analytic 2
Difficulty: Easy 46
Difficulty: Hard 4
Learning Objective: 3.01 Explain the relationships between cost estimation, cost behaviour and cost prediction 3
Learning Objective: 3.02 Explain the concept of cost drivers, including volume-based and non-volume-based cost drivers 3
Learning Objective: 3.03 Introduce the unit, batch, product and facility level hierarchy of costs and cost drivers 8
Learning Objective: 3.04 Describe the different roles that cost driver analysis can play in management accounting 2
Learning Objective: 3.05 Define and analyse the behaviour of the following types of costs: variable, fixed, step-fixed, semiv 25
ariable (or mixed) and curvilinear
Learning Objective: 3.06 Explain the importance of the relevant range when using a cost behaviour pattern for cost predicti 6
on
Learning Objective: 3.07 Define and provide examples of engineered, committed and discretionary costs 5
Learning Objective: 3.08 Describe the following approaches to cost estimation: managerial judgment (including account cla 7
ssification), the engineering method, and quantitative analysis (including high–low, and simple and multiple regression)
Learning Objective: 3.09 Estimate cost functions using the high–low method and regression analysis 23
Learning Objective: 3.10 Explain some of the issues that arise in estimating cost functions in practice, including data collect 5
ion problems, learning curve effects, and cost–benefit evaluations
Learning Objective: 3.11 After studying the appendix, use Microsoft Excel® to estimate and evaluate a regression equation 4
Learning Objective: 3.12 After studying the appendix, describe the impact of learning curve effects on the estimation of cos 2
t behaviour
1. Product costing is the process of:

A. accumulating the costs of a production process.
B. assigning costs to a firm's products.
C. placing a value on fixed assets owned by a producer.
D. accumulating the costs of a production process AND assigning costs to a firm's products.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 4.01 Explain the role of product costing systems
2. Under Australian accounting standards, manufactured products are generally:

A. valued at market value and expensed in the period made.
B. valued at market value and expensed in the period sold.
C. valued at cost and expensed in the period made.
D. valued at cost and expensed in the period sold.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 4.03 Outline the flow of costs through the manufacturing accounts used in product costing
Learning Objective: 4.09 After studying the appendix, explain how inventories must be valued for external financial reporting
3. Consider the following statements regarding product cost information.

i. Product cost information is necessary for planning, cost control and providing information for making decisions.
ii. Product cost information is not necessary to justify rate increases that are subject to the approval of government
authorities.
iii. Product cost information is necessary to value inventory on the balance sheet.
Which of the statement/s is/are correct?
A. i, ii and iii
B. i and ii
C. i and iii
D. iii
AACSB: Reflective
Difficulty: Medium
Learning Objective: 4.02 Describe why managers need different measures of product costs for different purposes
4. Manufacturing costs consist of:

A. direct materials.
B. conversion costs.
C. downstream costs.
D. direct materials and conversion costs, but not downstream costs.
AACSB: Reflective
Difficulty: Easy
5. As production takes place, all manufacturing costs are debited to the:
A. work in process inventory account.
B. manufacturing overhead account.
C. cost of goods sold account.
D. finished goods account.
AACSB: Reflective
Difficulty: Easy
6. When products are completed, their product costs are transferred from work in process inventory to the:
A. manufacturing overhead accounts.
B. finished goods account.
C. cost of goods sold account.
D. indirect labour account.
AACSB: Reflective
Difficulty: Easy
7. To transfer work in process inventory to finished goods inventory:

A. debit finished goods and credit work in process.
B. debit work in process and credit finished goods.
C. add direct labour to the work in process inventory.
D. add direct labour and direct materials to the finished goods inventory.
AACSB: Reflective
Difficulty: Easy
8. Cost of goods sold is closed into the income summary account:

A. at the end of the production cycle.
B. when the product is sold.
C. at the end of the accounting period, along with other expenses and revenues of the period.
D. at no time.
AACSB: Reflective
Difficulty: Easy
9.
The following data apply to Stratford Ltd
Calculate the amount of direct materials used during the year.
A. $36 500
B. $42 500 Direct materials used = beginning + purchased - ending
C. $47 500 = 5500 + 45000 - 3000 = 47500
D. $53 500
AACSB: Analytical
Difficulty: Easy
10.
Predetermined overhead rate—200 per cent of direct labour cost

Calculate the amount of direct labour cost incurred during the year.
A. $20 000
B. $18 000
C. $10 000
AACSB: Analytical
Difficulty: Medium
Learning Objective: 4.04 Use basic techniques to allocate manufacturing overhead costs to products
11.
What was the actual manufacturing overhead incurred during the year?
A. $22 000
B. $20 000 20000 + 2000 = 22000
C. $18 000
D. $16 000 COGS = Beginning finished goods + COG manufactured - ending finished goods
--> COG manufactured = 72500
AACSB: Analytical
Difficulty: Medium
12.
Calculate the cost of goods manufactured during the year.
A. $62 500
B. $67 500 COGS = Beginning finished goods + COG manufactured - ending finished goods
C. $70 500 --> COG manufactured = 72500
D. $72 500
AACSB: Analytical
Difficulty: Medium
Learning Objective: 4.07 Prepare a schedule of cost of goods manufactured and a schedule of cost of goods sold, and understand the relationship
between these reports and external accounting reports
13. Manufacturing overhead:
A. consists of direct material and direct labour costs.
B. is easily traced to jobs.
C. should not be assigned to individual jobs because it bears no obvious relationship to them.
D. is a heterogeneous pool of indirect production costs that can include gas and electricity costs and depreciation.
AACSB: Reflective
Difficulty: Easy
14. A predetermined overhead rate is calculated as follows:

A. budgeted manufacturing overhead/budgeted amount of cost driver.
B. budgeted amount of cost driver/budgeted manufacturing overhead.
C. budgeted manufacturing overhead/budgeted amount of non-manufacturing overhead.
D. budgeted manufacturing overhead/ budgeted total expenses.
AACSB: Reflective
Difficulty: Easy
15. Which of the following statements is not correct regarding work in process?
A. Work in process is partially completed inventory.
B. Work in process consists of direct labour, direct material and allocated manufacturing overhead.
C. Work in process is debited as product costs are incurred.
D. Work in process is credited when goods are sold.
AACSB: Reflective
Difficulty: Easy
16. The debit side of the manufacturing overhead account is used to accumulate:
A. actual manufacturing overhead costs as they are incurred throughout the accounting period.
B. overhead applied, to work in process inventory.
C. predetermined overhead.
D. overapplied overhead.
AACSB: Reflective
Difficulty: Easy
17. Gratis Company Ltd applies overhead based on direct labour hours in their printing department. At the beginning of
the year, the company estimated that manufacturing overhead would be $550 000, direct labour hours would be 100 000
and direct labour cost would be $1 100 000 in the printing department. What is the printing department's predetermined
overhead rate for the year?
A. $0.18 per direct labour hour
B. $0.50 per direct labour hour 550000/100000 = 5.5
C. $2.00 per direct labour hour
D. $5.50 per direct labour hour
AACSB: Analytical
Difficulty: Easy
18. Brainpower Pty Ltd is an advertising agency that uses a job costing system. Brainpower applies overhead to jobs
based on direct professional labour hours. At the beginning of the year, overhead was estimated to be $75 000, direct
professional labour hours were estimated to be 15 000, and direct professional labour cost was projected to be $225 000.
During the year, Brainpower incurred actual overhead of $80 000, actual direct labour hours of 14 500 and actual direct
labour cost of $222 000. What was Brainpower's overapplied or underapplied overhead during the year?
A. $5000 underapplied
POHR = estimated overhead costs / Estimated direct professional labour hr
B. $5000 overapplied
C. $7500 underapplied
= 75000 / 15000 = 5
D. $7500 overapplied Applied OH = Actual direct professional labor hrs worked * POHR
= 14500 * 5 = 72500
Ovẻ/Under applied OH = Applied manufacturing OH - Actual manufacturing OH
= 72500 - 80000 = 7500 (underapplied)
AACSB: Analytical
Difficulty: Medium
19. Process costing is normally used when:

A. large numbers of different products are manufactured.
B. large numbers of nearly identical products are manufactured.
C. small numbers of nearly identical products are manufactured.
D. the fixed costs of manufacturing exceed the variable cost of manufacturing.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 4.05 Distinguish between job costing and process costing and understand in which situations job costing or process costing may be
the most appropriate costing system
20. If a manufacturer underestimated the manufacturing overhead budget and overestimates the activity base for the year,
what is the result?
A. Overapplied factory overhead
B. Underapplied factory overhead
C. Overstated finished goods inventory
D. Understated work in process inventory
AACSB: Reflective
Difficulty: Medium
21. If manufacturing overhead is overapplied for the period, a method to bring the balance of the manufacturing overhead
account to zero would be:
A. debit cost of goods sold, credit manufacturing overhead.
B. debit work in process inventory, credit manufacturing overhead.
C. debit manufacturing overhead, credit raw materials inventory.
D. debit manufacturing overhead, credit cost of goods sold.
AACSB: Reflective
Difficulty: Medium
22. The estimates used to calculate the predetermined overhead rate:

A. will generally prove to be incorrect to some degree.
B. will usually result in a non-zero balance left in the manufacturing overhead account at the end of the year.
C. are likely to result in either overapplied or underapplied overhead.
AACSB: Reflective
Difficulty: Medium
23. When underapplied or overapplied overhead is allocated among the three accounts work in process, finished goods
and cost of goods sold, this process is called:
A. proration.
B. just-in-time costing.
C. zero-based costing.
D. overhead application.
AACSB: Reflective
Difficulty: Easy
24. When underapplied or overapplied manufacturing overhead is prorated, to which of the following accounts can
amounts be assigned?
A. Direct materials, manufacturing overhead and direct labour
B. Cost of goods sold, work in process and finished goods
C. Direct materials, finished goods and cost of goods sold
D. Direct materials, work in process inventory and finished goods inventory
AACSB: Reflective
Difficulty: Easy
25. If the manufacturing overhead account has a credit balance, then
A. manufacturing overhead is overapplied.
B. manufacturing overhead is underapplied.
C. cost of goods sold is understated.
D. manufacturing overhead is underapplied AND cost of goods sold is understated.
AACSB: Reflective
Difficulty: Easy
26. To accumulate costs under job costing

A. the cost of direct labour is assigned to each production job.
B. the cost of direct material is assigned to each production job.
C. the cost of manufacturing overhead is allocated to each production job.
AACSB: Reflective
Difficulty: Easy
27. Total manufacturing cost includes

A. direct material and direct labour in a job costing system.
B. direct labour and manufacturing overhead in a process costing system.
C. direct material, direct labour and manufacturing overhead in both job costing and process costing.
D. direct labour and manufacturing overhead in both a job costing and a process costing system.
AACSB: Reflective
Difficulty: Easy
28. The assignment of direct labour costs to individual jobs is based on

A. actual total payroll costs divided equally among all the jobs in process.
B. estimated total payroll costs divided equally among all the jobs in process.
C. the actual time spent on each job multiplied by the wage rate.
D. the estimated time spent on each job multiplied by the wage rate.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 4.06 Use job costing to estimate product costs; describe the procedures and source documents, and prepare journal entries to
record costs under a job costing system
29. Leisure Life manufactures a variety of sporting equipment. The firm's predetermined overhead application rate was
150 per cent of direct labour cost. Job 101 included direct materials of $15 000 and direct labour of $6000.
The manufacturing overhead applied to Job 101 during the year was
A. $4000.
B. $6000. =6000*150% = 9000
C. $8000.
D. $9000.
AACSB: Analytical
Difficulty: Easy
30. Leisure Life manufactures a variety of sporting equipment. The firm's predetermined overhead application rate was
150 per cent of direct labour cost. Job 104 included direct material of $20 000 and total costs were $25 000. The
manufacturing overhead applied to Job 104 to date is
A. $5000.
B. $2000. Total cost = DM + DL + OH
C. $3000. 25000 = 20000 + X + 150%X --> X = 2000
D. $2500.
Manufacturing OH = 2000 * 150% = 3000
AACSB: Analytical
Difficulty: Easy
31. Which of the following is true regarding job costing?

A. It is a type of product costing system used for small numbers of products produced in distinct batches.
B. It is used exclusively in manufacturing environments.
C. It is used for continuous mass production of products.
D. It is used exclusively for products of a similar nature.
AACSB: Reflective
Difficulty: Medium
32. In which of the following industries could process costing be used?

A. Petroleum refining
B. Food processing
C. Paper mills
AACSB: Analytical
Difficulty: Easy
33. In which of the following industries could job costing be used?
A. Machine shop and specialty manufacturing
B. Bread making
C. Cement production
D. Food processing
AACSB: Analytical
Difficulty: Medium

A. In job costing, costs are accumulated by job order.
B. In process costing, the cost per unit is found by averaging the costs incurred over the units produced.
C. In process costing, the production costs are assigned to each unit produced.
D. In job costing, the cost of each unit of a particular job is found by dividing the total cost of the job by the number of units
in the job.
AACSB: Analytical
Difficulty: Easy
35. In the valuation of inventory at the end of an accounting period, the following costs are included:
A. manufacturing costs.
B. manufacturing and upstream costs.
C. manufacturing and downstream costs.
D. manufacturing, upstream and downstream costs.
AACSB: Reflective
Difficulty: Easy
36. Managers using costing data for making decisions will usually use the following data in product cost information.
A. Manufacturing costs
B. Manufacturing and upstream costs
C. Manufacturing and downstream costs
D. Manufacturing, upstream and downstream costs
AACSB: Reflective
Difficulty: Easy
37. Which of the following statements is most complete and correct?
A. Job costing traces costs to departments and process costing traces costs to products.
B. Job costing develops the cost of products and process costing develops the costs of processes.
C. Both job and process costing develop the cost of products.
D. Both job and process costing are concerned with the cost of departments.
AACSB: Reflective
Difficulty: Easy

i. Job costing accumulates costs by jobs or batches.
ii. Process costing accumulates costs by departments or processes.
iii. Process costing accumulates costs for specific time periods.
iv. Job costing accumulates costs by departments.
A. i and ii
B. ii
C. iv
D. iii and iv
AACSB: Reflective
Difficulty: Easy
39. If a manufacturing firm ends the year with underapplied overhead, one method of treatment is
A. debit manufacturing overhead, credit cost of goods sold.
B. debit cost of goods sold, credit manufacturing overhead.
C. debit work in process, credit manufacturing overhead.
D. debit finished goods inventory, credit manufacturing overhead.
AACSB: Reflective
Difficulty: Easy
40. On completion of products under a job cost system, costs are transferred as follows:
A. Debit finished goods inventory, credit work in process
B. Debit work in process, credit finished goods inventory
C. Debit cost of goods sold, credit work in process inventory
D. Debit work in process inventory, credit cost of goods sold
AACSB: Reflective
Difficulty: Easy
41. Product costs may be used for which of the following purposes?
i. Valuation of inventories
ii. Management decision making
iii. Pricing decisions
iv. Cost control
A. i and ii
B. ii, iii and iv
C. i, ii and iii
AACSB: Reflective
Difficulty: Easy
42. Which of the following industries are likely to be using process costing?
i. Petroleum
ii. Computer manufacture
iii. Sugar refining
iv. Furniture manufacture
A. i and ii
B. ii and iii
C. i and iii
D. ii and iv
AACSB: Reflective
Difficulty: Medium
43.
Select the relevant information from the following, and calculate the cost of goods available for sale:
Total manufacturing costs were $5390.

Cost of goods available for sale is:
Cost of goods available for sale = Total manufacturing cost + Opening inventory of finished goods
A. $5300 = $5,390 + $500 = $5,890
B. $5320
C. $5920
AACSB: Reflective
Difficulty: Medium
44. Which of the following would appear on the debit side of the overhead account?
A. Actual overhead cost incurred in the period
B. Overhead applied (charged) to production
C. Overapplied overhead for the period
D. Actual overhead cost incurred in the period AND overapplied overhead for the period
AACSB: Reflective
Difficulty: Medium
45. Which of the following would appear on the credit side of the overhead account?
A. Actual overhead cost incurred in the period
B. Overhead applied (charged) to production
C. Underapplied overhead for the period
D. Overhead applied (charged) to production AND underapplied overhead for the period
AACSB: Reflective
Difficulty: Medium
46. In calculating its predetermined overhead rate, a firm incorrectly called some items of indirect labour ‘direct labour'.
Since the firm uses direct labour costs as the basis for application of overhead costs, the effect of this error is to
A. underestimate the overhead rate.
B. overestimate the overhead rate.
C. underestimate direct labour costs.
D. underestimate the denominator used for allocating overhead.
AACSB: Reflective
Difficulty: Medium
47. Which of the following statements correctly completes this sentence? ‘For a manufacturing firm, when goods are
completed and ready for sale '
A. the firm's total assets are increased.
B. the firm's total assets are decreased.
C. there is no change in the value of the firm's assets.
D. the firm's work in process inventory is increased.
AACSB: Reflective
Difficulty: Medium
48.
Howard Corporation has a job order costing system. The following debits (credits) appear in the firm's work in process account for the
month of June:
Overhead is applied at 90 per cent of direct labour cost. There is only one job still in process at the end of June, and this job has been
charged with $2250 factory overhead. What was the amount of direct materials charged to that job?
A. $2250 Ending balance in WIP account = 12000 + 40000 + 30000 + 27000 - 100000 = 9000
B. $2500
C. $4250
Manufacturing cost = DM + DL + OH
D. $9000 9000 = DM + 2250 + 2250/90% --> DM = 4250
AACSB: Analytical
Difficulty: Hard
49. For a particular period, Petersen's opening and closing work in process balances were $20 000 and $14 000
respectively. Direct materials used was $200 000 and overhead applied was $130 000. Cost of goods manufactured was
$490 000. What was the amount of direct labour cost incurred for the period?
A. $148 000
B. $154 000 Total manufacturing cost = DM + DL + OH applied
C. $160 000 490000 = 200000 + DL + 130000 --> DL = 160000
D. $504 000
DL cost incurred = 160000 - 20000 + 14000 = 154000
AACSB: Analytical
Difficulty: Hard
50.
Richardson & Sons purchased direct material worth $15 000 during the most recent period. At the end of the period the direct material
account balance was $6000 larger than the beginning balance. Cost of goods sold was $150 000. Overhead is applied at 50 per cent of
direct labour cost. Other account balances are:
What is the amount of prime cost added to production for the period?
A. $9000 COGM = 150000 - 110000 + 60000 = 100000

B. $29 000 TMC = 100000 + 20000 - 75000 = 45000
C. $33 000 DM used = 0 + 15000 - 6000 = 9000
D. $36 000 --> Conversion cost = 45000 - 9000 = 36000
DL = (36000/3) * 2 = 24000
AACSB: Analytical --> PC = 9000 + 24000 = 33000
Difficulty: Hard
51.
The following information relates to Wells Fargo for July 2008:
Assuming underapplied or overapplied overhead is transferred to cost of goods sold at the end of the period, which of the following
would be the entry to the cost of goods sold account?
A. $80 000 debit

B. $80 000 credit
C. $40 000 credit
D. $40 000 debit
AACSB: Analytical
Difficulty: Medium
52. The amount of overhead applied to jobs using a predetermined (budgeted) rate is rarely equal to the actual cost of
overhead incurred for a period. Which of the following is not a valid explanation for this?
A. Actual spending for overhead is not equal to budgeted spending for overhead.
B. Actual use of the overhead allocation base is not equal to the budgeted use of the allocation base.
C. Budget estimates of overhead were unrealistically low.
D. Direct costs were unexpectedly high.
AACSB: Reflective
Difficulty: Medium
53.
A firm's total overhead incurred for the year was $40 000, and at year-end the overhead component of WIP, FG and COGS were as
follows:
If underapplied or overapplied overhead is to be prorated, what is the amount (to the nearest dollar) that will be transferred to WIP
because of the proration?
A. Credit WIP with $945

B. Debit WIP with $945
C. Credit WIP with $974
D. Debit WIP with $974
AACSB: Analytical
Difficulty: Medium
Learning Objective: 4.10 Prorate underapplied or overapplied overhead to various inventory accounts
54. If the work in process inventory has increased during the period, which of the following statements is definitely true?
A. Cost of goods sold will be greater than cost of goods manufactured.
B. Cost of goods manufactured will be greater than cost of goods sold.
C. Total manufacturing costs for the period will be greater than cost of goods manufactured.
D. Total manufacturing costs for the period will be less than cost of goods manufactured.
AACSB: Reflective
Difficulty: Medium
55. Which of the following costs should be considered when managers are making short term profitability analysis
decisions?
A. Marketing costs
B. Design costs
C. Research and development costs
D. None of the above
AACSB: Reflective
Difficulty: Easy
56. Which of the following costs should managers focus on when making long term strategic pricing decisions?
A. Marketing costs
B. Design costs
C. Research and development costs
D. All of the above
AACSB: Reflective
Difficulty: Easy
57. Which of the following statements about product costing is false?

A. Product costs may differ depending on the decision context.
B. Organisations should aim to have only one product costing system.
C. In designing a product costing system, managers need to make a careful assessment of costs and benefits associated
with each element of the product cost.
D. Both current costs and future costs are relevant for managerial decisions.
AACSB: Reflective
Difficulty: Medium
58. Bambie Ltd. applies overheads based on direct labour hours. The company has budgeted 50 000 direct labour hours
at a cost of $10 per hour, and manufacturing overhead of $750 000 in the assembly division for the year. The actual direct
labour hours used for the year turns out to be 47 000 hours. What is the applied overhead for the year?
A. $705 000
B. $70 500 POHR = 750000/50000 = 15%
C. $750 000
D. 500 000 Applied overhead = 15%*47000 = 705000
AACSB: Analytical
Difficulty: Easy
59. Which of the following about using proration to dispose of underapplied or overapplied overhead is correct?
A. Proration is a less accurate method than closing the account to COGS, because it arbitrarily allocates overhead
between the COGS account, WIP account, and finished goods account.
B. Proration is a less accurate method than closing the account to COGS, because the process affects three accounts
rather than just one account.
C. Proration is a more accurate method than closing the account to COGS, because it recognises that over/under
estimation of overhead rate affects more than just the COGS account.
D. Proration is a more accurate method than closing the account to COGS, because the potential distortion is spread out
over three accounts.
AACSB: Reflective
Difficulty: Medium
60. Snoozo Moozo manufactures bed frames and mattresses that are custom-made to a person's height and weight. It is
a publicly listed company and therefore must comply with any applicable Australian accounting standards. Which of the
following statements is most correct?
A. Snoozo Moozo should use job costing as it is more applicable to their production process.
B. Snoozo Moozo should use process costing as it is more applicable to their production process.
C. Snoozo Moozo should use process costing as it is more applicable to their production process and it is required under
applicable accounting standards.
D. Snoozo Moozo may use either job costing or processing cost, as both are acceptable under applicable accounting
standards and both methods can result in accurate production costs.
AACSB: Reflective
Difficulty: Medium
61. A list of all materials required for a particular job is most commonly referred to as
A. a source document.
B. a bill of materials.
C. a purchase order.
D. a schedule of goods manufactured.
AACSB: Reflective
Difficulty: Easy
62. Snoozo Moozo manufactures bed frames and mattresses that are custom-made to a person's height and weight. Last
week, Stevie Oslow, a bed frame specialist, reported spending 35 hours working on a number of bed frames, including 5
hours overtime. Barry is paid $20 per hour ordinarily, and $30 per hour when working overtime. Which of the following
journal entries are most appropriate in accounting for Barry's wages for the 35 hours?
A. Credit Wage Payable $750, Debit WIP $750
B. Credit Wage Payable $750, Debit WIP $700, Debit Manufacturing overhead $50
C. Credit Wage Payable $750, Debit WIP $600, Debit Manufacturing overhead $150
D. Credit Wage Payable $600, Credit other expenses $150, Debit WIP $750
AACSB: Analytical
Difficulty: Medium
63. Valuing inventories using net realisable value method requires managers to:
A. estimate sales value of the components of the merchandise, less any anticipated conversion costs.
B. estimate costs of the merchandise based on the most recent job cost sheets.
C. estimate sales value of the merchandise less any anticipated costs of completing and selling the products.
D. estimate sales value of the merchandise, disregarding any anticipated costs of completing and selling the products.
AACSB: Reflective
Difficulty: Easy
64. In a company where products undergo a number of separate processes, the process costing system
A. is not appropriate and job costing system should be used instead.
B. aggregates the costs of different processes and averages them out when calculating product costs.
C. requires the costs of undergoing different production processes to be determined simultaneously.
D. requires the costs of products that have completed processing in the earlier department to be transferred to the
subsequent department.
AACSB: Reflective
Difficulty: Easy
65.
The following data apply to Brewers Ltd
A. $122 000
B. $135 000 COGS = beginning finished goods + COGM - ending finished goods
C. $145 000 --> COGM = 150000 - 15000 + 10000 = 145000
D. $150 000
AACSB: Analytical
Difficulty: Medium
66.
The following data apply to Easy Chairs Ltd
A. $420 000
B. $405 000 COGS = beginning finished goods + COGM - ending finished goods
C. $385 000 --> COGM = 420000 - 50000 + 35000 = 405000
D. $370 000
AACSB: Analytical
Difficulty: Medium
67. Which of the following factors influences management's approach to process costing?
A. The degree to which products are identical in their consumption of direct materials
B. The existence of work in process inventory at the end of the accounting period
C. The degree to which products are identical in their specific production processes
AACSB: Reflective
Difficulty: Medium
Learning Objective: 4.08 Estimate product costs using a basic process costing system, and prepare journal entries to record costs
68. In the general ledger, the production costs are transferred through the work in process inventory accounts to
A. production costs account.
B. costs of goods sold account.
C. finished goods inventory account.
D. work in process account.
AACSB: Reflective
Difficulty: Medium
69. Management can hold department managers responsible for costs incurred in their area by
A. tracking production costs to production departments.
B. dividing total production costs by the number of production areas.
C. keeping work in process to a minimum in each area.
D. employing experienced production managers.
AACSB: Reflective
Difficulty: Easy
70.
Under AASB102 Inventories the cost of inventory must include
A. administration and selling costs.

B. transportation and handling costs.
C. storage costs.
D. abnormal wastage costs.
AACSB: Reflective
Difficulty: Medium
71.
Flow of costs
Describe the flow of goods through the manufacturing accounts in order to calculate cost of goods sold.
While production is occurring, all partially completed manufacturing inventory costs such as materials, labour and
overhead are accumulated in the work in process account. Once the products are completed, the related costs are
transferred from the work in process to the finished goods inventory account. When the goods are sold, the related costs
are transferred from finished goods inventory to cost of goods sold expense.
Difficulty: Easy
72.
Applied overhead
Discuss the reasons for using applied overhead rather than actual overhead to determine the cost of production jobs.
There are three reasons. First, as overhead costs usually bear no obvious relationship to individual jobs or units of
products, but must be incurred for the production process to take place, it is crucial that overhead costs are applied to
products in order to have a complete picture of product costs.
Second, actual overhead is not known until after the end of the accounting period. The cost of jobs would not be available
in a timely fashion if actual overhead costs were used.
Third, overhead costs often vary due to seasonal factors. This variation is not relevant (once a decision has been made to
operate through the seasonal factors) to decisions involving products or pricing in the short term. Thus, it is better to use
applied overhead to eliminate cost variation due simply to seasonal factors.
AACSB: Reflective
Difficulty: Medium
73.
Job costing and process costing

Differentiate between the types of manufacturing environments that would be suited to:
i. job costing and
ii. process costing
Include two examples of manufacturers that would fit each of these two environments.
i. Job costing is typically used in manufacturing environments in which goods are produced in distinct batches, called jobs.
Two examples of such manufacturers are aircraft manufacturers and furniture manufacturers.
ii. Process costing is typically used in manufacturing environments in which large numbers of identical product units are
manufactured. Two examples of such manufacturers are textiles and processed food.
AACSB: Reflective
Difficulty: Medium
74.
Underapplied overhead
i. Describe how overhead may be underapplied.
ii. Assume that underapplied overhead is treated as an adjustment to cost of goods sold. Explain why an under application of overhead
increases cost of goods sold.
i. Overhead will be underapplied when total actual overhead costs exceed applied overhead. This can occur for a variety
of reasons, including underestimation of some overhead costs, mis-estimation of production or changes in the mix of
products that affect the level of overhead costs incurred.
ii. In most manufacturing environments, the bulk of products made during the period are also sold in the same period and
ending work in process is modest relative to the amount of goods manufactured. Therefore, the vast majority of the
overhead applied to the work in process account will flow through to finished goods inventory and to cost of goods sold
expense. However, if overhead is underapplied, the cost of goods sold has been increased by an insufficient amount.
Consequently the underapplied overhead should be added to cost of goods sold.
Difficulty: Medium
75. Explain the difference between direct labour costs and indirect labour costs. How would this information be captured
on a timesheet by an employee?
Direct labour is the employee time spent directly on each production job whereas indirect labour is not specific to any single production
job. For example cleaning the floor at the end of the day is not specific to a single production job, but to the many production jobs for
that day.
In a job costing system, direct labour costs are assigned to jobs using time sheets filled out by employees. A time sheet records the
amount of time an employee spends on each production job. The time sheet is used to add direct labour costs to work in process
inventory and to the job cost sheets for the various jobs in process, and as the basis for paying employee wages. Time sheets may be
completed daily or weekly.
An example of a daily production employee's completed time sheet for the day could show that an employee spent 4.5 hours on job
number AA10 and 3 hours on job number AA16. This is direct labour. Another 0.5 hours was spent on shop clean-up duties. This time
will be classified by the accounting department as indirect labour, and its cost will also be included in manufacturing overhead. Note that
the format of time sheets can vary, depending on the computer software that is used to generate the report.
The information on the time sheets is also used for accounting entries and the processing of wages.
Difficulty: Medium
76. In comparison to job-order costing, process costing is by far the most accurate costing system.
FALSE
AACSB: Reflective
Difficulty: Easy
77. To calculate a predetermined overhead rate, budgeted overheads are divided by the actual cost driver.
FALSE
AACSB: Reflective
Difficulty: Easy
78. When overheads are over-allocated, the actual overheads incurred are greater than those allocated.
FALSE
AACSB: Reflective
Difficulty: Easy
79.
The flow of manufacturing overheads is:

Raw materials  WIP  Finished Goods  COGS
TRUE
AACSB: Reflective
Difficulty: Easy
80. With job costing, a job cost sheet is used to record the manufacturing overheads allocated, when finishing a specific
job.
TRUE
AACSB: Reflective
Difficulty: Easy
81. Manufacturing overheads incurred are debited to the work-in-process inventory account.
FALSE
AACSB: Reflective
Difficulty: Easy
82. Cost of Goods Manufactured = Beginning Work in Process + Total Manufacturing Costs – Ending Work in Process.
TRUE
AACSB: Reflective
Difficulty: Easy
83.
When recording inventory in the financial statements, the accounting standards prescribe that the companies use the lower of cost or
net realisable value.
TRUE
AACSB: Reflective
Difficulty: Easy
84. Manufacturing costs include direct labour, direct materials and all company-operating costs.
FALSE
AACSB: Reflective
Difficulty: Easy
85. Manufacturers differ from retailers in that they have three inventory accounts in the balance sheet as opposed to one.
TRUE
AACSB: Reflective
Difficulty: Easy
86. In some organisations downstream costs are treated as product-related.

TRUE
AACSB: Reflective
Difficulty: Easy
87. External accounting reports require inventory to be valued at the distribution cost.
FALSE
AACSB: Reflective
Difficulty: Easy
88. The schedule of cost of goods sold includes any underapplied/overapplied overhead.
TRUE
AACSB: Reflective
Difficulty: Easy
Category # of Que
stions
Difficulty: Easy 51
Difficulty: Hard 3
Learning Objective: 4.01 Explain the role of product costing systems 4
Learning Objective: 4.02 Describe why managers need different measures of product costs for different purposes 6
Learning Objective: 4.03 Outline the flow of costs through the manufacturing accounts used in product costing 18
Learning Objective: 4.04 Use basic techniques to allocate manufacturing overhead costs to products 26
Learning Objective: 4.05 Distinguish between job costing and process costing and understand in which situations job cost 16
ing or process costing may be the most appropriate costing system
Learning Objective: 4.06 Use job costing to estimate product costs; describe the procedures and source documents, and 7
prepare journal entries to record costs under a job costing system
Learning Objective: 4.07 Prepare a schedule of cost of goods manufactured and a schedule of cost of goods sold, and un 4
derstand the relationship between these reports and external accounting reports
Learning Objective: 4.08 Estimate product costs using a basic process costing system, and prepare journal entries to rec 3
ord costs
Learning Objective: 4.09 After studying the appendix, explain how inventories must be valued for external financial reporti 4
ng
Learning Objective: 4.10 Prorate underapplied or overapplied overhead to various inventory accounts 1
1.
Wages paid to a supervisor in a factory are a part of:
Prime cost Conversion cost
A.
Yes No
B.
Yes Yes
C.
No No
D.
No Yes
AACSB: Reflective
Difficulty: Easy
Learning Objective: 5.01 Describe the principles of process costing where work in process (WIP) inventories are involved
2. Which of the following are components of conversion costs?

A. Direct labour and direct materials
B. Indirect materials and manufacturing overhead
C. Direct labour and manufacturing overhead
D. Direct labour and indirect labour
AACSB: Reflective
Difficulty: Medium
3. Which of the following represents a correct sequence in preparing a departmental production report?
A. Analysis of physical flow of units, computation of unit costs, calculation of equivalent units and analysis of total costs
B. Analysis of physical flow of units, calculation of equivalent units, computation of unit costs and analysis of total costs
C. Analysis of total costs, calculation of equivalent units, computation of unit costs and analysis of physical flow of units
D. Analysis of total costs, analysis of physical flow of units, computation of unit costs and calculation of equivalent units
AACSB: Reflective
Difficulty: Easy
4. Under Australian accounting standards, which methods can be used to prepare the departmental production report?
A. Weighted average, first in first out and standard costing
B. Last in first out, first in first out and standard costing
C. Last in first out, standard costing, weighted average
D. First in first out, last in first out, weighted average and standard costing
AACSB: Analytical
Difficulty: Medium
Learning Objective: 5.02 Assign total production costs for a department to completed units and WIP inventory using the weighted average method of
process costing
5. Rex Company Ltd had 4000 units in work in process at 1 April. During April, 11 000 units were completed. At 30 April,
5000 units remained in work in process. How many units were started during April?
A. 11 000
B. 5000 11,000 + 5,000 - 4,000 = 12,000
C. 12 000
D. 16 000
AACSB: Analytical
Difficulty: Medium
process costing
6. Assuming that there was no beginning work in process inventory and the ending work in process inventory is 50 per
cent complete as to conversion costs, the number of equivalent units as to conversion costs would be
A. the same as the units completed.
B. the same as the units placed in process.
C. less than the units completed.
D. less than the units placed in process.
AACSB: Analytical
Difficulty: Medium
process costing
7. Which of the following represents the production units used to calculate equivalent units under the weighted average
method?
A. Work to date on ending work in process + units started and completed.
B. All units completed + work to date on ending work in process.
C. Work to complete beginning work in process + work to date on ending work in process.
D. Work to complete beginning work in process + units completed – work done on ending work in process.
AACSB: Reflective
Difficulty: Easy
process costing
8. Rebex Chemical Company manufactures Compound 2 in two sequential departments. On June 1, Department 2 had
3000 units, which were 50 per cent complete as to conversion cost. During June, 15 000 units were completed and
transferred from Department 1. On June 30, Department 2 had 4000 units, which were 20 per cent complete as to
conversion costs. How many units were completed and transferred from Department 2 during the month of June?
A. 11 000
B. 12 500 3,000 + 15,000 - 4,000 = 14,000
C. 14 000
D. 15 700
AACSB: Analytical
Difficulty: Medium
process costing
9. Softcloth Textile Pty Ltd manufactures a variety of fabrics. The Weaving Department had 1000 units in work in process
on April 1, which were 20 per cent complete as to conversion costs. During April, 8000 units were completed and
transferred. On April 30, 4000 units remained in work in process 50 per cent complete as to conversion costs. Using the
weighted average method process costing, calculate the equivalent units of conversion for the month of April.
A. 12 000
B. 9000
C. 9800
D. 10 000
AACSB: Analytical
Difficulty: Medium
process costing
10. Softcloth Textile Pty Ltd manufactures a variety of fabrics. The Weaving Department had 1000 units in work in process
on April 1, which were 20 per cent complete as to conversion costs. During April, 8000 units were completed and
transferred. On April 30, 4000 units remained in work in process 50 per cent complete as to conversion costs. Using the
FIFO method of process costing, calculate the equivalent units of conversion for the month of April.
A. 9000
B. 9800 8,000 + 4,000*50% = 10,000
C. 10 000
D. 12 000
AACSB: Analytical
Difficulty: Medium
Learning Objective: 5.03 Assign total production costs for a department to completed units and WIP inventory using the FIFO method of process costing
11. What is the inventory formula that shows the physical flow of production units during a given month, under the
weighted average method?
A. Physical units in beginning work in process + units started – units completed and transferred out = units in ending work
in process.
B. Units in beginning work in process + units completed and transferred out + units started = units in ending work in
process.
C. Units started + units completed and transferred out + units in ending work in process = units in beginning work in
process.
D. Units in beginning work in process – units started + units completed and transferred out = units in ending work in
process.
AACSB: Reflective
Difficulty: Easy
process costing
12. The major difference between weighted average and FIFO is

A. how completed and transferred units are treated.
B. how ending inventory is treated.
C. how beginning inventory is treated.
D. how current period costs are treated.
AACSB: Reflective
Difficulty: Easy
13. A company starts work on 1000 physical units and completes 75 per cent of conversion activity. The costs are $1500
for conversion and $5000 for direct material. What is the cost per equivalent unit for conversion?
A. $1.00 per unit
B. $1.50 per unit
Cost per equivalent unit = 1500 / (1000*75%) = 2.00 per unit
C. $2.50 per unit
D. $2.00 per unit
AACSB: Analytical
Difficulty: Easy
process costing
14. A company starts work on 1000 physical units and completes 75 per cent of conversion activity. The costs are $1500
for conversion and $5000 for direct material. What is the cost per equivalent unit for direct material?
A. $10.00 per unit
B. $5.00 per unit Cost per unit for direct material = 5000 / 1000 = 5.00 per unit
C. $6.00 per unit
D. $6.67 per unit
AACSB: Analytical
Difficulty: Easy
process costing
15.
If the FIFO method is used, the cost of beginning work in process should be included in:
Unit Cost Cost of units transferred out
A.
No Yes
B.
No No
C.
Yes No
D.
Yes Yes
AACSB: Reflective
Difficulty: Easy
16.
Which of the following are needed to calculate ending work in process under process cosing?
Unit cost Equivalent units Cost in beginning work in process
A.
No No Yes
B.
Yes Yes No
C.
Yes Yes Yes
D.
Yes No No
AACSB: Reflective
Difficulty: Easy
process costing
17.
Given the following information, use the weighted average method to calculate cost per equivalent unit for the following materials.
A. $0.427
Total cost = Beginning WIP + Started in May = 11,000 + 36,000 = 47,000
B. $0.4235
Total equivalent = Units completed + Ending WIP = 85,000 + 25,000 = 110,000
C. $0.55 Cost per equivalent unit = 47,000 / 110,000 = 0.427
D. $0.327
AACSB: Analytical
Difficulty: Easy
process costing
18. Equivalent unit calculations are necessary to allocate manufacturing costs between:
A. cost of goods manufactured and ending work in process.
B. beginning work in process and units completed.
C. cost of goods manufactured and beginning work in process.
D. cost of goods manufactured and cost of goods sold.
AACSB: Reflective
Difficulty: Easy
process costing
19. The FIFO method is a more accurate method than weighted average because:
A. it does not require the calculation of equivalent units.
B. the costs of current period are not combined with the costs of the prior period.
C. it considers prior period costs during the current period.
D. it must be computerised in order to obtain accurate calculations.
AACSB: Reflective
Difficulty: Easy
20.
Costs are accumulated by a responsibility centre for control purposes when using:
Job order costing Process costing
A.
Yes Yes
B.
Yes No
C.
No Yes
D.
Costs are irrelevant for control purposes
AACSB: Reflective
Difficulty: Medium
Learning Objective: 5.06 Recognise and explain important issues that influence the design of process costing and operation costing, including the use of
predetermined overhead and conversion costs and standard costs; determining the degree of completion; and the relevance of process costing for
responsibility accounting and for service firms
21. In both job and process costing, the journal entry to record predetermined overhead is.
A. debit work in process and credit raw materials inventory, salaries payable and manufacturing overhead.
B. debit work in process and credit manufacturing overhead applied.
C. debit manufacturing overhead and credit work in process and raw materials inventory.
D. debit manufacturing overhead and credit work in process inventory.
AACSB: Reflective
Difficulty: Easy
22. In both job and process costing, the journal entry to record completed goods is.
A. debit work in process and credit manufacturing overhead.
B. credit finished goods inventory and debit cost of goods sold.
C. debit finished goods inventory and credit work in process.
D. debit work in process inventory and credit finished goods inventory.
AACSB: Reflective
Difficulty: Easy
23. In both job and process costing, the journal entry to record cost of goods sold is.
A. debit finished goods inventory and credit cost of goods sold.
B. debit finished goods inventory and credit work in process.
C. debit cost of goods sold and credit work in process.
D. debit cost of goods sold and credit finished goods inventory.
AACSB: Reflective
Difficulty: Easy
24. Which of the following statements about operation costing is true?

i. Conversion costs are accumulated by department.
ii. Direct material costs are accumulated by batch.
iii. It is a hybrid product costing system.
A. i, ii and iii
B. ii and iii
C. i and iii
D. i and ii
AACSB: Reflective
Difficulty: Easy
Learning Objective: 5.05 Assign total production costs for a department to completed units and WIP inventory under a common hybrid costing system
called ‘operation costing'
25.
South River Chemicals Pty Ltd manufactures a product called Zybek. Direct materials are added at the beginning of the process and
conversion activity occurs uniformly throughout the process. The following data pertains to the month of May.
Using the weighted average method of process costing, calculate the equivalent units of direct materials and conversion costs for the
month of May.
68+7 = 75
A. DM 75 000; CC 69 400 68+7*0.2 = 69.4
B. DM 75 000; CC 60 400
C. DM 60 000; CC 60 400
D. DM 68 000; CC 69 400
AACSB: Analytical
Difficulty: Medium
process costing
26.
conversion activity occurs uniformly throughout the process. The following data pertain to the month of May.
Using the FIFO method of process costing, calculate the equivalent units of direct materials and conversion activity for the month of
May.
A. DM 75 000; CC 69 400 0+68-15+7 = 60

B. DM 75 000; CC 60 400
C. DM 60 000; CC 60 400 15*0.4+(68-15)+7*0.2 = 60.4
D. DM 68 000; CC 69 400
AACSB: Analytical
Difficulty: Medium
27.
South River Chemicals Pty Ltd manufactures a product called Zybek. Direct materials are added at the end of the process and
Using the weighted average method of process costing, calculate the equivalent units of direct materials and conversion costs for the
month of May.
68+7*0 = 68
A. DM 75 000; CC 69 400 68+7*0.2 = 69.4
B. DM 75 000; CC 60 400
C. DM 60 000; CC 60 400
D. DM 68 000; CC 69 400
AACSB: Analytical
Difficulty: Medium
process costing
28.
South River Chemicals Pty Ltd manufactures a product called Zybek. Direct materials are added at the end of the process and
Using the FIFO method of process costing, calculate the equivalent units of direct materials and conversion activity for the month of
May.
DM= 15+(68-15)+7*0 =68
A. DM 75 000; CC 69 400 CC= 15*0.4+(68-15)+7*0.2=60.4
B. DM 60 000; CC 60 400
C. DM 68 000; CC 69 400
AACSB: Analytical
Difficulty: Medium
29.
Healthy Flavour is a food processing company that makes a product called Health Nut soup in two processes—blending and
condensing. The output of the blending department is transferred to the condensing department. All materials are added at the
beginning of the blending process, and conversion activity occurs uniformly throughout both processes. The following data pertain to
the month of April in the blending department.
Using the FIFO method of process costing, calculate the equivalent units of direct materials for the month of April.
A. 60 000
B. 58 000
C. 55 000 0+45000+5000
D. 50 000
AACSB: Analytical
Difficulty: Easy
Learning Objective: 5.07 Calculate product costs and prepare journal entries to record the flow of costs in a process costing system with sequential
production departments
30.
Healthy Flavour is a food processing company that makes a product called Health Nut soup in two processes—blending and
condensing. The output of the blending department is transferred to the condensing department. All materials are added at the
beginning of the blending process, and conversion activity occurs uniformly throughout both processes. The following data pertain to
the month of April in the blending department.
Using the FIFO method of process costing, calculate the cost per equivalent unit of conversion activity for the month of April.
A. $0.5048 10000*0.7+45000+5000*0.9 = 16000

B. $0.4169
C. $0.4381
AACSB: Analytical
Difficulty: Medium
31. In which of the following ways is normal spoilage accounted for?

