Q1. If sales total $1,000,000, fixed costs total $400,000, and variable costs are 55% of sales, the contribution margin ratio is 45%.
a. true
b. false
Q2. Which of the following is an example of a cost that varies in total as the number of units produced changes?
a. Electricity per KWH to operate factory equipment
b. Monthly rent on a factory building
c. Straight-line depreciation on factory equipment
d. Salary of a production supervisor
Q3. As production increases, what should happen to the variable costs per unit?
a. Stay the same
b. Increase
c. Decrease
d. Either increase or decrease, depending on the fixed costs
Q4. If the property tax rates are increased, this change in fixed costs will result in an increase in the break-even point.
a. true
b. false
Q5. The point where the sales line and the total costs line intersect on the cost-volume-profit chart represents
a. the maximum possible operating loss.
b. the maximum possible operating income.
c. the total fixed costs.
d. the break-even point.
Q6. For purposes of analysis, mixed costs are generally
a. classified as fixed costs.
b. classified as variable costs.
c. classified as period costs.
d. separated into their variable and fixed cost components.
Q7. If direct materials cost per unit decreases, the break-even point will increase.
a. true
b. false
Q8. As production increases, what would you expect to happen to fixed costs per unit?
a. Increase
b. Decrease
c. Remain the same
d. Either increase or decrease, depending on the variable costs
Q9. Which of the following activity bases would be the most appropriate for food costs of a hospital?
a. Number of cooks scheduled to work
b. Number of x-rays taken
c. Number of patients who stay in the hospital
d. Number of scheduled surgeries
Q10. The graph of a variable cost when plotted against its related activity base appears as a
a. circle.
b. rectangle.
c. straight line.
d. curved line.
Q11. The amount of income that would result from an alternative use of cash is called
a. differential income.
b. sunk cost.
c. differential revenue.
d. opportunity cost.
Q12. Differential revenue is the amount of income that would result from the best available alternative for the proposed use of cash.
a. true
b. false
Q13. Whiteville Co. can further process Product B to produce Product C. Product B is currently selling for $45 per pound and costs $30 per pound to produce. Product C would sell for $80 per pound and would require an additional cost of $18 per pound to produce. What is the differential cost of producing Product C?
a. $30 per pound
b. $18 per pound
c. $17 per pound
d. $12 per pound
Q14. The amount of increase or decrease in cost that is expected from a particular course of action as compared to an alternative is termed
a. period cost.
b. product cost.
c. differential cost.
d. discretionary cost.
Q15. Granger Co. can further process Product B to produce Product C. Product B is currently selling for $55 per pound and costs $42 per pound to produce. Product C would sell for $82 per pound and would require an additional cost of $13 per pound to produce. What is the differential revenue of producing and selling Product C?
a. $15 per pound
b. $42 per pound
c. $45 per pound
d. $27 per pound
Q16. In deciding whether to accept business at a special price, the short- run price should be set high enough to cover all variable costs and expenses.
a. true
b. false
Q17. When standard costs are used in applying the cost-plus approach to product pricing, the standards should be based upon normal levels of performance.
a. true
b. false
Q18. Dinkins Inc. is considering disposing of a machine with a book value of $50,000 and an estimated remaining life of five years. The old machine can be sold for $15,000. A new machine with a purchase price of $150,000 is being considered as a replacement. It will have a useful life of five years and no residual value. It is estimated that variable manufacturing costs will