A. Expensed in the period in which it occurred
B. Included as part of the unit cost of output
C. Written off to cost of goods sold
D. Included in inventory valuation until year-end and then written off
AACSB: Reflective
Difficulty: Medium
Learning Objective: 5.04 Account for the costs of normal and abnormal spoilage under the weighted average method of process costing
32. In which of the following ways is abnormal spoilage accounted for?
A. Expensed in the period in which it occurred
B. Included as part of the unit cost of output
C. Written off to cost of goods sold
D. Included in inventory valuation until year-end and then written off
AACSB: Reflective
Difficulty: Easy
33.
The following data apply to Zilch Ltd in its mixing department for the month of April. All material is introduced at the start of the process
and conversion occurs evenly through the process. Spoilage occurred at the midpoint in the process.
Using the weighted average method, what are the equivalent units for conversion?
A. 85 000 65+15*1/3+10*0.5
B. 75 000
C. 77 000
D. 82 000
AACSB: Analytical
Difficulty: Medium
34. Abnormal spoilage costs assist management to

A. control costs.
B. control quality.
C. hold supervisors responsible.
AACSB: Reflective
Difficulty: Medium
35. Operational costing is appropriate where
i. there are different material inputs.
ii. there are common material inputs.
iii. processes are identical.
iv. different combinations of specific processes apply to different products.
A. i and ii
B. ii and iii
C. ii and iv
D. i and iv
AACSB: Reflective
Difficulty: Medium
36. Operation costing is appropriate for products with the following characteristics.
i. Repetitive mass production
ii. Individual products
iii. Large batches with repetitive processes
iv. Some unique features, some common features
A. i and iii
B. i and iv
C. ii and iii
D. iii and iv
AACSB: Reflective
Difficulty: Easy
37. Which of the following firms are more likely to use operational costing techniques?
i. Oil refineries
ii. Food processors
iii. Large scale clothing manufacturers
iv. Tourist operators
A. i and ii
B. ii and iii
C. i and iii
D. ii and iv
AACSB: Reflective
Difficulty: Medium
38. Inventory valuation in operation costing requires
A. direct materials and conversion costs being traced to processes.
B. direct material and conversion costs being traced to batches.
C. direct materials traced to batches and conversion costs traced to processes.
D. direct materials traced to processes and conversion costs traced to batches.
AACSB: Reflective
Difficulty: Easy
39. Which of the following statement/s is/are true?

A. Weighted average costs provide a better basis for cost control than FIFO costs.
B. Weighted average costs provide a better basis for performance evaluation than standard costs.
C. Cost per equivalent unit provides a measure of production efficiency.
D. Weighted average costs provide a better basis for cost control than FIFO costs AND cost per equivalent unit provides a
measure of production efficiency.
AACSB: Reflective
Difficulty: Easy
40. The technical term for costs moving between one department and the next in a multidepartment process is
A. transferred costs.
B. transferred out costs.
C. transferred in costs.
D. prior costs.
AACSB: Reflective
Difficulty: Easy
41. Which of the following inventory valuation method/s is/are less suited to cost control?
A. Weighted average costs
B. First in first out cost
C. Standard costs
D. Weighted average costs AND standard costs
AACSB: Reflective
Difficulty: Medium
42.
Process costing systems are suitable for firms that produce

i. homogeneous products.
ii. heterogeneous products.
iii. individual products.
iv. repetitive products.
A. i and iii
B. i and iv
C. ii and iv
D. i and ii
AACSB: Reflective
Difficulty: Easy
43. The establishment of predetermined conversion costs for operation costing requires which of the following.
i. Budgeted level of the cost driver
ii. Budgeted direct labour costs
iii. Budgeted manufacturing overhead costs
A. i
B. i and ii
C. i, ii and iii
D. i and iii
AACSB: Reflective
Difficulty: Easy
44. Assume material is added at the beginning of a process, and the beginning WIP inventory is 30 per cent complete as
to conversion costs. Using the FIFO method of costing, the total equivalent units for material for this process during this
period is equal to
A. units started this period in this process.
B. units started this period in this process plus 70 per cent of beginning inventory.
C. beginning inventory this period for the process.
D. units started this period in this process plus the beginning inventory.
AACSB: Reflective
Difficulty: Medium
45. Assume material is added at the beginning of a process, and the beginning WIP inventory is 30 per cent complete as
to conversion costs. Using the weighted average method of costing, the total equivalent units for material for this process
during this period is equal to
A. units started this period in this process.
B. units started this period in this process plus 70 per cent of beginning inventory.
C. beginning inventory this period for the process.
D. units started this period in this process plus the beginning inventory.
AACSB: Reflective
Difficulty: Medium
46. In a process costing system the cost of abnormal spoilage should be:
A. prorated between units transferred out and ending inventory.
B. included in the cost of units transferred out.
C. treated as a loss in the period incurred.
D. ignored.
AACSB: Reflective
Difficulty: Easy
47. For a firm, which produces its product through two processes, the costs in opening work in process for Process 2 are
best described as
A. prior process costs.
B. transferred in costs.
C. prior period costs.
D. conversion costs.
AACSB: Reflective
Difficulty: Easy
48. For a firm, which produces its product through two processes, the costs transferred into Process 2 from Process 1 can
be described as
A. prior process costs.
B. transferred in costs.
C. prior period costs.
D. prior process costs AND transferred in costs.
AACSB: Reflective
Difficulty: Easy
49. Raphael's Refining uses a weighted average process costing system. For a particular period, its opening inventory
consisted of 100 items (60 per cent complete as to conversion costs) whose costs were $1600 made up of material $300
and conversion cost $1300. During the month, 1000 items were started and 950 were completed. Ending inventory of WIP
was one-third complete. There was no spoilage. Costs placed in process during the month were materials $1600 and
conversion costs $13 700. Materials are added at the halfway point. What is the amount of cost that would be allocated to
goods completed in the period? 950 1 950 1 950
A. $14 615 0 0 0.3 50
150
B. $16 513
C. $16 900 300 1300
D. $16 150
13700
1600
15
2
AACSB: Analytical 2*950+15*950 = 16150
Difficulty: Hard
process costing
50.
Raphael's Refining uses a FIFO process costing system. For a particular period, its opening inventory consisted of 100 items (60 per
cent complete as to conversion costs) whose costs were $1600 made up of material $300 and conversion cost $1300. During the
month, 1000 items were started and 950 were completed. Ending inventory of WIP was one-third complete. There was no spoilage.
Costs placed in process during the month were materials $1785 and conversion costs $13 865. Materials are added at the halfway
point. What is the amount of cost that would be allocated to goods completed in the period?
0 0 0.4 40
100
1 850 1 850
A. $16 513 850
0 0 1/3 50
B. $16 900 150
1785 13865
C. $16 150 14.75
2.1
D. $14 913 2.1*850 14.75*850=12537.5
300 1300
AACSB: Analytical
Difficulty: Hard
51.
conversion activity occurs uniformly throughout the process. The following selected data pertain to the month of May.
What are the unit costs for the period (rounded to two decimal places) assuming weighted average costing?
DM=(16500+72000)/12000
A. DM $7.38; CC $17.03
B. DM $6; CC $14.78
CC=(24750+162630)/11000
C. DM $7.38; CC $14.78
D. DM $6; CC $17.03
AACSB: Analytical
Difficulty: Medium
52.
What are the unit costs for the period (rounded to two decimal places) assuming FIFO costing?
A. DM $7.25; CC $15.62
B. DM $5.90; CC $13.55
C. DM $5.90; CC $15.62
AACSB: Analytical
Difficulty: Medium
53. Collins Chemicals produces a compound through two processes. For its second process for a particular period,
Collins had an opening WIP inventory of 100 units halfway through the process; 2300 units completed in the period; and a
closing WIP inventory of 400 units three-quarters of the way through the process. Materials are added at the beginning of
the process and conversion costs are incurred uniformly. Calculate the equivalent units for transferred in costs for the
period if the firm used weighted average costing.
A. 2300 1
B. 2500 2300
C. 2600
400 1
D. 2700
AACSB: Reflective
Difficulty: Medium
54. Collins Chemicals produces a compound through two processes. For its second process for a particular period,
Collins had an opening WIP inventory of 100 units halfway through the process; 2300 units completed in the period; and a
closing WIP inventory of 400 units three-quarters of the way through the process. Materials are added at the beginning of
the process and conversion costs are incurred uniformly. Calculate the equivalent units for transferred in costs for the
period if the firm used FIFO costing.
A. 2300 100 0
B. 2400 2200 1
C. 2500
D. 2600 400 1
AACSB: Reflective
Difficulty: Medium
55. Heara Ltd manufactures metal sheets and uses the weighted average method process costing. On 1 May the Rolling
Department had 2000 units work in progress, which were 20 per cent completed as to conversion costs. During May 10
000 units were completed and transferred out. The remaining work in progress on 30 May was 50 per cent complete in
terms of conversion rate. If the equivalent unit is 12 000 units, what is the 30 May work in progress?
A. 4000 units
B. 2000 units 10000+X*0.5= 12000
C. 8000 units
X=4000
D. 5000 units
AACSB: Analytical
Difficulty: Hard
process costing
56. Heara Ltd manufactures metal sheets, and uses the weighted average method process costing. On 1 May the Rolling
Department had 3000 units work in progress, which were 50 per cent completed as to conversion costs. During May 8000
units were completed and transferred out. The remaining work in progress on 30 May was 2000 units, at 50 per cent
complete in terms of conversion rate. What is the equivalent unit of conversion?
A. 1000 units
B. 2000 units 8000+2000*0.5
C. 7500 units
D. 9000 units
AACSB: Analytical
Difficulty: Medium
process costing
57. Heara Ltd manufactures metal sheets, and uses the FIFO process costing. On 1 May the Rolling Department had
3000 units work in progress, which were 50 per cent completed as to conversion costs. During May 8000 units were
completed and transferred out. The remaining work in progress on 30 May was 2000 units at 50 per cent complete in
terms of conversion rate. What is the equivalent unit of conversion?
A. 2000 units 3000*0.5+5000+2000*0.5
B. 7500 units
C. 9000 units
D. 10 500 units
AACSB: Analytical
Difficulty: Medium
process costing
58. The difference in cost per equivalent units between the weighted average method and the FIFO method
A. will be higher if there is no beginning work in process.
B. will be higher if there is no ending work in process.
C. will disappear if there is no beginning work in process.
D. will be lower if there is no ending work in process.
AACSB: Reflective
Difficulty: Easy
59. Latta Coffee Ltd has two main processes: roasting and packaging. Roasted coffee beans are transferred to the
packaging department before the final product is shipped to customers. The following information for the month of April for
the Roasting department is available: total cost of goods completed and transferred from Roasting department to
Packaging department is $25 000; ending work in progress in April is $1000; number of equivalent units of conversion is
5000 units.
Which of the following journal entries is appropriate at the end of April?
A. Debit Packaging Department $26 000, Credit Roasting Department $26 000 25000
B. Debit Packaging Department $25 000, Credit Roasting Department $25 000
C. Debit Roasting Department $26 000, Credit Packaging Department $26 000
D. Debit Roasting Department $25 000, Credit Packaging Department $25 000 1000`
AACSB: Reflective
Difficulty: Easy
process costing
60. Eldervale Winery produces premium wine in the Hunter Valley. Jasmine Droll, the vineyard manager who is
responsible for overseeing the grape harvest, ignores company guidelines and decides to hire some inexperienced
harvest workers. As a result a lot of good grapes are wasted. For the purpose of product costing, the losses associated
with this grape wastage should be treated as
A. unethical spoilage.
B. abnormal spoilage.
C. normal spoilage.
D. overhead labour costs.
AACSB: Reflective
Difficulty: Medium
61. Eldervale Winery produces premium wine in the Hunter Valley. During the bottling process, small amount of spillage is
often unavoidable. How should the costs associated with the spillage be treated?
A. It should be included in the work in progress.
B. It should be expensed in the period the cost is incurred.
C. It should be ignored in the work in progress account and reported only in the internal production reports.
D. It should be expensed immediately under the FIFO method, but included in the work in progress in the weighted
average method.
AACSB: Reflective
Difficulty: Medium
62. Owl's Hours produces herbal tea and prides itself in having one of the largest ranges of herbal teas in Australia. It sells
more than 50 varieties of tea leaves with a wide range of prices (depending on where the tea leaves are grown). The
production processes of its products is simple, but vary depending on whether the tea is sold as loose leaves (which
requires packing tea leaves in various sized boxes) or tea bags (which requires additional process in packaging tea in
specially designed tea bags). Owl's Hours decides to use an operation costing system. This decision is
A. correct, because the company uses a large variety of tea leaves as direct materials and yet has simple production
processes.
B. correct, because the company uses a large variety of tea leaves as direct materials and the different products require
different sequences of processes.
C. incorrect, because the different production lines require the tea leaves to be packaged in very distinctive methods.
D. incorrect, because the company has a very homogenous product – it produces and sells only tea.
AACSB: Reflective
Difficulty: Medium
63. Banana Shirts produces t-shirts in large batches. Most of its t-shirts are made of regular cotton, although some are
made from ethically produced cotton. The manufacturing process is relatively simple; most t-shirts go through similar
processes; the main difference is whether the t-shirt requires embroidery or printing. The most appropriate costing system
for Banana Shirts is
A. process costing system.
B. job costing system.
C. operation costing systems.
D. both job costing system and operation costing system are appropriate.
AACSB: Reflective
Difficulty: Medium
64. Which of the following is not required when calculating the equivalent units for conversion?
i Percentage of conversion for ending work in progress
ii Percentage of conversion for physical units that have been completed and transferred out of the department
iii. Cost of direct materials
A. i only
B. i and ii
C. i, ii and iii
D. i and iii
AACSB: Reflective
Difficulty: Medium
65. Management uses predetermined overhead costs when costs and cost drivers are
A. reliable.
B. predictable.
C. unstable.
D. stable.
AACSB: Reflective
Difficulty: Easy
66. Process costing is only suitable for products that are

A. heterogeneous.
B. homogeneous.
C. harmonious.
AACSB: Reflective
Difficulty: Medium
67. Standard costs are based on estimates of cost of materials, labour and overheads. Standard costs are also known as
A. actual costs.
B. forecasted costs.
C. expected costs.
D. budgeted costs.
AACSB: Reflective
Difficulty: Easy
68. At Hilltop Dairy Producers Pty Ltd, an employee ignored the standard sterilising procedures before beginning the new
batch of low fat milk causing the batch to curdle. This would be regarded as
A. spoilage.
B. normal spoilage.
C. expected spoilage.
D. abnormal spoilage.
AACSB: Reflective
Difficulty: Easy
69. When accounting for the costs of abnormal spoilage at the end of the period, the costs of abnormal spoilage are
A. included as part of the cost of unit completed.
B. expensed as loss on abnormal spoilage in the current period.
C. included in the cost of finished goods.
D. expensed as closing work in process in the current period.
AACSB: Reflective
Difficulty: Medium
70. Which of the following product features would best suit a hybrid costing system?
A. Identical and unique features
B. Identical and very similar features
C. Some unique and common features
D. Some unique and individual features
AACSB: Reflective
Difficulty: Medium
71. Briefly explain the four steps in process costing with work in process inventories.
Step one Analyse the physical flow of units.
Step two Calculate the equivalent units (for direct material and conversion).
Step three Calculate the unit costs (that is, the cost per equivalent unit for direct material and conversion).
Step four Analyse the total costs (to determine the cost to be removed from work in process and transferred either to the next
production department or to finished goods).
Difficulty: Easy
72. Describe the weighted average method used in process costing and explain how the unit costs are calculated.
The weighted average method is a process costing method that averages the cost of opening WIP inventory and current
production costs to determine the cost of completed production and closing WIP.
The cost per equivalent unit for both direct material and conversion is calculated by dividing the total direct material cost
by the total equivalent units
Difficulty: Medium
process costing
73.
Explain the term 'normal spoilage' and why management is unable to eliminate this production cost.
In almost all businesses, mistakes are made, defective outputs are produced and resources are wasted. The cost of these
defective products and wasted resources that cannot be recovered by rework or recycling is called spoilage.
Normal spoilage is the spoilage that is considered to be inherent in the production process and that occurs even under
efficient operating conditions. This spoilage is a necessary part of the production process. It is unavoidable and therefore
its cost is treated as part of the cost of the good units completed and transferred out.
Difficulty: Medium
74. For a manufacturer that produces large batches of automotive parts, which type of costing system would you
recommend? Justify your answer.
Operation costing
Some businesses produce a range of related products where the conversion activities may be very similar or identical across the firm's
product lines, even though the direct materials may differ significantly. This type of production is described as batch manufacturing
processes, as individual product lines are produced in large batches, each requiring a specific combination of direct materials and a
specific sequence of production processes.
The repetitive processes used by these large-scale batch manufacturers are well suited to process costing, even where product lines
require different sequences of processes. However, process costing is not appropriate, as each batch uses different materials, which
have different costs. Businesses that use batch manufacturing processes could use a job costing system and carefully assign costs to
each production batch, but, as the production processes are repetitive, this level of detail is not required. The conversion costs of each
process—that is, the direct labour and manufacturing overhead costs of each process—will be the same for each unit processed, but
the combination of processes required to produce each product may differ. The materials costs of each product may also differ.
A better solution is to use a hybrid costing system known as operation costing, which:
assigns direct material costs to individual batches—a job costing approach
accumulates conversion costs by department (or operation or process), which are allocated to all units passing through the department
—a process costing approach.
AACSB: Analytic
Difficulty: Hard
75. Discuss why management would elect to use predetermined overhead and conversion costs.
Predetermined rates smooth out the effects of fluctuations in actual costs and cost driver volumes from one month to the
next. Process costing and operation costing environments involve stable, repetitive production processes. Labour and
overhead costs and cost driver volumes may not fluctuate much over time and, under these circumstances, actual costs
may be used instead of predetermined costs. However, where costs and cost driver volumes are unstable, predetermined
overhead (and sometimes conversion) costs are preferred.
Difficulty: Medium
76. In process costing, equivalent units are the same under both the weighted average method and the FIFO method.
FALSE
AACSB: Reflective
Difficulty: Easy
77. Operation costing is just another name for process costing as both systems trace all production costs to processes or
departments.
FALSE
AACSB: Reflective
Difficulty: Easy
78. Abnormal spoilage is identified to assist managers in tracking the costs of wasted resources.
TRUE
AACSB: Reflective
Difficulty: Easy
79. A standard cost is a budgeted cost per unit.

TRUE
AACSB: Reflective
Difficulty: Easy
80. To calculate equivalent units, multiply the partially completed physical units in the process by the percentage of
completion.
TRUE
AACSB: Reflective
Difficulty: Easy
81. Process costing can be used in service businesses if the service is routine and repetitive.
TRUE
AACSB: Reflective
Difficulty: Easy
82. Where a process has two departments [A and B], the first new debit entry in the work in process inventory account for
Department B in any period will be transferred-in costs.
TRUE
AACSB: Reflective
Difficulty: Easy
83. Conversion costs are generally added at specific points throughout a process.
FALSE
AACSB: Reflective
Difficulty: Easy
84. Normal spoilage can always be avoided by a more efficient approach to production.
FALSE
AACSB: Reflective
Difficulty: Easy
85. The departmental production report replaces the job cost sheet used by production departments.
TRUE
AACSB: Reflective
Difficulty: Easy
process costing
86. The departmental production report summarises the flow of production quantities through the department plus the
amount of production costs transferred in from the department's work in process inventory account during the period.
FALSE
AACSB: Reflective
Difficulty: Medium
process costing
87. Process costing and operation costing are consistent with the concepts of responsibility accounting.
TRUE
AACSB: Reflective
Difficulty: Easy
Category # of
Que
stion
s
AACSB: Analytic 1
Difficulty: Easy 44
Difficulty: Hard 4
Learning Objective: 5.01 Describe the principles of process costing where work in process (WIP) inventories are involved 15
Learning Objective: 5.02 Assign total production costs for a department to completed units and WIP inventory using the weig 22
hted average method of process costing
Learning Objective: 5.03 Assign total production costs for a department to completed units and WIP inventory using the FIFO 11
method of process costing
Learning Objective: 5.04 Account for the costs of normal and abnormal spoilage under the weighted average method of proc 15
ess costing
Learning Objective: 5.05 Assign total production costs for a department to completed units and WIP inventory under a comm 10
on hybrid costing system called ‘operation costing'
Learning Objective: 5.06 Recognise and explain important issues that influence the design of process costing and operation 7
costing, including the use of predetermined overhead and conversion costs and standard costs; determining the degree of co
mpletion; and the relevance of process costing for responsibility accounting and for service firms
Learning Objective: 5.07 Calculate product costs and prepare journal entries to record the flow of costs in a process costing s 8
ystem with sequential production departments

A. Traditional costing systems tend to over cost high-volume product lines.
B. Traditional costing systems tend to create a product cost distortion problem.
C. In traditional costing, the high-volume products are often subsidising the low-volume products.
D. Traditional product costing systems recognise a range of non-volume-based cost drivers.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 8.01 Explain the problems associated with traditional costing systems
A. Under traditional costing, product cost distortions will be relatively insignificant if overhead costs are a small proportion
of product cost.
B. Activity-based costing will significantly improve the product cost accuracy where overhead costs are a small proportion
of total costs.
C. Activity-based costing will significantly improve product cost accuracy where there is significant product diversity.
D. Upstream and downstream costs are often a significant part of a product's costs.
AACSB: Reflective
Difficulty: Easy
3. Which of the following statements regarding activity-based costing (ABC) is false?
A. ABC can be used to measure the cost of cost objects.
B. ABC can be used to analyse the profitability of customers.
C. ABC is not an appropriate tool for analysing non-manufacturing costs.
D. ABC evolved as a response to problems with traditional costing systems.
AACSB: Reflective
Difficulty: Easy
4. Which of the following can signal the need for a new product costing system?
A. Line managers do not believe reported product costs.
B. Complex products have high reported profitability while more basic high-volume products show small margins or even
losses.
C. Overhead rates are high and increasing.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 8.02 Recognise common indicators of an outdated product costing system
5. Which of the following can signal the need for a new product costing system?
A. Bids won and lost are difficult to explain.
B. Competitors' high-volume products are priced unreasonably low.
C. Our low-volume products are priced low compared to competitors.
AACSB: Reflective
Difficulty: Easy
6. A resource driver is:
A. a factor that causes a cost.
B. a unit of work performed within the organisation.
C. used to estimate the cost of resources consumed by an activity.
D. a factor that causes a cost AND is used to estimate the cost of resources consumed by an activity.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 8.03 Describe both the costing view and the activity-management view of the activity-based costing (ABC) model
7. A cost driver:
A. is a factor that causes a cost.
B. may also be a resource driver.
C. is a unit of work performed within the organisation.
D. is a factor that causes a cost AND may also be a resource driver.
AACSB: Reflective
Difficulty: Easy
8. Activity management:
A. is another name for activity-based costing.
B. is the same as the comprehensive activity-based product costing system.
C. uses activity information to monitor and control what is happening in a business.
AACSB: Reflective
Difficulty: Easy
9. Which of the following statements is/are true?
i. Activity management requires analysis of overhead activities only.
ii. Activity management requires analysis of all activities.
iii. Activity management requires identification of detailed activities, rather than broad activities.
A. iii
B. ii
C. i and iii
D. ii and iii
AACSB: Reflective
Difficulty: Easy
10. Characteristics of activity-based costing include:
A. a greater number of overhead cost application bases compared to traditional costing systems.
B. the overhead cost application bases are likely to be more accurate cost drivers than would be the case in traditional
costing systems.
C. the simplicity of the system makes it easy to implement.
D. a greater number of overhead cost application bases compared to traditional costing systems AND the overhead cost
application bases are likely to be more accurate cost drivers than would be the case in traditional costing systems.
AACSB: Reflective
Difficulty: Easy
11. Companies are likely to benefit from activity-based costing systems if:
A. they have wide variations in the volume of individual production runs and setups are costly.
B. they have a narrow range of products with similar volumes and setups are costly.
C. they have a narrow range of products and setups are not costly.
AACSB: Reflective
Difficulty: Medium
12. Consider the following statements. Which of the statements is true?
A. As the activity-based system accuracy increases, the cost of inferior decisions based on distorted product costs
decreases.
B. As the activity-based system accuracy increases, the costs of implementing and operating the system increase.
C. As the activity-based system accuracy increases, the total cost from inferior decisions and the cost to implement and
operate the system decrease.
D. As the activity-based system accuracy increases, the cost of inferior decisions based on distorted product costs
decreases AND as the activity-based system accuracy increases, the costs of implementing and operating the system
increase.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 8.07 Recognise which types of organisations can gain the greatest benefits from activity-based costing
13. Activity-based costing has most to offer where:
A. overhead is high and volume driven.
B. overhead is high and non-volume driven.
C. overhead is low and non-volume driven.
D. direct labour is a major proportion of total costs.
AACSB: Reflective
Difficulty: Easy
14. Consider the following statements. Traditional costing systems can produce distorted product costs if:
i. overheads are driven by non-volume factors.
ii. overheads are a minor part of the product cost.
iii. it fails to recognise non-manufacturing costs as product costs.
Which of the statements is true?
A. i
B. ii
C. iii
D. i and iii
AACSB: Reflective
Difficulty: Medium
15. Consider the following statements. Activity-based costing is more difficult in a service business because:
i. service businesses have a low proportion of overhead in their total costs.
ii. service businesses tend to have a higher level of facility costs than most manufacturers.
iii. it is often difficult to identify service activities because they are non-repetitive.
Which of the above statements is true?
A. i
B. ii
C. ii and iii
D. i, ii and iii
AACSB: Reflective
Difficulty: Easy
Learning Objective: 8.12 Describe the difficulties of implementing activity-based costing in service organisations
16. Consider the following statements.
i. The optimal product costing system is the most accurate system.
ii. The optimal product costing system is the one that minimises the cost of poor decisions from inferior information.
iii. The optimal product costing system is the most expensive one.
Which of the statements is true?
A. i
B. ii
C. iii
AACSB: Reflective
Difficulty: Medium
17. In a simple activity-based product costing system:
A. direct material, direct labour, manufacturing overhead and non-manufacturing overhead are assigned to products on an
activity basis.
B. direct material is traced using a traditional approach, while direct labour, manufacturing overhead and non-
manufacturing overhead are assigned to products on an activity basis.
C. direct material and direct labour are traced using a traditional approach, manufacturing overhead is assigned on an
activity basis and non-manufacturing overhead is expensed as it is incurred.
D. direct material, direct labour and manufacturing overhead are traced using a traditional approach, and non-
manufacturing overhead is assigned on an activity basis.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 8.04 Describe the different approaches to activity-based costing, which include different subsets of costs
18. Calculate the cost per unit for setup for one run of 10 000 units if setup labour is $20 per hour and 10 hours are
required to set up.
A. $0.04 per unit. Set up cost =10,000 / 10 = 1,000
B. $0.06 per unit. --> Cost per unit = 20/ 1,000 = 0.02
C. $2.00 per unit.
D. $0.02 per unit.
AACSB: Analytical
Difficulty: Easy
Learning Objective: 8.05 Use the activity-based costing model to measure the overhead costs of activities and assign these activity costs to products
19. Calculate the activity cost per unit of activity driver if the activity cost is $3500, the activity driver is the number of
batches and the total quantity of the activity driver is 1750 batches.
A. $3.00 per batch.
B. $1.50 per batch. =3,500 / 1,750 = 2.00 per batch
C. $2.00 per batch.
D. $2.50 per batch.
AACSB: Analytical
Difficulty: Easy
20. Calculate the cost of processing one sales order if the total activity cost is $1 720 000 p.a., the activity driver is the
number of orders received and the annual quantity of the activity driver is
43 000 orders.
A. $20 per order. =1,720,000 / 43,000 = 40 per order
B. $25 per order.
C. $40 per order.
D. $50 per order.
AACSB: Analytical
Difficulty: Easy
21. An activity cost pool:
A. is a combination of a number of activities.
B. must be made up of activities at the same level.
C. can only be used at the product level.
D. is a combination of a number of activities AND must be made up of activities at the same level.
AACSB: Reflective
Difficulty: Easy
22.
Quality Carvings manufactures furniture. They have decided to develop an activity-based costing system. Shown below is each activity,
its cost and the activity driver used to assign these costs to products.

Under an activity-based costing system, what is the activity cost per unit of activity driver for processing orders?

A. $93.33 =37,800 / 1,500 = 25.20
B. $25.20
C. $25.40
D. $62.00

AACSB: Analytical
Difficulty: Easy
23.
Quality Carvings manufactures furniture. They have decided to develop an activity-based costing system. Shown below is each activity,
its cost and the activity driver used to assign these costs to products.

Under an activity-based costing system, what is the activity cost per unit of activity driver for making patterns?

=140,000 / 8,000 = 17.50
A. $4.73
B. $10.00
C. $17.50
D. $21.50

AACSB: Analytical
Difficulty: Easy
24.
Summer Ice Pty Ltd is a manufacturer of a range of ice cream products. The following is a list of activities, costs and quantities of
activity drivers for a number of activities that occur in the factory.

Under an activity-based costing system, what is the activity cost per unit of activity driver for measuring ingredients?

A. $12.90 =7,000 / 500 = 14.00
B. $15.00
C. $13.80
D. $14.00

AACSB: Analytical
Difficulty: Easy
25.
Summer Ice Pty Ltd is a manufacturer of a range of ice cream products. The following is a list of activities, costs and quantities of
activity drivers for a number of activities that occur in the factory.

Under an activity-based system, what is the activity cost per unit of activity division for packing into containers?

A. $0.06
B. $0.05 =24,000 / 600,000 = 0.04
C. $0.02
D. $0.04

AACSB: Analytical
Difficulty: Easy
26. In an activity-based costing system, a bill of activities will include:
A. a charge for allocated overhead.
B. the activity cost per unit of activity driver.
C. the quantity of activity consumed.
D. the activity cost per unit of activity driver AND the quantity of activity consumed.
AACSB: Reflective
Difficulty: Medium
27. Which of the following is not a useful broad category of cost classification in activity-based costing?
A. The unit level activity.
B. The batch level activity.
C. The facility level activity.
D. The differential level activity.
AACSB: Reflective
Difficulty: Easy
28. Which of the following are examples of batch level activities?
A. Machine setup.
B. Materials handling.
C. Machining.
D. Machine setup AND materials handling.
AACSB: Reflective
Difficulty: Easy
29. Consider the following statements regarding traditional costing systems.
i. All overhead costs are assumed to be driven by volume of production.
ii. All product costs are direct costs.
iii. Traditional costing systems tend to distort product costs when numerous products are made that vary in their
production requirements.
Which statement/s is/are true?
A. i
B. ii and iii
C. i and iii
D. ii
AACSB: Reflective
Difficulty: Easy
30. Consider the following statements.
i. Product diversity creates problems in product costing because diverse products tend to utilise productive activities in
very different ways.
ii. Overhead costs that are not incurred at the unit level create product-costing problems because they do not vary with
measures such as direct labour hours or machine hours.
iii. Product diversity exists when a single product, such as pens, are made in different colours.
Which of the above statement/s is/are true?
A. i
B. ii
C. i and ii
D. i and iii
AACSB: Reflective
Difficulty: Medium
31.
HiTech Products manufactures three types of CD players: Cheap, Econo and Deluxe. HiTech uses an activity-based product costing
system. The company has identified five activities. Each activity, its cost and related activity driver are identified below:

The following information pertains to each product line of CD players:

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

A. $141.00
B. $272.00
C. $164.00
D. $228.24

AACSB: Analytical
Difficulty: Hard
32.
HiTech Products manufactures three types of CD players: Cheap, Econo and Deluxe. HiTech uses an activity-based product costing
system. The company has identified five activities. Each activity, its cost and related activity driver are identified below:
The following information pertains to each product line of CD players:

Under an activity-based product costing system, what is the cost per unit of Econo (to the nearest dollar)?

A. $272
B. $282
C. $228
D. $320

AACSB: Analytical
Difficulty: Hard
33.
The Pinewood Furniture Company Pty Ltd plans to manufacture two lines of chairs in the coming year—lounge and patio. The company
is considering introducing an activity-based costing system. Given below are each activity, its cost and its related activity driver.

The level of activity for the year is:

Under an activity-based costing system, what is the activity cost per unit of activity driver for machine setups?

A. $5000 per setup.
B. $2500 per setup.
C. $1200 per setup.
D. $1667 per setup.

AACSB: Analytical
Difficulty: Easy
34.


Under an activity-based costing system, what is the activity cost per unit of activity driver for material handling?

A. $2.00 per part.
B. $16.67 per part.
C. $2.50 per part.
D. $5.00 per part.

AACSB: Analytical
Difficulty: Easy
35.


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

A. $4.80 per part
B. $24 per direct labour hour
C. $10 per part
D. $10 per direct labour hour

AACSB: Analytical
Difficulty: Easy
36.


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

A. $7.50 per direct labour hour.
B. $30.00 per direct labour hour.
C. $25.00 per unit.
D. $30.00 per unit.

AACSB: Analytical
Difficulty: Easy
37.


Under an activity-based costing system, what is the total cost of lounge chairs for the year?

A. $1 710 000
B. $1 410 000
C. $890 000
D. $1 150 000

AACSB: Analytical
Difficulty: Medium
38.


Under an activity-based costing system, what is the total cost of patio chairs for the year?

A. $1 150 000
B. $890 600
C. $1 710 000
D. $590 000

AACSB: Analytical
Difficulty: Medium
39. Traditional product costing systems result in inaccurate product costs when:
A. direct labour increases.
B. the proportion of direct labour and raw material increases.
C. product diversity increases.
D. the proportion of direct labour and raw material increases AND product diversity increases.
AACSB: Reflective
Difficulty: Medium
40. Which of the following statements is true? Indicators of problems with product cost systems exist when:
i. non-manufacturing costs that are product related become insignificant.
ii. the proportion of manufacturing overhead not driven by production volume increases.
iii. there is an increase in product diversity.
A. i
B. ii
C. iii
D. ii and iii
AACSB: Reflective
Difficulty: Easy
41. Which of the following statements, as indicators of product cost systems, are out of date?
i. Highly profitable products are difficult to make.
ii. Competitors' prices appear to be very low.
iii. The market easily absorbs price increases.
A. i
B. i and iii
C. ii and iii
D. i, ii and iii
AACSB: Reflective
Difficulty: Easy
42. The benefits arising from the introduction of activity-based costing are likely to be greater where:
i. overhead is a large proportion of total cost.
ii. implementation costs are not high due to the support of advanced IT systems.
iii. batches are of a similar size.
A. i and ii
B. i and iii
C. ii and iii
AACSB: Reflective
Difficulty: Medium
43. Which of the following are usually included in traditional cost systems?
i. Direct material is traced to products.
ii. Non-manufacturing costs are assigned to products.
iii. Manufacturing overhead is allocated using a production-volume-based cost driver.
A. i
B. ii
C. iii
D. i and iii
AACSB: Reflective
Difficulty: Easy
44. Which of the following are common production volume measures?
i. Direct labour hours.
ii. Machine hours.
iii. Direct material cost.
A. i and ii
B. ii and iii
C. i and iii
D. iii only
AACSB: Reflective
Difficulty: Easy
45. Recent developments in manufacturing and marketing have resulted in significant changes to cost manufacturing
structures. Which of the following statements is/are false?
i. The proportion of direct labour increases.
ii. The proportion of manufacturing overhead increases.
iii. Product diversity decreases.
iv. The proportion of non-volume-related manufacturing overheads increases.
A. i and ii
B. i and iii
C. ii and iii
D. iii and iv
AACSB: Reflective
Difficulty: Easy
46. Recent increases in downstream costs have occurred because of:
i. increased advertising and product promotion.
ii. increased customer servicing.
iii. increased competition.
iv. increases in product design.
A. i and ii
B. ii and iii
C. iii and iv
D. i, ii and iii
AACSB: Reflective
Difficulty: Easy
47. Which of the following are indicators of an outdated costing system?
i. Products which are difficult to make have high profit margins.
ii. Competitors prices appear unrealistically low.
iii. Customers are not deterred by price increases.
iv. A lot of time is spent on special product cost projects.
A. i, ii and iii
B. ii, iii and iv
C. i, iii and iv
D. i, ii, iii and iv
AACSB: Reflective
Difficulty: Easy
48. In which of the following may a traditional costing system result?
A. The product costs are distorted.
B. Complex products are under-costed.
C. Simple products are over-costed.
D. All the given answers.
AACSB: Reflective
Difficulty: Medium
49. One of the results of the inaccuracies arising from traditional costing systems may be:
A. overhead costs are overapplied.
B. overhead costs are underapplied.
C. actual overheads exceed overhead applied.
D. overhead costs are underapplied AND actual overheads exceed overhead applied.
AACSB: Reflective
Difficulty: Medium
50. Despite the obvious advantages of ABC, many firms are still reluctant to implement it. What are the reasons for this
reluctance?
i. Uncertainty about the benefits of ABC.
ii. The opinion that the current system serves all the firm's needs.
iii. Lack of resources to implement ABC.
A. i and ii
B. ii and iii
C. i and iii
D. i, ii and iii
AACSB: Reflective
Difficulty: Easy
Learning Objective: 8.08 Outline various design issues to be considered when implementing activity-based costing, including budgeted versus actual
costs, implementation of activity-based costing as a ‘project’ and the inclusion of other cost objects
i. Both traditional cost systems and ABC focus on resources supplied.
ii. Plant and equipment is an example of a committed resource under an ABC system.
iii. Committed resources always equal resources used.
A. i
B. ii
C. iii
D. ii and iii
AACSB: Reflective
Difficulty: Easy
Learning Objective: 8.09 Explain the implications of spare capacity for estimating the cost of activities
52. Behavioural issues may be important in implementing an ABC system. Which of the following are some of the
methods employed to minimise adverse outcomes?
i. Use a top down approach.
ii. Use a bottom up approach.
iii. Ensure all employees have a sense of ownership in the system.
A. i and ii
B. ii and iii
C. iii
D. i and iii
AACSB: Reflective
Difficulty: Easy
Learning Objective: 8.10 Appreciate the importance of 'behavioural issues' in implementing activity-based costing
53. Which of the following are limitations of ABC?
i. The system requires significantly more data.
ii. The system requires extensive updating if the product range changes.
iii. The inclusion of facility level costs greatly increases the accuracy of cost per unit.
A. i and ii
B. i and iii
C. i, ii and iii
AACSB: Reflective
Difficulty: Medium
Learning Objective: 8.08 Outline various design issues to be considered when implementing activity-based costing, including budgeted versus actual
costs, implementation of activity-based costing as a ‘project’ and the inclusion of other cost objects
54. Which of the following statements best completes this sentence: 'Activity-based costing'
A. asserts that cost behaviour can best be determined if the split between fixed and variable cost is ignored.
B. has replaced standard costing as the preferred method of allocating costs to products.
C. is based on allocating fixed overheads based on the elements that drive them.
D. emphasises the need to obtain a better understanding of the behaviour of overhead costs.
AACSB: Reflective
Difficulty: Medium
55. A cost driver is:
A. a collection of cost pools.
B. a cost-allocation base chosen arbitrarily.
C. any factor that caused costs to be incurred.
D. costs that behave in a similar manner.
AACSB: Reflective
Difficulty: Easy
56. Appropriate cost-driver identification depends on:
A. a cause-and-effect relationship existing between the cost driver and costs of the activity.
B. the number of cost pools used.
C. homogeneity of cost pools.
D. the number of products produced or services provided.
AACSB: Reflective
Difficulty: Easy
57. Volume-based measures may be used to apply overhead when:
A. production runs are of various sizes and overhead costs are directly proportional to the size of the run.
B. production runs are of various sizes but each run has a constant setup time.
C. purchasing costs are related to the number of purchase orders not the number of items bought.
D. material handling costs are driven by the number of materials issued to production, and components are used
differentially by different products.
AACSB: Reflective
Difficulty: Hard
58. Direct labour hours or direct labour dollars are suitable overhead allocation bases when:
A. overhead costs are insignificant.
B. direct labour details are readily available.
C. direct material costs are highly correlated with direct labour hours.
D. they have been used satisfactorily in the past.
AACSB: Reflective
Difficulty: Medium
59. Which of the following is not an indicator of a company whose costing system needs to be more accurate?
A. Competitors' prices seem unrealistically low.
B. Products that are difficult to make have low profit margin.
C. At the end of the year, there is a significant amount of overapplied overhead.
D. Customers are not deterred by a significant increase in prices.
AACSB: Reflective
Difficulty: Easy
60. Twista Manufacturing has the following activities and activity costs per year: Machining ($20 000); Forklifting ($10
000); machine setup ($32 000) and quality inspection ($40 000). The operation starts with setting up the machines; each
batch of products requires a different setup. This is followed by machining, where the cost of machining varies directly
with the number of machine hours. Forklifts are used to move the work in progress around. Because quality is important,
an inspection is carried out for each batch of products.
The following information is also available:
Number of machine hours per year: 20 000 machine hours
Number of forklift moves per year: 500 moves
Number of batches per year: 4000 batches
Each year, Twista Manufacturing produces 5000 units of Product X. These units of Product X require 5000 machine
hours, 120 moves and 500 batches to produce. The direct materials and direct labour together cost $15 per unit of
Product X.
Which of the following activities should be grouped together in the same activity cost pool?
A. Machining and machine set up.
B. Machine set up and quality inspection.
C. Forklifting and quality inspection.
D. Machining and forklifting.
AACSB: Reflective
Difficulty: Medium
000); machine setup ($32 000), and quality inspection ($40 000). The operation starts with setting up the machines; each
Product X.
Which of the following are the correct activity rates for machining and quality inspection?
A. $1 per machine hour and $2 per machine hour.
B. $5 per batch and $10 per batch.
C. $2400 and $5000.
D. $1 per machine hour, and $10 per batch.
AACSB: Analytical
Difficulty: Medium
Product X.
The forklifting costs and machine set up costs allocated to Product X are:
A. $2400 and $4000.
B. $5000 and $9000.
C. $2400 and $5000.
D. $5000 and $4000.
AACSB: Analytical
Difficulty: Medium
Product X.
The machining costs and quality inspection costs allocated to each unit of Product X are:
A. $0.16 and $0.32
B. $1 and $2
C. $0.5 and $1
D. $1 and $1
AACSB: Analytical
Difficulty: Medium
Product X.
The total cost for one unit of Product X is:
A. $20.10
B. $18.28
C. $5.10
D. $3.28
AACSB: Analytical
Difficulty: Hard
65. Puff Animal Hospital looks after the health of household pets such as dogs, cats, birds and rabbits. The hospital wants
to use an activity based costing system to allocate costs to each animal case it handles. These cases tend to vary in their
complexity: some pets are here for a regular check ups and immunisation; other pets have emergencies that require
surgery. Some pets are very exotic and require the attention of the supervisor vet; others are common animals with
common problems such that only the junior vets are needed. Puff Animal Hospital is quite large; on average there are five
vets, a general assistant, and two receptionists on duty at one time.
Which of the following is NOT a reason that supports the use of activity-based costing at Puff Animal Hospital?
A. There are a variety of different activities involved for cases that vary in complexity.
B. It is easy to trace the time each vet spent on different animals.
C. The hospital is large and therefore likely to have a lot of indirect costs.
D. Some cases require surgery which means using surgery facilities; other cases do not.
AACSB: Reflective
Difficulty: Medium
66. Puff Animal Hospital looks after the health of household pets such as dogs, cats, birds and rabbits. The hospital wants
to use an activity based costing system to allocate costs to each animal case it handles. These cases tend to vary in their
complexity: some pets are here for a regular check ups and immunization; other pets have emergencies that require
surgery. Some pets are very exotic and require the attention of the supervisor vet, others are common animals with
common problems such that only the junior vets are needed. Puff Animal Hospital is quite large; on average there are five
vets, a general assistant, and two receptionists on duty at one time.
Which of the following is an example of a facility sustaining activity for Puff Animal Hospital?
A. The supervisor vet supervises junior vets in some of the more complex cases.
B. Processing invoices.
C. The general vet gives health checks for small dogs.
D. The general assistant cleans the hospital.
AACSB: Reflective
Difficulty: Hard
67. Cofission Electronics make small electronic parts. The management accountant at Cofission, Jasmine Vake, decides
to implement an activity-based costing (ABC) system. She lists the following points to support her decision:
i. The recent cost report shows that the ratio of prime costs to manufacturing overhead cost is approximately 1:3.
ii. Cofission is a small company.
iii. Cofission has three product lines: basic parts (parts that are common to many products and many suppliers),
customised parts (electronic parts that are highly customised to very specialised electric motors), prototypes (where
Cofission Electronics need to design as well as manufacture these specialised electronic parts).
iv. Cofission Electronics has recently implemented a flexible manufacturing system; this practically eliminates any setup
costs; with this system, product customisation takes very little additional time.
You are not convinced that all of the above points support Jasmine's decision. Which of the above points support the use
of ABC in Cofission?
A. i, ii and iii
B. ii, iii and iv
C. i and iii
D. iii and iv
AACSB: Analytical
Difficulty: Medium
68. Cofission Electronics make small electronic parts. The management accountant at Cofission, Jasmine Vake, decides
to implement an activity-based costing (ABC) system. She lists the following points to support her decision:
i. The recent cost report shows that the ratio of prime costs to manufacturing overhead cost is approximately 1:3
ii. Cofission is a small company.
iii. Cofission has three product lines: basic parts (parts that are common to many products and many suppliers),
customized parts (electronic parts that are highly customized to very specialized electric motors), prototypes (where
Cofission Electronics need to design as well as manufacture these specialized electronic parts).
iv. Cofission Electronics has recently implemented a flexible manufacturing system; this practically eliminates any setup
costs; with this system, product customization takes very little additional time.
You are not convinced that all of the above points support Jasmine's decision. Which of the above points contradict
Jasmine's decision?
A. i and ii
B. ii
C.
i, ii and iv
D. ii and iv

AACSB: Reflective
Difficulty: Hard
69. Which of the following rates would not be used to assign manufacturing overhead costs to products?
A. Activity-based rates
B. Facility rates
C. Plantwide rates
D. Departmental rates
AACSB: Reflective
Difficulty: Easy
Learning Objective: 8.06 Explain the differences between product costs prepared under activity-based costing and those prepared under traditional
costing systems
70. When moving from a traditional costing system to an activity-based system, there is a significant improvement in the
accuracy of the product costs because:
A. simple activity costing assumes that all manufacturing overhead costs are driven by the volume of production.
B. simple activity-based costing allocates overheads based on the cost per activity driver.
C. improved identification of cost drivers results in more accurate allocation of manufacturing overheads to products.
D. simple activity-based costing allocates overheads based on the cost per activity driver, resulting in more accurate
allocation of manufacturing overheads to products.
AACSB: Reflective
Difficulty: Medium
costing systems
71. Activity based costing focuses on the cost of resources:
A. budgeted.
B. used.
C. committed.
D. supplied.
AACSB: Reflective
Difficulty: Easy
72. When introducing an activity-based costing system which of the following actions are recommended for the
changeover to be successful?
A. Increased involvement of non-accounting staff in the design and implementation stages.
B. Preparation of a change management plan that considers behavioural issues.
C. A bottom-up approach to encourage staff to own the new system and to see it as a tool to help them with their work.
D. All of the answers are recommended.
AACSB: Reflective
Difficulty: Medium
73. Plant, equipment and supervision that have been supplied in advance for use in production are known as:
A. supplied resources.
B. committed resources.
C. used resources.
D. budgeted resources.
AACSB: Reflective
Difficulty: Easy
74. When using average costs in activity-based costing, which of the following costs, are not divided by the number of
units produced to estimate the cost per unit of product?
A. Unit level
B. Batch level
C. Facility level
D. Product level
AACSB: Reflective
Difficulty: Medium
Learning Objective: 8.11 Identify the limitations of activity-based costing in providing accurate product costs
75. Prepare a list of 14 possible indications that a new product costing system is likely to be needed.
1. Sales are increasing, but profits are decreasing.
2. Product lines are diverse.
3. Only a small percentage of total costs are in direct labour.
4. Competitors' high-volume products seem to be priced very low.
5. Line managers do not believe the product costs reported by the accounting department.
6. Product line profit margins are difficult to explain.
7. Line managers suggest that profitable products be dropped.
8. Competitors do not sell some of the products in which our system reports high profit margins.
9. Marketing personnel are unwilling to use reported product costs in making pricing decisions.
10. Complex products that are difficult to manufacture are reported to be very profitable, although they are not priced at a
premium.
11. The firm seems to have captured a highly profitable product line for itself.
12. Overhead rates are very high and increasing over time.
13. It is difficult to explain bids won and bids lost.
14. The accounting department spends significant amounts of time on special costing projects to support bids or pricing
decisions.
AACSB: Reflective, Communication

Difficulty: Hard
76. At a recent professional meeting, two accountants discussed product-costing problems in their respective companies.
Both accountants are familiar with ABC systems but neither firm uses this method.
Accountant A reported that part of the problem in product costing in his firm is that there are major differences between
product lines as to volume of units, utilisation of various activities, quality assurance requirements established by
customers and size of the products. Accountant B noted that in her firm, which produces consumer products, all products
undergo the same basic production processes and in the same sequence, but in an increasing variety of colours and
packaging modes.
Both accountants are worried about the potential distortion of product costs under their traditional product costing
systems.
Which accountant should be more concerned about the potential distortion? Explain.
Accountant A should be more concerned. The variety of product lines made in his firm's facility reflects product diversity at
the product line level. In accountant B's firm, there still is only one product line with an increasing number of models based
on colour and packaging. While more attention may need to be devoted to assigning the packaging costs (perhaps
through a version of operation costing), the situation in that firm is not as severe as in the firm with several product lines.

Difficulty: Medium
costing systems
77. Describe how assigning overhead costs differs under a simple activity-based product costing system from a traditional
volume-based costing system.
Under a traditional volume-based system, a predetermined overhead rate based on direct labour hours or some other
measure of volume is used to apply overhead to the product. Many manufacturers use direct labour hours assuming that
they are closely related to the volume of activity in the factory.
Under a simple activity-based product costing system, overhead is applied in two steps. The first step is to identify
significant activities and group costs by these activities into activity cost pools. The second step is to find an activity driver
for each pool and apply the costs to products according to their relative use of the activity drivers.
Difficulty: Easy
costing systems
78. As an organisation expands it is common for their product offering to become diversified. Explain the reasons that
would cause management to change to an activity based costing system and the benefits that could be expected by the
organisation.
In many businesses, product diversity has increased and cost structures have become more overhead-intensive and less
volume-driven. Under these circumstances, traditional costing systems are likely to overstate the costs of high-volume
simple products produced in large batches, and understate the costs of low-volume customised products produced in
small batches. Where product costs are an essential part of the strategic decision making and planning and control
processes, these businesses are likely to experience considerable difficulty because of the inadequate information from
their traditional costing systems, and to reap substantial benefits from implementing activity-based costing. Given the
emerging business environment and its implications for product and cost structures, we might have expected a strong
trend towards the adoption of ABC since its introduction in the late 1980s. The decision of whether or not to implement
ABC should be based on a careful assessment of the costs and benefits.
The benefits from ABC will be greatest where:
a. overhead costs are a significant portion of total costs and a large part of overhead is not directly related to production
volume;
b. the business has a diverse product range, and individual products' use of support resources differs from their use of
volume-based cost drivers;
c. production activity involves diverse batch sizes and product complexity;
d. the proportion of product-related costs incurred outside of manufacturing is increasing relative to manufacturing costs;
e. there are likely to be high 'costs' associated with making inappropriate decisions based on inaccurate product costs
(this is most likely in a highly competitive environment where product cost is a key input to strategic decision making and
where competitors have accurate product cost information);
f. the cost of designing, implementing and maintaining the ABC system is likely to be relatively low due to sophisticated IT
support.
Difficulty: Medium
79. Activity-based costing has the potential to improve the accuracy of product costs, however, it is important for
management to understand its limitations. Identify and explain two limitations.
While ABC has the potential to improve the accuracy of product costs, it is important to understand its limitations:
Facility-level costs.
Some proponents of ABC recommend that virtually all costs, including facility costs, be assigned to products. However, facility-level
activities may bear no obvious relationship to products. If these facility-level costs are assigned to products, the allocation basis must
be arbitrary. The higher the proportion of allocated facility costs, the greater the arbitrary element of the product costs. Of course a
business must cover its facility-level costs to make a profit but, in the income statement, it is better to deduct them after estimating the
product-related profit margin, rather than include them in the product costs.
Use of average costs.
Activity-based estimates of the cost per unit of product, such as the costs of the Hensley Tooth and the Custom Cast Tooth in Exhibits
8.7 and 8.8, are average costs. Unit level costs are incurred for each unit of product, but batch-level, product-level and facility-level
costs must be divided by the number of units produced to estimate the cost per unit of product. It is important that managers
understand this. Many product-related decisions are better based on either unit-level costs in the short term or total product costs in the
longer term, rather than looking at the average cost per unit of product.
Complexity.
When ABC is set up as an ongoing costing system, it involves more detailed recording and analysis than for conventional costing
systems. If the company is changing rapidly, the data in the activity-based system must be updated frequently to avoid the production of
outdated, irrelevant information. This can be expensive. The level of complexity increases dramatically when the system is used for
activity management as well as for product costing, because activity management requires a more extensive and detailed analysis of
costs and activities.
Difficulty: Medium
Learning Objective: 8.11 Identify the limitations of activity-based costing in providing accurate product costs
80. ABC is a methodology that can be as simple or as complex as the organisation wants it to be.
TRUE
AACSB: Reflective
Difficulty: Medium
Learning Objective: 8.04 Describe the different approaches to activity-based costing, which include different subsets of costs
81. Activities in ABC can be classified as batch-level activities, product-sustaining activities, facility-sustaining activities
and departmental activities.
FALSE
AACSB: Reflective
Difficulty: Easy
82. While ABC can be used with service industries, it can be difficult to implement because service industries do not
always have repetitive individual activities.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 8.12 Describe the difficulties of implementing activity-based costing in service organisations
83. The ABC model links resources to activities via resource drivers and activities to cost objects via activity drivers.
TRUE
AACSB: Reflective
Difficulty: Easy
84. Prime indicators of problems with a traditional costing system include company profits being eroded and production
managers not being able to make sense of product costs.
TRUE
AACSB: Reflective
Difficulty: Easy
85. Traditional product costing does not generally include non-manufacturing costs despite the fact that these costs are
now a significant proportion of most organisations' total costs.
TRUE
AACSB: Reflective
Difficulty: Easy
86. One of the major benefits of ABC is that there are virtually no behavioural implications of introducing such a costing
system, as there is no real change in the way data are collected and analysed.
FALSE
AACSB: Reflective
Difficulty: Easy
87. The activity drivers used with ABC can include labour hours, machine parts, numbers of setups and kilograms of
materials.
TRUE
AACSB: Reflective
Difficulty: Easy
88. There does not need to be a strong correlation between overhead costs and the cost driver to ensure accurate
product costs.
FALSE
AACSB: Reflective
Difficulty: Easy
89. Resource drivers are used to estimate the cost of resources consumed by a cost object.
FALSE
AACSB: Reflective
Difficulty: Easy
90. Underlying factors that cause activities to be performed and their costs to be incurred are known as root cause cost
drivers.
TRUE
AACSB: Reflective
Difficulty: Easy
91. Under an activity-based system where budgeted costs have been used, it is necessary to include the cost of unused
capacity, when estimating and reporting profit.
TRUE
AACSB: Reflective
Difficulty: Easy
Category # of Q
uestio
ns
AACSB: Reflective, Communication 2
Difficulty: Easy 57
Difficulty: Hard 7
Learning Objective: 8.01 Explain the problems associated with traditional costing systems 15
Learning Objective: 8.02 Recognise common indicators of an outdated product costing system 11
Learning Objective: 8.03 Describe both the costing view and the activity-management view of the activity-based costing (A 9
BC) model
Learning Objective: 8.04 Describe the different approaches to activity-based costing, which include different subsets of cost 2
s
Learning Objective: 8.05 Use the activity-based costing model to measure the overhead costs of activities and assign these 30
activity costs to products
Learning Objective: 8.06 Explain the differences between product costs prepared under activity-based costing and those pr 4
epared under traditional costing systems
Learning Objective: 8.07 Recognise which types of organisations can gain the greatest benefits from activity-based costing 7
Learning Objective: 8.08 Outline various design issues to be considered when implementing activity-based costing, includin 2
g budgeted versus actual costs, implementation of activity-based costing as a ‘project’ and the inclusion of other cost object
s
Learning Objective: 8.09 Explain the implications of spare capacity for estimating the cost of activities 4
Learning Objective: 8.10 Appreciate the importance of 'behavioural issues' in implementing activity-based costing 3
Learning Objective: 8.11 Identify the limitations of activity-based costing in providing accurate product costs 2
Learning Objective: 8.12 Describe the difficulties of implementing activity-based costing in service organisations 2

1. The budget is:
A. a short-term plan.
B. more detailed than a strategic plan.
C. not influenced by strategic decisions.
D. a short-term plan AND more detailed than a strategic plan.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 9.01 Understand how the budgeting process fits into the wider strategic planning processes of an organisation
2. The five primary purposes of a budget are:
A. planning, allocating resources; facilitating communication and coordination; controlling profit and operations; evaluating
performance and providing incentives.
B. planning; allocating resources; facilitating communication and coordination; controlling profit and operations; and
allocating overhead costs.
C. planning; allocating resources; facilitating communication and coordination; controlling profit and operations; and
evaluating competition.
D. planning; allocating resources; controlling profit and operations; providing incentives; evaluating performance; and
allocating overhead costs.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 9.02 Explain the five major purposes of the budgeting process
3. The purposes of a budget include:
A. planning.
B. facilitating communication and coordination.
C. controlling profit and operations, and evaluating performance and providing incentives.
AACSB: Reflective
Difficulty: Easy
4. A company's plan for the acquisition of long-term assets, such as buildings and equipment, is called a
A. capital expenditure budget.
B. master budget.
C. financial budget.
D. profit plan.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 9.04 Understand the various components that make up an annual budget
5. Which of the following involves decisions about the types of businesses and markets that an organisation operates in,
and about how those businesses and activities will be financed?
A. Sales forecasting
B. Strategic planning
C. Financial statement forecasting
D. Financial planning
AACSB: Reflective
Difficulty: Easy
6. The annual financial budget is also called a
A. capital budget.
B. master budget.
C. long-range budget.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 9.03 Understand how budgets are developed and used in responsibility accounting systems
7. A budget that is continually updated by periodically adding a new incremental time period such as a quarter, and
dropping the period just completed is a
A. short-range budget.
B. long-range budget.
C. capital budget.
D. rolling budget.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 9.05 Discuss the importance of assumptions and predictions in budgeting
8. Budgeted financial statements include:
A. a budgeted profit and loss statement.
B. a budgeted balance sheet.
C. a cash budget.
D. All of the given options
AACSB: Reflective
Difficulty: Easy
9. Budgets that cover a particular period of time, longer than a year, are
A. short-range budgets.
B. long-range budgets.
C. rolling budgets.
D. continuous budgets.
AACSB: Reflective
Difficulty: Easy
10. Past sales levels and trends, general economic trends, and political and legal events are all used for
A. sales forecasting.
B. resource allocation.
C. financial budgets.
D. resource budgets.
AACSB: Reflective
Difficulty: Easy
11. A slightly inaccurate sales forecast, since it comes at the beginning of the budgeting process
A. has an insignificant influence on the other schedules comprising the annual financial budget.
B. should not influence the accuracy of the other schedules comprising the annual financial budget at all.
C. has a distorting effect on the other estimates in the budget.
D. slightly influences the sales figure and the budgeted financial statements and influences no other figures.
AACSB: Reflective
Difficulty: Medium
12. For a manufacturing business, a production budget, including budgets for direct material, direct labour and
manufacturing overhead are part of the
A. sales budgets.
B. operating budgets.
C. budgeted financial statements.
D. budgeted balance sheets.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 9.11 Complete the major budgeting schedules for a manufacturing organisation
13. A manufacturer prepares a production budget. The comparable budget for a retail or wholesale business would be a
budget for
A. sales.
B. purchases.
C. direct materials.
D. direct labour.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 9.06 Describe the similarities and differences in the operating budgets prepared by manufacturers, retailers and wholesalers, and
service firms
14. Based on the production budget, the manufacturer develops budgets for
A. direct labour.
B. direct materials.
D. All of the given options

AACSB: Reflective
Difficulty: Easy
15. Which of the following encompasses a detailed plan for using the basic factors of production material, labour and
overhead to produce a product or provide a service?
A. Budget financial statement
B. Sales forecast
C. Operating budget
D. Cash budget
AACSB: Reflective
Difficulty: Easy
16. Which of the following indicate/s the overall financial results of the organisation's planned operations for the budget
period?
A. Sales forecast
B. Budgeted financial statements
C. Cash budget
AACSB: Reflective
Difficulty: Easy
17. The typical starting point in the sales forecasting process is
A. the sales level of the preceding year.
B. input from key executives.
C. economic trends.
D. the sales manager's best guess.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 9.07 Complete the major budgeting schedules for a service organisation
18. A cash budget
A. is appropriate for a business in any industry.
B. shows expected cash receipts and planned payments.
C. shows expected sales and planned expenses.
D. is appropriate for a business in any industry AND shows expected cash receipts and planned payments.
AACSB: Reflective
Difficulty: Easy
service firms
19. Which of the following shows the schedule of cash payments for the materials and services the firm purchased on
account, and all cash payments for services that are paid in advance or paid at the time of purchase?
A. Selling and administrative expense budget
B. Cash payments budget
C. Cash receipts budget
D. Overhead budget
AACSB: Reflective
Difficulty: Easy
20. Which of the following includes the cash receipts and cash payments and discloses a firm's financial plans?
A. Cash budget
B. Selling and administrative expense budget
C. Budgeted financial statement
AACSB: Reflective
Difficulty: Easy
21. A budget that includes indirect materials, indirect labour and other indirect manufacturing costs is
A. an overhead budget.
B. a cash budget.
C. an administrative expense budget.
D. a summary budget.
AACSB: Reflective
Difficulty: Easy
22. A budget that includes sales revenue, cost of goods sold, operating expenses and net profit is a
A. budgeted profit and loss statement.
B. budgeted balance sheet.
C. budgeted statement of changes in financial position.
D. budgeted statement of cash flows.
AACSB: Reflective
Difficulty: Easy
23.
BeActive Sporting Goods sells tandem bicycles. The following data was taken from the most recent quarterly sales forecast.

BeActive's cost for one bicycle is $125. How many units should the company purchase in May?

A. 1478 = May expected sales units + (May monthly inv - April monthly inv)
B. 1672 = 1575 + (412-315) = 1672
C. 1575
D. 1562

AACSB: Analytical
Difficulty: Medium
24.
BeActive Sporting Goods sells tandem bicycles. The following data was taken from the most recent quarterly sales forecast.

BeActive's cost for one bicycle is $125. What dollar amount should the company budget for June purchases?

A. $153 125 = June expected sales units + (June monthly inv - May monthly inv)
B. $154 750 = 1650 + (425 - 412) = 1663
C. $204 625 Dollar amount = 1663 * 125 = $207 875
D. $207 875

AACSB: Analytical
Difficulty: Medium
25.
Vebco manufactures a product requiring 0.5 grams of platinum per unit. The cost of platinum is approximately $360 per gram. Vebco
maintains an ending inventory of platinum equal to 10 per cent of the following month's production. The following data were taken from
the most recent quarterly production budget.
Determine the cost of platinum purchased in August.
=Aug production units - July production units based on Aug *10% + Sep production units *
A. $195 840 10%
B. $200 160 =1100 - 1100 * 10% + 980 * 10% = 1088 units
C. $391 680 The required platinum would be = 1088 * 0.5 = 544 ounces
D. $400 320
--> Cost of platinum = 544 * 360 = $ 195 840
AACSB: Analytical
Difficulty: Hard
26.
Lee's Appliances forecasts the following sales figures for the next four months.

Cash sales average 10 per cent of total sales and credit sales are collected 50 per cent in the month of sale and 50 per cent in the
month following sale. What are the estimated cash collections in May?

A. $215 000 = (150000*10%) + (150000*90%*50%) + (250000*90%*50%)
B. $207 500 = $195 000
C. $195 000
D. $82 500

AACSB: Analytical
Difficulty: Medium
27.
Lee's Appliances forecasts the following sales figures for the next four months.

Cash sales average 10 per cent of total sales and credit sales are collected 50 per cent in the month of sale and 50 per cent in the
month following sale. What is Lee's estimated accounts receivable balance on July 31?

A. $150 000 =150000 * 0.9 * 0.5 = 67500
B. $135 000
C. $75 000
D. $67 500

AACSB: Analytical
Difficulty: Medium
28.
The Grainger Company's Budgeted Profit and Loss Statement reflects the following amounts:

Sales are collected 50 per cent in the month of sale, 30 per cent in the month following sale, 19 per cent in the second month following
sale and 1 per cent is uncollectible. The uncollectible accounts are expensed at the end of the year.
Grainger pays for purchases by the fifth of the month following purchase, to take advantage of the 3 per cent discount allowed.
On January 1, Grainger had a cash balance of $88 000 and an accounts receivable balance of $58 000; $35 000 on account will be
collected in January with the remaining balance to be collected in February. Grainger had an accounts payable balance of $72 000 on
January 1. Invoices are recorded at their gross amount.
The monthly expense figures include $5000 in monthly depreciation. The expenses are paid for in the month incurred.
What is Grainger's expected cash balance at the end of January?

A. $92 000
B. $94 160
C. $87 000
D. $89 160

AACSB: Analytical
Difficulty: Hard
29.
Telcer & Company had 3000 units in finished goods inventory on December 31. Following is a partial production budget for January to
March.
How many units does the company expect to sell in January?

A. 6900 Sale in units = Total units to be produced + Beginning FG inv - desired ending inv
B. 8900
C. 9400
= 9400 + 3000 - 2500 = 9900
D. 9900

AACSB: Analytical
Difficulty: Medium
30.
On January 1, Bandy Manufacturing plans to introduce a product called Handy Dandy. The company plans to sell each unit of Handy
Dandy for $25.00. Management has forecast the following in sales units for the first three months.

Each unit of Handy Dandy requires 2 kg of Dingaling and 1 hour of direct labour. Management wants to end each month with a Handy
Dandy inventory level equal to 10 per cent of the following month's sales and a Dingaling inventory equal to 5 per cent of the following
month's production. Dingaling can be purchased for $3 per kg and direct labour costs are estimated to be $5.00 per hour. How many
units should Bandy Manufacturing produce in February?

A. 32 000 Total required units = 28000 + (40000*10%) = 32000
B. 27 300
C. 28 000
Required production units = 32000 - (28000*10%) = 29200
D. 29 200

AACSB: Analytical
Difficulty: Medium
31.

Dandy inventory level equal to 10 per cent of the following month's sales, and a Dingaling inventory equal to 5 per cent of the following
month's production. Dingaling can be purchased for $3 per kg and direct labour costs are estimated to be $5.00 per hour. How many
kilograms of Dingaling should be purchased in January? Bandy plans to have no inventory of Dingaling on January 1:
Total required units = 35000 + (28000*10%) = 37800

Required production units = 37800 - 0 = 37800
A. 78 520
B. 72 800
C. 72 680 Total pounds needed for production = 37800 * 2 = 75600
D. 78 400 Total material required = 75600 + (29200*2*5%) = 78520
Direct material purchases in Jan = Total material required - Beginning direct material
AACSB: Analytical
= 78520 - 0 = 78520
Difficulty: Medium
32.

month's production. Dingaling can be purchased for $3 per kg and direct labour costs are estimated to be $5.00 per hour. What amount
should be budgeted for direct labour in February?

A. $160 000
B. $146 000
C. $140 000
D. $134 000

AACSB: Analytical
Difficulty: Medium
33.
month's production. Dingaling can be purchased for $3 per kg and direct labour costs are estimated to be $5.00 per hour. What are
Bandy Manufacturing's budgeted prime costs in January?

A. $235 560
B. $294 000
C. $385 000

AACSB: Analytical
Difficulty: Hard
34. The person responsible for managing the budget process
A. is responsible for specifying the process by which budget data will be gathered.
B. collects information and prepares the annual financial budget.
C. communicates budget procedures and deadlines to employees throughout the organisation.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 9.08 Describe a typical organisation's process of budget administration
35. Consider the following statements about budget administration.
i. Regardless of size, the budgeting process in all organisations must be a formal process.
ii. The budget manual is prepared to communicate budget procedures and deadlines to employees throughout the
organisation.
iii. Good internal control procedures require that the manager responsible for managing the budget process be an
individual other than the chief accountant.
A. i
B. ii
C. iii
D. i and iii
AACSB: Reflective
Difficulty: Medium
36. To communicate budget procedures and deadlines to employees throughout the organisation, the manager
responsible for managing the budget often develops and disseminates a
A. budget manual.
B. sales forecast.
C. memorandum.
D. budget schedule.
AACSB: Reflective
Difficulty: Easy
37. In preparing and using any budget, it is important that managers keep in mind the
A. assumptions and predictions upon which the budget is based.
B. present value of future cash flow.
C. budgeted profit and loss statement.
D. ‘bottom line'.
AACSB: Reflective
Difficulty: Easy
38. The difference between the revenue or cost projection that a person provides and a realistic estimate of the revenue
or cost is called
A. passing the buck.
B. budgetary slack.
C. participative budgeting.
D. resource allocation processing.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 9.09 Discuss the behavioural consequences of budgets: participative budgeting, budgetary slack and budget difficulty
39. People create budgetary slack because
A. their performance will look better if they beat the budget.
B. it helps them cope with uncertainty.
C. they believe their budget requests will be cut.
AACSB: Reflective
Difficulty: Medium
40. When employees throughout an organisation are meaningfully involved in the budget-setting process, this is referred
to as
A. budgeting slack.
B. participative budgeting.
C. padding the budget.
D. employee-based budgeting.
AACSB: Reflective
Difficulty: Medium
41. Consider the following statements about zero-base budgeting.
i. The budget for virtually every activity in an organisation is initially set to the level that existed during the previous year.
ii. The budget helps identify areas of waste and redundant activities.
iii. The budget must be justified in terms of its continued usefulness.
A. i, ii and iii
B. i and ii
C. ii and iii
D. iii
AACSB: Reflective
Difficulty: Medium
Learning Objective: 9.10 Understand zero-base budgeting and program budgeting
42. Program budgeting
A. is similar to line item budgeting.
B. relates budget performance to the achievement of objectives.
C. develops qualitative performance criteria rather than quantitative criteria.
D. focuses on inputs rather than outputs.
AACSB: Reflective
Difficulty: Easy
43. Which of the following statements are true if optimum benefit is to be derived from the budget process?
A. Employees participate in the development of the budget.
B. Targets should include slack to enable easy achievement.
C. Rewards are not required.
D. Employees participate in the development of the budget AND rewards are not required.
AACSB: Reflective
Difficulty: Easy
44. The position where the firm's goals and employees' aims coincide is called
A. participative budgeting.
B. goal achievement.
C. goal congruence.
D. budgetary achievement.
AACSB: Reflective
Difficulty: Easy
45. Which of the following does budget preparation require to achieve optimum outcomes?
i. Top-down budgeting
ii. Bottom-up budgeting
iii. Participative budgeting
A. i
B. ii and iii
C. i and iii
D. i, ii and iii
AACSB: Reflective
Difficulty: Easy
46. Suppose that the departmental manager deliberately underestimates the level of sales activity by 10 000 units. What
is this practice called?
A. Budgetary participation
B. Appropriate caution
C. Budgetary slack
D. Allowance for uncertainty
AACSB: Reflective
Difficulty: Easy
47.
The following is the forecast level of inventory (in units) for Aardvark Ltd.
If the company plans to sell 320 000 units, how many will they need to produce during the period?

A. 330 000 =320000 + 15000 - 20000 = 315000
B. 315 000
C. 305 000
D. 320 000

AACSB: Analytical
Difficulty: Medium
48. The usual order of steps in preparing a budget is
A. production budget, sales budget, budgeted income statement.
B. sales budget, production budget, budgeted income statement.
C. budgeted income statement, production budget, sales budget.
D. budgeted income statement, sales budget, production budget.
AACSB: Reflective
Difficulty: Easy
49.
Budgeted sales for ABC Company are as follows:
All stock is marked up to sell at its invoice cost plus 25 per cent. On average 60 per cent of credit sales are collected in the month of
sale, 35 per cent in the month following sale and the remainder is uncollectable. The budgeted cost of goods sold for the month of
October is:

A. $1 360 000
B. $1 425 000
C. $1 520 000

AACSB: Analytical
Difficulty: Easy
50.
Budgeted sales for ABC Company are as follows:

All stock is marked up to sell at its invoice cost plus 25 per cent. On average 60 per cent of credit sales are collected in the month of
sale, 35 per cent in the month following sale and the remainder is uncollectible. Budgeted total cash receipts for November are:

A. $1 675 000
B. $1 875 000
C. $1 280 000

AACSB: Analytical
Difficulty: Medium
51. A production budget
A. is based on projected purchases as disclosed by the purchases budget.
B.
does not make provision for production planning by determining what products will be made.
C. contributes to scheduling labour requirements.
D. is not used to review available production capacity.

AACSB: Reflective
Difficulty: Medium
52. XYZ has budgeted to sell 100 000 units of P for February 2008. It has an opening inventory of 20 000 units of P and
would like a closing inventory of 30 000 units. Each unit of P requires 2 kg of raw material Y. Inventory of Y at the
beginning of the month is 5000 kg. Assuming the sales budget is met and the desired closing inventory of P is achieved,
how many kilograms of Y need to be purchased during February, in order to have a closing balance of 8000 kg?
A. 113 000
B. 117 000 Total P units = 100000 + 30000 - 20000 = 110000 units
C. 223 000 Y = 2P --> Y = 220000 kg
D. 183 000 Y kg = 220000 + 8000 - 5000 = 223000

AACSB: Analytical
Difficulty: Medium
53. Which of the following is not typically a responsibility centre for a manufacturing firm?
A. Cost centre
B. Profit centre
C. Investment centre
D. Inventory centre
AACSB: Reflective
Difficulty: Easy
54. The Z Company has prepared a sales budget for 40 000 units for a three-month period. The company desires a
closing finished goods inventory of 12 000 units, and closing direct material inventory of 14 000 units at the end of the
quarter. There is no beginning finished goods inventory, but beginning inventory of direct materials is 2000 units. It takes
two units of direct material to make one unit of finished product. The number of units of direct material to be purchased
during the quarter is
A. 52 000.
B. 104 000. =Total units = 40000 + 14000 - 2000 = 52000
C. 118 000. --> 52000 * 2 = 104000 units
D. 116 000. Total units of direct material = 104000 + 12000 - 0 = 116000

AACSB: Analytical
Difficulty: Medium
55.
Sales of 50 000 finished products are budgeted for Tracey Company. Four kilograms of direct material are required for each finished
unit. Actual beginning and desired ending inventories of direct material and finished goods are as follows.
All products are finished at the end of the period, so there is no work in process at the beginning and end of the period. How many
kilograms of direct material is the company planning to purchase?

A. 218 000 Total units = 50000 + 15000 - 11000 = 54000 units
B. 214 000 --> 54000 * 4 = 216000 kg
C. 186 000 Total kg= 216000 + 32000 - 30000 = 218000 kg
D. 184 000

AACSB: Analytical
Difficulty: Medium
56.
Carter Manufacturers have budgeted sales for the coming months as follows.

The firm has decided that to avoid losing customers because of production hold-ups it will in future maintain a finished goods inventory
on hand equal to one-fifth of the following month's budgeted sales. At 31 December, the company had in finished goods stock 10 000
units. What is budgeted production for the quarter January–March?

A. 530 000 units =(160000+240000+20000) + (400000*20/100) - 10000 = 600000 + 80000 -10000
B. 830 000 units =670000 units
C. 670 000 units
D. 680 000 units

AACSB: Analytical
Difficulty: Hard
57. Assume for a firm that budgeted production for July and August is 180 000 and 200 000 units respectively. It takes
half a kilogram of direct material to make one unit of finished product. Materials inventory is maintained at 10 per cent of
the next month's budgeted production needs. If the 30 June inventory of materials was 5000 kg, how many kilograms of
direct material should be purchased during July?
A. 105 000 kg
B. 195 000 kg
C. 90 000 kg
D. 95 000 kg
AACSB: Analytical
Difficulty: Hard
58. Which of the following items should be taken into account when setting budgets?
A. Positive behaviour of employees is more likely to result if the budgetary process is participative.
B. The budget goals should not be so tight that they are unachievable.
C. The goals of the individual sections' budget should be aligned with the firm's goals.
AACSB: Reflective
Difficulty: Medium
59. Which of the following items would not be taken into account when preparing a firm's cash budget?
A. Depreciation on motor vehicles
B. Provision for doubtful debts
C. Discount allowed
D. Depreciation on motor vehicles AND provision for doubtful debts
AACSB: Reflective
Difficulty: Medium
60. Which of the following are unlikely to influence the sales forecast?
A. Past sales levels
B. Past production levels
C. Economic trends
D. The pricing policy of the company
AACSB: Reflective
Difficulty: Easy
service firms
61. Strawman Ltd runs tutoring classes for high school students. The maximum number of students a weekly tutorial class
can take is 15. Each tutor, who is paid a per semester salary of $20 000 including on-costs, can manage up to 5 classes
per week per semester. Assuming that this semester there are 350 students enrolled. What is the budgeted salary for
tutors this semester?
A. $100 000 =$20000*5 = $100000
B. $93 333
C. $20 000
D. $6428
AACSB: Analytical
Difficulty: Medium
62. Top-down budgeting refers to
A. a budgeting system that begins with sales forecasts and works downwards to the raw materials budget.
B. a budgeting systems that begins with budgeting the facility-level costs.
C. a budgeting system where senior managers impose budget targets on junior managers.
D. a budgeting system where there are frequent communications between top and bottom managers.
AACSB: Reflective
Difficulty: Easy
A. A top-down budgeting system is more efficient than a bottom-up budgeting system.
B. A top-down budgeting system is more likely to result in unrealistically difficult budget targets.
C. A bottom-up budgeting system is less likely to result in budget padding.
D. A bottom-up budgeting systems is more likely to result in employee empowerment.
AACSB: Reflective
Difficulty: Medium
64. Jasmine Coy is a barista at Tosa Cafe, which is known for its quality coffee. Her manager has set a very difficult cost
target. As a result, Jasmine uses lower quality coffee beans which results in poor quality coffee. This is an example of
A. Budget slack.
B. Goal incongruence.
C. Lack of employee empowerment.
D. Short range budgeting.
AACSB: Reflective
Difficulty: Medium
65. EasySleep Inn is a chain of medium-priced hotels. Each year during the budgeting process, the manager of each hotel
in the chain has to submit a capital expenditure request, justifying the amounts of expenditure they request. Top
management then makes a decision on whether to fund each capital expenditure request. This is an example of which
purpose of budgeting?
A. Controlling profit
B. Allocating resources
C. Empowering employees
D. Evaluating performance and providing incentives
AACSB: Reflective
Difficulty: Medium
66.
Which of the following is/are likely to lead to budget acceptance?
i Targets are developed with employee inputs.
ii Employees are held responsible for activities that they can control.
iii Budget is cascaded down from corporate level to the various responsibility centres.

A. i only
B. i and ii
C. i and iii
D. ii and iii

AACSB: Reflective
Difficulty: Easy
67. Which of the following is an example of padding the budget?
A. Overestimating sales
B. Underestimating labour costs
C. Overestimating direct material costs
D. Underestimating capital expenditure
AACSB: Reflective
Difficulty: Medium
68. Christina Wadat is a sales manager at Walter Booksellers. She believes that the sales revenue will most likely to be
$500 000 this coming year. However, she decides to build in budget slack of 10 per cent. The amount of sales revenue
she inputs into the company's sales budget is
A. $450 000.
B. $500 000. =500000 + (500000*10%) = 550000
C. $550 000.
D. 600 000.
AACSB: Analytical
Difficulty: Medium
69. Zero-based budgeting refers to
A. a budgeting system that has very uncertain assumptions.
B. a new budgeting system for a company that has not had a budget before.
C. a budgeting system where all activity costs are based on estimates only.
D. a budgeting system where all activities are initially set to zero and will not be continued unless they are clearly justified.
AACSB: Reflective
Difficulty: Easy
70. Which of the following benefits is not provided by the budgeting process?
A. Benchmarks
B. Performance evaluation
C. Competitive strategy
D. Facilitates communication
AACSB: Reflective
Difficulty: Medium
71. Insurance Plus provides their sales staff with a base salary and commissions. When the various departments' actual
performance exceeds the budgeted sales figures an additional bonus is paid. This is an example of
A. facilitating communication and coordination.
B. controlling profit and operations.
C. evaluating performance and providing incentives.
D. allocating resources.
AACSB: Reflective
Difficulty: Easy
72.
A 'Rolling Budget' is also known as a

A. revised budget.
B. reformed budget.
C. current budget.
D. continuous budget.

AACSB: Reflective
Difficulty: Easy
73. As the starting point in the budgeting process, managers need to understand the strategy of the organisation, to
enable them to formulate a budget that supports the organisation's
A. mission statement.
B. strategic plan.
C. forecasts.
D. vision.
AACSB: Reflective
Difficulty: Medium
74. Which of the following external factors would not be considered when forecasting sales for a furniture manufacturer?
A. General economic trends
B. Rising Australian dollar
C. Increasing foreign aid
D. Consumer's disposable income
AACSB: Reflective
Difficulty: Medium
service firms
75. Which of the following budgets is usually prepared at the start of the budgeting process?
A. Production budget
B. Annual budget
C. Operating budget
D. Sales budget
AACSB: Reflective
Difficulty: Easy
service firms
76. Briefly describe the five primary purposes of the budgeting process.
1 Planning. The most obvious purpose of a budget is to express a plan of action in financial terms. The budgeting process forces the
individuals within a business to plan. For example, in formulating a quarterly budget the various managers must work together to plan
for the expected sales demand, as well as the staffing and supplies needed to meet the anticipated demand. These decisions will drive
the estimation of revenues and costs.
2 Facilitating communication and coordination. For a business to plan operations effectively there must be good communication and
coordination between all managers. The budgeting process provides a formal mechanism to enable this to take place. The budgeting
process pulls together the plans developed by each manager across the organisation.
3 Allocating resources. Generally, a firm's resources are limited, and budgets provide one way of allocating resources among
competing uses. In an organisation various departments/ divisions would be competing for resources and senior management would
use the budgeting process to consider the many alternative uses that could be made of the limited resources available to the company.
The budgeting process provides a forum for evaluating alternative uses of those limited resources.
4 Controlling profit and operations. The budget can serve as a benchmark to allow a comparison against actual financial results at all
levels of a business. For example, within a sales department, a report that compares actual sales to budgeted sales may be prepared
on a weekly basis to help sales staff exercise some control over total sales. In addition, the budgeted costs of a customer service
department may be compared with actual costs each month to highlight areas where there needs to be greater cost control. As part of
the budgeting process, standard costs are often developed for major production inputs (such as direct materials used in production) or
activities. These ideal costs provide benchmarks to help managers control financial resources.
5 Evaluating performance and providing incentives. Comparing actual results with budgeted results also helps managers to evaluate
the performance of individuals, departments, divisions or the entire company. Since budgets are used to evaluate performance, they
can also be used to provide incentives for people to perform well. For example, in many companies, managers and other employees
may have part of their salary based on whether they exceed their budget target
Difficulty: Medium
77. Discuss how benchmarks are applied to measure performance in responsibility accounting.
Responsibility accounting is the term used to describe the practice of holding managers responsible for the activities and
performance of their area of the business. For example, a particular manager might be held responsible for the activities
and results of the accounting department, the personnel department or a production department. A senior manager might
be responsible for a complete business unit, which may include many departments. The budget can be used as a
benchmark to measure the performance of people and departments.
As part of the budgeting process, the managers of various departments or other sections of a business are often required
to develop their own budget estimates for the costs, revenue or profits of their areas. These same managers are then held
responsible for meeting budget targets when actual operations commence.
Difficulty: Medium
78. Discuss how participative budgeting can achieve acceptance of the budget from staff.
The process of gaining acceptance of the budget involves negotiation and subsequent revision of budget estimates. This lengthy and
time-consuming process, called participative budgeting, allows managers at all levels to develop their own initial estimates for
budgeted sales, costs and so on.
Top-down budgeting describes the system where senior managers impose budget targets on more junior managers—there is little
participation or consultation in the budget-setting process. Budgets may be set at the corporate level and then cascaded down to the
various responsibility centres—profit centres and cost centres—throughout the organisation. This may be a cost-effective and timely
way of setting budgets, but there are two major disadvantages. First, senior managers may have less knowledge of the local business
environment than do those managers working directly in the particular responsibility centres. Budget targets may not embody this
knowledge and may be unrealistic. Second, limited involvement in setting budget targets can result in a lack of commitment by middle
and junior managers to achieving the budget targets.
The term bottom-up budgeting is used to describe the participative process in which people at the lower managerial and operational
levels play an active role in setting their own budget. Budgets are collected at the lowest responsibility centres of the business and are
consolidated and fed up to senior management. This budgeting process operates in a bottom-up manner. Under this approach, we
would still expect a certain amount of review and negotiation to take place before budgets are approved by senior managers.
Participative budgeting can encourage coordination and communication between managers and a greater understanding and
appreciation of the objectives and strategy of the wider organisation. Accuracy of the budget estimates may be enhanced because
those people close to operations have the best knowledge of the likely sales in their region or the likely costs of running their
responsibility centre.
It is generally believed that most people will perform better and try harder to achieve a budget goal if they have been consulted in
setting that budget. Such participation can give employees the feeling that ‘this is my budget', rather than the common feeling that ‘this
is the budget you imposed on me'.
Difficulty: Medium
79. Managers can window dress their performance by creating budgetary slack. Explain why a manager would do this and
support your answer with three examples.
There are three primary reasons why people create budgetary slack. First, people often believe that their performance will look better to
their superiors if they can ‘beat the budget'. Second, budgetary slack is often used to cope with uncertainty. A departmental supervisor
may feel reasonably confident of the cost projections in the departmental budget, but may also feel that some unforeseen event during
the budgetary period could result in unanticipated costs. (For example, an unexpected machine breakdown could occur.) One way of
allowing for that unforeseen event is to pad the budget. If nothing goes wrong, the supervisor can beat the cost budget. If some
unfortunate event does occur, the budgetary slack will absorb the impact of the event and the budget will still be met.
The third reason for padding budgets is that managers are competing for limited resources, and it is common for their initial budget
requests to be cut by their manager or the budget review committee. Thus we have a vicious circle: budgetary projections are padded
because they are likely to be cut, and they are cut because they are likely to be padded.
If the evaluation of a regional sales manager's performance is based on whether his or her sales budget for the territory is exceeded, it
encourages the sales manager to provide a conservative, or low, sales estimate.
When a supervisor provides a departmental cost estimate to their manager to be used in the budget, there is an incentive to
overestimate costs. When the actual cost incurred in the department is found to be less than the inflated cost projection, the manager
may conclude that the supervisor has managed the department in a cost-effective way.
These illustrations are examples of padding the budget. Budget padding means underestimating revenue or overestimating costs.
The difference between the revenue or cost projection that a person provides, and a realistic estimate of the revenue or cost, is called
budgetary slack. For example, if a plant manager believes that the annual electricity cost will be $18 000, but estimates a budget of
$20 000, then the manager has built $2000 of slack into the budget.
Difficulty: Medium
80. Zero-based budgeting is too introspective. Discuss this statement.
When managers focus on their own part of the business, they can overlook the interactions with other departments and
the relevance of their operations to overall business objectives and strategies. Thus, zero-base budgeting may not be very
useful in helping businesses to manage costs or improve their performance. It has also been claimed that it does not help
in identifying areas of waste, redundant activities, communication barriers or opportunities for more effectively deploying
resources to support business needs. In the modern business environment, there are more sophisticated techniques,
such as value analysis, that allow businesses to consider the viability of activities in terms of whether they add value to
the customer and, therefore, to the business.
Difficulty: Easy
81. Employees are always motivated to work towards the company's goals when budgets are handed down from top
management as employees rarely have the time or the inclination to become involved in the budgeting process.
FALSE
AACSB: Reflective
Difficulty: Medium
82. There should never be inaccuracies when forecasting sales figures as these figures are only affected by internal
factors which management can control.
FALSE
AACSB: Reflective
Difficulty: Easy
service firms
83. If an organisation were more focused on outputs rather than inputs, they would be advised to use program budgeting
as opposed to other alternatives.
TRUE
AACSB: Reflective
Difficulty: Medium
84. Before any steps are taken in the budgeting process, it is essential that all involved in the process familiarise
themselves with the strategic plans of the organisation so they can formulate the budget in light of these plans.
TRUE
AACSB: Reflective
Difficulty: Easy
85. Where an organisation elects to incorporate responsibility accounting into the firm, they will establish some common
responsibilities centres such as cost, revenue, investment and expense.
TRUE
AACSB: Reflective
Difficulty: Easy
86. Budgets can be used as a benchmark against which to evaluate performance and control costs.
TRUE
AACSB: Reflective
Difficulty: Easy
87. Budgets can be broken into three main categories, capital expenditure budgets, operating budgets and continuous
budgets.
FALSE
AACSB: Reflective
Difficulty: Easy
88. A problem with participative budgeting is that there will always be a tendency for those participating to build slack into
the budget to ensure a better outcome for their performance assessment.
TRUE
AACSB: Reflective
Difficulty: Easy
89.
As all budgets 'hang' off the sales budget, if the sales forecasts are incorrect, chances are all operating budgets will also be inaccurate.

TRUE

AACSB: Reflective
Difficulty: Easy
service firms
90. A detailed plan that shows the financial consequences of an organisation's operating activities for a specific future
time period is known as a strategic plan.
FALSE
AACSB: Reflective
Difficulty: Medium
91. The cash budget assists management in evaluating their financial needs.
TRUE
AACSB: Reflective
Difficulty: Easy
92. A budget manual communicates budget procedures and deadlines throughout the organisation.
TRUE
AACSB: Reflective
Difficulty: Easy
Category # of Quest
ions
Difficulty: Easy 48
Difficulty: Hard 5
Learning Objective: 9.01 Understand how the budgeting process fits into the wider strategic planning processes of an o 4
rganisation
Learning Objective: 9.02 Explain the five major purposes of the budgeting process 7
Learning Objective: 9.03 Understand how budgets are developed and used in responsibility accounting systems 4
Learning Objective: 9.04 Understand the various components that make up an annual budget 7
Learning Objective: 9.05 Discuss the importance of assumptions and predictions in budgeting 4
Learning Objective: 9.06 Describe the similarities and differences in the operating budgets prepared by manufacturers, 7
retailers and wholesalers, and service firms
Learning Objective: 9.07 Complete the major budgeting schedules for a service organisation 16
Learning Objective: 9.08 Describe a typical organisation's process of budget administration 4
Learning Objective: 9.09 Discuss the behavioural consequences of budgets: participative budgeting, budgetary slack a 18
nd budget difficulty
Learning Objective: 9.10 Understand zero-base budgeting and program budgeting 5
Learning Objective: 9.11 Complete the major budgeting schedules for a manufacturing organisation 16

1. A control system comprises
A. a predetermined or standard performance level.
B. a measure of actual performance.
C. a comparison between standard and actual performance.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 10.01 Explain how standard costing can be used to help control costs and manage resources more effectively
2. A cost variance is
A. the difference between the cost of a product and its selling price.
B. a measure of risk.
C. the difference between the actual cost and the standard cost.
D. the difference between actual costs in two successive time periods.
AACSB: Reflective
Difficulty: Easy
3. A standard cost is
A. the actual cost of a unit of production.
B. a budget for the production of one unit of a product or service.
C. useful in calculating equivalent units.
D. the average cost within the industry.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 10.02 Describe the analysis of historical data and engineering methods of setting standards
4. Which of the following are methods for setting standards?
A. Historical data analysis and cost analysis
B. Task analysis and analysis of historical data
C. Budgetary analysis and data analysis
D. Cost analysis and budgetary analysis
AACSB: Reflective
Difficulty: Easy
5. Which of the following statements is false concerning the two ways to set standards?
A. Time and motion studies are part of the task analysis method.
B. The usefulness of the historical data analysis method is reduced by changes in production methods.
C. The task analysis method is future oriented rather than past oriented.
D. The task analysis method and the analysis of historical data method cannot be used together.
AACSB: Reflective
Difficulty: Easy
6. Legacy Company Ltd has determined that 1 unit of its product requires 1.5 hours of direct labour in the assembly
department and 1 hour in the finishing department. Assemblers are paid $8.00 per hour and finishers are paid $9.00 per
hour. Determine the standard labour cost of one unit.
A. $22.50
B. $17.00
=1.5 * 8 + 1* 9 = 21
C. $20.00
D. $21.00
AACSB: Analytical
Difficulty: Easy
Learning Objective: 10.04 Develop standard costs for direct material and direct labour
7. Which of the following statements is false regarding perfection standards?
A. They are attained only under optimum operating conditions.
B. These standards assume peak efficiency, lowest input prices and best quality materials attainable.
C. These standards motivate some employees to achieve the lowest cost possible.
D. The benefits of these standards have been proven and are irrefutable.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 10.03 Explain how the use of perfection standards and practical standards may impact behaviour
8. A standard that assumes a production process is as efficient as practical under normal operating conditions is
A. a perfection standard.
B. an attainable standard.
C. an average standard.
D. an operating standard.
AACSB: Reflective
Difficulty: Easy
9. Which of the following statements about perfection standards is false?
A. Some managers believe that perfection standards encourage a higher level of performance.
B. Some managers believe that perfection standards discourage workers who may then not perform as well.
C. Some managers believe that perfection standards will encourage workers to sacrifice quality in order to achieve the
quantity standard.
D. Perfection standards are generally accepted by managers as the best type of standard.
AACSB: Reflective
Difficulty: Easy
A. Many service organisations cannot use standard costing because their services are non-repetitive.
B. Practical standards are also known as attainable standards.
C. Practical standards incorporate a certain amount of inefficiency, such as that caused by an occasional machine
breakdown.
AACSB: Reflective
Difficulty: Medium
11. A material price variance is shown by
A.
AP(PQ – SQ).
B.
(AP – SP).
C.
PQ (AP – SP).
D. (PQ – SQ) (AP – SP).

AACSB: Reflective
Difficulty: Easy
Learning Objective: 10.05 Calculate and interpret the direct material price and quantity variances, and the direct labour rate and efficiency variances
12. A material quantity variance is shown by
A.
SP (AQ – SQ).
B.
(SQ) (AQ).
C.
(AQ – SQ).
D.
(AQ – SQ) (AP – SP).
AACSB: Reflective
Difficulty: Easy
A. The standard cost per unit of materials is used to calculate a materials price variance.
B. The standard cost per unit of materials is used to calculate a materials usage variance.
C. The standard cost per unit of materials cannot be determined until the end of the period.
D.
The standard cost per unit of materials is used to calculate a materials price variance AND the standard cost per unit of materials is
used to calculate a materials usage variance.
AACSB: Reflective
Difficulty: Easy
14. Which department typically is responsible for an unfavourable materials price variance?
A. Purchasing
B. Engineering
C. Production
D. Receiving
AACSB: Reflective
Difficulty: Easy
Learning Objective: 10.08 Understand how control can be achieved through assigning responsibility for certain variances to particular managers
15. A labour rate variance is shown by
A.
AH (AR – SR).
B.
(AH – SH),
C.
(AH – SH) (AR – SR),
D.
AR (AH – SH),
AACSB: Reflective
Difficulty: Easy
16. A labour efficiency variance is shown by
A.
(AR) (AR).
B.
SR (AH – SH).
C.
(AH – SH).
D.
AH (AR – SR).
AACSB: Reflective
Difficulty: Easy
A. The standard direct labour hours per unit of output are used to calculate a labour rate variance.
B. The standard direct labour hours per unit of output are used to calculate a labour efficiency variance.
C. The standard direct labour hours per unit of output cannot be determined until the end of the period.
AACSB: Reflective
Difficulty: Easy
18. An unfavourable labour efficiency variance indicates that
A. standard hours exceed actual hours.
B. actual hours exceed standard hours.
C. standard rate times standard hours exceeds actual rate times actual hours.
D. actual rate exceeds standard rate.
AACSB: Reflective
Difficulty: Medium
19.
Given the following information, calculate the materials price variance:

Direct materials usage variance = SP * (AQ - SQ)
A. $2800 (F)
B. $2800 (U) 3000 = SP * (30,000 - 29,000) --> SP = $3 per unit
C. $6000 (U)
D. $6000 (F) = AQ * (AP - SP) = 30,000 * (84,000 / 30,000 - 3) = 6000 (F)

AACSB: Analytical
Difficulty: Medium
20.
Given the following information, calculate the direct labour rate variance.

A. $17 250 (U) Direct labor efficiency variance = SR * (AH - SH)
B. $20 700 (U)
C. $21 000 (F) 3200 = SR * (34,500 - 35,000) --> SR = 6.4
D. $20 700 (F)
AH * (AR - SR) = 34,500 * (241,500 / 34,500 - 6.4) = 20,700 (U)
AACSB: Analytical
Difficulty: Easy
21.
The following data relates to QA firm.
Cost standards:

Actual results:
7800 units were produced.

Calculate the direct material quantity variance.

A. $750 (F)
B. $800 (F)
= SP * (AQ - SQ) =2.5 * (23,100 - 3*7800) = 750 (F)
C. $750 (U)
D. $780 (F)

AACSB: Analytical
Difficulty: Easy
22.
Cost standards:

Actual results:

Calculate the direct material price variance, based on the quantity of materials purchased.

A. $2310 (U)
B. $2500 (U)
=AQ * (AP - SP) = 25,000 * (2.6 - 2.5) = 2500 (U)
C. $2500 (F)
D. $2000 (U)

AACSB: Analytical
Difficulty: Easy
23.
The following data relates to QA firm:
Cost standards:

Actual results:

Calculate the direct material price variance, based on the quantity of materials purchased.

A. $2310 (F) =AQ * (AP - SP) = 23,100 * (2.6 - 2.5) = 2310 (U)
B. $2310 (U)
C. $2500 (U)
D. $2500 (F)

AACSB: Analytical
Difficulty: Easy
24.
Cost standards:

Actual results:

Calculate the direct labour rate variance.

A. $8010 (F) =AH * (AR - SR) = 40,100 * (7.3 - 7.5) = 8020 (F)
B. $8000 (U)
C. $8020 (F)
D. $7800 (F)

AACSB: Analytical
Difficulty: Easy
25.
Cost standards:

Actual results:

Calculate the labour efficiency variance.

A. $8000 (F)
B. $8000 (U) =SR * (AH - SH) = 7.5 * (40,100 - 5*7800) = 8250 (U)
C. $8250 (U)
D. $8250 (F)

AACSB: Analytical
Difficulty: Easy
26.
I Wear Optometry determined the following variances had occurred during the month of September:

The company made 1600 pairs of eyeglasses during the month using 2000 direct labour hours. The standard wage rate per hour is
$14.50. Determine the standard wages for September's output.

A. $22 750
B. $34 800
C. $29 000
D. $23 200

AACSB: Analytical
Difficulty: Medium
27.
I Wear Optometry determined the following variances had occurred during the month of September:

The company made 1600 pairs of eyeglasses during the month using 2000 direct labour hours. The standard wage rate per hour is
$14.50. What is the number of standard hours allowed for one pair of eyeglasses?

A. 1 hour
B. 1600 hours
C. 1 hour 15 minutes
D. Insufficient data to determine

AACSB: Analytical
Difficulty: Medium
28. Cultco Company Ltd has set the following direct material standards per unit of product: 2.5 kg @ $3.00 per kg; $7.50
per unit. During April, actual direct material purchased and used amounted to 8000 kg at a cost of $3.10 per kg. Actual
production amounted to 3000 units. Determine Cultco's direct material price variance.
A. $1500 (U)
B. $800 (U) =AQ * (AP - SP) = 8000 * (3.1 - 3) = 800 (U)
C. $750 (U)
D. $500 (U)
AACSB: Analytical
Difficulty: Medium
production amounted to 3000 units. Determine Cultco's direct material quantity variance.
A. $2300 (U)
B. $1500 (U)
C. $800 (U)
=SP * (AQ - SQ) = 3 * (8000 - 2.5 * 3000) = 1500 (U)
D. $500 (U)
AACSB: Analytical
Difficulty: Medium
production amounted to 3000 units. Determine the total material variance.
A. $2300 (U)
B. $11 500 (U) =AQ * AP - SQ * SP = 8000 * 3.1 - (2.5*3000) * 3 = 2300 (U)
C. $800 (U)
D. $750 (U)
AACSB: Analytical
Difficulty: Hard
31. Twister Pty Ltd has set direct labour standards of 3 hours per unit and $5 per hour. During the month 2900 hours at a
total cost of $17 400 were used to produce 1000 units. Determine the direct labour efficiency variance.
A. $100 (F)
B. $100 (U) =SR * (AH - SH) = 5 * (2900 - 3 * 1000) = 500 (F)
C. $500 (F)
D. $500 (U)
AACSB: Analytical
Difficulty: Easy
total cost of $17 400 were used to produce 1000 units. Determine the direct labour price variance.
A. $2400 (U)
B. $2400 (F)
C. $2900 (U)
= AH * (AR - SR) = 2900 * (17400/2900 - 5) = 2900 ( U)
D. $2900 (F)
AACSB: Analytical
Difficulty: Easy
total cost of $17 400 were used to produce 1000 units. Determine the total direct labour variance.
A. $2400 (F)
B. $2900 (F) =(AH * AR) - (SH * SR) = (2900 * (17400/2900) - (3000 * 5) = 2400 (U)
C. $2900 (U)
D. $2400 (U)
AACSB: Analytical
Difficulty: Medium
34. Management by exception is best defined as
A. controlling actions of subordinates through acceptance by them of management techniques.
B. investigating unfavourable variances.
C. devoting management time to follow up only on significant variances.
D. controlling costs so that non-zero variances are quite exceptional.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 10.06 Explain several methods that can be used for assessing the significance of standard cost variances
35. When considering the significance of cost variances, managers should not consider
A. relative size of the variances.
B. recurring variances.
C. the trends of the variances.
D. favourable or unfavourable status of the variances.
AACSB: Reflective
Difficulty: Medium
36. What is the most viable rule of thumb for choosing variances that should be investigated?
A. Greater than $10 000 or greater than 10 per cent of standard cost
B. Greater than 50 per cent of standard
C.
Never investigate favourable variances
D.
Always investigate unfavourable variances
AACSB: Reflective
Difficulty: Easy
37. A direct labour efficiency variance cannot be caused by
A. producing fewer finished units than originally planned.
B. poor quality raw materials.
C. employee inefficiency.
D. an out-of-date labour time standard.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 10.07 Understand how to determine the causes of variances, and when to take corrective actions
38. Which of the following statements regarding standard costing is/are true?
A. Standard costing is useful in diagnosing organisational performance.
B. Standard costing is useful in performance appraisal.
C. Standard costing is useful in determining employee pay bonuses.
AACSB: Reflective
Difficulty: Easy
39. Which of the following statements regarding variances is/are true?
The actions that create a favourable direct material price variance
i. can result in an unfavourable direct material quantity variance
ii. are likely to create an unfavourable direct labour rate variance
iii. can result in an unfavourable direct labour efficiency variance
A. i
B. i and ii
C. i and iii
D. ii and iii
AACSB: Reflective
Difficulty: Easy
40. The manager generally responsible for the direct material price variance is the
A. sales manager.
B. production supervisor.
C. purchasing manager.
D. personnel manager.
AACSB: Reflective
Difficulty: Easy
41. The production supervisor generally does not influence the
A. direct material quantity variance.
B. direct labour rate variance.
C. direct labour efficiency variance.
D. direct material price variance.
AACSB: Reflective
Difficulty: Medium
42.
Which of the following statements is false?

A. Standard costs are used for product costing.
B. Standard costs provide a benchmark against which actual costs can be compared.
C. Standard costs are actual costs.
D. Standard costs are used for control.

AACSB: Reflective
Difficulty: Medium
Learning Objective: 10.11 Prepare journal entries to account for direct material and direct labour cost variances
43. Under a standard costing system
A. standard costs are entered into the work in process and finished goods inventory account.
B. actual costs are entered into work in process inventory account while standard costs are entered into the finished
goods account.
C. the raw material inventory account is based on standard quantities and standard cost.
D. actual costs are entered into raw material and work in process inventory account.
AACSB: Reflective
Difficulty: Easy
A. Variances are temporary accounts.
B. Variance accounts may be closed to cost of goods sold.
C. Favourable variances are recorded as a credit entry.
AACSB: Reflective
Difficulty: Easy
45. If Company XYZ purchased 30 000 kg of brass metal at an actual price of $7.10 per kg (standard price is $7.00 per
kg), the entry to the direct material price variance should be
A. $3000 debit.
B. $3000 credit. = AQ * (AP - SP) = 30000 * (7.1 - 7) = 3000 (Dr)
C. $1500 debit.
D. $1500 credit.
AACSB: Analytical
Difficulty: Easy
46. Which of the following journal entries correctly represents the recording of an unfavourable material price variance?
A. Direct material debit, materials price variance and accounts payable credit.
B. Direct material and materials price variance debit, accounts payable credit.
C. Direct material debit, work in process and accounts payable credit.
D. Direct materials debit, accounts payable credit.
AACSB: Reflective
Difficulty: Easy
47. A company using a standard costing system uses an actual quantity of 1100 kg of material at an actual cost of $1.20
per kg. The standard quantity allowed was 1000 kg at a standard cost of $1.00 per kg. After the goods are completed and
transferred from work in process inventory, what is the cost of direct material that would appear in finished goods
inventory?
A. $1000 =1000 * 1 = 1000
B. $1100
C. $1200
D. $1320
AACSB: Reflective
Difficulty: Easy
48. A company using a standard costing system uses an actual quantity of 520 direct labour hours at an actual cost of
$5.90 per hour. The direct labour hours quantity allowed was 500 hours at a standard cost of $6.00 per hour. What is the
cost of direct labour that would appear in work in process inventory?
A. $3068
B. $3120 =500 * 6 = 3000
C. $2950
D. $3000
AACSB: Reflective
Difficulty: Easy
49. A favourable labour rate variance leads to a
A. credit to the labour rate variance account.
B. debit to the labour rate variance account.
C. larger than standard debit to work in process.
AACSB: Reflective
Difficulty: Easy
50.
Flexer Company Ltd has set the following standards for the production of one unit of product. Normal production each month is 500
units.

During June, actual production amounted to 420 units. All direct material was purchased and used this month. Actual cost amounted
to:

Determine the direct material price for June production.

A. $875 (U) = AQ * (AP - SP) = 3500 * (21875/3500 - 6.5) = 875 (F)
B. $840 (F)
C. $840 (U)
D. $875 (F)

AACSB: Analytical
Difficulty: Easy
51.
units.

to:

Determine the standard material quantity allowed for June production.

A. 4000 kg
B. 8 kg
SQ = 8 * 420 = 3360 kg
C. 3360 kg
D. 3500 kg

AACSB: Analytical
Difficulty: Easy
52.
units.

to:

Determine the direct material quantity variance for June production.

A. $35 (U) =SP * (AQ - SQ) = 6.5 * (3500 - 3360) = 910 (U)
B. $875 (U)
C. $910 (U)
D. $875 (F)

AACSB: Analytical
Difficulty: Easy
53.
units.

to:

Determine the direct labour rate variance for June production.

A. $280 (U) =AH * (AR - SR) = 1720 * (12212/1720 - 7) = 172 (U)
B. $172 (U)
C. $200 (U)
D. $168 (U)

AACSB: Analytical
Difficulty: Easy
54.
units.

to:

Determine the direct labour efficiency variance for June production.

A. $452 (U) =SR * (AH - SH) = 7 * (1720 - 4*420) = 280 (U)
B. $172 (U)
C. $280 (U)
D. $284 (F)

AACSB: Analytical
Difficulty: Easy
55.
units.

to:

Determine the standard direct labour hours allowed for June production.

A. 2000 hours = 4 * 420 = 1680 hrs
B. 1720 hours
C. 420 hours
D. 1680 hours

AACSB: Analytical
Difficulty: Easy
A. Standard cost systems use budgeted costs of direct material and direct labour.
B. Variances provide a means of performance evaluation and rewards for employees.
C. A standard costing system is usually more expensive than an actual costing system.
D. Variances provide motivation for employees to adhere to standards.
AACSB: Reflective
Difficulty: Easy
A. Unfavourable variances represent the costs of producing inefficiently.
B. Unfavourable variances (after closing to cost of goods sold) cause cost of goods sold to be higher.
C. Unfavourable variances are recorded as a credit entry.
D. Significant unfavourable variances should be investigated by managers.
AACSB: Reflective
Difficulty: Medium
58. Which of the following statements is/are false?
A. All favourable variances represent the costs of producing efficiently.
B. Favourable variances (after closing to cost of goods sold) cause cost of goods sold to be lower.
C. Significant favourable variances do not need to be investigated by managers.
D. All favourable variances represent the costs of producing efficiently AND significant favourable variances do not need
to be investigated by managers.
AACSB: Reflective
Difficulty: Medium
59. Which of the following statements is true with regard to variances requiring investigation?
i. Favourable variances do not need to be investigated.
ii. Large variances should be investigated.
iii. Consistent trends in variances should be investigated.
A. i
B. ii
C. i and ii
D. ii and iii
AACSB: Reflective
Difficulty: Easy
60. A firm's purchasing manager bought poor quality material at a large saving. Because of the lower quality of material,
more scrap was produced and because of the extra labour hours required an additional employee had to be hired to
assist in the cutting operation. Assuming only the facts given, what variance(s) would result?
A. Favourable material price
B. Favourable material price; unfavourable material quantity; unfavourable labour efficiency
C. Favourable material price; unfavourable material quantity; unfavourable labour efficiency; unfavourable labour rate
D. Favourable material price; unfavourable labour efficiency
AACSB: Reflective
Difficulty: Medium
61. For a particular period a firm worked a larger number of overtime hours than planned in order to complete a larger
than usual number of job orders. The jobs were all completed within the standard time allowed for each job. Assuming
only the facts given, what variance(s) would result from these facts?
A. Unfavourable labour rate; unfavourable labour efficiency
B. Unfavourable labour efficiency; unfavourable material quantity variance
C. Unfavourable labour rate; unfavourable labour efficiency; unfavourable material quantity
AACSB: Reflective
Difficulty: Medium
62. Which of the following statements is a definition of standard quantity of direct materials allowed for a period? Standard
quantity of direct materials is
A. the number of units of material that should have been used for expected (budgeted) production.
B. the number of units of material that were used for actual production.
C. the number of units of material that should have been used for actual production.
D. the number of units of material required for each unit of production.
AACSB: Reflective
Difficulty: Easy
63.
A particular firm with zero material inventory purchased 30 000 kg of material and used 25 000 kg. For control purposes, it is
recommended that firms calculate the material price variance at the time of purchase. The variance could alternatively be calculated at
the time of usage of that material. Which of the following statements most correctly reflects a comparison of the two methods for this
firm?

A. Whether calculated on purchase or usage, both variances will be favourable.
B. Whether calculated on purchase or usage, both variances will be unfavourable.
C. The variance calculated on purchase will be larger than the variance calculated on usage, but in the same direction
(favourable/unfavourable).
D. The variance calculated on purchase will be smaller than the variance calculated on usage, but in the same direction
(favourable/unfavourable).

AACSB: Reflective
Difficulty: Medium
64. In which of the following circumstances would it be acceptable to record the material price variance at the time of
usage of the materials?
A. Where a fixed contract price is in place for the purchase of materials for a period.
B. Where the purchasing manager is held accountable for all material price variances.
C. Where the purchasing manager has little control over the price paid.
D. Both where a fixed contract price is in place for the purchase of materials for a period AND where the purchasing
manager has little control over the price paid.
AACSB: Reflective
Difficulty: Hard
65. Which of the following statements regarding allowances for spoilage and/or inefficiency is not correct?
A. When allowances are not included within the standards, any inefficiencies are highlighted as unfavourable variances.
B. When allowances are not included within the standards, any inefficiencies are highlighted as favourable variances.
C. Firms would never set standards that included an allowance for spoilage.
D. When allowances are not included within the standards, any inefficiencies are highlighted as favourable variances AND
firms would never set standards that included an allowance for spoilage.
AACSB: Reflective
Difficulty: Easy
66. A department's budgeted output for a 4-week period was 500 units at a standard cost of $100 per unit. The actual
production was 450 units and the firm's ledger revealed actual costs for the month to be $50 200. The standard production
cost for the period is
A. $50 000. =450 * 100 = 45000
B. $50 200.
C. $45 000.
D. insufficient information to determine.
AACSB: Reflective
Difficulty: Easy
67. When material price variances are recognised at the time of material purchase, direct materials used are
A. credited to the materials account at standard cost.
B. debited to the work in process account at actual prices.
C. credited to the materials account at actual cost.
D. debited to the materials account at standard cost.
AACSB: Reflective
Difficulty: Easy
68. A material price variance of $5000 (unfavourable) for a period has been calculated. The actual unit price was $9.00.
The actual quantity of material used was 6000. The standard quantity of materials was 5000. Calculate the standard unit
price for a unit of raw materials for the period (round where necessary).
A. $5.00
B. $8.00 Material price variance = AQ * (AP - SP)
C. $8.17 5000 = 6000 * (9 - X) --> X = 8.17
D. $9.83
AACSB: Analytical
Difficulty: Easy
69. Which of the following could not be an explanation of the labour efficiency variance for a firm whose variances for the
period included an unfavourable material price variance and a favourable labour efficiency variance?
A. Standards are out of date.
B. If the unfavourable material price variance was due to better quality materials being purchased, this in turn could lead
to less waste of materials.
C. A timesaving improvement to the material-handling techniques has not yet been incorporated into the standard.
D. Deliberate inefficiency.
AACSB: Reflective
Difficulty: Medium
70.
Selected data about a firm's materials follows.

What amount would be debited to materials account for the purchase of material? Actual price * standard quantity
Actual price * actual quantity = $750
A. $780
B. $750 Material price variance = AQ * (-AP + SP)
C. $720
D. $810
30 = -750 + X --> X = 780

AACSB: Analytical
Difficulty: Easy
71.
Selected data about a firm's materials follows.

What amount would be debited to work in process account for materials used?

A. $660 Actual price * actual quantity = $750
B. $630
C. $600
Material price variance = AQ * (-AP + SP)
30 = -750 + X --> X = 780
AACSB: Analytical
Difficulty: Easy
72. When using the statistical control chart to investigate variances
A. managers should only investigate variances that are beyond the critical value.
B. managers should only investigate variances that are fall below the critical value over a number of consecutive periods.
C. any variances that go beyond the critical values are likely to be the result of random events such as employee illness.
D. managers should estimate the critical values by averaging the variances over a number of periods.
AACSB: Reflective
Difficulty: Medium
73. Jasmine Morron is examining a statistical control chart on the recent cost report of her manufacturing company.
Jasmine is focusing on one specific process, the labour efficiency variance of polishing. She determines that the critical
values for this process are $1000. Which of the following statements is correct?
A. Jasmine should investigate only unfavourable variances that are larger than $1000.
B. Any variances of less than $1000 are likely to be the result of random events.
C. Jasmine should investigate unfavourable variances of any size, and favourable variances that are larger than $1000.
D. Jasmine should investigate any variances that are larger than $500.
AACSB: Reflective
Difficulty: Medium
74. Jasmine Morron is examining a statistical control chart on the recent cost report of her manufacturing company.
Jasmine is focusing on one specific process, the labour efficiency variance of polishing. She determines that the critical
values for this process are $1000. The labour efficiency variances for the last 6 months were all favourable: $500F (July),
$600F (August), $750F (September), $880F (October), $900F (November) and $990F (December). Jasmine decides not
to investigate these variances. Do you agree with her decision?
A. Yes, because all the variances are below the critical value.
B. Yes, because all the variances are below the critical value and are favourable.
C. No, because there is a trend of the variances increasing steadily over time.
D. No, she should investigate the variances in November and December because they are both within 10% of the critical
value.
AACSB: Reflective
Difficulty: Medium
75. Jay Bole is in the process of developing a standard for the labour cost of one unit of Product X. According to the
design manual, it takes a skilled worker 30 minutes to produce one unit of Product X when the workshop is operating at
peak condition. However, Product X is quite complex and even a skilled worker operating in high efficiency often needs
another 5 minutes to adjust the tools, re-oil the machine and rework some aspects of the product. A skilled worker is paid
$30 per hour, while the company pays 20 per cent on-costs on top of this.
Jay decides to develop a perfection standard. The standard labour cost for one unit of Product X is
A. $15.
B. $17.50.
C. $18.
D. $21.
AACSB: Analytical
Difficulty: Medium
76. Jay Bole is in the process of developing a standard for the labour cost of one unit of Product X. According to the
design manual, it takes a skilled worker 30 minutes to produce one unit of Product X when the workshop is operating at
peak condition. However, Product X is quite complex, and even a skilled worker operating in high efficiency often needs
another 5 minutes to adjust the tools, re-oil the machine, and rework some aspects of the product. A skilled worker is paid
$30 per hour, while the company pays 20 per cent on-costs on top of this.
Jay decides to develop a practical standard. The standard labour cost for one unit of Product X is
A. $15.
B. $17.50.
C. $18.
D. $21.
AACSB: Analytical
Difficulty: Medium
77. When developing a perfection standard for direct labour, a manager should include which of the following?
i Labour on-costs
ii Occasional inefficiencies and machine breakdowns
iii A minimal acceptable idle time
A. i
B. i and ii
C. iii
D. i and iii
AACSB: Reflective
Difficulty: Easy
78. Dexter Surgical Tools has set the following direct labour standard: 0.5 hours at $20 per hour, for each unit of Tool #11.
The company plans to produce 1200 units of Tool #11 in July; however, the actual production was 1000 units and only
900 units were actually sold. The actual labour cost for July was $22 per hour.
The labour efficiency variance for July was
A. $1200 Favourable.
B. $1200 Unfavourable. =SR * (AH - SH) = 20 * (0.5 * 1000 - 0.5 * 900) = 1000 (U)
C. $1000 Favourable.
D. $1000 Unfavourable.
AACSB: Analytical
Difficulty: Easy
79. Dexter Surgical Tools has set the following direct labour standard: 0.5 hours at $20 per hour, for each unit of Tool #11.
The company plans to produce 1200 units of Tool #11 in July; however, the actual production was 1000 units and only
900 units were actually sold. The actual labour cost for July was $22 per hour.
Which of the following is a likely explanation for the July labour efficiency variance?
A. The standard was set incorrectly.
B. A machine breakdown has resulted in unanticipated inefficiencies.
C. The production level was smaller than expected.
D. Both incorrectly set standards and a machine breakdown are likely explanations.
AACSB: Reflective
Difficulty: Medium
80. Dexter Surgical Tools has set the following perfection direct labour standard: 0.5 hours at $20 per hour, for each unit
of Tool #11. The company plans to produce 1200 units of Tool #11 in July; however, the actual production was 1000 units
and only 900 units were actually sold. The actual labour cost for July was $22 per hour.
If Dexter Surgical Tools decides to use a practical standard instead of the perfection standard, the labour efficiency
variance is likely to
A. remain unchanged.
B. increase.
C. decrease.
D. not enough information.
AACSB: Reflective
Difficulty: Medium
81. Companies sometimes develop standards based on historical data. Which of the following statements about this
approach is correct?
A. This is an appropriate approach for mature production process.
B. This is an appropriate approach for processes that are labour intensive.
C. This is an inappropriate approach because it is a relatively more expensive approach to standard setting.
D. This approach is only acceptable for manufacturing companies.
AACSB: Reflective
Difficulty: Easy
82. Which of the following is not a desired outcome from allowing managers to participate in the setting of standards?
A. Greater confidence in the accuracy of the standard
B. Increased commitment to standards
C. Easily attained standards
AACSB: Reflective
Difficulty: Medium
Learning Objective: 10.09 Describe how the use of standard costing and variance reporting may impact individuals' behaviours
83. When a manager receives a bonus based on meeting the standards and achieving increased efficiencies which of the
following could be an undesired outcome?
A. Increased profit
B. Satisfied customers
C. Reduced employee theft
D. Lower quality raw materials
AACSB: Reflective
Difficulty: Medium
84. Standard costs can be used for
A. controlling costs and products.
B. controlling budgets and products.
C. control and products.
D. control and product costing.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 10.10 Explain how standard costs are used in product costing
85. In a standard costing system all inventories are recorded at
A. actual cost.
B. standard cost.
C. budgeted cost.
D. purchase cost.
AACSB: Reflective
Difficulty: Easy
86. As production takes place, the product costs are added to the
A. raw materials inventory account.
B. work in process inventory account.
C. finished goods inventory account.
D. cost of goods sold account.
AACSB: Reflective
Difficulty: Medium
87. An debit balance in the direct material price variance account or direct labour price variance accounts would cause the
costs of goods sold to
A. increase.
B. decrease.
C. stay the same.
D. have no impact.
AACSB: Reflective
Difficulty: Medium
88.
Usefulness of standard costs in controlling costs

Standard costs are said to be useful in controlling costs. Assume that the standard cost for raw materials per unit of finished product is
$6.00 based on 3 kg at $2.00 per kg.
i. Explain how such a standard can be used to evaluate performance.
ii. Why is the degree of controllability important in utilising standard costs to evaluate performance?
i. The standard cost provides a measure of how much material should be used for a unit of product and how much each
kilogram of raw material should cost. This standard provides a basis for evaluating performance by allowing a benchmark
to be established based on the actual output of finished product for the time period. If an output of 100 units is assumed,
then 300 kilograms should have been used. Furthermore, these materials should have been purchased for $2 per kilo.
ii. The degree of controllability is important because not all factors are subject to the same degree of control. For example,
the market for the raw material may be extremely competitive, in which case both buyers and sellers in that market are
price takers. Therefore, management would have very little control over the material's price variance. On the other hand,
management generally has more control over the usage of materials due to the ability to influence the amount of scrap,
rejected units etc. that are produced.

Difficulty: Medium
89.
Motivational effects of standard cost systems

Standard cost systems can have motivational effects; some are desirable, some are not. Consider the following situation:
The materials purchasing manager is paid a salary plus a bonus based on the net favourable materials price variance. Generally, this
bonus amounts to 30 to 40 per cent of the manager's total compensation. Due to the bankruptcy of a company in a related field, there is
an opportunity to buy a key raw material. The standards for this material call for grade AA, usually purchased for $56 per tonne.
Because of the bankruptcy, the company can obtain grade AAAA for $62 per tonne. While the quality of the final product will be the
same regardless of the grade of raw material used, there will be substantial savings in production if the grade AAAA material is used.
These savings are expected to be two to three times the additional cost of $6 per tonne.
i. How would an unfavourable price variance on a particular purchase affect the overall price variance for the year?
ii. Will the use of the materials price variance to provide a bonus to the purchasing manager lead to a desirable or undesirable
behavioural outcome? Explain.
i. The effect of an unfavourable price variance is to reduce the net favourable variance. A sufficient number of such events
could cause the net materials price variance to be unfavourable and would eliminate the bonus to the materials
purchasing manager.
ii. The use of the variance in this way would lead to an undesirable behavioural outcome. The materials purchasing
manager is a gatekeeper; that is, this manager observes the purchasing opportunities available and determines whether
the firm will follow them. In this case, the manager would be unlikely to pursue the opportunity since it would have a
negative effect on the bonus calculation. As a result, the overall possibility of offsetting higher purchase costs with savings
in production would not be explored by management.

Difficulty: Hard
90.
Interaction of materials and labour variances

For the quarter just ended, BoSan Pty Ltd reported the following variances in one of its manufacturing departments:

The sum of the favourable variances above exceeded the unfavourable materials price variance by a considerable amount. The quality
of the output from the department was the same as usual. Practically all of the raw material used in this quarter was purchased in this
quarter.
Is there any connection between these variances? If so, explain.
While a connection between these variances cannot be guaranteed, the following certainly is plausible. Higher than
standard quality materials were purchased leading to an unfavourable materials price variance. When these materials
were utilised, however, favourable efficiency variances were created because the higher quality raw material was easier
for labour and machines to process, reducing wasted material and wasted labour and machine time.

Difficulty: Hard
91.
Cost flow: standard system versus normal system

How does the flow of costs in a standard cost system differ from the flow in a normal cost system?
In a standard cost system, the entries into the work in process inventory account are based on standard quantities and
standard costs. In an actual cost system, the entries would be based on actual quantities and actual costs. The same
comment applies to the finished goods inventory account.
The raw materials inventory accounting standard cost system reflects actual quantities purchased valued at standard
costs. In an actual cost system, actual purchase costs would be entered into the account.

Difficulty: Medium
92. Explain how practical standards the attitude of managers and their willingness to commit to the set standards.
Standards that are challenging but are expected to be attained are called practical (or attainable) standards. These
standards assume a production process that is as efficient as it is practical, under normal operating conditions. Practical
standards factor in occurrences such as occasional machine breakdowns and normal amounts of raw material wastage.
Attaining a practical standard keeps employees on their toes, without demanding miracles. Many organisational
psychologists believe that practical standards result in greater motivation to achieve standards, and encourage more
positive and productive employee attitudes, than do perfection standards.
Difficulty: Medium
93. In general, it is felt that theoretical standards do not motivate employees to achieve goals, as employees are aware
that the standards set are virtually impossible to achieve.
TRUE
AACSB: Reflective
Difficulty: Easy
94. It is possible to set standards by benchmarking against better performing companies in
the industry.
TRUE
AACSB: Reflective
Difficulty: Easy
95. When investigating variances, management are more likely to investigate those costs that are uncontrollable.
FALSE
AACSB: Reflective
Difficulty: Easy
96. Variance analysis is used to evaluate actual performance by analysing the differences between standard and actual
costs.
TRUE
AACSB: Reflective
Difficulty: Easy
97. Five kilograms at a cost of $7 per kilogram and 2 hours @ $32 per hour are examples of standard costs for the
production of a product.
TRUE
AACSB: Reflective
Difficulty: Easy
98. Standard costs are used for evaluating performance and controlling costs but they are never used for costing
products.
FALSE
AACSB: Reflective
Difficulty: Easy
99. Variances are used for control purposes by highlighting problem areas, such as using too many materials, so that
corrective action can be taken.
TRUE
AACSB: Reflective
Difficulty: Easy
100. When using a standard costing system for recoding purposes, most companies will close the variance accounts by
debiting finished goods.
FALSE
AACSB: Reflective
Difficulty: Easy
101. Production managers are usually in the best position to influence labour rates, labour usage and material prices.
FALSE
AACSB: Reflective
Difficulty: Easy
102. In setting standards, it is common to carry out time and motion studies to determine how long it should take workers
to perform a particular process.
TRUE
AACSB: Reflective
Difficulty: Easy
103. When estimating the cost of an economic quantity of a raw materials, any discounts for the bulk order are included in
the estimated price.
TRUE
AACSB: Reflective
Difficulty: Easy
104. When a variance is identified as insignificant, managers need to find out the cause of the variance.
FALSE
AACSB: Reflective
Difficulty: Easy
105. Product costs can be used in both financial and management accounting.
TRUE
AACSB: Reflective
Difficulty: Easy
Category # of Questi
ons
Difficulty: Easy 68
Difficulty: Hard 4
Learning Objective: 10.01 Explain how standard costing can be used to help control costs and manage resources mor 7
e effectively
Learning Objective: 10.02 Describe the analysis of historical data and engineering methods of setting standards 6
Learning Objective: 10.03 Explain how the use of perfection standards and practical standards may impact behaviour 11
Learning Objective: 10.04 Develop standard costs for direct material and direct labour 5
Learning Objective: 10.05 Calculate and interpret the direct material price and quantity variances, and the direct labour 33
rate and efficiency variances
Learning Objective: 10.06 Explain several methods that can be used for assessing the significance of standard cost va 7
riances
Learning Objective: 10.07 Understand how to determine the causes of variances, and when to take corrective actions 10
Learning Objective: 10.08 Understand how control can be achieved through assigning responsibility for certain varianc 7
es to particular managers
Learning Objective: 10.09 Describe how the use of standard costing and variance reporting may impact individuals' be 3
haviours
Learning Objective: 10.10 Explain how standard costs are used in product costing 4
Learning Objective: 10.11 Prepare journal entries to account for direct material and direct labour cost variances 16
1. Which of the following statements on flexible budgets is false?

A. It enables companies to control overhead costs.
B. It can be used to calculate direct material and direct labour variances.
C. It is the same as a static budget.
D. It provides a useful basis for comparison between actual and expected costs for a given level of activity.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 11.01 Distinguish between static and flexible budgets
2. A static budget is always:

A. based on a specific planned activity level.
B. based on a range of activity within which the firm may operate.
C. the same as a flexible budget.
D. based on maximum capacity.
AACSB: Reflective
Difficulty: Easy
3. Which of the following statements is true?

A. In a standard costing system, standard costs can only be used for cost control.
B. In a standard costing system, standard costs can only be used for product costing.
C. In a standard costing system, standard costs are used for both cost control and product costing.
D. In a normal costing system, standard costs are used for cost control and normal costs are used for product costing.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 11.09 Outline the criticisms and advantages of standard costing
4. Which of the following formulas is the relationship between activity and total budgeted overhead cost is represented
by?
A. Budgeted variable overhead cost per unit  total activity units
B. Budgeted variable overhead cost per unit + budgeted fixed overhead cost
C. (Budgeted variable overhead cost per unit  total activity units) + budgeted fixed overhead costs
D. (Budgeted fixed overhead cost per unit  total activity units) + (budgeted variable overhead cost per unit  total activity
units)
AACSB: Reflective
Difficulty: Easy
Learning Objective: 11.05 Calculate and interpret the variable overhead spending and efficiency variances, and the fixed overhead budget and volume
variances
5. When a flexible budget is used, a decrease in the actual production level within a range of activity would
A. decrease variable cost per unit.
B. decrease total variable costs.
C. increase variable cost per unit.
D. decrease fixed cost per unit.
AACSB: Reflective
Difficulty: Easy
variances
6.
Star Company is preparing a flexible budget for 2008 and the following maximum capacity estimates for department Z are:
Assume that Star's normal capacity is 80 per cent of maximum capacity. What would be the total factory overhead rate per direct labour
hour in a flexible budget at normal capacity?
A. $6.00
B. $6.50 =150000/50000 + 240000/(50000*80%)
C. $7.50
=$9
AACSB: Analytical
Difficulty: Easy
variances
7.
A lexible budget is appropriate for a:
Sales commission budget Direct material budget Variable overhead budget
A.
Yes No Yes
B.
Yes Yes Yes
C.
No Yes No
D.
No No No
AACSB: Analytical
Difficulty: Easy
8.
A flexible budget for Heath Company for 5 000 hours is shown below:
What are the total overhead costs for 10 000 hours?
A. $35 000 Total overhead costs = Variable overhead + Fixed overhead

B. $45 000
C. $50 000 = $25 000 * 2 + $10 000
D. $60 000 = $60 000
AACSB: Analytical
Difficulty: Easy
variances
9. The predetermined fixed overhead rate is found by
A. budgeted total overhead / actual total activity.
B. actual fixed overhead / planned activity measure.
C. budgeted fixed overhead / planned activity measure.
D. budgeted fixed overhead / actual activity measure.
AACSB: Reflective
Difficulty: Easy
variances
10. Overhead application refers to

A. the addition of overhead cost to work in process inventory as a product cost.
B. a system of allocating manufacturing cost to products.
C. static budget applications.
D. Both the addition of overhead cost to work in process inventory as a product cost AND a system of allocating
manufacturing cost to products.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 11.04 Apply overheads to work in process under a standard costing system
11. The activity measure for overhead allocation should be one

A. that varies in a similar pattern to the way that variable overhead varies.
B. that follows a fixed pattern.
C. that has a magnitude that never changes.
D. that is always based on units produced, not on hours used.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 11.02 Explain the advantages of a flexible budget for performance evaluation and control
12.
Which of the following is used in the computaion of the variable overhead spending variance?
Actual variable Flexible budget based Standard variable

factory overhead on standard hours overhead rate
A.
No Yes No
B.
No No No
C.
Yes No Yes
D.
Yes Yes Yes
AACSB: Reflective
Difficulty: Easy
variances
13. In a standard costing system, the total manufacturing overhead variance is measured as
A. the difference between applied overhead based on actual output and actual overhead cost incurred.
B. the difference between actual overhead costs for two subsequent periods.
C. the difference between overhead costs in the flexible budget for two subsequent periods.
D. the difference between standard overhead applied and the overhead cost in the flexible budget.
AACSB: Reflective
Difficulty: Easy
variances
14.
Dean Company used a standard cost system to prepare the following budget at normal capacity for the month of May.
Actual data for May were as follows:
Determine the ixed overhead budget and volume variances.
Fixed OH budget = Actutal fixed OH - budgeted OH

= $125 000 - $120 000 = $5000 (U)
Budget Volume
A. Applied fixed OH = standard fixed OH rate * Standard

$5000 F $5000 U hrs allowed for actual out put = ($120 000 / 24 000) * 25
000 = 125 000
B.
$5000 U $0 Volume variances = Budgeted fixed OH - Applied fixed
OH
C. $120 000 - $125 000 = $5000 (F)
$5000 U $5000 F
D.
$0 $5000 U
AACSB: Analytical
Difficulty: Medium
variances
15. Assume the number of machine hours is the cost driver for variable overhead. The difference between the actual
variable overhead and the flexible budget for variable overhead (based on standard machine hours allowed for actual
output) is the
A. volume variance.
B. net overhead variance.
C. efficiency variance.
D. sum of variable spending and efficiency variances.
AACSB: Reflective
Difficulty: Easy
variances
16.
Which of the following is used in the calculaion of the variable overhead spending variance?
Standard
Flexible
variable
budget based Flexible budget based on
overhead
on standard actual hours
applied to
hours allowed
production
A.
Yes Yes Yes
B.
Yes No No
C.
No Yes No
D.
No No Yes
AACSB: Reflective
Difficulty: Easy
variances
17. The difference between the actual manufacturing overhead and the manufacturing overhead applied to production is
the
A. sum of spending, efficiency, budget and volume variances.
B. efficiency variance.
C. spending variance.
D. volume variance.
AACSB: Reflective
Difficulty: Easy
variances
18. Which of the following cannot cause an unfavourable variable overhead efficiency variance?
A. Using more direct labour hours or direct machine hours than the standard quantity, given actual output.
B. Higher than expected production accomplished in less than the standard machine hours allowed.
C. Using more of the variable overhead item, such as electricity, than the standard amount allowed.
AACSB: Reflective
Difficulty: Medium
variances
19.
DBC Company applies ixed overhead at $8 per machine hour. During the year actual ixed overhead amounted to $75
000 and the standard machine hours allowed for units produced was 11 000. Budgeted ixed overhead was $80 000.
Which of the following is the best descripion of the items used to calculate the volume variance?
Budgeted FOH Applied FOH Actual FOH
A.
$80 000 $88 000 =8 * 11 000 ignore
B.
$88 000 $88 000 ignore
C.
$88 000 $75 000 ignore
D.
ignore $88 000 $75 000
AACSB: Analytical
Difficulty: Easy
variances
20.
Security Doors has a standard variable overhead rate of $4 per direct labour hour. The standard quantity of direct labour per unit of
production is 3 hours. The company's static budget was based on 50 000 units. Actual results for the year are as follows.
What is Security Door's flexible budget for variable overhead costs for the actual output?
A. $600 000
B. $540 000
C. $495 000
D. $432 000
AACSB: Analytical
Difficulty: Medium
variances
21.
What was Security Door's variable overhead spending variance?
A. $45 000 favourable

B. $60 000 favourable
C. $15 000 unfavourable
D. $45 000 unfavourable
AACSB: Analytical
Difficulty: Medium
variances
22.
What was Security Door’s variable overhead efficiency variance?

AACSB: Analytical
Difficulty: Medium
variances
23.
Carvelle Cabinets set the following standard cost per unit for 2008.
The standards were set based on a capacity of 20 000 machine hours.
During the year, 5100 units were produced.

=Actual fixed OH - budgeted OH = $205 000 - ($10 * 20 000)
= $5000 (U)
What was Carvelle's fixed overhead budget variance?
A. $2000 unfavourable
B. $7000 unfavourable
C. $5000 unfavourable
D. $4000 favourable
AACSB: Analytical
Difficulty: Medium
variances
24.
What was Carvelle's fixed overhead volume variance?
A. $4000 favourable Applied fixed OH = standard fixed OH rate * Standard hrs allowed for actual output = $10 *
B. $1000 unfavourable 4 * 5100 = 204 000
C. $2000 favourable
D. $4000 unfavourable Volume variances = Budgeted fixed OH - Applied fixed OH
$200 000 - $204 000 = $4000 (F)
AACSB: Analytical
Difficulty: Medium
variances
25.
What was the amount of total overhead (fixed and variable) applied to work in process inventory during 2008?
= 4*8*5100 + 4*10*5100
A. $356 400
B. $365 750
=$367200
C. $367 200
D. $370 750
AACSB: Analytical
Difficulty: Easy
variances
26.
What was Carvelle's variable overhead spending variance?
A. $7350 unfavourable Actual variable OH - (AH * SVR)

B. $2550 unfavourable =$165 750 - (19 800 * 8)
C. $4800 favourable
D. $7350 favourable
=7350 (U)
AACSB: Analytical
Difficulty: Easy
variances
27.
What was Carvelle's variable overhead efficiency variance?
A. $4800 favourable 8(19800-4*5100)= 4800

B. $2550 unfavourable
C. $7350 unfavourable
D. $4800 unfavourable
AACSB: Analytical
Difficulty: Easy
variances
28.
How many units had Carvelle budgeted to produce?
=(20000*10) / 40 = 5000
A. 5100
B. 5000
C. 20 000
D. Insufficient information to determine
AACSB: Analytical
Difficulty: Easy
variances
29.
What was the total amount of under/overapplied overhead for the firm?
A. $3550 under = ($205000 + $165750) - $367200 (Q25)

B. $3550 over
C. $3550 debit
=$3550 (under)
D. Both A and C
AACSB: Analytical
Difficulty: Medium
variances
Learning Objective: 11.07 Prepare journal entries to account for manufacturing overhead under standard costing
30. Atrex Company determined that its variable overhead spending variance was $10 000 unfavourable for the year.
Actual variable overhead was $100 000 for the year. Variable overhead is applied based on machine hours. The standard
rate per machine hour was $9. The standard quantity of machine hours allowed for good output was 9000. What was the
actual quantity of machine hours used?
A. 12 222
B. 11 000 Variable OH spending variance = Actual variable OH - (AH * SVR)
C. 10 000 $10 000 = $100 000 - (AH * 9)
D. 9000 --> AH = 10 000
AACSB: Analytical
Difficulty: Medium
variances
31. What can create the variable overhead efficiency variance?

A. Efficient or inefficient usage of a specific component of variable overhead (e.g. electricity)
B. Production of units for finished goods inventory versus production for sale
C. Efficient or inefficient use of the cost driver (e.g. machine hours) for variable overhead
D. A difference between the planned level of output and the actual level of output
AACSB: Reflective
Difficulty: Medium
variances

A. An unfavourable variable overhead spending variance can result from paying a higher than expected price for variable
overhead items.
B. A favourable variable overhead spending variance can result from using less of the variable overhead items than
expected at the actual activity level.
C. An unfavourable variable overhead spending variance can result from producing fewer units than expected at the
actual activity level.
D. The spending variance is the real control variance for variable overhead.
AACSB: Reflective
Difficulty: Medium
variances
33. Budgeted fixed overhead is the basis for controlling fixed overhead because
A. it provides the benchmark against which actual expenditure is compared.
B. fixed overhead does not change as production activity varies.
C. budgeted fixed overhead is the same at all activity levels in the flexible budget.
AACSB: Reflective
Difficulty: Easy
variances
34. Why is the budget variance the real control variance, for fixed overhead?
A. It compares budgeted expenditures with budgeted fixed overhead costs.
B. It compares actual expenditures with budgeted fixed overhead costs.
C. It compares actual expenditures with budgeted variable overhead costs.
D. It compares the static budget with the flexible budget.
AACSB: Reflective
Difficulty: Easy
variances
35. The fixed overhead budget variance compares

A. actual variable overhead with actual fixed overhead.
B. budgeted variable overhead with budgeted fixed overhead.
C. actual fixed overhead with budgeted fixed overhead.
D. actual total cost of units produced with the budgeted production.
AACSB: Reflective
Difficulty: Easy
variances
36. When does budgeted fixed overhead differ from applied fixed overhead? (Assume the number of machine hours is the
activity base.)
A. During any period in which the number of standard machine hours allowed differs from the budgeted or planned activity
level.
B. It always differs.
C. During any period in which actual overhead costs exceed planned overhead costs.
D. During any period in which budgeted production equals planned production.
AACSB: Reflective
Difficulty: Medium
variances
37. Which of the following best describes the cost of underutilising productive capacity?
A. Lost sales of products that are produced.
B. Lost contribution margin of products that are not produced.
C. An implicit cost that is inevitable.
D. There is no cost.
AACSB: Reflective
Difficulty: Easy
variances
a
38. As overall productive activity changes, the following should move in the same direction, in roughly the same
proportion:
A. total variable overhead cost; standard variable overhead rate.
B. total variable overhead cost; fixed overhead budget variance.
C. cost driver; total variable overhead cost.
D. cost driver; fixed overhead cost.
AACSB: Reflective
Difficulty: Easy
variances
39. Which of the following interpretations of an unfavourable fixed overhead volume variance is correct?
A. It measures the cost of underutilising productive capacity.
B. It is overapplied overhead.
C. It is similar to a favourable variable overhead efficiency variance.
D. It has no use for control purposes.
AACSB: Reflective
Difficulty: Medium
variances
40. An overhead cost performance report is composed of the

A. actual and budgeted costs for each overhead item.
B. variable overhead spending and efficiency variances.
C. fixed overhead budget variance along with actual and budgeted costs for each overhead item.
D. variable overhead spending and efficiency variances, fixed overhead budget variance, and actual and budgeted costs
for each overhead item.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 11.06 Prepare an overhead cost performance report
41. Since variances are temporary accounts, how are they usually handled?
A. Closed directly to cost of goods sold at the end of each month.
B. Closed directly to cost of goods sold at the end of each accounting period.
C. Closed directly to cost of goods manufactured at the end of each accounting period.
D. Closed directly to profit and loss account at the end of the year.
AACSB: Reflective
Difficulty: Easy
42. Which of the following statements is true for a standard cost system?
A. Applied fixed manufacturing overhead is recorded as a debit to the manufacturing overhead account.
B. Overapplied fixed overhead is always debited to cost of goods sold.
C. Underapplied fixed overhead is always credited to finished goods inventory.
D. Applied fixed manufacturing overhead is recorded as a debit to the work in process inventory account.
AACSB: Reflective
Difficulty: Easy
43. When is the predetermined fixed overhead rate used?

A. To apply fixed overhead to the cost of goods manufactured.
B. To apply fixed overhead to the work in process inventory account.
C. To apply fixed overhead to the cost of goods sold.
D. To prepare the budget.
AACSB: Reflective
Difficulty: Easy
44. To which ledger account are the standard costs of direct material, direct labour and manufacturing overhead
charged?
A. Not used at all.
B. Used for variances only.
C. Entered into work in process inventory.
D. Entered into a standard control account.
AACSB: Reflective
Difficulty: Easy
45.
Bozo Pty Ltd uses a standard costing system for product costing. The company uses direct labour hours as the cost driver to apply
overhead costs. The following amounts were budgeted for the year:
Calculate the total standard overhead rate per direct labour hour (variable and fixed).
A. $0.125 Total overhead = $1 000 000 + $600 000 = $1 600 000

B. $4.06 --> Standard OH rate = $1 600 000 / 200 000 = $8
C. $8.00
D. $8.20
AACSB: Analytical
Difficulty: Easy
variances
46.
Framlingham uses a standard costing system for product costing. The company uses direct labour hours as the cost driver to apply
The following were the actual results:
Calculate the variable overhead spending variance.

=Actual variable OH - (AH * SVR) = $950 000 - (195 000 * 5) = $25 000 (F)
AACSB: Analytical
Difficulty: Easy
variances
47.
Master Products has the following information at the end of the year:
What is Master Product's sales price variance?
A. $3000 favourable Actual quantity sold * (actual selling price - planned selling price)
B. $7500 favourable =14000*(147000/14000-150000/15000) = $7000 (F)
C. $7000 favourable
AACSB: Analytical
Difficulty: Easy
Learning Objective: 11.11 After studying the appendix, calculate and interpret the sales price and sales volume variances
48.
Master Products has the following information at the end of the year.
What is Master Product's sales volume variance?
A. $10 000 unfavourable =(Actual units sold - Budgeted units sold) x Budgeted contribution margin
B. $4000 unfavourable =(14 000 - 15 000) * ($60 000 / 15 000) = $4000 (U)
C. $4400 favourable
AACSB: Analytical
Difficulty: Easy
49.
Hamilton Pty Ltd uses a standard costing system for product costing. The company uses direct labour hours as the cost driver to apply
Calculate the fixed overhead volume variance.
A. $24 000 favourable Applied fixed OH = standard fixed OH rate * standard hrs allowed for actual output
B. $24 000 unfavourable
C. $34 000 favourable
= ($600 000 / 50 000) * 48 000 = $576 000
D. $10 000 unfavourable Fixed OH volume variance = Budgeted fixed OH - applied fixed OH
= $600 000 - $576 000 = $24 000 (U)
AACSB: Analytical
Difficulty: Medium
variances
50.
Calculate the amount of overhead cost applied to work in process inventory.
A. $1 520 000 Fixed budgeted rate = $600 000 / 50 000 = $12

B. $1 536 000 Variable budgeted rate = $1 000 000 / 50 000 = $20
C. $1 550 000 Total OH cost applied = $20 * 48 000 + $12 * 48 000 = $1 536 000
D. $1 600 000
AACSB: Analytical
Difficulty: Medium
variances
51.
Calculate the total amount of underapplied or overapplied manufacturing overhead.
A. $80 000 underapplied = ($950 000 + $610 000) - $1 536 000 = $24 000 (Under)
B. $64 000 underapplied
C. $50 000 overapplied
D. $24 000 underapplied
AACSB: Analytical
Difficulty: Easy
variances
52.
Calculate the amount of fixed overhead budget variance.
A. $10 000 favourable Fixed OH budget variance = Actual fixed OH - Budgeted OH

B. $10 000 unfavourable = $610 000 - $600 000
C. $24 000 favourable
= $10 000 (U)
AACSB: Analytical
Difficulty: Easy
variances
53.
Calculate the amount of variable overhead spending variance.

B. $15 000 unfavourable =Actual variable OH - (AH * SVR)
C. $25 000 unfavourable =$950 000 - (195 000 * ($1 000 000 / 200 000)
D. $15 000 favourable =$25 000 (F)
AACSB: Analytical
Difficulty: Medium
variances
54.
Calculate the amount of variable overhead efficiency variance.

Efficiency variance= SR( AH-Standard amount hour based on actual unit)
A. $25 000 favourable SR=1000000/200000=5
C. $15 000 favourable =195000-(200/50)*48000=3000
5*3000=15000 (U) vì actual hours lớn hơn
AACSB: Analytical
Difficulty: Medium
variances
55. Which of the following statements relating to standard costs is false?

A. Standard costs result in more stable product costs.
B. Standard costs enable management to concentrate on significant variances.
C. Standard costs provide a valid basis for cost comparisons.
D. Standard costs cannot be used for external reporting.
AACSB: Reflective
Difficulty: Easy
56. Which of the following is not an advantage of standard costing?

A. Standard costing provides a basis for sensible cost comparisons.
B. Standard costing provides a means of performance evaluation.
C. Standard costing can be a motivational tool for employees.
D. Once standards have been set, they need not be revised, resulting in a more efficient accounting department.
AACSB: Reflective
Difficulty: Easy
A. Standard costing systems do not indicate the causes of the variances.
B. Standard costing systems enable the production of timely performance reports.
C. Standard costing systems may create undesirable behaviour.
D. Standard costing systems tend to forget the importance of product quality and customer service.
AACSB: Reflective
Difficulty: Easy
58. Which of the following criticisms of standard costing systems is false?

A. Variances concentrate on results rather than causes.
B. Standard costing systems concentrate on activities.
C. Standard costing systems place too much emphasis on direct labour costs and efficiency.
D. Standard costing systems are too narrowly defined.
AACSB: Reflective
Difficulty: Easy
59. When using activity-based costing, we recognise four types of activity costs: unit level, batch level, product level and
facility level. Under activity-based budgeting, which of the following types of cost would be ‘flexed'?
A. Product level
B. Batch level
C. Unit level
AACSB: Reflective
Difficulty: Easy
Learning Objective: 11.10 Understand how activity-based budgeting provides a more accurate form of budgeting than does conventional budgeting
60. The sales price variance equals:

A. (actual sales price – budgeted sales price)  budgeted sales volume.
B. (actual sales price – budgeted sales price)  actual contribution margin.
C. (actual sales price – budgeted sales price)  actual sales volume.
D. (actual sales volume – budgeted sales volume)  budgeted contribution margin.
AACSB: Reflective
Difficulty: Easy
61. The sales volume variance equals:

A. (actual sales volume – budgeted sales volume)  actual sales price.
B. (actual sales volume – budgeted sales volume)  actual contribution margin.
C. (actual sales volume – budgeted sales volume)  budgeted contribution margin.
D. (actual sales price – budgeted sales price)  budgeted sales volume.
AACSB: Reflective
Difficulty: Easy
62.
Use the following data to determine the company's variable overhead spending variance for March.
A. $500 favourable Actual variable OH - (AH * SVR)

B. $500 unfavourable =$39 500 - (5000 * $8)
C. $4500 favourable
=$500 (F)
AACSB: Analytical
Difficulty: Easy
variances
63.
Use the following data to determine the company's fixed overhead volume variance for March.
Applied fixed OH = Standard fixed OH rate * Standard hrs allowed for actual output
A. $10 000 overapplied =$20 * 5500 = $110 000
B. $10 000 underapplied Fixed OH volume variance = Budgeted fixed OH - Applied fixed OH
C. $20 000 overapplied
D. $20 000 underapplied
= $100 000 - $110 000 = $10 000 (over)
AACSB: Analytical
Difficulty: Medium
variances
64.
The following table provides information about a company's production.
If variable costs increased in 2005 by 10 per cent and fixed overheads increased in 2006 by 20 per cent, what was the variable cost
per unit in 2004?
A. $3.35
B. $3.40
C. $3.45
D. $3.50
AACSB: Analytical
Difficulty: Hard
variances
65.
The following table provides information about a company's production.
If variable costs increased in 2005 by 10 per cent and fixed overheads increased in 2006 by 20 per cent, what was the estimated total
cost in 2006?
A. $447 600
B. $472 800
C. $504 200
D. More than $514 400
AACSB: Analytical
Difficulty: Hard
variances
66.
Universal Pty Ltd used a standard cost system to prepare the following budget at normal operating capacity for the month of January
2007.
Actual data for January 2007 were as follows:
Using the two-way analysis of overhead variances, what is the total of the fixed budget variance and the variable overhead spending
variance for January 2007?
Controllable variance = OH variance - volume variance
A. $3000 favourable OH variance (actual - applied) = 147000 - 6.5*21000 = 10500
B. $5000 favourable Volume variance = 108000 - 4.5*21000 = 13500
C. $9000 favourable CV = 10500 - 13500 = $3000 (F)
Variable cost per DLH: 48000/24000 = 2 --> Fixed cost per DLH = 6.5-2 = 4.5
AACSB: Analytical
Difficulty: Hard
variances
67. A favourable overhead efficiency variance is the result of

A. actual outputs exceeding actual inputs within the framework of a flexible budget.
B. standard outputs allowed for actual inputs exceeding the flexible budget inputs.
C. the flexible budget for actual input exceeding the actual costs incurred.
D. standard inputs allowed for actual outputs achieved exceeding the actual inputs within the framework of a flexible
budget.
AACSB: Reflective
Difficulty: Easy
variances
68. The budgeted costs per unit for a company are fixed costs $2 per unit; variable costs $3 per unit. What is the expected
cost of producing 1005 units?
A. $2013
B. $5025
C. $3017
AACSB: Reflective
Difficulty: Medium
variances
69. Adams Corporation has developed the following flexible budget formula for annual indirect labour cost: Total cost =
$4800 + 50c per machine hour. Operating budgets for the current month are based on 20 000 hours of planned machine
time. Calculate the amount of indirect labour costs included in this planning budget.
A. $7200
B. $10 000 =($4800/12) + 20 000 * 0.5
C. $14 400 =$10 400
The $4800 denotes the annual cost, so the monthly is
=$4800/12 months
AACSB: Analytical
Difficulty: Easy
Learning Objective: 11.03 Prepare a flexible overhead budget, using both a formula and a report format
70.
Z Company uses a variable costing system. There was no opening or closing stock. The following data is available.
Use this data to determine Z's sales price variance.
A. $2000 favourable
=(Actual sales price - Budgeted sales price) * Actual sales volume
C. $58 000 unfavourable =(($142 000 / 700) - ($200 000 / 1000) * 700 = 2000 (F)
D. $10 000 favourable
AACSB: Analytical
Difficulty: Medium
71.
Z Company uses a variable costing system. There was no opening or closing stock. The following data is available:
Use this data to determine Z's sales volume variance:
A. $8000 unfavourable =(Actual sales volume - Budgeted sales volume) * Budgeted contribution margin
B. $18 000 unfavourable =(700 - 1000) * ((200000 - 80000 - 40000 -20000) / 1000)
C. $60 000 unfavourable =$18 000 (U)
D. $18 000 favourable
AACSB: Analytical
Difficulty: Medium

A. Budgeted hours and standard hours are always the same.
B. Budgeted hours and standard hours are never the same.
C. Budgeted hours and standard hours will be the same when budgeted production equals actual production.
D. Budgeted hours and standard hours are both related to budgeted production levels.
AACSB: Reflective
Difficulty: Medium
variances

A. A flexible budget is calculated for actual activity level only.
B. A static budget can be calculated for a number of activity levels.
C. A static budget is prepared for budgeted activity level only.
D. Both A and C
AACSB: Reflective
Difficulty: Easy
74. Which of the following statements is incorrect?
A. The company's fixed overhead costs can be expressed as a flexible budget formula.
B. The company's variable costs can be expressed as a flexible budget formula.
C. The company's total production costs can be expressed as a flexible budget formula.
D. A cost must have a fixed and a variable component before it can be expressed as a flexible budget formula.
AACSB: Reflective
Difficulty: Easy
75. A particular company incurs actual overhead of $10 per unit produced. The company's budgeted (standard) overhead
cost per unit produced is $9 per unit. Overhead is applied based on machine hours. If the company's actual machine
hours worked was 1000, and standard hours allowed for units produced in the period was 1100 hours, what amount would
be debited to work in process for overhead if the company used actual costing, normal costing and standard costing
respectively?
A. $11 000; $9 900; $9 000 Actual costing = $10 * 1000 = $10 000
B. $11 000; $9 000; $9 900 Normal costing =$9 * 1000 = $9000
C. $10 000; $9 900; $9 000 Standard costing = $9 * 1100 = $9900
D. $10 000; $9 000; $9 900
AACSB: Reflective, Analytical

Difficulty: Medium
76. Which of the following statements about activity-based budgeting (ABB) is incorrect?
A. ABB is based on the estimated cost of activities, while conventional budgeting is based on estimated costs of line
items.
B. ABB starts with estimating the costs of resources, while conventional costing starts with estimating sales.
C. ABB is generally a more accurate planning tool than conventional budgeting.
D. ABB focuses on resource consumption rather than resource acquisition.
AACSB: Reflective
Difficulty: Easy
77. Which of the following is not a limitation of standard costing system?

A. Standard costing system takes a process perspective rather than a departmental perspective.
B. Standard costing system becomes outdated easily.
C. Standard costing systems do not encourage continuous improvement
D. Standard costing system focuses on the consequences rather than the causes of variances.
AACSB: Reflective
Difficulty: Easy
78. Felter Company uses a standard costing system based on direct labour hours. Last month, Felter Company used
more electricity and indirect materials than planned. This is likely to result in
A. unfavourable variable overhead efficiency variance.
B. unfavourable variable overhead efficiency variance and unfavourable variable overhead spending variance.
C. unfavourable variable overhead efficiency variance and unfavourable fixed overhead variance.
D. unfavourable variable overhead spending variance.
AACSB: Reflective
Difficulty: Medium
variances
79. Felter Company uses a standard costing system based on direct labour hours. Last month, Felter Company used
more direct labour hours than planned, while the production level was consistent with expectations. This is likely to result
in
A. unfavourable fixed overhead variance and unfavourable variable overhead spending variance.
B. unfavourable fixed overhead variance and unfavourable variable overhead efficiency variance.
C. unfavourable variable overhead spending variance.
D. unfavourable variable overhead efficiency variance.
AACSB: Reflective
Difficulty: Medium
variances
80. The fixed overhead volume variance

A. is useless, as it does not serve a control purpose. Rather, it is calculated only as a difference between total fixed
overhead variance and fixed overhead budget variance.
B. is useless for control purposes, but allows managers to estimate capacity costs.
C. is useless for control purposes, but useful for product costing purposes.
D. is useful only when conducting two-way overhead variance analyses.
AACSB: Reflective
Difficulty: Easy
variances
81. A three-way overhead variance analysis refers to

A. a variance analysis comprising three variances, including overhead spending variance, variable overhead efficiency
variance, fixed overhead volume variance.
B. a variance analysis comprising three variances, including variable overhead spending variance, variable overhead
efficiency variance, and fixed overhead budget variance.
C. a variance analysis that requires managers to estimate each variance using information from three different
independent sources.
D. a variance analysis that requires managers to average the variances calculated over three accounting periods.
AACSB: Reflective
Difficulty: Easy
variances
82. Felter Company sold 8000 units of Product X last month. The actual production level was 9000 units. The budget
selling price was $10, but the sales manager had to discount the products by 20 per cent before managing to sell these
units. The sales price variance is
A. $16 000 unfavourable.
B. $20 000 unfavourable. =(Actual sales price - Budgeted sales price) * Actual sales volume
C. $16 000 favourable. =($10 - $10*0.8 )* 8000 = $16 000 (U)
D. $20 000 favourable.
AACSB: Analytical
Difficulty: Easy
83. Felter Company reported that the total variance between actual and budgeted total contribution margin in April was
$1000 favourable. The sales price variance was $5000 favourable. The fixed overhead budget variance was $1200
unfavourable. The sales volume variance was
A. $4000 unfavourable.
B. $4000 favourable. contribution margin var = sale price var+sale volume var+var cost var
C. $5200 unfavourable.
D. $5200 favourable.
1000=5000+X+0=>X=-4000 (U)
AACSB: Analytical
Difficulty: Medium
84. An unfavourable fixed overhead budget is likely to the result of

A. an unexpected increase in factory rent.
B. an unexpected increase in electricity rate.
C. an incorrect application of fixed overhead rate.
D. an unexpected increase in factory rent and an unexpected increase in electricity rate.
AACSB: Reflective
Difficulty: Medium
variances
85. Which of the following statements about variable overhead variances is correct?
A. Variable overhead efficiency variance highlights any inefficient uses of variable indirect costs such as electricity.
B. Variable overhead efficiency variance is not a useful control tool.
C. Variable overhead spending variance is useful only as a product costing tool.
D. Variable overhead spending variance may be caused by lower than expected usage of direct labour hours.
AACSB: Reflective
Difficulty: Easy
variances
86. Which of the following budgets allow managers to select the most appropriate benchmark for cost control?
A. Manufacturing budget
B. Static budget
C. Flexible budget
D. Overhead budget
AACSB: Reflective
Difficulty: Easy
87. When preparing the flexible overhead budget which of the following activities would be the most suitable to use as the
standard input measure for measuring electricity for a car manufacturer?
A. Depreciation of machinery
B. Factory rent
C. Direct labour hours
D. Machine hours
AACSB: Reflective
Difficulty: Medium
88. In a standard costing system, overhead is applied to inventory using the

A. flexible overhead rate.
B. standard overhead rate.
C. flexible variable rate.
D. standard variable rate.
AACSB: Reflective
Difficulty: Easy
89. The focus of most variance reports is to highlight the differences between
A. budgeted expenditure and actual expenditure.
B. budgeted expenditure and flexible expenditure.
C. budgeted revenue and actual revenue.
D. budgeted revenue and flexible revenue.
AACSB: Reflective
Difficulty: Easy
90. Flexible budgets can be used by service organisations to

A. plan overhead costs.
B. control overhead costs.
C. determine product costing.
D. plan and control overhead costs.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 11.08 Apply flexible budgets in a service environment
91. Which of the following are service organisations not required to do?
A. Plan overhead costs
B. Control overhead costs
C. Determine product costing
D. Plan and control overhead costs
AACSB: Reflective
Difficulty: Medium
92.
Management response to volume variance

The SanBo Plant has an overall plant manager, four assistant plant managers and 30 department managers. One of the assistant plant
managers made the following comments at a meeting of the department managers that report to him: ‘These unfavourable production
volume variances are killing our performance. When these variances are put on a per unit basis and added to our standard costs, the
resulting product costs make us look like the worst plant in the company. If we don't get our unit costs down and look more efficient, we
will be in deep trouble. The plant might be closed.
‘This is what we should do. I want these departments to run at 100 per cent of normal output. If you don't have specific orders, make
some of the components that are used for our most popular products. We can store the stuff; we will have to use it some time.
Meanwhile that will boost our output, eliminate the unfavourable production volume variances and get our unit costs back down where
they should be.'
Will the assistant plant manager's suggestion improve the plant's performance? Explain why or why not.
The assistant plant manager's suggestion will lower unit costs calculated on a full cost basis. However, his suggestion will
cause work in process inventory to increase and cause real increases in variable manufacturing costs while not reducing
total fixed manufacturing costs. Production in excess of sales demand (beyond safety stock requirements) will reduce
long-term profits. As product life cycles become shorter, it is quite possible to have a substantial inventory of unusable
components.

Difficulty: Hard
variances
93.
Advantages of standard costing

One of the stated advantages of standard costing is ‘more stable product costs'.
i. List two other advantages of standard costing.
ii. Assume that the company's business activity has a strong seasonal pattern; namely, the volume of activity in the busiest month of
the year is four times as large as the volume in the slowest month. Explain how standard costing gives more stable product costs in this
situation. You may assume that, on average, fixed costs of production amount to more than half of the cost of the product.
i. Standard costing has the following advantages:

provision of a basis for sensible cost comparisons
facilitation of management by exception
provision of a benchmark for evaluation of performance
motivation for employees
reduced expenses below actual or normal cost systems.
ii. The key to stable product costs is the treatment of fixed costs. The total fixed costs are not likely to change very much
as production varies from month to month. If these fixed costs were assigned to each month's production as under an
actual cost system, the fixed costs per unit would be high during periods of low activity and low during the peak months.
This information would not be useful to management.

Difficulty: Hard
94.
Overhead cost performance report

Explain how a manager can use an overhead cost performance report to investigate the underlying causes of significant overhead
variances.
Using these flexible budgets, we can calculate the variable overhead spending and efficiency variances, and the fixed overhead budget
variance for each overhead cost item in the flexible budget. An overhead cost performance report shows actual and budgeted costs,
along with these itemised variances for each overhead item. The performance report, displayed in Exhibit 11.9, could be used by
management to help exercise control over each of the overhead costs.
Notice that the performance report includes spending and efficiency variances only for the variable items, and a budget variance for the
fixed items. The volume variance is not included as it has no implications for cost control. Upon receiving this report, a manager might
investigate significant variances to determine underlying causes.
Difficulty: Easy
95.
Choice of activity as the overhead cost driver in a service organisation's flexible budget.
Define overhead application and describe why direct labour hours would not be considered an accurate cost driver for allocating
overhead costs for a hotel. Provide two examples of cost drivers that could be used in the hotel industry and justify your answer.
Overhead application refers to the methods of allocating overhead cost to products, and is recorded in the work in process inventory
account. In a standard costing system, overhead is applied to inventory using the standard overhead rate, and is based on the standard
quantity of input allowed, given actual output.
Machine hours, direct labour hours, direct labour cost and direct material cost are among the most common activities used to construct
flexible budgets. To ensure an accurate flexible budget that can be used to control overhead costs, the activity chosen should be a cost
driver, which is any activity or factor that causes costs to be incurred, while input measures, such as direct labour hours or machine
hours, provide an easy and convenient basis for constructing a flexible budget. Unfortunately these input measures are not always
accurate cost drivers. Determining cost drivers requires an understanding of cost behaviour.
Non-manufacturing organisations, such as hotels, also use flexible budgets to control overhead costs. For example, hotels may use
occupancy rates for their accommodation, and in their restaurants they can use customers served as the basis for their flexible
overhead budgets.
Since a hotel does not produce goods that can be inventoried, there is no product costing role for its costing system.
Difficulty: Medium
96. There are many who support using standard costing and as many again who are critical of this traditional approach to
help control costs. Briefly discuss three advantages and three disadvantages of using a traditional standard costing
system
Criticisms of Standard Costing Systems

Variances are too aggregated and concentrate on the consequences rather than the causes of problems.
Variance reports are produced too late to be useful.
Standard costing systems tend to focus too heavily on cost minimisation.
Standard costing systems take a departmental perspective rather than a process perspective.
Standard costing systems place too much emphasis on the cost and efficiency of direct labour.
Overhead variances, in particular, give limited information for cost control.
Standard costs do not explicitly encourage continuous improvement.
Standard costs become outdated quickly because of shorter product life cycles.
Standard costing systems are not defined broadly enough to capture the full costs of materials.
Advantages of Standard Costing
Standard costs provide a good basis for cost comparisons.
Calculation of standard costs and cost variances enables managers to use management by exception in order to concentrate on
significant variances only.
Variances can provide a convenient basis for performance evaluation and determining bonuses for employees.
Participation in the setting of standards, assigning responsibility for certain variances to appropriate managers and the use of variances
for performance evaluation can have a motivational effect on employees and managers.
The use of standard costs in product costing results in more stable product costs compared to actual product costs.
Standard costs can also be used for external reporting.
Difficulty: Hard
97. Management uses flexible budgets for controlling manufacturing overhead costs.
TRUE
AACSB: Reflective
Difficulty: Easy
98. The volume variance calculated for fixed overheads is a way of reconciling the two purposes of costing systems:
product costing and cost control.
TRUE
AACSB: Reflective
Difficulty: Easy
variances
99. In the accounting recording system, unfavourable variances are recorded in a similar way to revenue and favourable
variances are recorded in a similar way to expenses.
FALSE
AACSB: Reflective
Difficulty: Easy
100. One of the shortcomings of ABC is that it is not easy to account for common costs shared by more than one activity.
TRUE
AACSB: Reflective
Difficulty: Medium
101. A correct interpretation of an unfavourable variance is that it measures the cost of underutilising productive capacity.
FALSE
AACSB: Reflective
Difficulty: Easy
variances
102. A four-way overhead analysis involves calculating variances for variable overheads, spending and efficiency, fixed
overhead budget and fixed overhead volume.
TRUE
AACSB: Reflective
Difficulty: Easy
variances
103. ABB works in the reverse way to ABC as under ABB, once the sales volume and production volume have been
estimated then the demand for activities can be determined.
TRUE
AACSB: Reflective
Difficulty: Easy
104. A flexible budget is prepared for an expected level of activity.

FALSE
AACSB: Reflective
Difficulty: Easy
105. One of the main criticisms of standard costing systems is that it tends to focus too heavily on cost minimisation.
TRUE
AACSB: Reflective
Difficulty: Easy
106. Although it is assumed that fixed overheads remain constant regardless of the level of activity, the total applied fixed
overhead decreases with activity.
FALSE
AACSB: Reflective
Difficulty: Easy
variances
107. Flexible overhead budgets are based on standard input measures instead of units of output in a multiproduct firm.
TRUE
AACSB: Reflective
Difficulty: Easy
108. Flexible budgets only reflect changes in the volume of activity in the variable overhead estimates.
FALSE
AACSB: Reflective
Difficulty: Easy
109. When calculating the predetermined manufacturing overhead rates using direct labour hours as the cost driver the
formula is ‘total overhead divided by total direct labour hours'. This rate is applied to both the variable overhead and the
fixed overhead.
FALSE
AACSB: Reflective
Difficulty: Easy
ons
AACSB: Reflective, Analytical 1
Difficulty: Easy 69
Difficulty: Hard 6
Learning Objective: 11.01 Distinguish between static and flexible budgets 8
Learning Objective: 11.02 Explain the advantages of a flexible budget for performance evaluation and control 4
Learning Objective: 11.03 Prepare a flexible overhead budget, using both a formula and a report format 3
Learning Objective: 11.04 Apply overheads to work in process under a standard costing system 4
Learning Objective: 11.05 Calculate and interpret the variable overhead spending and efficiency variances, and the fixe 60
d overhead budget and volume variances
Learning Objective: 11.06 Prepare an overhead cost performance report 3
Learning Objective: 11.07 Prepare journal entries to account for manufacturing overhead under standard costing 6
Learning Objective: 11.08 Apply flexible budgets in a service environment 3
Learning Objective: 11.09 Outline the criticisms and advantages of standard costing 7
Learning Objective: 11.10 Understand how activity-based budgeting provides a more accurate form of budgeting than d 4
oes conventional budgeting
Learning Objective: 11.11 After studying the appendix, calculate and interpret the sales price and sales volume varianc 9
es

1. The concept of cost volume profit analysis is based on classifying costs as
A. fixed and variable costs.
B. variable product and period costs.
C. product controllable and uncontrollable costs.
D. fixed and variable costs AND variable product and period costs.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 18.01 Calculate the break-even point in sales units using the CVP equation
2. The break-even point is that level of activity where
A. total revenue equals total cost.
B. total revenue equals fixed cost.
C. total revenue equals variable cost.
D. total revenue equals product cost.
AACSB: Reflective
Difficulty: Easy
3. The contribution margin per unit is calculated as the difference between
A. sales revenue per unit and fixed cost per unit.
B. sales revenue per unit and variable cost per unit.
C. sales revenue per unit and product cost per unit.
D. fixed cost per unit and variable cost per unit.
AACSB: Reflective
Difficulty: Easy
4. The break-even point is calculated by
A. sales volume  unit selling price / sales volume  unit variable cost.
B. variable costs / total revenue.
C. fixed costs / unit contribution margin.
D. variable costs / unit contribution margin.
AACSB: Reflective
Difficulty: Easy
5. Ribco Company Ltd makes and sells only one product. The unit contribution margin is $6, and the break-even point in
unit sales is 24 000. What are the company's fixed expenses?
A. $400 000
B. $14 400 BEP in unit sales = Fixed cost / CM
C. $40 000 24000 = X / 6 --> X = 144000
D. $144 000
AACSB: Analytical
Difficulty: Easy
6. The contribution margin ratio is (all on a per unit basis)
A. the difference between the selling price and the variable cost.
B. variable cost divided by selling price.
C. contribution margin divided by selling price.
D. contribution margin divided by fixed cost.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 18.02 Calculate the contribution margin ratio, and use it to find the break-even point in sales dollars
7. The break-even point in sales dollars can be calculated by dividing
A. fixed expenses by the unit contribution margin.
B. variable expenses by the unit contribution margin.
C. fixed expenses by the contribution margin ratio.
D. variable expenses by the contribution margin ratio.
AACSB: Reflective
Difficulty: Easy
8.
The firm's fixed costs are $60 000, variable cost per unit is $15 and selling price per unit is $20. The contribution margin per unit is

A. $5.
B. $15. CM = 20 - 15 = 5
C. $20.
D. $35.

AACSB: Analytical
Difficulty: Easy
9. The firm's fixed costs are $60 000, variable cost per unit is $15 and selling price per unit is $20. The break-even point in
units is
A. 1715.
B. 3000. BEP = 60000 / 5 = 12000
C. 4000.
D. 12 000.
AACSB: Analytical
Difficulty: Easy
10. The firm's fixed costs are $60 000, variable cost per unit is $15 and selling price per unit is $20. The break-even point
in sales dollars is
A. $80 000.
B. $120 000. BEP in sales dollars = 60000 / (5/20) = 240000
C. $240 000.
D. $300 000.
AACSB: Analytical
Difficulty: Easy
11. The firm's fixed costs are $60 000, variable cost per unit is $15 and selling price per unit is $20. The contribution
margin percentage is
A. 2.5%.
B. 25%. CM % = (20-15) / 20 = 0.25 = 25%
C. 33%.
D. 400%.
AACSB: Analytical
Difficulty: Easy
12. Epex Pty Ltd makes a single product. Annual fixed expenses are $48 000 and the contribution margin ratio is 30 per
cent. What volume in sales dollars is necessary for Epex to achieve a target profit of $15 000?
A. $63 000
B. $90 000 Target sales volume in sales dollar = (48000 + 15000 ) / 0.3 = 210000
C. $160 000
D. $210 000
AACSB: Analytical
Difficulty: Easy
Learning Objective: 18.04 Use the break-even formula to determine the sales units or sales revenue required to achieve a target net profit
13. If the contribution margin is $10, the selling price per unit is $25 and the fixed costs are $45 000, what is the number
of units that must be sold to break even?
A. 4500
B. 4000 BEP in unit = 45000 / 10 = 4500
C. 3000
D. 1800
AACSB: Analytical
Difficulty: Easy
14. If the contribution margin is $10, the selling price per unit is $25 and the fixed costs are $45 000, to earn a targeted
net profit of $50 000 the total dollar value of sales must be at least
A. $10 000.
B. $112 500. Target sales volume dollar = (45000+50000) / (10/25) = 237500
C. $122 500.
D. $237 500.
AACSB: Analytical
Difficulty: Easy
15. The difference between the budgeted sales revenue and the break-even sales revenue is the
A. unit contribution margin.
B. contribution margin percentage.
C. safety margin.
D. operating leverage.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 18.05 Apply CVP analysis to determine the effect on profits of changes in fixed costs, variable costs, sales prices and sales volume
16. Suppose fixed expenses were to increase by 5.9 per cent. How would this affect the break-even point?
A. The break-even point in units would rise 5.9 per cent.
B. The break-even point in dollars would rise 11.8 per cent.
C. The break-even point in dollars would rise by more than 5.9 per cent.
D. The break-even point in dollars would fall by more than 5.9 per cent.
AACSB: Reflective
Difficulty: Easy
17. Suppose variable expenses were to decrease by $3.00 per unit. What effect would this have on the cost volume profit
analysis?
A. The unit contribution margin would rise by $3.00.
B. The break-even point in units would increase.
C. The break-even point in units would decrease.
D. The unit contribution margin would rise by $3.00 AND the break-even point in units would decrease.
AACSB: Reflective
Difficulty: Easy
18. Which of the following changes will affect the unit contribution margin?
A. Changes in fixed cost
B. Changes in variable cost per unit
C. Changes in selling price per unit
D. Both changes in variable cost per unit AND changes in selling price per unit
AACSB: Reflective
Difficulty: Easy
19. Suppose the selling price per unit increased from $5.00 to $6.00 per ticket. What effect would this have on the cost
volume profit analysis?
A. The contribution margin would increase.
B. The contribution margin would decrease.
C. The break-even point in units would decrease.
D. The contribution margin would increase AND the break-even point in units would decrease.
AACSB: Reflective
Difficulty: Easy
20. (p. 857) Assume that selling price is greater than variable cost. Now suppose the selling price and the variable cost
per unit increase by $5.00. What effect would these changes have on the contribution margin in dollars and on the
contribution margin ratio?

Dollar contribution margin Contribution margin ratio

A.
Increase Increase
B.
Decrease Decrease
C.
No change No change
D.
No change Decrease
AACSB: Reflective
Difficulty: Medium
21. The total contribution margin is calculated as the difference between
A. sales price and variable cost per unit.
B. sales price and fixed cost per unit.
C. total revenue and total variable cost.
D. total revenue and total cost.
AACSB: Reflective
Difficulty: Easy
22. Cost volume profit analysis is based on certain general assumptions. Which of the following statements about these
assumptions is/are true?
A. The price of the product will remain constant as volume varies within the relevant range.
B. Expenses can be categorised as fixed, variable or semivariable.
C. Total fixed costs remain constant and unit variable cost remains unchanged as activity varies.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 18.08 Describe the limitations and potential uses of CVP analysis in practice
23. Under an activity-based costing system, the break-even point in units is calculated by
A. total non-volume activity cost / selling price per unit – fixed cost per unit.
B. total non-volume activity cost / selling price per unit – unit level cost per unit.
C. total non-volume activity cost / contribution margin per unit.
D. total fixed costs / contribution margin per unit.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 18.09 Use activity-based approaches within CVP analysis and understand the limiting assumptions implicit in this analysis
24. Which of the following are advantages of an activity-based costing approach to cost volume profit (CVP) analysis as
compared to a CVP analysis based on traditional product costing?
A. Unit variable costs are recognised more clearly.
B. Fixed costs are viewed as fixed only with respect to changes in sales and production volume, but not as fixed with
respect to changes in other cost drivers such as number of set-ups and number of material moves.
C. The assumption in traditional CVP analysis that sales and production volumes are equal can be relaxed.
D. Unit variable costs are recognised more clearly AND fixed costs are viewed as fixed only with respect to changes in
sales and production volume, but not with respect to changes in other cost drivers such as number of set-ups and number
of material moves.
AACSB: Reflective
Difficulty: Medium
25. Which of the following assumptions is made when doing a cost volume profit analysis based on activity-based
costing?
A. Sales volume equals production volume.
B. As production volume changes, the number of set-ups, inspections, material moves etc. does not change.
C. The purchase price of raw materials per unit remains constant.
D. Sales volume equals production volume AND the purchase price of raw materials per unit remains constant.
AACSB: Reflective
Difficulty: Medium
26. The extent to which an organisation uses fixed costs in its cost structure is called
A. financial leverage.
B. operating leverage.
C. fixed cost leverage.
D. operating leverage AND fixed cost leverage.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 18.11 Explain the concepts of cost structure and operating leverage, and measure operating leverage
27. If total costs remain the same, the smaller the proportion of fixed costs in a firm's cost structure
A. the greater the impact on profit from a percentage change in sales volume.
B. the smaller the impact a percentage change in sales volume will have on profit.
C. the lower the contribution margin.
D. the smaller the impact a percentage change in sales volume will have on profit AND the lower the contribution margin.
AACSB: Reflective
Difficulty: Medium
28. If the operating leverage factor is known, which of the following can be determined?
A. Contribution margin ratio
B. Contribution margin in dollars
C. Break-even point in sales dollars
D. Percentage change in profit for a given percentage change in sales
AACSB: Reflective
Difficulty: Medium
29. Alclear Pool & Spa presently provides a weekly maintenance service to 150 homes. Variable costs amount to
approximately $12 per week for labour, mileage, chemicals and other supplies. Fixed costs are approximately $13 000 per
quarter (13 weeks). Customers pay $270 per quarter for the weekly service. All contracts are written for one quarter (13
weeks).
Determine the number of customers (rounded) to break even.
A. 95
B. 103 BEP = 13000 / (270 - 12*13) = 114
C. 114
D. 197
AACSB: Analytic
Difficulty: Medium
30. Alclear Pool & Spa presently provides a weekly maintenance service to 150 homes. Fixed costs are approximately
$13 000 per quarter (13 weeks). Customers pay $270 per quarter for the weekly service. All contracts are written for one
quarter (13 weeks). Now assume the contracts with customers are restructured such that the price per quarter is $300
and the contribution margin percentage is 57 per cent. Assume the tax rate is 25 per cent.
Determine the sales dollars (to the nearest $100) necessary to obtain an after-tax profit of $9600 per quarter.
A. $39 600
B. $45 300 X * 300 * 0.57 - 13000 = 9600/0.75
C. $52 900 --> X = 150,8772
D. $90 200 Sales dollars = 150,8772 * 300 = 45263,16

AACSB: Analytical
Difficulty: Medium
Learning Objective: 18.07 Include income taxes in CVP analysis
31.
Maxie Pty Ltd makes and sells two types of shoes, Plain and Fancy. Product data is as follows:

Sixty per cent of the sales in units are Plain and annual fixed expenses are $45 000.
Determine the weighted average unit contribution margin.
The WA unit contribution margin = (selling price - variable costs)*60% + (selling

A. $17.00 price - variable costs)*40%
B. $9.25 = (20-12) * 0.6 + (35-24) * 0.4 = 9
C. $9.00
D. $4.80

AACSB: Analytical
Difficulty: Easy
Learning Objective: 18.06 Calculate the break-even point and prepare a profit volume graph where there are multiple products
32.
Maxie Pty Ltd makes and sells two types of shoes: Plain and Fancy. Product data is as follows:

Sixty per cent of the sales in units are Plain and annual fixed expenses are $45 000 and the sales mix remains constant.
Determine the total number of units Maxie Pty Ltd must sell to break even.

A. 9375 Break - even point in unit = Fixed costs / Unit contribution margin
B. 5000 = 45000 / 9 = 5000
C. 4737
D. 2647

AACSB: Analytical
Difficulty: Medium
33.

Determine the number of units of Plain and Fancy respectively that Maxie Pty Ltd must sell to break even.

A. 2000; 3000 Plain = 5000 * 0.6 = 3000
B. 0; 5000 Fancy = 5000 - 3000 = 2000
C. 5000; 0
D. 3000; 2000

AACSB: Analytical
Difficulty: Medium
34.

How many units of Fancy must Maxie Pty Ltd sell to earn a target profit of $31 500?

A. 3400
Target sales volume in unit = (Fixed costs + target net margin) / unit contribution
B. 2000 margin
C. 7286 = (45000 + 31500) / 9 = 8500
D. 8500
Unit of Fancy = 8500 * 0.4 = 3400
AACSB: Analytical
Difficulty: Medium
35.

Sixty per cent of the sales in units are Plain and annual fixed expenses are $45 000 and the sales mix remains constant. Assume an
income tax rate of 20 per cent.
How many units of Plain must Maxie Pty Ltd sell to earn an after tax profit of $18 000?
Sales volume required to earn net profit after tax

A. 4500 =[Fixed costs + target net profit after tax / (1 - tax rate)] / unit contribution margin
B. 7875 = [45000 + 18000 / (1 - 0.2)] / 9 = 7500
C. 3960
D. 8437 Unit of Plain = 7500 * 0.6 = 4500

AACSB: Analytical
Difficulty: Medium
36.

Sixty per cent of the sales in units are Plain and annual fixed expenses are $45 000 and the sales mix remains constant. Assume an
income tax rate of 20 per cent.
The break-even point for this data is 5000 units in total. How will the calculation of the break-even point change (if at all) if the relative
percentages of the products in the mix change from 60 per cent Plain shoes to 40 per cent Fancy shoes?

A. The break-even point in total will not change. The only change will be the relative number of each of the units.
B. Neither the break-even point in total nor the relative number of each of the units to produce at break-even will change.
C. The break-even point will change because the calculation above assumes a constant mix, namely 60 per cent to 40 per
cent.
D. The break-even point will be higher.

AACSB: Reflective
Difficulty: Medium
37.
Econ Pty Ltd produced and sold 45 000 units of a single product last year. Data concerning the year's profit and loss statement are as
follows:

What was Econ's total contribution margin for the year?

A. $495 000 Total contribution margin = selling price - variable cost
B. $540 000 = 1350000 - (585000 + 40500 + 184500)
C. $724 500 = 540000
D. $810 000

AACSB: Analytical
Difficulty: Easy
38.
Econ Pty Ltd produced and sold 45 000 units of a single product last year. Data concerning the year's profit and loss statement is as
follows:
What was Econ's break-even point (rounded) in unit sales?
Break even point in units = fixed costs / unit contribution margin

A. 36 000 = (270000 + 54000 + 108000) / 540000
B. 24 000 = 0.8
C. 25 411
D. 26 832
Sold 45000 = 0.8 * 45000 = 36000
AACSB: Analytical
Difficulty: Medium
39.
follows:

What was Econ's break-even point in dollar sales?

A. $720 000 Contribution margin ratio = Contribution margin per unit / selling price = 540000 / 1350000
B. $762 330 = 0.4
C. $1 080 000 Break even point in dollar =Fixed costs / contribution margin ratio
D. $1 134 000 = 432000 / 0.4 = 1080000

AACSB: Analytical
Difficulty: Medium
40.
follows:

What was Econ's operating leverage?
Net income = Total contribution margin - Fixed costs

A. 4 = 540000 - 432000 = 108000
B. 5
C. 6 Operating leverage = Contribution margin / net income
D. 7 = 540000 / 108000 = 5

AACSB: Analytical
Difficulty: Medium
41.
follows:

Assuming sales revenue increases by 15 per cent, what will be the percentage increase in profit before income tax?

A. 15%
B. 45% Sales increase = 15% * 5 (operating leverage) = 75%
C. 60%
D. 75%

AACSB: Analytical
Difficulty: Hard
42.
follows:

Assuming all cost relationships will remain constant for the coming year, how many units must be sold for the company to earn an
after-tax profit of $180 000 if the income tax rate is 40 per cent?

A. 45 000
B. 47 500
C. 61 000
D. 70 000

AACSB: Analytical
Difficulty: Hard
43. Under activity-based costing systems, break-even point in units treats which costs as included in the numerator?
i. Batch costs
ii. Product costs
iii. Faculty level costs
A. i and ii
B. i and iii
C. ii and iii
AACSB: Reflective
Difficulty: Easy
44. The firm uses activity-based costing and has the following cost structure: selling price $50, batch cost $20 000, unit
level costs $30 per unit, facility costs $120 000 and product costs $60 000. What is the break-even point in units?
A. 6000
B. 7000 Break even point = (Total batch, product and facility level costs) / (selling price per unit - cost per unit)
C. 9000
D.
= (20000 + 60000 + 120000) / (50 - 30) = 10000
10 000
AACSB: Reflective
Difficulty: Easy
45. Cost volume profit analysis, including customer-related costs, must incorporate which of the following costs:
i. market level costs
ii. customer level costs
iii. order level costs
iv. batch level costs
A. i and ii
B. ii and iii
C. i, ii and iii
AACSB: Reflective
Difficulty: Easy
46. Which of the following statements applies to cost volume profit and sensitivity analysis?
i. Only one variable is changed.
ii. All variables are changed.
iii. One or more variables are changed.
iv. Only one set of variables need be assessed.
A. i
B. ii
C. iii
D. iv
AACSB: Reflective
Difficulty: Easy
Learning Objective: 18.10 Explain how financial planning models can be used for sensitivity analysis and to develop more sophisticated profit models
47.
‘Goal seek' analysis provides for which of the following?
i. An output for a given set of inputs
ii. Required inputs for a given output
iii. A range of outputs for a range of inputs

A. i
B. ii
C. iii

AACSB: Reflective
Difficulty: Easy
48. Which of the following do limitations of cost volume profit include?
i. Not all costs can be classified as fixed or variable.
ii. Revenue changes may not be linear.
iii. Sales volume is the only cost driver.
iv. Inventory levels do not change.
A. i and ii
B. i and iii
C. i, ii and ii
AACSB: Reflective
Difficulty: Easy
49. Which of the following are assumptions of cost volume profit analysis?
i. Sales mix is constant.
ii. External factors do not change.
iii. Fixed costs change with sales volume.
iv. Variable costs are constant per unit of sales.
A. i, ii and iii
B. ii, iii and iv
C. i, ii and iv
AACSB: Reflective
Difficulty: Easy
50. Your local pizza parlour has annual fixed costs of $20 000, the pizza price is $8 and the unit variable cost $4. What is
the contribution margin ratio?
A. 40%
Contribution margin ratio = Contribution margin / selling price
B. 45%
C. 50% = (8-4) / 8 = 0.5 = 50%
D. 60%
AACSB: Analytical
Difficulty: Easy
51. If break-even sales volume is $40 000 and contribution margin $7500, what is the net profit?
A. $7500
B. $32 500
C. $0
AACSB: Reflective
Difficulty: Easy
52. Would you expect the following to be high or low in a labour-intensive industry: (1) operating leverage, (2) break-even
point and (3) safety margin?
A. High, high, low
B. Low, low, high
C. Low, low, low
D. High, high, high
AACSB: Reflective
Difficulty: Medium
53.
Would you expect the following to be high or low in an automated firm: (1) level of fixed costs, (2) level of risk and (3) break-even point?

A. High, high, high
B. Low, high low
C. High, high, low
D. Low, low, high

AACSB: Reflective
Difficulty: Medium
54. Would you expect the following to be high or low in a labour-intensive firm: (1) operating leverage, (2) safety margin
and (3) profit potential?
A. Low, high, low
B. Low, low, high
C. High, low, high
D. High, low, low
AACSB: Reflective
Difficulty: Medium
55. Would you expect the following to be high or low in an automated firm: (1) safety margin, (2) operating leverage and
(3) profit potential?
A. Low, high, high
B. High, high, low
C. Low, high, low
D. High, low, low
AACSB: Reflective
Difficulty: Medium
56. Nesto sells two products: X and Y. The contribution margin ratio for X is 40 per cent and for Y is 50 per cent. If the
proportion of sales of X decreases, what will happen to the weighted average contribution margin?
A. Increase
B. Decrease
C. Remain the same
D. Changes in sales volume do not affect weighted average contribution margin
AACSB: Reflective
Difficulty: Easy
57. Which of the following will increase a company's break-even point?
A. Increasing the contribution margin per unit
B. Increasing the variable cost per unit
C. Reducing the company's total fixed costs
D. Increasing the selling price per unit
AACSB: Reflective
Difficulty: Easy
58. The contribution margin ratio is calculated as
A. total contribution margin / total sales revenue.
B. total profit / sales revenue.
C. contribution margin per unit / selling price per unit.
D. total contribution margin / total sales revenue AND contribution margin per unit / selling price per unit.
AACSB: Reflective
Difficulty: Easy
59.
For a firm that would break even at $200 000 sales and earn a profit of $30 000 at sales of $250 000, which of the following statements
is always true?

A. Fixed costs are $80 000.
B. The selling price is $2 per unit.
C. Profit at sales of $300 000 would be $80 000.
D. The contribution margin is 60 per cent of sales.

AACSB: Analytical
AACSB: Reflective
Difficulty: Medium
60. A firm is reorganising and reclassifying its cost structure. The firm previously classified the item ‘glue and nails' as
indirect material. The firm is considering now tracing this cost directly to products and treating ‘glue and nails' as direct
material. What is the effect on the break-even point (if any) of that change, provided all other items remain unchanged?
A. The break-even point will not change.
B. The break-even point will increase.
C. The break-even point will decrease.
D. The break-even point will change but without actual figures, it is impossible to say in what direction the change will be.
AACSB: Reflective
Difficulty: Medium
61. A firm is reorganising and reclassifying its cost structure. What is the effect on the break-even point (if any) if direct
labour costs are reduced and fixed indirect labour costs are increased, provided all other items remain unchanged?
A. The break-even point will increase.
B. The break-even point will decrease.
C. The break-even point will change but without actual figures, it is impossible to say in what direction the change will be.
D. It is not possible to determine whether the break-even point will change or will remain the same.
AACSB: Reflective
Difficulty: Medium
62. Cost volume profit analysis is a popular tool in practice. Why is it so popular?
A. It is a simple tool that can be used for long-run decision making.
B. It is a simple tool to apply and is suitable for short-run decision making.
C. It can be employed in all types of firms.
D. It is a simple tool to apply and is suitable for short-run decision making AND it can be employed in all types of firms.
AACSB: Reflective
Difficulty: Easy
63. Which of the following is the most precise definition of the operating leverage factor? The operating leverage factor
measures
A. the proportion of fixed costs in a firm's cost structure.
B. the proportion of variable costs in a firm's cost structure.
C. the effect that an increase (decrease) in sales volume will have on profit.
D. the proportion of fixed costs in a firm's cost structure AND the proportion of variable costs in a firm's cost structure.
AACSB: Reflective
Difficulty: Easy
64. A firm has an operating leverage factor of 4. This means that
A. if sales revenue increased by 2 per cent, profit would increase by 4 per cent.
B. if sales revenue increased by 2 per cent, profit would increase by 8 per cent.
C. if sales revenue increased by 2 per cent, profit would increase by 2 per cent.
D. profit would increase by 4 times the dollar increase in sales revenue.
AACSB: Analytical
Difficulty: Easy
65. The operating leverage factor is calculated as
A. total profit / sales revenue.
B. contribution margin per unit / selling price per unit.
C. contribution margin / net profit.
D. contribution margin / total fixed costs.
AACSB: Reflective
Difficulty: Easy
66. The margin of safety is the difference between
A. contribution margin and net profit before tax.
B. budgeted contribution margin and actual contribution margin.
C. budgeted sales revenue and actual sales revenue.
D. budgeted sales revenue and break-even sales revenue.
AACSB: Reflective
Difficulty: Easy
67.
A firm produces products A and B. The following data is available:
Selling price per unit is $20 A and $25 B
Variable costs per unit is $11 A and $18 B
Sixty percent of sales in units are expected to be product A. Fixed costs are expected to be $82 000. Calculate the break-even level of
sales in units.
Contribution margin = (20 - 11) * 0.6 + (25 - 18) * 0.4 = 8.2

A. 2460 A; 1312 B Break even point in unit = 82000 / 8.2 = 10000
B. 3000 A; 2000 B
C. 6000 A; 4000 B Unit of A = 10000 * 0.6 = 6000
D. 18 000 A; 14 000 B

Unit of B = 10000 * 04. = 4000
AACSB: Analytical
Difficulty: Medium
68. Cost volume profit applied to the service industry.
A hotel has 10 000 room nights available per annum, charges $50 per room per night, pays fixed costs of $150 000 per
annum and variable costs of $16 for each night a room is occupied. If the price per room per night is increased by 5 per
cent, the break-even occupancy rate as a percentage (rounded) is
A. 38%. price per room = 50 * (1+5%) = 52.5
B. 41%.
BEP in room = Fixed costs / Cotribution margin per room
C. 44%.
D. 50%. = 150000 / (52.5 - 16) = 4109 rooms
BEP occupacy rate = (BEP in room / Annual room available) * 100
= (4109 / 10000) * 100 = 41.09%
AACSB: Analytical
Difficulty: Medium
69.
Cost volume profit applied to the service industry
A nursing home has the following annual budget:
Variable cost = 1125000

Fixed cost = 330000
Calculate the budgeted contribution margin ratio.

A. 3%
B. 22% Contribution margin ratio = (1500000 - 1125000) / 1500000 = 0.25 = 25%
C. 25%
D. 33.33%

AACSB: Analytical
Difficulty: Medium
70.

Calculate the budgeted break-even point in inpatient days.

A. 7333 days
B. 22 000 days BEP per impatient day = 330000 / 375000 = 0.88
C. 25 000 days 25000 impatient days = 0.88 * 25000 = 22000

AACSB: Analytical
Difficulty: Medium
71.
Which of the following statements is correct if fixed administration costs were increased by $50 000 and all other matters remained the
same?

A. The break-even point in inpatient days would increase.
B. The contribution would decrease.
C. The net profit would increase.
D. There would be no change in break-even point.

AACSB: Analytical
Difficulty: Easy
72.
A firm makes and sells three standard products in a specific product mix. All three products are made using the same production
facilities. The following budgeted data for the coming year is available.

Total annual fixed costs $348 000
Tax rate 40%
The break-even sales units for products 1, 2 and 3 are

A. 1200; 3000; 1800.
B. 3600; 9000; 5400.
C. 2400; 6000; 3600.
D. Can only determine the total break-even point, not the units of each product

AACSB: Analytical
Difficulty: Medium
73.

Tax rate 40%
What sales revenue would be required for each of the three products to earn a profit of $139 200 after tax?

A. $400 000; $600 000; $480 000
B. $296 000; $740 000; $444 000
C. $200 000; $300 000; $240 000
D. $800 000; $1 200 000; $960 000

AACSB: Analytical
Difficulty: Hard
74.

Tax rate 40%
Calculate the margin of safety for the firm.

A. $1 776 000
B. $1 664 000
C. $1 332 000

AACSB: Analytical
Difficulty: Hard
75. Cost volume profit analysis is based on the separation of fixed and variable costs. The analysis can be stated as an
equation as follows: P = a(b – c) – d. In this statement of the equation, P is the profit, and
A.
b is the price per unit; c is the variable cost per unit; a is the number of units produced; d is the fixed cost.
B.
b is the number of units produced; c is the fixed cost; a is the price per unit; d is the variable cost per unit.
C.
b is the fixed cost; c is the number of units produced; a is the variable cost per unit; d is the price per unit.
D.
All of the given answers are incorrect because they all refer to the number of units produced. In fact, profit is determined according to
the number of units sold.
AACSB: Reflective
Difficulty: Easy
76. Cost volume profit (CVP) analysis is based on a number of limiting assumptions. Which of the following is not one of
the assumptions of the CVP model?
A. Production units equal sales units over the period.
B. If the firm has a product mix, the mix remains constant.
C. Cost behaviour is linear over the relevant range.
D. CVP analysis only applies to a single-product firm.
AACSB: Reflective
Difficulty: Easy
77. Which of the following statements is most correct with respect to the assumptions of the cost volume profit model?
A. The assumptions of the model are realistic.
B. The assumptions of the model are unrealistic, and therefore the model has little usefulness.
C. It is not possible to state whether the assumptions of the model are realistic or unrealistic.
D. The assumptions of the model are unrealistic, but the model has great usefulness in certain circumstances, as
evidenced by its use in practice.
AACSB: Reflective
Difficulty: Easy
78. Which of the following statements about the cost-volume-profit graph is false?
A. It can be used to identify both profit areas and loss areas.
B. It shows the relevant range of total revenue.
C. It cannot be used to make managerial decisions involving step-wise costs.
D. It can be used to identify break-even points.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 18.03 Prepare a cost volume profit graph and a profit volume graph, and explain how they may be used
79.
Chelonia Ltd manufactures small robot toys. It plans to introduce a new product, Speedie the robot tortoise. The following activity cost
information is available:

It is expected that each unit of Speedie will sell for $23. The direct material cost for unit is $10. What is the contribution margin per
units?
(For simplicity, assume that you can have partial moves and partial batches – that is, no need to round up the number of batches and
the number of moves.)

A. $21 CM per unit = selling price - variable cost = 23 - (500/100 + 200/100 + 2 +10) = 4
B. $13
C. $11
D. $4

AACSB: Analytical
Difficulty: Easy
80.

It is expected that each unit of Speedie will sell for $23. The direct material cost for unit is $10. What is the break-even point in units?

A. 518 units
B. 1000 units BEP = 5000 / 4 = 1250
C. 1250 units
D. 2850 units

AACSB: Analytical
Difficulty: Hard
81.

It is expected that each unit of Speedie will sell for $23. The direct material cost for unit is $10. Assuming a tax rate of 40%, how many
units of Speedie must Chelonia Ltd produce and sell to make an after-tax profit of $12 000?

A. 1000 units
B. 1818 units Sales volume required to earn net profit after tax
C. 4250 units =[5000 + (12000/(1-0.4)] / 4 = 6250
D. 6250 units

AACSB: Analytical
Difficulty: Hard
82. Chelonia Ltd manufactures small robot toys. It plans to introduce a new product, Spunkie, which is a solar-powered
robot jellyfish. Initially, Chelonia Ltd plans to sell each unit of Spunkie for $95, with an expectation that 2500 units can be
sold. The variable cost per unit is $30. The management accountant at Chelonia Ltd is exploring the idea of making some
modification to Spunkie which will cost $2 per unit. This modification can allow them to increase the price to $100. This
however will lower the demand to 2000 units. Should Chelonia Ltd reduce the price of Spunkie?
A. Yes, as the modified model will increase per unit contribution margin by $3.
B. Yes, as the modified model will increase both the sales revenue and the contribution margin.
C. No, while the modified model will increase the contribution margin per unit, the lower sales volume results in a net
decrease in profit.
D. No, while the modified model will increase sales revenue, the lower contribution margin per unit will result in lower
overall net profit.
AACSB: Reflective
Difficulty: Medium
83. Chelonia Ltd manufactures small robot toys. It plans to introduce two products, Speedie and Spunkie. It is anticipated
that the product mix will be 40% Speedie and 60% Spunkie. One unit of Speedie will be sold for $100, with variable cost
equals $40. For a unit of Spunkie, the selling price will be $120 and the variable cost is $70. The fixed cost for producing
the two products is $108 000. What is the break even point?
A. Speedie: 1200 units; Spunkie: 800 units Contribution margin = (100-40) * 0.4 + (120-70) * 0.6
B. Speedie: 800 units, Spunkie: 1200 units = 54
C. Speedie: 1800 units; Spunkie: 2160 units BEP = 108000 / 54 = 2000
D. Speedie: 2160 units, Spunkie: 1800 units

Speedie =2000 * 0.4 = 800
Spunkie =2000 * 0.6 = 1200
AACSB: Analytical
Difficulty: Medium
84. Chelonia Ltd manufactures small robot toys. It plans to introduce two products, Speedie and Spunkie. It is anticipated
that the product mix will be 40% Speedie and 60% Spunkie. One unit of Speedie will be sold for $100, with variable cost
equals $40. For a unit of Spunkie, the selling price will be $120 and the variable cost is $70. The fixed cost for producing
the two products is $108 000. The company plans to include a safety margin of $20 000 before tax. Assuming a tax rate of
30%, what should be the budgeted sales?
A. Speedie: 1012 units; Spunkie: 1517 units
B. Speedie: 1517 units, Spunkie: 1012 units
C. Speedie: 948 units; Spunkie: 1422 units
D. Speedie: 1422 units, Spunkie: 948 units
AACSB: Analytic
Difficulty: Hard
85. In general, an increase in fixed cost while the contribution margin remains unchanged will
A. increase the break even point.
B. decrease the break even point, but only if the safety margin is positive.
C. either increase or decrease the break even point, depending on operation leverage.
D. have no impact on break even point.
AACSB: Reflective
Difficulty: Easy
86. Which of the following statements about the safety margin is correct?
i. All else being equal, the safety margin is higher when the break even point is lower.
ii The safety margin depends on the budgeted revenue
iii The safety margin is unaffected by fixed cost.
A. i and ii
B. i and iii
C. ii and iii
D. All three statements are correct
AACSB: Reflective
Difficulty: Easy
87. Chelonia Ltd manufactures small robot toys. It plans to introduce a new product, Spunkie, which is a solar-powered
robot jellyfish. The break even point for Spunkie is 1500 units at $100 per unit. Assuming that the safety margin is $2000,
what are the budgeted sales (in units)?
A. 1540 units
B. 1530 units Margin of safety (in unit) = Budgeted sales units - BEP
C. 1520 units --> Budgeted sales units = (2000/100) + 1500 = 1520
D. 1500 units
AACSB: Analytical
Difficulty: Easy
88. The break-even point in units can be seen on a CVP graph at the intersection of
A. the fixed cost line and the total revenue line.
B. the total revenue line and the total cost line.
C. the fixed cost line and the total cost line.
D. the total revenue line and the profit/loss line.
AACSB: Reflective
Difficulty: Easy
89. On a CVP graph the vertical distance between the total revenue and total costs lines represents the
A. sales volume.
B. fixed costs.
C. variable costs.
D. profit or loss.
AACSB: Reflective
Difficulty: Easy
90.
If a firm has $482 500 in fixed costs, a unit contribution margin of $45 and targeted sales volume of 12 500 units, the target net profit
would be

A. 1737. Target sales volume = Fixed costs + target net margin / CM
B. 13 402. 12500 = (482500 + X) / 45 --> X = 80000
C. 80 000.
D. 10 722.

AACSB: Reflective
Difficulty: Easy
91.
If a firm has $482 500 in fixed costs, a target net profit of $80000 and targeted sales volume of 12 500 units, the unit contribution
margin would be

A. 6.03. Target sales volume = Fixed costs + target net margin / CM
B. 6.40. 12500 = (482500 + 80000) / X --> X = 45
C. 38.60.
D. 45.00.

AACSB: Reflective
Difficulty: Easy
92. When management runs several CVP analyses with different combinations of estimates this is known as
A. variation analysis.
B. sensitivity analysis.
C. advanced CVP analysis.
D. goal-seek analysis.
AACSB: Reflective
Difficulty: Easy
93. Which of the following approaches enables management to apply specific changes in assumptions and data and then
to examine the effect of those changes on the output?
A. Traditional CVP analysis
B. Goal-seek approach
C. What-if analysis
D. Sensitivity analysis
AACSB: Reflective
Difficulty: Easy
94. i. Explain how cost volume profit (CVP) analysis can be used by management.
ii. One of the assumptions underlying CVP analysis is a constant sales mix over the relevant range of activity. What are
the other assumptions underlying CVP analysis?
iii. The Bygon Company Ltd makes major household appliances such as refrigerators, stoves and dishwashers. Sales are
heavily dependent upon the number of housing starts and the level of disposable income. Next year the number of
housing starts in Victoria is expected to be the same as this year; however, about two-thirds of these starts will be for
rental units compared to a historical average of one-third. The remaining housing starts will be for single-family homes
and up market units. Bygon generally makes two levels of each product: the economy model (fully functional, but with few
special features) and the prestige model (with the most popular special features). Bygon assumes a product mix of 40 per
cent economy and 60 per cent prestige. Describe how the change in the percentage of rental units in housing starts could
create a problem with the stable product mix assumption.
i. CVP analysis can be used to perform ‘what if' analyses that allow management to estimate the effects of various
changes in operations on the profitability at various levels of sales. For example, the effects of changes in selling price,
variable costs per unit, fixed costs in total and volume of goods produced and sold may be explored by manipulating the
CVP model with different values for these items.
ii. The four additional assumptions for the CVP model are:
Cost behaviour is linear; that is, variable cost per unit is constant and fixed costs in total are constant.
The behaviour of total costs is linear. This implies that:
* costs can be categorised as fixed, variable or semivariable
* labour productivity, production technology and market conditions do not change
* there are no capacity additions during the period under consideration.
For both variable and fixed costs, sales volume is the only cost driver.
Inventories at the beginning = inventories at the end. This implies that production = sales.
iii. The shift towards more rental units and fewer single-family homes and up-market units is very likely to mean that the
demand for the economy models will increase relative to the demand for the prestige models. The rental unit generally will
be used for households with a lower income. Traditionally, renters will save costs by purchasing the cheaper model.
AACSB: Reflective
Difficulty: Medium
95. i. Explain how the traditional profit and loss statement differs from the format used in cost volume profit (CVP)
analysis.
ii. One of the assumptions underlying CVP analysis is a constant variable cost per unit and fixed costs in total over the
relevant range of activity. What are the other assumptions underlying CVP analysis?
iii. The Beetle Company Ltd is experiencing considerable growth and now is able to consider buying raw materials in far
larger quantities than a few years ago. For example, one of their primary raw materials may be obtained in bulk purchase
lots consisting of three railway wagons as a purchasing unit. The advantage of purchasing in this quantity is that the per-
litre cost of this raw material is much cheaper than obtained through purchases of single semitrailer truckloads. In
planning for next year, the lower end of possible levels of activity is sufficiently small that the purchase of single semitrailer
truckloads would be appropriate. However, at the higher end of the possible levels of activity, purchase in three railway
wagons units would be preferable. How could the situation described above be reflected in the CVP analysis? Which of
the lines (total revenue, total costs, total fixed costs) would have to be changed and how?
i. In the traditional profit and loss statement, costs are grouped by function: manufacturing, selling and administration. In
CVP analysis, costs are grouped by behaviour: variable and fixed.
ii. The additional assumptions are:
constant selling price over the relevant range
stable product mix
equal sales and production volumes
labour productivity, production technology and market conditions do not change
there are no capacity additions during the period under consideration
there are no significant changes in the level of inventories.
iii. The total cost line will be affected. The total cost line is constructed by adding variable costs on top of the fixed costs.
For relatively low volume of activity, the slope of the total cost line should reflect the purchase costs associated with single
semitrailer truck purchases. However, at high levels of activity, the slope should reflect the purchase costs associated with
the larger, three railway wagon option. This means that the assumption of a constant variable cost per unit is not
maintained.
AACSB: Reflective
Difficulty: Medium
96. i. ‘Cost driver' is a widely used term in activity-based costing. What is a cost driver? What is the cost driver in
conventional cost volume profit (CVP) analysis? How is the cost driver measured in conventional CVP analysis?
ii. In activity-based costing, costs are classified into unit level, batch level, product level and facility level. How are these
categories typically handled in CVP analysis, where there are only two categories available: fixed or variable?
iii. In an environment where activity-based costing is necessary and appropriate, is the relevance of conventional CVP
analysis enhanced or diminished? Explain.
iv. Explain the additional limiting assumption of using CVP analysis under activity-based costing.
i. A cost driver is an activity or event that causes costs to be incurred. The cost drivers used in conventional CVP analysis
are related to production volume. This may be measured directly in terms of units produced if products are reasonably
homogeneous. Alternatively, it may be measured by using a ‘common denominator' such as direct labour hours or
machine hours to deal with diversity in the products manufactured.
ii. The first category, unit level costs, is viewed as variable with respect to production volume in conventional CVP
analysis; the other categories are not related to production volume, but these will vary with respect to particular activity
drivers. The term ‘fixed cost' is not relevant under activity-based costing systems.
iii. The relevance of conventional CVP analysis is diminished since costs can be viewed as fixed or variable only with
respect to the impact of one cost driver: units produced and sold. When costs can vary with respect to the number of
batches produced or the number of product lines that must be sustained, then the conventional CVP analysis cannot
handle these changes in a useful manner. The changes can be reflected in revised levels of activity costs to reflect
expected changes in the number of set-ups or engineering changes, etc.
iv. Under conventional CVP analysis, it is assumed that costs and profits are directly related to sales volume. However,
activity-based costing recognises a range of cost drivers, including non-volume-based drivers. Consequently, there are
few costs that are fixed in relation to their cost driver—most costs will vary in respect to particular activity drivers. The only
costs that can be regarded as ‘fixed' in the short run are facility-level costs, as they do not vary with any activity driver.
To break even under an activity-based system, therefore, the business must generate sufficient sales not just to cover
‘fixed costs', but to cover the ‘total' costs of the business. Therefore, to find break even, we must add together all facility-,
product- and batch-level costs and divide by the unit contribution margin.
AACSB: Reflective
Difficulty: Hard
97. i. Define operating leverage.
ii. The firm is planning to increase the selling price. If sales volume in units does not change, what will happen to the
operating leverage factor? (Assume the firm pays no income taxes.) Explain.
iii. The firm is planning to increase fixed manufacturing costs and decrease variable manufacturing costs per unit. At the
present volume of production, the total manufacturing costs will be unchanged. What will this change do to the operating
leverage factor? (Assume no income taxes.) Explain.
i. Operating leverage is contribution margin divided by net profit. It indicates the extent to which a firm uses fixed costs in
its cost structure.
ii. The increase in selling price with no change in units sold will increase both the contribution margin and the net profit by
the same dollar amount. The percentage change in net profit will be greater than the percentage change in contribution
margin. Consequently, the operating leverage factor will decrease.
iii. The decrease in variable costs will increase the contribution margin, but net profit will not be changed due to the
increase in fixed costs. Therefore, the operating leverage factor will increase.
AACSB: Reflective
Difficulty: Hard
98. Describe and illustrate with an example, the steps required to construct a cost volume profit (CVP) graph.
Step one: Draw the axes of the graph. Label the vertical axis in dollars and the horizontal axis in units of sales volume. (Note that in

CVP analysis, costs are assumed to be fixed or variable with respect to production volume, and production volume is assumed to be
equal to sales volume.)
Step two: Draw the fixed cost line. This is parallel to the horizontal axis, since fixed costs are assumed not to change despite changes
in sales volume.
Step three: Draw the total cost line. First, calculate total costs at any volume. For example, fixed costs $561 600 and variable costs
with a volume of 8000 units at a cost of $31.50 per unit:
Plot this point ($813 600 at 8000 units) on the graph. Second, draw the total cost line passing through point A and the intercept of the
fixed cost line on the vertical axis ($561 600). The difference between this line and the fixed cost line is equal to variable costs.
Step four: Draw the total revenue line. First, calculate total sales revenue at any convenient volume. We will choose 8000 units again.

Total revenue is $720 000 (8000  $90 per unit). Plot this point ($720 000 at 8000 units) on the graph. Second, draw the total revenue
line passing through point B and the origin.
Step five: Find the break-even point. This occurs at the intersection of the total revenue line and the total cost line.
Difficulty: Medium
99. Management would prefer a smaller safety margin to a larger one, as the smaller margin puts the company in a better
financial position.
FALSE
AACSB: Reflective
Difficulty: Easy
100. Although the cost structure of a firm considers the proportions of fixed and variable costs, these structures will differ
depending on the firm itself and the particular industry.
TRUE
AACSB: Reflective
Difficulty: Easy
101. The cost volume profit model is a simple model to use because tax is a factor that does not have to be considered.
FALSE
AACSB: Reflective
Difficulty: Easy
102. When calculating the breakeven point with a company that has multiple products, there is no real need to know the
proportion of the sales for each product.
FALSE
AACSB: Reflective
Difficulty: Easy
103. When doing cost volume profit analysis, the starting point is always to analyse the cost behaviours in relation to
activity levels.
TRUE
AACSB: Reflective
Difficulty: Easy
104. If a firm has a net profit of $50 000, a revenue of $520 000 and variable costs of $300 000, the operating leverage
factor would be 5.5.
FALSE
AACSB: Analytical
Difficulty: Easy
105. When calculating a breakeven point with activity-based costing, all costs from unit, batch, product and facility levels
are used in the formula.
TRUE
AACSB: Reflective
Difficulty: Easy
106. One of the biggest criticisms of cost volume profit (CVP) analysis is that it is merely a simplified model that needs to
be used with a lot of caution.
TRUE
AACSB: Reflective
Difficulty: Easy
107. ‘What-if' analysis allows financial models to be manipulated in terms of changes to assumptions and data, to
determine the changes in outputs.
TRUE
AACSB: Reflective
Difficulty: Easy
108. To calculate the breakeven point, the equation (SP-VC)X – FC = 0 where SP = selling price per unit, VC = variable
cost per unit, FC = fixed costs and X = the units at breakeven, can be used.
TRUE
AACSB: Reflective
Difficulty: Easy
109. When fixed costs are divided by the contribution margin ratio the result will provide management with the break-even
point in sales dollars.
TRUE
AACSB: Reflective
Difficulty: Easy
110. When interpreting the cost volume profit graph, the break-even point is where the total revenue line intercepts the
fixed cost line.
FALSE
AACSB: Reflective
Difficulty: Easy
111.
If a firm has $4 00 000 in fixed costs, a unit contribution margin of $60 and a target net profit of $80 000, the target sales volume to
achieve this profit would be 8000 units.

TRUE

AACSB: Reflective
Difficulty: Easy
ons
AACSB: Analytic 2
Difficulty: Easy 69
Difficulty: Hard 9
Learning Objective: 18.01 Calculate the break-even point in sales units using the CVP equation 25
Learning Objective: 18.02 Calculate the contribution margin ratio, and use it to find the break-even point in sales dollar 7
s
Learning Objective: 18.03 Prepare a cost volume profit graph and a profit volume graph, and explain how they may be 5
used
Learning Objective: 18.04 Use the break-even formula to determine the sales units or sales revenue required to achiev 6
e a target net profit
Learning Objective: 18.05 Apply CVP analysis to determine the effect on profits of changes in fixed costs, variable cost 15
s, sales prices and sales volume
Learning Objective: 18.06 Calculate the break-even point and prepare a profit volume graph where there are multiple p 10
roducts
Learning Objective: 18.07 Include income taxes in CVP analysis 8
Learning Objective: 18.08 Describe the limitations and potential uses of CVP analysis in practice 10
Learning Objective: 18.09 Use activity-based approaches within CVP analysis and understand the limiting assumption 10
s implicit in this analysis
Learning Objective: 18.10 Explain how financial planning models can be used for sensitivity analysis and to develop m 5
ore sophisticated profit models
Learning Objective: 18.11 Explain the concepts of cost structure and operating leverage, and measure operating lever 15
age

1. Which of the following statements about the management accountant's role in the decision-making process is/are true?
i. The management accountant is primarily responsible for selecting an alternative in the decision-making process.
ii. The management account is primarily responsible for collecting the data in the decision-making process.
iii. The management accountant is sometimes involved in developing a decision model in the decision-making process.
A. i
B. i and ii
C. i and iii
D. ii and iii
AACSB: Reflective
Difficulty: Medium
Learning Objective: 19.01 Describe the steps in the decision-making process, and the management accountant's role in that process
2. Which of the following statements about the decision-making process is/are true?
i. The first step in the decision-making process is to define or clarify a decision problem into clear terms that can be
addressed.
ii. Before alternatives can be identified, the necessary data must first be collected.
iii. After the alternatives are identified, the criterion on which a decision will be made must be specified.
A. i
B. ii
C. iii
AACSB: Reflective
Difficulty: Easy
3. When the objectives of the decision are in conflict, one objective may be specified as the decision criterion and the
other objectives are established as:
A. differential criteria.
B. irrelevant criteria.
C. constraints.
D. opportunity costs.
AACSB: Reflective
Difficulty: Easy
4. What term is used to describe factors in a decision problem that cannot be expressed effectively in numerical terms?
A. Qualitative
B. Quantitative
C. Sensitive
D. Uncertain
AACSB: Reflective
Difficulty: Easy
5. Decision problems involving accounting data are specified in:
A. qualitative terms.
B. quantitative terms.
C. financial aspects.
D. accounting aspects.
AACSB: Reflective
Difficulty: Easy
6. Criteria measured utilising quantitative terms include objectives such as:
A. profit maximisation or cost minimisation.
B. cost minimisation and employee morale.
C. increased sales and improved quality.
D. cost minimisation and employee morale; increased sales and improved quality.
AACSB: Reflective
Difficulty: Easy
7. An accounting information system should be designed to provide useful information. To be useful the information must
be:
A. qualitative not quantitative.
B. unique and unavailable through other sources.
C. historical in nature and not purport to predict the future.
D. relevant, accurate and timely.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 19.03 Describe the characteristics of relevant information
8. If a management accountant is trying to decide whether a cost is relevant to a decision, he or she should consider the
cost relevant if:
A. it is a historical cost precise in nature.
B. it is a historical cost that is the same among all alternatives.
C. it is an expected future cost that is the same for each alternative.
D. it is an expected future cost that is different for each alternative.
AACSB: Reflective
Difficulty: Easy
9. The most common trade-off in a decision situation is between information:
A. accuracy and relevance.
B. relevance and timeliness.
C. accuracy and timeliness.
D. sensitivity and relevance.
AACSB: Reflective
Difficulty: Easy
10. In order for information to be relevant, the decision to be made must have an effect on:
i. future cost or revenues.
ii. past cost or revenues.
iii. the timeliness of information.
A. i
B. ii
C. iii
D. i and ii
AACSB: Reflective
Difficulty: Easy
11. In order to be relevant to a decision, cost or benefit information must involve ________, rather than ________.
A. a past event; a future event
B. actual data; estimated data
C. a future event; a past event
D. a past event; a current event
AACSB: Reflective
Difficulty: Easy
i. Accurate but irrelevant information is still useful for decision making.
ii. Relevant, accurate, but not timely information is not useful in decision making.
iii. Relevant information that is known to have some weaknesses in accuracy still is useful in decision making.
A. i
B. ii
C. i and ii
D. ii and iii
AACSB: Reflective
Difficulty: Medium
13. Which of the following statements about relevant information is/are true?
i. An accountant can use past prices, previous market demand and previous cost data to predict future costs when
repetitive decisions are made.
ii. No relevant information is available within an organisation's information system for unique decisions.
iii. It is important to segregate relevant data from irrelevant data because it is possible to overload management with
information.
A. i
B. ii
C. ii and iii
D. i and iii
AACSB: Reflective
Difficulty: Easy
14. Which of the following statements about relevant information is/are true?
i. For information to be relevant, it must relate to the future.
ii. For information to be relevant, it must differ between the alternatives.
iii. For information to be relevant, it must be completely accurate.
A. i
B. i and ii
C. i and iii
AACSB: Reflective
Difficulty: Easy
15.
In a decision to keep or replace a piece of equipment, calculate the total yearly expense of keeping the old equipment using the
following data.

A. $105 000
B. $25 000
C. $95 000
D. $130 000

AACSB: Analytical
Difficulty: Easy
16. The primary advantage of differential analysis is that it:
A. clearly shows the difference between the costs and benefits of the alternatives.
B. is much easier to formulate than total cost.
C. reduces the cost of one alternative by the cost of another.
D. only considers relevant costs.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 19.04 Identify relevant information, including giving the appropriate treatment to sunk costs and opportunity costs
17. Opportunity cost is best defined as:
A. the amount of money that is paid for something.
B. the amount of money that is paid for something, considering inflation.
C. the highest valued benefit given up in making a choice.
D. all of the benefits that are given up in making a choice.
AACSB: Reflective
Difficulty: Easy
18. Opportunity cost may also be described as:
A. a foregone benefit.
B. a comparative cost.
C. a frontier cost.
D. an alternative cost.
AACSB: Reflective
Difficulty: Easy
19. The book value of an asset such as equipment is an example of:
A. a future cost.
B. a differential cost.
C. an opportunity cost.
D. a sunk cost.
AACSB: Reflective
Difficulty: Easy
20. In decision making, opportunity costs are:
A. unimportant costs.
B. historical costs.
C. relevant costs.
D. future costs.
AACSB: Reflective
Difficulty: Easy
21. Manufacturers sometimes sell products at less than full price for a special order. The analysis of such decisions
focuses on:
A. fixed cost.
B. relevant benefits.
C. relevant costs.
D. both relevant benefits and relevant costs.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 19.05 Select and analyse relevant information for special order decisions
22.
Which of the following statements about variable and fixed expenses, as they relate to relevance, is/are true?
i. Variable expenses may or may not be relevant costs.
ii. Variable expenses are always relevant.
iii. Fixed expenses are never relevant.

A. i
B. i and iii
C. iii
D. ii and iii

AACSB: Reflective
Difficulty: Medium
23. Rapid Growth Pty Ltd is presently operating at full capacity. They received a special order that, if accepted, would
require refusing some sales to regular customers. Which of the following factors should management consider when
making their decision?

Variable costs of special order Fixed costs of equipment Opportunity costs

A.
Yes Yes Yes
B.
Yes Yes No
C.
Yes No Yes
D.
Yes No No
AACSB: Reflective
Difficulty: Easy
24. A special order generally should be accepted if:
A. its revenue exceeds allocated fixed costs, regardless of the variable costs associated with the order.
B. excess capacity exists and the revenue exceeds all variable costs associated with the order.
C. excess capacity exists and the revenue exceeds allocated fixed costs.
D. the revenue exceeds variable costs, regardless of available capacity.
AACSB: Reflective
Difficulty: Medium
25.
When excess capacity exists, the only relevant cost associated with a special order will usually be which cost?

A. Fixed cost
B. Variable cost
C. Administrative cost
D. Allocated fixed cost

AACSB: Reflective
Difficulty: Easy
26. Which of the following statements regarding short-term decisions is true?
A. Fixed costs must only be considered on a per unit basis.
B. Fixed costs will actually behave as variable costs when they are unitised for special decisions.
C. Unitised fixed costs are valid only for make or buy decisions.
D. Unitised fixed costs are misleading because they appear to behave as variable costs when in fact they are not.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 19.11 Identify the pitfalls to avoid when using accounting data in decisions
27.
A firm has the following cost data per unit.

Calculate fixed costs per unit.

A. $0.75
B. $1.75
C. $2.25
D. $3.25

AACSB: Analytical
Difficulty: Easy
Learning Objective: 19.06 Select and analyse relevant information for decisions about whether to make or buy a product
28.
A firm has the following cost data per unit.
Calculate total cost per unit.

A. $3.25
B. $4.25
C. $1.75
D. $2.25

AACSB: Analytical
Difficulty: Easy
29. The manager of Big Mac Ltd is considering the purchase of equipment to make hamburgers that will reduce annual
operating costs by $1500. The equipment will cost $6000 and will have a useful life of five years with no resale value. The
new equipment will replace equipment purchased five years ago at a cost of $10 000, that has a book value of $5000 and
no resale value. What will be the net effect on profit for the next five years in total if the new equipment is purchased?
(Ignore tax effects.)
A. $7500 increase
B. $4500 decrease
C. $3500 decrease
D. $1500 increase
AACSB: Analytical
Difficulty: Medium
30. Jaspar Ltd has 1000 units in inventory that cost $2.00 per unit to produce. Due to changing technology, the sales
department is having difficulty selling the product. It will cost $500 to scrap the units. The company should consider any
price over:
A. $2000.
B. $2500.
C. $1500.
D. $0.
AACSB: Analytical
Difficulty: Medium
31. Mod Clothiers makes women's clothes. It costs $28 000 to produce 5000 pairs of polka-dot polyester pants. They
have been unable to sell the pants at their usual price of $50.00. The company is evaluating two alternatives. They could
sell the pants 'as is' for a total of $15 000 or they could modify the pants at a cost of $3000 and sell them for a total of $20
000.
What would be the effect on profit of modifying the pants and selling them as opposed to selling 'as is'?
A. $8000 decrease
B. $11 000 decrease
C. $2000 increase
D. $3000 increase
AACSB: Analytical
Difficulty: Easy
32. Mod Clothiers makes women's clothes. It costs $28 000 to produce 5000 pairs of polka-dot polyester pants. They
have been unable to sell the pants at their usual price of $50.00. The company is evaluating two alternatives. They could
sell the pants 'as is' for a total $15 000 or they could modify the pants and sell them for a total of $20 000.
At what cost to modify each pair of pants, would Mod Clothiers be indifferent between the two alternatives?
A. $0.40
B. $0.50
C. $0.75
D. $1.00
AACSB: Analytical
Difficulty: Easy
33.
Xebex Pty Ltd is considering whether to make or buy a component used in the production of Faz Machines. The annual cost of
producing the 100 000 components used by the company is as follows.
If Xebex were to discontinue production of the component, direct fixed manufacturing costs would be reduced by 80 per cent.
Xebex should buy the 100 000 components if the cost of purchasing per unit is less than what amount?

A. $4.50
B. $4.00
C. $3.80
D. $3.00

AACSB: Analytical
Difficulty: Medium
34.
Xebex Pty Ltd is considering whether to make or buy a component used in the production of Faz Machines. The annual cost of
producing the 100 000 components used by the company is as follows.

If Xebex were to discontinue production of the component, direct fixed manufacturing costs would be reduced by 80 per cent.
What are the irrelevant costs in the decision?

A. $50 000
B. $70 000
C. $80 000
D. $100 000

AACSB: Analytical
Difficulty: Medium
35. Sunshine Products is a multiproduct firm. The revenues of a single product are $200 000 when 10 000 units are sold.
Variable costs are $16 per unit. Direct fixed expenses of $25 000 consist primarily of depreciation on equipment
specialised to the product. By what amount will Sunshine Products' cash flow change if the product is dropped?
A. $200 000 decrease
B. $160 000 decrease
C. $40 000 decrease
D. $15 000 decrease
AACSB: Analytical
Difficulty: Easy
36. Holt Pty Ltd presently makes 20 000 units of a certain part to use in production. The cost to make the part is $20 per
unit including $15 in variable costs and $5 in fixed overhead applied. If Holt buys the part from Bricker, the cost would be
$18 per unit and the released facilities could not be used for any other activity. Eighty per cent of the fixed overhead would
continue. Determine the relevant costs to make the part.
A. $320 000
B. $360 000
C. $380 000
D. $300 000
AACSB: Analytical
Difficulty: Medium
37.
SloGrowth has idle capacity. They have received a special order for 2000 units at a price of $6 per unit. Currently production and sales
are budgeted for 20 000 units without considering the special order. Budget information for the year is presented below.

Cost of goods sold includes $20 000 of fixed manufacturing cost. Determine the effect on profit if the special order is accepted.

A. Remains the same
B. Increase by $2000
C. Decrease by $2000
D. Decrease by $1000

AACSB: Analytical
Difficulty: Easy
38.
Sound Systems reported the following results from the sale of 24 000 radios:
Sound Systems expects similar operating results during the current year. Rhythm Systems has offered to purchase 3000 radios at $16
each. Sound Systems estimates approximately 5000 additional units could be made with the capacity currently available in the factory.
The owner of Sound Systems is in favour of accepting the order. She feels it would be profitable because no variable selling costs will
be incurred. The plant manager is against acceptance because his 'full cost' of production is $17.
Determine the change in profit if the special order is accepted.

A. $3000 increase
B. $12 000 increase
C. $12 000 decrease
D. $36 000 decrease

AACSB: Analytical
Difficulty: Easy
39. Generally, joint costs are not relevant in decision making after split-off because:
A. they do not help increase the sales.
B. they increase the sales margin only marginally.
C. they do not change regardless of any decision.
D. joint costs reflect opportunity costs.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 19.08 Explain how to treat joint product costs in decisions about whether to sell a product or process it further
40. In the relative sales value method, joint costs are allocated between products:
A. in proportion to their sales value at split-off point.
B. in proportion to their profit margin at split-off point.
C. in proportion to the separable costs at split-off point.
D. in proportion to cost of production of a joint product.
Difficulty: Easy
41. Contribution margin per machine hour can be calculated by dividing:
A. machine hours required per unit by sales margin per unit.
B. contribution margin per unit by machine hours required per unit.
C. machine hours required per unit by contribution margin per unit.
D. total machine hours required by total contribution margin.
Difficulty: Easy
42. Product costs incurred after the split-off point are called:
A. separable processing costs.
B. joint product cost.
C. by-product costs.
D. scrap costs.
AACSB: Reflective
Difficulty: Easy
43. Lido Products produces two products (A and B) from a joint process. The joint cost of production is $80 000. Five
thousand units of Product A can be sold at split-off for $20 per unit or processed further at an additional cost of $20 000
and sold for $25 per unit. Ten thousand units of Product B can be sold at split-off for $15 per unit or processed further at
an additional cost of $20 000 and sold for $16 per unit.
What is the difference in profit if Lido decides to process further Product A, instead of selling it at split-off?
A. $25 000 increase
B. $5000 increase
C. $21 000 increase
D. $27 000 decrease
AACSB: Analytical
Difficulty: Easy
44. Lido Products produces two products (A and B) from a joint process. The joint cost of production is $80 000. Five
thousand units of Product A can be sold at split-off for $20 per unit or processed further at an additional cost of $20 000
and sold for $25 per unit. Ten thousand units of Product B can be sold at split-off for $15 per unit or processed further at
an additional cost of $20 000 and sold for $16 per unit.
What is the difference in profit if Lido decides to process further Product B, instead of selling it at split-off?
A. $10 000 increase
B. $20 000 increase
C. $10 000 decrease
D. $58 000 decrease
AACSB: Analytical
Difficulty: Easy
45. Consider the situation where an activity-based costing system is in use rather than a traditional volume-based costing
system. Which of the following statements is/are true?
A. The relevant cost decision model would be inappropriate if activity-based costing is used.
B. The relevant cost decision model is still appropriate, but a different decision criterion must be used.
C. The data collection and analysis step is going to be affected by the use of non-volume-related cost drivers.
D. The relevant cost decision model would be inappropriate if activity-based costing is used AND the data collection and
analysis step is going to be affected by the use of non-volume-related cost drivers.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 19.09 Complete relevant cost analysis using activity-based costing
46. Consider a situation where an activity-based costing system is in use rather than a traditional volume-based costing
system. Which of the following statements is/are true?
A. The use of activity-based costing eliminates the need to consider qualitative factors.
B. When an activity-based costing system is used, facility level costs will have to be analysed differently than under a
traditional volume-based costing system.
C. When an activity-based costing system is used, unit level costs will have to be analysed differently than when a
traditional volume-based costing system is used.
AACSB: Reflective
Difficulty: Easy
47. When a joint production process results in two or more products being produced simultaneously, the products are
termed:
A. joint products.
B. split-off products.
C. by-products.
D. separable products.
AACSB: Reflective
Difficulty: Easy
48. Which of these statements about joint cost allocation is false?
A. It is useful in deciding whether to process further a joint product after split-off.
B. It is not useful in making accurate profit determination about individual joint products from given data.
C. It can be accomplished using the physical units method approach.
D. It can be used to value inventory.
AACSB: Reflective
Difficulty: Easy
49. A chocolate company uses the weight of joint products as the allocation basis. This type of cost allocation is the:
A. relative sales value method.
B. net realisable value method.
C. physical units method.
D. joint cost allocation method.
AACSB: Reflective
Difficulty: Easy
50. The joint cost allocation method that recognises the revenues at split-off but does not consider any further processing
costs is the:
C. joint cost allocation method.
D. constant gross margin method.
AACSB: Reflective
Difficulty: Easy
51. The joint cost allocation method that ensures that the gross margin for each product is identical is the:
C. joint cost allocation method.
D. constant gross margin method.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 19.12 Use various approaches to allocate joint costs to products, and evaluate the usefulness of these approaches for managerial
decision making
52. The method under which the relative magnitude of the final products' net realisable values is used to allocate the joint
cost is the:
A. net realisable value method.
B. constant gross margin method.
C. relative sales value method.
D. physical units method.
AACSB: Reflective
Difficulty: Easy
decision making
53. A joint product with very little value relative to other joint products is termed a:
A. negligible product.
B. accounted loss.
C. by-product.
D. scrap.
AACSB: Reflective
Difficulty: Easy
decision making
54. The joint cost allocation method that is not based on the economic characteristics of the joint products is the:
A. joint cost allocation method.
B. relative sales value method.
C. physical units method.
D. net realisable value method.
AACSB: Reflective
Difficulty: Easy
decision making
55. An appropriate way to account for by-products is to:
A. subtract the net realisable value of the by-products from the cost of the joint process.
B. deduct the by-product's sales value at split-off from the production cost of the main products.
C. allocate a portion of the joint cost to the by-product.
D. subtract the net realisable value of the by-products from the cost of the joint process AND/OR deduct the by-product's
sales value at split-off from the production cost of the main products.
AACSB: Reflective
Difficulty: Easy
decision making
56.
Lipex Pty Ltd produces two products (A and B) from a particular joint process. Each product may be sold at the split-off point or
processed further. Additional processing requires no special facilities, and production costs of further processing are entirely variable
and traceable to the products involved. Joint production costs for the year were $60 000. Sales values and costs are as follows.
Allocate the joint production costs based on the physical units method. What are the joint costs assigned to product A?

A. $25 714
B. $20 339
C. $34 286
D. $30 000

AACSB: Analytical
Difficulty: Easy
decision making
57.
Lipex Pty Ltd produces two products (A and B) from a particular joint process. Each product may be sold at the split-off point or
processed further. Additional processing requires no special facilities, and production costs of further processing are entirely variable
and traceable to the products involved. Joint production costs for the year were $60 000. Sales values and costs are as follows.

Allocate the joint production costs based on the physical units method. What are the joint costs assigned to product B?

A. $25 714
B. $20 339
C. $34 286
D. $39 661

AACSB: Analytical
Difficulty: Easy
decision making
58.
A firm incurs manufacturing costs totalling $240 000 in process 1 to produce the following three beverages emerging from that process
at the split-off point.
Apple juice: sold immediately it emerges from Process 1 without further processing for $0.70 litre.
Apple cider: processed further in Process 2 with an additional cost of $0.66667 litre, then sold for $1.50 litre.
Apple pulp: processed further in Process 3 with an additional cost of $1.50 litre, then sold for $3.50 litre.

The following data relates to the period in which the joint costs were incurred.
What is the amount of joint cost that would be allocated to apple juice if the physical measures method had been used?

A. $120 000
B. $80 000
C. $84 000
D. $130 000

AACSB: Analytical
Difficulty: Easy
decision making
59.
Apple cider: processed further in Process 2 at an additional cost of $0.66667 litre, then sold for $1.50 litre.
Apple pulp: processed further in Process 3 at an additional cost of $1.50 litre, then sold for $3.50 litre.
What is the amount of joint cost that would be allocated to apple juice if the relative sales value method had been used?

A. $120 000
B. $80 000
C. $84 000

AACSB: Analytical
Difficulty: Easy
decision making
60.
Apple cider: processed further in Process 2 at an additional cost of $0.66667 litre, then sold for $1.50 litre
What is the amount of joint cost that would be allocated to apple juice if the net realisable value method had been used?

A. $120 000
B. $80 000
C. $84 000
D. $91 000

AACSB: Analytical
Difficulty: Medium
decision making
61.
at the split-off point:
Apple cider: processed further in Process 2 at an additional cost of $0.66667 litre, then sold for $1.50 litre.
What is the amount of joint cost that would be allocated to apple juice if the constant gross margin method had been used?

A. $120 000
B. $91 000
C. $84 000
D. $80 000

AACSB: Analytical
Difficulty: Hard
decision making
62. A joint cost is:
A. a cost of a single process that yields two or more products or services simultaneously.
B. a cost that is not directly attributable to the production of any specific good or service.
C. a cost shared by more than one process in a manufacturing cycle.
AACSB: Reflective
Difficulty: Easy
63. One method of treating by-products is to:
A. treat the by-product in the same way as the main products.
B. allocate all joint costs to both products and by-products.
C. adjust the cost of the joint products by subtracting the net realisable value of the by-product from the joint costs.
D. adjust the cost of the joint products by subtracting the cost of the by-product from the joint costs.
AACSB: Reflective
Difficulty: Easy
64. An opportunity cost is defined as:
A. the profit of the next best alternative foregone.
B. the additional revenue if we do not drop the product.
C. the additional (incremental) cost of accepting the order.
D. not being relevant if there is excess capacity.
AACSB: Reflective
Difficulty: Easy
65. Which of the following statements is true of relevant costs?
A. Variable costs are always relevant.
B. Sunk costs are never relevant.
C. If costs are the same under two alternatives, they are not relevant.
D. Sunk costs are never relevant AND if costs are the same under two alternatives, they are not relevant.
AACSB: Reflective
Difficulty: Easy
66. Why are joint costs never relevant in deciding whether to sell a product at split-off or process it further?
A. Because they are sunk costs
B. Because they are the same under both alternatives
C. Because they have already been allocated to joint products
D. Because they are sunk costs AND because they are the same under both alternatives
AACSB: Reflective
Difficulty: Easy
67.
A company produces products A, B and C and the profit and loss statement for the past twelve months shows the following (in
thousands) details.

The company is considering dropping Product C. If it does this, the fixed costs will remain the same except that the firm will be able to
rent out excess factory space at $30 000 per annum. If other revenue and cost figures remained the same, what would be the effect on
annual profit of dropping Product C?

A. 0
B. Increase of $30 000
C. Increase of $40 000
D. Decrease of $10 000

AACSB: Analytical
Difficulty: Medium
Learning Objective: 19.07 Select and analyse relevant information for decisions to add or delete a product or department
68. Which of the following is a correct statement regarding the link between decision making and performance
evaluation?
A. Managers are rewarded for good decisions; therefore there is always an incentive for mangers to make the best
decision for the firm.
B. Where managers are rewarded by financial variables such as bottom-line profit, there is often an incentive for
managers to avoid a decision that may be in the best interests of the firm but reduce their segment's bottom line.
C. Managers can be relied on to always make decisions that are in the interests of the firm as a whole.
D. Decision making and performance evaluation are separate issues for the managers of firms and are seldom related.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 19.10 Discuss how incentives can influence the way that managers make decisions
69. For which of the following should joint costs and joint cost allocations not be used?
A. Inventory valuation
B. Comparing profitability of joint products
C. Rewarding managers of processes beyond split-off point
D. Both comparing profitability of joint products AND rewarding managers of processes beyond split-off point
AACSB: Reflective
Difficulty: Easy
70. A firm currently makes a component, and requires 30 000 of them for the coming year's production. Another supplier
has offered the part at a delivered price of $3 per unit. It would cost $3000 to check purchased units for quality. Product
costs per unit for the past year were $2.35 variable and $1 fixed based on 30 000 units. If the component was bought,
fixed overhead would be reduced by $6000, the cost of leasing specialised equipment. The space vacated by the
equipment can be rented for $4000 for the year. Which of the following statements is the correct quantitative analysis of
the make or buy decision?
A. The buy option costs $12 500 more than the make option.
B. The buy option costs $12 500 less than the make option.
C. The buy option costs $10 500 more than the make option.
D. The firm is indifferent between the two options.
AACSB: Analytical
Difficulty: Medium
71. A firm currently makes a component, and requires 30 000 for the coming year's production. Another supplier has
offered the part at a delivered price of $3 per unit. It would cost $3000 to check purchased units for quality. Product costs
per unit for the past year were $2.35 variable and $1 fixed based on 30 000 units. If the component was bought, fixed
overhead would be reduced by $6000, the cost of leasing specialised equipment. The space vacated by the equipment
can be rented for $4000 for the year. At what level of units of production is the firm indifferent between making and
buying?
A. 30 000 units
B. 10 769 units
C. 4615 units
D. 20 000 units
AACSB: Analytical
Difficulty: Medium
72. For a firm that currently makes a particular component, which of the following are qualitative factors that would be
considered following a quantitative analysis in favour of buying?
A. Buying increases uncertainty, in particular with respect to timely availability of the component.
B. Buying surrenders control over product design and quality.
C. Employee morale would be affected if a decision to buy meant dismissing staff.
AACSB: Reflective
Difficulty: Easy
73. Which of the following is a correct quantitative decision-rule with respect to whether to drop a product?
A. If the product has a positive contribution margin, then do not drop the product.
B. If the product is showing a net loss, the product should be dropped.
C. If the profit of the firm without the product is higher than with the product, the product should be dropped.
D. If the product has a positive contribution margin, then do not drop the product AND if the profit of the firm without the
product is higher than with the product, the product should be dropped.
AACSB: Reflective
Difficulty: Medium
74.
A firm produces three items from a single process in batches containing 40 units A (a by-product); 100 units B; 100 units C. Separable
costs and selling prices are:

Joint process costs are $30 000 per batch.
What is the amount of joint costs that would be allocated to B using the net realisable value method and treats by-product revenue as a
reduction of the cost of the principal products?

A. $7000
B. $7500
C. $15 000
D. $14 000

AACSB: Analytical
Difficulty: Medium
decision making
75. When considering the allocation of joint costs, which of the following statements (if any) is false?
A. If there are no beginning inventories and all products are sold at the split-off point, the relative sales value method and
the constant gross margin percentage methods yield the same results.
B. In order to use the actual sales value at split-off method, management does not have to determine which products will
be produced beyond the split-off point or what separable costs will be incurred.
C. A problem with the physical measures method of allocation is that it may not be related to the product's ability to
produce revenue.
D. The cause–effect criterion is the key principle in allocating costs when joint costing is used.
AACSB: Reflective
Difficulty: Medium
decision making
76.
C Limited produces two products (A and B) from a particular joint process. Each product may be sold at split-off or may be further
processed. Joint production costs for the year amounted to $60 000. Sales values and costs are as follows.

If the joint production costs were assigned using the relative sales value method the joint costs allocated to A would be:

A. $20 339.
B. $27 383.
C. $27 857.
D. $0: all joint costs are allocated to B.

AACSB: Analytical
Difficulty: Easy
77.
C Limited produces two products (A and B) from a particular joint process. Each product may be sold at split-off or may be further
processed. Joint production costs for the year amounted to $60 000. Sales values and costs are as follows.
If the joint production costs were assigned using the net realisable value method, the joint costs allocated to B would be:

A. $23 964.
B. $32 143.
C. $32 617.
D. $39 661.

AACSB: Analytical
Difficulty: Easy
decision making
78.
Zoota Ltd makes four products: Alta, Bepha, Delma and Gamta. The selling price and per unit costs are show below.

*Alta and Delma share the same factory; therefore, monthly rent is allocated equally between the two products. Other allocated monthly
fixed costs include administrative costs, which are allocated based on a $2/unit charge.
Zoota Ltd decides to drop Delma because it is unprofitable. Christina Bobo, the management accountant of Zoota Ltd, suggests that by
dropping Delma the company can save $1 x 5000 = $5000 a month. Your assessment of Christina's suggestion is:

A. Christina is correct in her quantitative assessment; although she needs to also consider the qualitative factors.
B. Christina is incorrect because by dropping Delma, the company actually loses $3 per unit.
C. Christina is incorrect, because by dropping Delma, the company actually loses $1 per unit.
D. Christina is incorrect, because Delma is currently at break-even point.

AACSB: Analytical
Difficulty: Hard
79.

Zoota Ltd is planning to downsize by focusing on the two most profitable products, Bepha and Gamta, while discontinuing Alta and
Delma. Which of the following are the correct assessments of the relevance of the items listed?

A. Raw materials for both products (relevant), selling price of both products (relevant), allocated fixed cost for both
products (relevant)
B. Raw materials for both products (relevant), selling price of both products (relevant), allocated rent for both products
(relevant)
C. Raw materials for both products (relevant), selling price of both products (irrelevant), allocated rent for both products
(irrelevant)
D. Raw materials for both products (relevant), allocated rent for both products (irrelevant), allocated fixed cost for both
products (relevant)

AACSB: Analytical
Difficulty: Easy
80.

What will be the company's total fixed cost (excluding rent) after Delma is dropped (assuming that sales volume = production volume)?

A. $30 000
B. $40 000
C. $50 000
D. $60 000

AACSB: Analytical
Difficulty: Easy
81. Kragle Ltd manufacturers a number of specialised electronic components, including the advanced X1000. Kragle Ltd
has the capacity to produce 10 000 units of X1000 per year. Currently it is operating at 80 per cent capacity. The selling
price for X1000 is $100 per unit. The variable cost per unit is $30. Fixed cost allocated to producing X1000 is $200 000
per year. Kragle Ltd receives a special order for 2000 units of X1000. The opportunity cost associated with taking this
special order is:
A. $0.
B. $60 000.
C. $140 000.
D. $200 000.
AACSB: Analytical
Difficulty: Medium
82. Kragle Ltd manufacturers a number of specialised electronic components, including the advanced X1000. Kragle Ltd
has the capacity to produce 10 000 units of X1000 per year. Currently it is operating at 80 per cent capacity. The selling
price for X1000 is $100 per unit. The variable cost per unit is $30. Fixed cost allocated to producing X1000 is $200 000
per year. Kragle Ltd receives a special order for 3000 units of X1000. The opportunity cost associated with taking this
special order is:
A. $0.
B. $30 000.
C. $70 000.
D. $100 000.
AACSB: Analytical
Difficulty: Medium
83. North Central Publishing is considering outsourcing its printing process. Which of the following are relevant for this
outsourcing decision?
i The rent associated with the freed-up space when the printing equipment is sold
ii Supplier's financial stability
iii The carrying amount of the printing equipment
A. ii and iii
B. i and ii
C. i and iii
D. i, ii and iii
AACSB: Reflective
Difficulty: Medium
84. Which of the following is not a characteristic of a tactical decision?
A. It is a short term decision.
B. It usually does not involve changing the capacity of the company.
C. It is difficult to reverse.
D. Qualitative factors are relevant.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 19.02 Explain the differences between tactical decisions and long-term decisions
85. Which of the following is least likely to be classified as a tactical decision?
A. Buying a new factory.
B. Outsourcing factory security.
C. Discontinuing an unprofitable product model.
D. Selling or disposing of a by-product
AACSB: Reflective
Difficulty: Medium
86. Sleepo Ltd has been manufacturing only one type of alarm clock, the PlainSnooze model. The company is considering
developing some modifications to make another, more advanced model. Two options are available: the ToughSnooze and
the MusicSnooze. Both ToughSnooze and MusicSnooze will start with the same processes as the PlainSnooze model,
but with additional advanced functions. ToughSnooze has a voice activated snooze function, as well as an 'indestructible'
aluminium casing, created for people who throw their alarm clocks around. The MusicSnooze also has a voice activated
snooze function, but instead of the tough aluminium casing, it has a 'music choice' function.
In choosing between making the ToughSnooze or the MusicSnooze, which of the following costs are relevant?
i The cost of building the PlainSnooze model.
ii. The cost of building a voice activated snooze function.
iii The cost of building an 'indestructible' aluminium cover.
iv The cost of building the 'music choice' function.
A. i, ii, iii and iii
B. ii and iii
C. ii, iii and iv
D. iii and iv
AACSB: Reflective
Difficulty: Easy
87. Which of the following statements in relation to making tactical decisions is incorrect?
A. Future costs are always relevant.
B. Sunk costs are always irrelevant.
C. Allocated and unitised fixed costs are generally irrelevant.
D. Opportunity cost is relevant when there is no excess capacity.
AACSB: Reflective
Difficulty: Easy
88. Which of the following steps in the decision making process would be primarily the responsibility of the management
accountant?
A. Identifying the alternative courses of actions
B. Specifying the decision criterion
C. Selecting a course of action
D. Clarifying the problem
AACSB: Reflective
Difficulty: Easy
89. A well-designed activity-based system helps managers because the costs are analysed in more detail and identify:
A. volume-based costs.
B. non-volume-based costs.
C. overheads and volume-based costs.
D. volume-based and non-volume-based costs.
AACSB: Reflective
Difficulty: Medium
90. When cost allocations are used to encourage the sales managers to push the higher margin products this action will
link:
A. decision making and budgeting.
B. decision making and management performance evaluation.
C. budgeting and management performance.
D. budgeting and targets.
AACSB: Reflective
Difficulty: Easy
91. When a costing system has been designed explicitly to influence certain decisions, this will:
A. discourage efficiency.
B. encourage efficiency.
C. discourage biases.
D. encourage biases.
AACSB: Reflective
Difficulty: Easy
92. Which of the following costs would not be recorded in the cost accounting system?
A. Sunk costs
B. Unitised costs
C. Opportunity costs
D. Allocated costs
AACSB: Reflective
Difficulty: Easy
93. Which of the following would be a relevant cost that would need to be considered for pricing a special order?
A. Additional set-up costs for the special order
B. Existing fixed manufacturing overhead
C. Non-manufacturing costs that will not change even if the special order is accepted
D. All of the costs are relevant costs
AACSB: Reflective
Difficulty: Medium
94. Relevance of joint costs for decision
The managers of firm ST are facing a decision to further process product J2 before sale. J2 is one of three joint products
provided by a manufacturing process. Product J2 presently is sold immediately after split-off. However, product J2 can be
processed further and sold for a higher price. The overall volume of activity is not expected to change. Are the joint costs
allocated to product J2 relevant for this decision? Explain your answer.
The joint production costs allocated to product J2 are not relevant for this decision. The decision does not affect the
operation of the joint process; therefore its costs should remain the same as now. Consequently, these costs are not
differential costs for this decision.
AACSB: Reflective
Difficulty: Easy
95. Relevance of joint costs for decision
The managers of firm LT are facing a decision to discontinue the production process. This process begins with a joint
process that yields three products. Each of the three products is further processed after the split-off point. The costs of the
entire production process are broken down into two major categories: costs of the joint process before split-off and after
split-off. Discuss the relevance of each of these categories of costs to the decision to discontinue the entire production
process.
The incremental costs in both categories are relevant to this decision. Since the entire production process may be
discontinued, many joint costs are differential and could be avoided through discontinuation of the entire process.
AACSB: Reflective
Difficulty: Easy
96. Steps in the decision-making process
i. Two of the steps in the decision-making process are to 'specify the criterion' and to 'develop a decision model'. List the
remaining four steps in the decision-making process.
ii. Explain the difference between the two steps listed above, specifying the criterion and developing a decision model.
i. The six steps are:
— clarify the decision problem
— specify the criterion (given in question)
— identify the alternatives
— develop a decision model (given in question)
— collect the data
— select an alternative.
ii. Specifying the criterion refers to the financial element (or other criterion) that is to be maximised or minimised (e.g.
profit, market share, total cost). Sometimes there are two or more important criteria, in which case one or more can be
expressed as constraints on the possible alternatives.
A decision model incorporates the criterion to be used to evaluate the alternatives. However, the decision model also
considers the constraints and the alternatives.
AACSB: Reflective
Difficulty: Easy
97. Steps in the decision-making process
The six steps in the decision-making process are to clarify the decision problem, specify the criterion, identify the
alternatives, develop a decision model, collect the data and select an alternative.
i. In which step is the management accountant most heavily involved? Explain.
ii. Assume that a decision-making process has been underway for a while and that three alternatives have been
developed. At the last step in the process, the managers suddenly realise there is another alternative. Describe which
steps in the decision-making process will have to be revisited in order to consider this new alternative.
i. The management accountant is most heavily involved in the fifth step, collecting the data. Much (but not all) of the data
is financial and the special expertise of the management accountant is the knowledge of where to find such information
and its strengths and weaknesses.
ii. The traditional answer to this question would be that steps three (identifying alternatives) through to six (selecting an
alternative) will have to be revisited. The decision model will have to be examined to see if it is adequate to evaluate the
new alternative; the necessary data for the new alternative will have to be gathered and then the decision made.
However, it is possible that a new alternative will raise questions about the suitability of the decision criterion, or even lead
to a further clarification of the decision problem. Consequently, all the steps in the decision-making process may have to
be re-examined.
AACSB: Reflective
Difficulty: Easy
98. Qualitative and quantitative characteristics
i. Distinguish between qualitative and quantitative characteristics.
ii. At what point in the six-step decision-making process do the qualitative characteristics have an impact?
i. Qualitative characteristics are factors in a decision situation that cannot be expressed effectively in numerical terms.
Quantitative factors are those that can be analysed and represented in a suitable manner through financial or numerical
analysis.
ii. The qualitative characteristics have an impact at the last step of the process when they are brought together with the
results of the quantitative analysis developed during the first five steps. However, in some situations, the qualitative
characteristics may shape the choice of alternatives (step three). For example, some alternatives may be rejected
immediately because of ethical considerations.
AACSB: Reflective
Difficulty: Easy
99. Characteristics for information for decision making
i. One characteristic of information that is essential in order for the information to be useful for decision making is
relevance. What are the other two characteristics?
ii. Frequently there is a conflict between the two characteristics requested in question (i), describe why this conflict exists.
iii. What distinguishes relevant information from irrelevant information?
i. The three characteristics are relevance (given in the question), accuracy and timeliness.
ii. Accuracy frequently can be enhanced if more time is used to develop, obtain or analyse the information. However,
information made available after the decision has been made has absolutely no value whatsoever. Consequently, in order
to meet deadlines for the decision, information may have to be developed that is less accurate.
iii. Relevant information is pertinent to the decision, that is, it has the potential to influence the decision. Irrelevant
information includes past conditions and future conditions that will not be affected by the choice between alternatives.
Relevant information must incorporate predictions about the future. While past revenues and costs may be useful, future
events are the key, and consequently, the past is only useful in its ability to improve the predictions for the future.
AACSB: Reflective
Difficulty: Easy
100. Distinctions between sunk costs and opportunity costs
i. Define sunk costs and opportunity costs.
ii. 'Information about sunk costs generally can be found in the accounting system; however, information about opportunity
costs rarely is found in the accounting records.' Do you agree with that statement? Explain why or why not.
i. A sunk cost is a cost that has already been incurred. Sunk costs do not affect future costs and, therefore, they cannot be
changed by any current or future action. An opportunity cost is the potential benefit given up when the choice of one
alternative requires the sacrifice of another alternative. It is measured using the net benefit of the best alternative that is
not taken.
ii. The accounting system is historical; its focus is on events that have occurred. Consequently, information about sunk
costs that are also past costs will be found in the accounting system. On the other hand, opportunity costs refer to the
benefits from alternatives that are not selected. Since these alternatives were not chosen, a historical cost system
generally will not include any measures of these costs.
AACSB: Reflective
Difficulty: Medium
101. Pitfalls in using unit fixed costs
Fixed costs can be expressed as total fixed costs or can be divided by the expected level of activity to obtain fixed costs
per unit. Which of these is likely to be more useful in decision making? Explain.
Total fixed costs will be more useful. Unit fixed costs are valid only for the particular level of activity that was used to
obtain the figure. At a higher level of activity, the unit fixed cost will be lower and vice versa. However, the total fixed cost
will remain unchanged. Unit fixed costs may also be misleading in that decision makers may view them as variable costs.
AACSB: Reflective
Difficulty: Easy
102. Effect of alternative costing systems on decisions
Traditional volume-based product costing systems and activity-based costing systems have been presented as alternative
methods to use to determine product costs.
i. In a traditional volume-based costing system, costs are classified as fixed and variable. In an activity-based costing
system, costs are classified into four categories. List those four categories.
ii. Is it possible for the quantitative analysis to differ depending on whether data is developed from a traditional volume-
based costing system or an activity-based costing system? If so, explain which of the four categories of cost in question (i)
are likely to cause the difference.
i. The four categories are unit level, batch level, product level and facility level.
ii. The quantitative analysis can differ. Costs in the batch and product level are likely to be most troublesome. The unit
level costs generally are variable with respect to production volume, while the facility-level costs generally are fixed.
Consequently, the distinction given in traditional volume-based costing systems is adequate for these costs. However, the
batch and product level categories do not neatly fit into the variable/fixed classification and will require careful analysis.
These categories are variable with respect to particular non-volume related cost drivers.
AACSB: Reflective
Difficulty: Easy
103. Many decisions can be classified as tactical decisions or strategic decisions. Using an example to illustrate both
types of decisions, briefly describe the differences between a tactical and strategic decision.
Tactical decisions do not usually require significant increases or decreases in capacity-related resources, such as factory space and
equipment and their impact may be short term. Thus, in these decisions many overhead costs are considered fixed. It is also assumed
that tactical decisions can be changed quickly or reversed to take advantage of better opportunities that may arise. Examples of tactical
decisions include whether to accept or reject a special order (that is a one-off production order) and whether to sell or process further a
joint product. In considering tactical decisions, we often focus on the incremental revenues and costs arising from each alternative.
In contrast, long-term decisions tend to be more strategic in nature, and may involve large outlays of (or decreases in) capacity-
related resources. The effects of these decisions tend to be more difficult to reverse and may extend for longer time periods. Examples
of long-term decisions include the closing of a business unit, the acquisition of automated computer equipment and the introduction of a
new product line.
In reality, many of the so-called tactical decisions do have longer-term implications. For example, if during a month, management
decides to reduce the production of a particular product due to limited production capacity, a long-term loss of customers and lower
profits may result. The process of identifying relevant costs and benefits is largely the same whether the decision is viewed from a
tactical or long-term perspective.
One additional factor that is relevant in a long-term analysis, however, is the time value of money. When the impact of a decision spans
several years, the analysis should account for the fact that a $1 cash flow today is worth more than a $1 cash flow in future years. A
dollar received today can be invested to earn interest, while the dollar received in five years' time cannot be invested over the
intervening time period. The analysis of long-term decisions requires recognition of the time value of money.
Difficulty: Medium
104. When making decisions, the quantitative information considered consists of factors relevant to the decision that
cannot be expressed effectively in numerical terms.
FALSE
AACSB: Reflective
Difficulty: Easy
105. The term given to the practice of having a process undertaken by an external firm rather than a company doing it
itself, is outsourcing.
TRUE
AACSB: Reflective
Difficulty: Easy
106. When making the decision of whether to process further a joint product, it is generally better to allocate the joint costs
using the relative sales value method to ensure the correct decision is made.
FALSE
AACSB: Reflective
Difficulty: Easy
107. While there is a decision-making model, in many instances managers frequently make decisions without necessarily
following the set steps detailed in the model.
TRUE
AACSB: Reflective
Difficulty: Easy
108. The split-off point is that stage in the manufacturing process where the products being manufactured can finally be
identified as separate products.
TRUE
AACSB: Reflective
Difficulty: Easy
109. When deciding whether to accept a special order, spare or idle capacity is not a factor that needs to be taken into
account.
FALSE
AACSB: Reflective
Difficulty: Easy
110. Sunk costs, unitising costs, how costs are allocated, and leaving out opportunity costs are all factors where errors
are often made, and will ultimately affect the outcome of the decision.
TRUE
AACSB: Reflective
Difficulty: Easy
111. When a department or a product is showing a loss after all costs have been traced and allocated, a company has no
option but to make the decision to either close the department or drop the product.
FALSE
AACSB: Reflective
Difficulty: Easy
112. The very nature of tactical decisions means that in many situations most overhead costs are considered fixed and
may not be relevant to the decision in hand.
TRUE
AACSB: Reflective
Difficulty: Easy
113. Efficient decision-making tends to consider relevant information only and this information focuses on incremental
revenue and expenses.
TRUE
AACSB: Reflective
Difficulty: Easy
114. When a business has idle capacity and has two options to choose from that will maximise capacity, the potential
benefit that is surrendered by choosing only one option is known as the opportunity cost.
TRUE
AACSB: Reflective
Difficulty: Easy
115. An activity-based approach to cost analysis is similar to a job costing approach.
FALSE
AACSB: Reflective
Difficulty: Easy
116. When performance incentives are part of a manager's remuneration, it is unlikely to influence their decision making.
FALSE
AACSB: Reflective
Difficulty: Easy
lOMoARcPSD|6612766

(p. 286) Manufacturing overhead costs are:

A. sometimes called factory burden

B. indirect product costs
C. all manufacturing costs other than direct material and direct labour
D. non-existent in service firms

AACSB: Reflective
Difficulty: Easy
Learning Objective: 07-01 Explain the nature of overhead costs and other indirect costs

2. A cost pool is:
(p. 287)
A. a collection of costs to be assigned

B. the joint result of several subunit activities
C. the primary function of a responsibility accounting system
D. a performance report of the lowest level manager

AACSB: Reflective
Difficulty: Easy
Learning Objective: 07-02 Describe the general principles for allocating indirect costs to cost objects

3. The process of assigning the costs in a cost pool to the cost objects is called:
(p. 287)
A. cost allocation

B. segmented profit and loss statement
C. variance
D. absorption costing

AACSB: Reflective
Difficulty: Easy

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lOMoARcPSD|6612766
4. Which of the following is a common base to distribute the cost of building depreciation to responsibility centres?
(p. 297)
A. Number of employees in responsibility centre

B. Budgeted sales dollars in responsibility centre
C. Square metres of space occupied by responsibility centre
D. Budgeted direct costs of operating the responsibility centre

AACSB: Reflective
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 07-07 Explain the relevant issues in estimating overhead rates, including identifying cost drivers, choosing volume-based and non-
volume-based cost drivers and deciding between budgeted and actual overhead rates

5. An allocation base may also be referred to as a:
(p. 286)
A. cost object

B. common cost
C. cost driver
D. joint base

Difficulty: Easy

6. Each cost pool is distributed to each responsibility centre in:
(p. 287)
A. proportion to that centre's relative amount of allocation base

B. proportion to that centre's relative amount of direct cost
C. proportion to that centre's relative amount of liabilities
D. proportion to that centre's relative amount of profit

Difficulty: Easy


lOMoARcPSD|6612766
7. Consider the following statements regarding cost allocation.

(p. 301) i. Allocation of budgeted costs is preferred to actual cost as this minimises the possibility that the actions of one
user department will affect the costs allocated to another user department.
ii. Allocation of standard budgeted rates is preferred, so the user department does not have to bear the
inefficiencies of support departments.
iii. Knowing the standard rates in advance allows the user departments to plan their activities with greater
certainty.

A. i
B. i and ii
C. i, ii and iii
D. ii and iii

AACSB: Reflective
Difficulty: Medium
Learning Objective: 07-09 Discuss the general principles and reasons for allocating indirect costs to responsibility centres

8. Budgeted amounts of allocation bases, rather than actual amounts, are preferable allocation bases because:
(p. 301)
A. when actual amounts are used the behaviour of one responsibility centre affects the costs allocated to other
responsibility centres.
B. budgeted amounts are known in advance, therefore costs are easier to allocate.
C. the use of actual amounts could cause fluctuations in the prices charged for a company's products or
services.
D. budgeted amounts are known in advance, therefore costs are easier to allocate AND the use of actual
amounts could cause fluctuations in the prices charged for a company's products or services.

AACSB: Reflective
Difficulty: Medium

9. The step/s used in cost allocation include/s:
(p. 292)
A. cost application

B. cost distribution
C. support department cost allocation

AACSB: Reflective
Difficulty: Easy
Learning Objective: 07-04 Use the two-stage allocation process to estimate departmental overhead rates and allocate overhead costs to products


lOMoARcPSD|6612766
10. If the relationship between overhead costs and the cost drivers differs substantially across production
(p. 292) departments, the firm should use:

A. a plantwide overhead rate

B. multiple-departmental overhead rates
C. actual overhead activity
D. machine hours to determine the overhead rate

AACSB: Reflective
Difficulty: Easy

11. Consider the following statements about the two-stage cost allocation process.
(p. 292) i. Costs in various cost pools are distributed to all departments, including support and production departments.
ii. Support department costs are allocated to production departments.
iii. Costs are assigned to each production department that has worked on the product.
Which statement/s is/are correct?

A. i, ii and iii

B. i and iii
C. iii
D. ii

AACSB: Reflective
Difficulty: Easy

12. Consider the following statements about support department costs.
(p. 292) i. In order to assign all manufacturing costs to products, support department costs must be allocated to
production departments.
ii. Support department costs are period costs rather than product costs because the support departments are not
directly involved in production.
iii. Support departments are not considered crucial to the production process.
Which statement/s is/are correct?

A. i, ii and iii

B. i and iii
C. iii
D. i

AACSB: Reflective
Difficulty: Medium


lOMoARcPSD|6612766
13. Which of the following would NOT be a volume-based cost driver in a conventional costing system?
(p. 297)
A. Quantity of direct material

B. Factory floor area in square metres
C. Direct labour hours
D. Machine hours

AACSB: Reflective
Difficulty: Medium

14. The mutual provision of service between support departments is called:
(p. 304)
A. joint service

B. shared services
C. reciprocal services
D. allocated services

Difficulty: Easy
Learning Objective: 07-10 Allocate support department costs to production departments using the direct method, the step-down method and the
reciprocal services method

15. Normal costing is when:
(p. 297)
A. actual material, labour and overhead costs are added to work in process.
B. actual material, and predetermined labour and overhead costs are added to work in process.
C. actual labour, and predetermined material and overhead costs are added to work in process.
D. actual material and labour and predetermined overhead costs are added to work in process.

Difficulty: Easy

16. For management accounting purposes, the denominator volume for applying overhead to products may be:
(p. 300)
A. budgeted capacity

B. practical capacity
C. normal capacity

AACSB: Reflective
Difficulty: Medium
Learning Objective: 07-08 Explain the effect of alternative capacity measures on overhead rates


lOMoARcPSD|6612766
17. The following information relates to the Moonie Park Manufacturing Company for the year 2012.
(p. 291)
The predetermined overhead rates per machine hour based on practical capacity, normal capacity and budgeted
capacity respectively are:

A. $4.50, $5.00 and $6.00 practical= B58/480000

B. $6.00, $4.50 and $5.00 normal=B58/432000
C. $6.00, $5.00 and $4.50 budget=B58/360000
D. $5.00, $4.50 and $6.00

AACSB: Analytical
Difficulty: Easy
Learning Objective: 07-03 Allocate overhead costs to products, using a plantwide rate


lOMoARcPSD|6612766
18. The following information relates to the Moonie Park Manufacturing Company for the year 2012.
(p. 291)
What would be the amount of underapplied or overapplied overhead at the end of the month if overhead rates
were calculated based on practical capacity, normal capacity and budgeted capacity respectively.

A. $17 500 under; neither under or over; $35 000 over
B. $17 500 under; $35 000 over; neither under or over
C. Neither under or over; $17 500 under; $35 000 over
D. Neither under or over; $35 000 over; $17 500 under

AACSB: Analytical
Difficulty: Medium

19. The most widely used methods of support department cost allocations are the:
(p. 304)
A. direct method and cost application.

B. cost distribution and step-down method.
C. direct method and step-down method.
D. step-down method and cost application.

Difficulty: Easy


lOMoARcPSD|6612766
20. The ‘direct method' ignores the fact that:

(p. 304)
A. some support departments provide services to other support departments

B. cost allocation is a major factor in its accountability
C. each department's cost is allocated only for the service consumed by it

AACSB: Reflective
Difficulty: Medium

21. The support department cost allocation method that completely ignores reciprocal services between support
(p. 304) departments is called the:

A. direct method

B. step-down method
C. reciprocal method
D. direct method AND step-down method

AACSB: Reflective
Difficulty: Medium

22. The support department cost allocation method that recognises some of the reciprocal services between support
(p. 304) departments is called the:

A. step-down method

B. reciprocal method
C. dual cost allocation method
D. joint cost method

AACSB: Reflective
Difficulty: Easy


lOMoARcPSD|6612766
23. The support department cost allocation method that fully accounts for the mutual provision of services between
(p. 304) support departments is called the:

A. direct method

B. step-down method
C. reciprocal method
D. dual cost allocation method

Difficulty: Easy

24. The first step under the step-down method is:
(p. 304)
A. allocate total support department costs to production departments.

B. choose a sequence in which to allocate support department costs.
C. apply a cost to the secondary support departments.
D. determine the overhead base for each production department.

Difficulty: Easy

25. When the step-down method is used to allocate support department costs, a common way to select the first
(p. 304) support department in the sequence is to choose the support department which:

A. obtains the highest yield

B. serves no other support department
C. serves the greatest number of other support departments
D. obtains the highest yield AND serves no other support department

Difficulty: Easy

26. After all manufacturing overhead costs have been assigned to the production departments, the step to assign all
(p. 304) manufacturing overhead costs accumulated in a production department to the jobs that the department has
worked on is called:

A. support department cost allocation

B. cost distribution
C. overhead application
D. cost apportionment

Difficulty: Easy

lOMoARcPSD|6612766

27. Assume a firm uses job costing. Which of the following is NOT a good reason to use departmental overhead
(p. 292) rates rather than a single plantwide rate?

A. Total overhead costs amount to about 5 per cent of total prime costs.
B. The various products made by the firm follow different sequences of manufacturing activities.
C. Overhead costs in some departments are a very large proportion of total department cost, but are a very small
proportion in other departments.
D. The firm makes multiple products using common equipment and employees.

AACSB: Reflective
Difficulty: Easy

28. The Lots More Store has a Janitorial Department and a Personnel Department that provide services to three
(p. 304) Sales Departments. The Janitorial Department cost is allocated based on space and the Personnel Department
cost is allocated based on employees. The following information is available.
Using the direct method, calculate the amount of Personnel Department cost allocated to Sales Department #3.

A. $12 000

B. $15 000
C. $12 857
D. $13 500

AACSB: Reflective
Difficulty: Easy


lOMoARcPSD|6612766
Using the direct method, calculate the amount of Janitorial Department cost allocated to Sales Department #2.

A. $8654
B. $8571
C. $9000
D. $10 350

AACSB: Analytical
Difficulty: Easy


lOMoARcPSD|6612766
cost is allocated because of employees. The following information is available.
Using the step-down method, calculate the amount of Personnel Department cost allocated to Sales Department
#3, if the Personnel Department is allocated first.

A. $13 500

B. $12 857
C. $12 000
D. $15 000

AACSB: Analytical
Difficulty: Medium


lOMoARcPSD|6612766
Using the step-down method, calculate the amount of Janitorial Department cost allocated to Sales Department
#2, if the Personnel Department is allocated first.

A. $10 247

B. $8571
C. $9857
D. $10 350

AACSB: Analytical
Difficulty: Medium

32. The process of allocating fixed and variable costs separately is called:
(p. 297)
A. variable cost application

B. fixed cost separation
C. reciprocal cost allocation
D. dual cost allocation

Difficulty: Easy


lOMoARcPSD|6612766
33. Under dual cost allocation, variable costs are allocated based on the user departments of the support
(p. 297) department's output:

A. long-run usage

B. short-run usage
C. long-run usage and short-run usage
D. neither the long- or short-run usage

AACSB: Reflective
Difficulty: Medium

34. Under dual cost allocation, fixed costs are allocated based on the user departments of the support department's
(p. 297) output:

A. long-run average usage

B. short-run usage
C. long-run usage and short-run usage
D. forecasted short-run usage

AACSB: Reflective
Difficulty: Medium

35. The size and scale of support departments is usually determined by the:
(p. 304)
A. capital budget

B. average fixed and variable costs
C. short-term needs of the user departments
D. projected long-run needs of the user departments

AACSB: Reflective
Difficulty: Easy

36. When allocating support department costs, the costs that should be used are:
(p. 304)
A. actual fixed costs and budgeted variable costs

B. actual fixed costs and actual variable costs
C. budgeted fixed costs and actual variable costs
D. budgeted fixed costs and budgeted variable costs

AACSB: Reflective

lOMoARcPSD|6612766
Difficulty: Easy

37. Consider the following statements about support department cost allocations.
(p. 301) i. The allocation of actual costs encourages support department managers to control the costs in their
departments.
ii. When budgeted costs are allocated, any efficiency in support department operations are passed along to user
departments.
iii. The allocation of budgeted costs rather than actual costs gives an incentive for support department managers
to control costs in their departments.

A. i
B. ii
C. i and ii
D. iii

AACSB: Reflective
Difficulty: Medium

38. Consider the following statements about support department cost allocations.
(p. 304) i. In a modern manufacturing environment, it is not necessary to allocate support department costs.
ii. Support department cost allocations continue to be necessary when a highly automated system is in use.
iii. In a flexible manufacturing system, the need to allocate costs diminishes because more costs have become
traceable to the product.

A. i
B. i and ii
C. ii and iii
D. i, ii and iii

AACSB: Reflective
Difficulty: Medium


lOMoARcPSD|6612766
39. Which of the following statement/s is/are true?

(p. 294)
A. A two-stage allocation process is not suitable under an activity-based costing system.
B. Under activity-based costing, the emphasis is on the cost of activities.
C. Under an activity-based costing system, the cost of activities may include the cost of labour.
D. Under activity-based costing, the emphasis is on the cost of activities AND under an activity-based costing
system, the cost of activities may include the cost of labour.

AACSB: Reflective
Difficulty: Medium
Learning Objective: 07-05 Use activity-based costing principles to assign overheads to products

40. The Kelsey Manufacturing Company Ltd has two production departments (Assembly and Finishing) and two
(p. 304) support departments (Janitorial and Personnel). The usage of the two support departments in 2012 is as follows:
The budgeted costs in the support departments of 2012 were as follows:
Using the direct method, what is the Personnel Department cost allocated to the Assembly Department?

A. $60 000

B. $54 000
C. $21 053
D. $78 842

AACSB: Analytical
Difficulty: Easy


lOMoARcPSD|6612766
Using the direct method, what is the Janitorial Department cost allocated to the Assembly Department?

A. $28 948

B. $21 053
C. $34 158
D. $25 000

AACSB: Analytical
Difficulty: Easy


lOMoARcPSD|6612766
Using the step-down method, what is the amount of Personnel Department cost allocated to the Assembly
Department with the Personnel Department cost allocated first?

A. $60 000

B. $54 000
C. $21 053
D. $28 948

AACSB: Analytical
Difficulty: Easy


lOMoARcPSD|6612766
Using the step-down method, what is the amount of Janitorial Department cost allocated to the Assembly
Department with the Personnel Department cost allocated first?

A. $24 842

B. $28 948
C. $34 158
D. $23 600

AACSB: Analytical
Difficulty: Difficult


lOMoARcPSD|6612766
Using the step-down method, what is the total support department costs allocated to the Finishing Department
with the Personnel Department cost allocated first?

A. $81 052

B. $74 000
C. $61 158
D. $78 842

AACSB: Analytical
Difficulty: Easy

45. Management would prefer to use either absorption costing or variable costing depending on:
(p. 316)
A. which gives the highest profit figure

B. which is required by the Australian accounting standards
C. whether they consider the benefits of using variable costing outweigh the additional costs involved
D. which is provided at the least cost

AACSB: Analytical
Difficulty: Easy
Learning Objective: 07-11 Understand and evaluate variable and absorption costing and prepare income statements using both approaches.


lOMoARcPSD|6612766
46. Variable costing is more useful than absorption costing for:

(p. 316) i. special order decisions
ii. short-term pricing of products
iii. long-term pricing of products

A. i
B. iii
C. i and ii
D. i, ii and iii

AACSB: Reflective
Difficulty: Easy

47. Consider the following statements regarding absorption costing and variable costing.
(p. 316) i. Profit reported under absorption costing for a year will likely differ from that reported under variable costing
because production and sales differ.
ii. Total profit when added together over a ten-year period will be approximately equal under absorption costing
and variable costing because production and sales will be approximately the same.
iii. Total profit when added together over a ten-year period will be significantly different under absorption and
variable costing because fixed costs will generally increase significantly over that long.

A. i
B. i and ii
C. i and iii
D. ii

AACSB: Reflective
Difficulty: Medium

48. Assume that the predetermined fixed overhead rate per unit remains the same from 2007 to 2008 and inventory
(p. 316) decreases in 2008. Which of the following statements is true?

A. The fixed overhead expended in 2008 under variable costing will be greater than that expended under
absorption costing.
B. The fixed overhead expended in 2008 under absorption costing will be greater than that expended under
variable costing.
C. The amount of fixed overhead expended will be the same under both methods.
D. It is impossible to determine what effect the decrease in inventory will have on net profit under absorption
costing.

AACSB: Reflective
Difficulty: Medium

lOMoARcPSD|6612766


49. Monex reported $65 000 in net profit for the year using absorption costing. The company had no units in
(p. 316) beginning inventory, planned and actual production was 20 000 units and sales were 18 000 units during the
year. Variable manufacturing costs were $20 per unit and total budgeted fixed manufacturing overhead was $100
000. There was no underapplied or overapplied overhead reported during the year. Determine the net profit under
variable costing.

A. $115 000

B. $75 000
C. $65 000
D. $55 000

AACSB: Analytical
Difficulty: Medium

50. Classix Products reported $28 000 in net profit for the year using variable costing. The company had no units in
(p. 316) beginning inventory, planned and actual production was 30 000 units, and sales were 25 000 units during the
year. Variable manufacturing costs were $15 per unit and total budgeted fixed manufacturing overhead was $150
000. There was no underapplied or overapplied overhead reported during the year. Determine the net profit under
absorption costing.

A. $28 000

B. $30 000
C. $53 000
D. $58 000

AACSB: Analytical
Difficulty: Medium

51. Gallison Company's net profit under absorption costing was $15 000 higher than under variable costing. During
(p. 316) the year, the company produced 20 000 units for total variable production costs of $80 000. If fixed manufacturing
overhead was $40 000, how many units were sold?

A. 20 000 units

B. 12 500 units
C. 10 000 units
D. 7500 units

AACSB: Analytical
Difficulty: Easy

lOMoARcPSD|6612766

52. The income of a company for a year on a variable costing basis is $85 000 and on an absorption costing basis is
(p. 316) $73 000. Fixed costs per unit were the same in both the prior and current year ($1.20 per unit). What was the
change in inventory over the year?

A. Decrease of 10 000 units

B. Increase of 10 000 units
C. Increase of 12 000 units

AACSB: Analytical
Difficulty: Easy

53. A normal absorption costing system charges work in process with:
(p. 297)
A. actual prime costs and actual overhead costs.

B. applied prime costs and all overhead costs using a budgeted rate.
C. actual prime costs and all overhead costs using a budgeted rate.
D. applied direct materials and all conversion costs using a budgeted rate.

Difficulty: Easy

54. Absorption costing profit is always equal to:
(p. 316)
A. variable costing profit + fixed overhead in opening inventory – fixed overhead in closing inventory
B. fixed overhead in opening inventory + fixed overhead in closing inventory
C. fixed overhead in opening inventory – fixed overhead in closing inventory
D. variable costing profit + fixed overhead in closing inventory – fixed overhead in opening inventory

AACSB: Reflective
Difficulty: Easy

55. Where the fixed overhead rate in both opening and closing inventories is the same, which of the following
(p. 316) statements is correct?

A. If inventory remains the same, absorption costing profit will be greater than variable costing profit.
B. If inventory has decreased, absorption costing profit will be greater than variable costing profit.
C. Absorption costing profit is always greater than variable costing profit.
D. If inventory has increased, absorption costing profit will be greater than variable costing profit.

AACSB: Reflective
Difficulty: Medium

lOMoARcPSD|6612766


(p. 316)
A. Inventories under absorption costing are always higher than under variable costing.
B. Cost of goods sold under absorption costing is always higher than under variable costing.
C. The amount of fixed overhead expensed under absorption costing is always higher than under variable
costing.
D. Inventories under absorption costing are always higher than under variable costing AND cost of goods sold
under absorption costing is always higher than under variable costing.

AACSB: Analytical
Difficulty: Easy

57. Using the information below, what would be the profit under variable costing and absorption costing,
(p. 316) respectively?

A. $10 044; $8220

B. $9000; $13 176
C. $10 044; $14 220
D. Insufficient data to calculate

AACSB: Analytical


lOMoARcPSD|6612766
58. The Browning Company manufactures a single product; the standard costs per unit being variable manufacturing
(p. 316) $8, fixed manufacturing $6. Selling and administrative costs are $2 per unit sold. The selling price is $20 per unit.
Actual and budgeted fixed overhead is $900 000 for the year. Information about Browning's production activity for
the year follows:
What is the value of closing inventory of finished goods under absorption costing?

A. $420 000

B. $240 000
C. $120 000
D. $480 000

AACSB: Analytical
Difficulty: Medium

the year follows:
What is the value of closing inventory of finished goods under variable costing?

A. $420 000

B. $180 000
C. $240 000
D. $120 000

AACSB: Analytical
Difficulty: Medium


lOMoARcPSD|6612766
the year follows:
What is the profit under absorption costing?

A. $750 000

B. $1 250 000
C. $350 000
D. $500 000

AACSB: Analytical
Difficulty: Medium

Actual and budgeted fixed overhead is $900,000 for the year. Information about Browning's production activity for
the year follows:
What is the profit under variable costing?

A. $1 250 000

B. $350 000
C. $500 000

AACSB: Analytical
Difficulty: Medium


lOMoARcPSD|6612766
the year follows:
Assuming all information is provided above, the difference in profit between absorption and variable costing
would be expected to be:

A. 25 000 × $8
B. 30 000 × $8
C. 25 000 × $6
D. 30 000 × $6

AACSB: Reflective
Difficulty: Easy

63. Absorption costing is a method of allocating cost to inventories such that the cost of inventory includes:
(p. 316)
A. both variable and fixed costs, irrespective of the level of operating capacity
B. an appropriate share of both variable and fixed costs with fixed costs being allocated based on normal
operating capacity
C. all costs other than fixed costs based on normal operating capacity
D. both variable and fixed costs, both of which are allocated based on normal operating capacity

AACSB: Reflective
Difficulty: Medium

64. Which of the following statement/s is/are correct?
(p. 316)
A. Absorption costing is required by the Australian accounting standards.

B. Variable costing records are more useful than absorption costing records for management decision making.
C. Firms that are required to comply with the accounting standards are likely to use variable costing if the
benefits of keeping a second set of records exceed the costs.

AACSB: Analytical
Difficulty: Medium

lOMoARcPSD|6612766

65. The production section of a firm is serviced by personnel and computing as follows:
(p. 304)
Personnel costs are allocated on the number of employees and computing costs on service hours. Overhead
rates are based on labour hours. If the direct method is used to allocate support department costs, what is the
overhead rate for the Assembly Department?

A. $8
B. $9.25
C. $9.44
D. $10.69

AACSB: Analytical
Difficulty: Medium


lOMoARcPSD|6612766
(p. 304)
rates are based on labour hours. If the reciprocal services method is used to allocate support department costs,
the total cost (rounded) allocated out of Personnel would be:

A. $40 000

B. $44 444
C. $56 715
D. $55 636

AACSB: Analytical


lOMoARcPSD|6612766
(p. 304)
rates are based on labour hours. If the reciprocal services method is used to allocate support department costs,
the total support department costs allocated to the Assembly Department (rounded) would be:

A. $55 927

B. $52 800
C. $53 800
D. $56 072

AACSB: Analytical

68. Appleford Ltd is a furniture manufacturer. It has a small range of products. Its manufacturing processes are
(p. 297) characterised by a high level of automation. Appleford Ltd decides to choose a volume-based cost driver for its
indirect manufacturing costs. Which of the following cost drivers is most appropriate?

A. The number of units produced.

B. The number of machine hours.
C. The number of manufacturing batches.
D. Direct labour hours.

AACSB: Reflective
Difficulty: Medium


lOMoARcPSD|6612766
69. When a company is choosing between different types of volume based cost drivers, which of the following factors
(p. 297) suggest the use of outputs as a cost driver?
i. The company has only one product.
ii. The company is labour intensive.
iii. The company uses large quantities of direct materials.

A. i
B. i and iii
C. ii
D. ii and iii

AACSB: Reflective
Difficulty: Easy

70. Jasmine Doh is considering using cost drivers that are measured in dollars (rather than physical units) for her
(p. 297) company. Your advice is:

A. This is a good idea as cost drivers measured in dollars are usually already recorded in the accounting system.
B. This is a good idea as it avoids estimating costs associated with each physical unit of cost driver.
C. This is a bad idea because dollar-based cost drivers are subject to price change.
D. This is a bad idea because using dollar-based cost drivers oversimplifies the cost allocation process.

AACSB: Reflective
Difficulty: Medium

71. Theoretical capacity refers to:
(p. 300)
A. the maximum level of production that a plant will produce under normal, efficient operating conditions
B. the maximum level of production that a plant will produce under peak efficiency
C. the minimum level of production that a plan can produce under peak efficiency
D. the level of production given the theoretical level of customer demand

Difficulty: Easy


lOMoARcPSD|6612766
72. The East Coast University uses a printing machine, the FL200, to print exam papers. According to the operation
(p. 300) manual, FL200 can print 2000 sets of exam papers per hour when it is operating at peak efficiency. However,
Edgo Liew, the head printer, notes that in normal (but still efficient) operations, the machine can produce only
1800 sets of exam papers in an hour. Further, Edgo also notes that given the small number of students enrolled
in the East Coast University, the machine is never required to print more than 1500 sets of exam papers per hour.
The practical capacity of the FL200 is:

A. 2000 sets of exam papers per hour

B. 1800 sets of exam papers per hour
C. 1500 sets of exam papers per hour
D. 500 sets of exam papers per hour

AACSB: Reflective
Difficulty: Medium

73. The East Coast University uses a printing machine, the FL200, to print exam papers. According to the operation
(p. 300) manual, FL200 can prints 2000 sets of exam papers per hour when it is operating at peak efficiency. However,
Edgo Liew, the head printer, notes that in normal (but still efficient) operations, the machine can produce only
1800 sets of exam papers in an hour. Further, Edgo also notes that given the small number of students enrolled
in the East Coast University, the machine is never required to print more than 1500 sets of exam papers per hour.
The theoretical capacity of the FL200 is:

A. 2000 sets of exam papers per hour

B. 1800 sets of exam papers per hour
C. 1500 sets of exam papers per hour
D. 500 sets of exam papers per hour

AACSB: Reflective
Difficulty: Medium


lOMoARcPSD|6612766
74. The following information about Monfort Manufacturing is available:

(p. 304
)
Using the direct method, the cost allocated from both of the support departments to Machining Department is:

A. $170 000

B. $155 000
C. $160 000
D. $180 000

AACSB: Analytical
Difficulty: Medium


lOMoARcPSD|6612766

(p. 304
)
Using the reciprocal method, the equations required to calculate the costs of the support departments are: (where
T= the cost of Training Department; M=the cost of Maintenance Department)

A. T=$300,000 + 0.25*M; M=$200,000+0.30*T

B. T=$300,000 + 0.30*M; M=$200,000+0.25*T
C. T=$200,000 + 0.30*M; M=$300,000+0.25*T
D. T=$200,000 + 0.25*M; M=$300,000+0.30*T

AACSB: Analytical
Difficulty: Medium


lOMoARcPSD|6612766

(p. 304
)
Using the reciprocal method, the cost allocated from Training Department to Polishing Department is:

A. $297,297
B. $106,177
C. $79,279
D. $74,324

AACSB: Analytical


lOMoARcPSD|6612766

(p. 304
)
Using the step-down method and starting with Training Department, the cost allocated from Training Department to
Machining Department is:

A. $50,000
B. $98,214
C. $106,667
D. $80,000

AACSB: Analytical
Difficulty: Medium

78. Dual rate versus single rate
(p. 297) Firm F has many support departments and the majority of their costs are fixed. Firm V also has many support
departments and the majority of their costs are variable. Determine which situation would be better suited for dual
rate cost allocation and explain why.

Firm F would be better suited for the dual rate cost allocation method. The dual rate method is useful to minimise
the effects of short-term changes in the level of one operating department on the fixed costs assigned from a
support department to other operating departments. The variable costs of support departments will change with
such changes in the level of activity, but the fixed costs will not. By using another basis for allocation that reflects
long-term utilisation, the fixed cost allocation remains stable during periods of variation in operating department
activities.

AACSB: Reflective
Difficulty: Medium
Graduate Attribute: Communication

lOMoARcPSD|6612766

79. Conceptual advantage of reciprocal method
(p. 304) Describe why the reciprocal method of allocating support department costs is conceptually superior to the direct
and step-down methods.

The reciprocal method can fully recognise all services provided by support departments to other support
departments. The direct method completely ignores all such services. The step-down method in certain situations
can recognise all such intra-support department cost flows, but in complex situations, will recognise only one half
of such flows.

AACSB: Reflective
Difficulty: Easy
Graduate Attribute: Communication

80. The reciprocal approach to allocating support department costs recognises that only large support departments
(p. 304) provide services to other support departments.

FALSE

AACSB: Reflective
Difficulty: Medium

81. The estimation of the quantity of a cost driver is called the denominator volume.
(p. 286)
TRUE

Difficulty: Easy

82. When estimating the costs of a cost object, direct costs are allocated and indirect costs are traced to the object.
(p. 286)
FALSE

Difficulty: Easy


lOMoARcPSD|6612766
83. Prior to allocating overheads to a product, it is necessary to allocate the costs of all support departments to the
(p. 304) production departments.

TRUE

Difficulty: Easy

84. A plantwide overhead rate is used to allocate overheads when it is assumed that overheads are all driven by the
(p. 291) same cost driver.

TRUE

Difficulty: Easy

85. Before any costing process can occur, it is necessary to identify the cost object.
(p. 286)
TRUE

Difficulty: Easy

86. Based on the following figures, the predetermined manufacturing overhead rate is $20 per machine hour.
(p. 287) Budgeted manufacturing overheads $240 000
Actual manufacturing overheads $250 000
Budgeted machine hours 10 000
Actual machine hours 12 000

FALSE

AACSB: Analytical
Difficulty: Easy

87. When management elect to calculate the overhead rate using a relatively long period of time, the overhead rate is
(p. 297) called a normalised overhead rate.

TRUE

Difficulty: Easy


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Chapter 01 Testbank Key

2. Which of the following statement/s about management accounting is/are true?

3. Which of the following statement/s about management accounting is/are true?

5. Which of the following is not an objective of management accounting?

9. The role of management accounting is to:

10. Budgeting can be used in an organisation to:

11. The benefits of management accounting information include:

12. Management accounting:

14. Both financial and management accounting:

16. A management accountant should be concerned with:

20. Which of the following statements is an element of confidentiality?

28. Which of the following statements is correct?

A. Control, feedback, planning

33. Which of the following statements is correct?

44. Management accounting focuses on:

49. Management accounting and decision making

The systems that management accountants can help to develop are:

Note: Answers may include any four of the following:

The following are some key points:

Identify and contrast management accounting and financial accounting information

1. Which of the following statements is false?

2. Which of the following statements is true?

3. Which of the following statements is true? A cost is:

6. As activity level decreases, unit variable cost:

7. As activity level increases, total variable costs:

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

13. Indirect costs:

14. Whether a cost is classified as direct or indirect will depend on:

16. Which of the following is not an example of a manufacturing overhead?

17. Product costs are:

19. Which of the following costs of a manufactured product is a period cost?

21. Cost of goods purchased includes the:

22. Product costs comprise:

Refer to the following data.

The prime costs are:

Refer to the following data.

The conversion costs are:

Refer to the following data.

The product costs are:

Refer to the following data.

The period costs are:

Refer to the following data.

The non-manufacturing costs are:

29. Indirect materials include:

31. Depreciation of factory equipment would be classified as:

32. Idle time is:

34. The flow of manufacturing costs through the system is:

The period costs are:

The prime costs are:

The conversion costs are:

A. $34 500. DL + Manufacturing OH(Indirect mat+ indirect labour + factory related)

The manufacturing overhead is: indirect mat+labor+factory related

40. In the manufacturing firm, inventories consist of:

42. Work in process inventories are composed of:

50. The monthly cost of renting manufacturing equipment is:

61. A responsibility centre:

64. Production costs assist management to determine:

67. Classifying responsibility centre costs as controllable or uncontrollable can enhance:

Behaviour of fixed and variable costs.

Components of a management accounting system

75. Only long-term decisions require an understanding of costs.

1. The relationship between cost and activity is called:

2. Forecasting a cost at a particular level of activity is called: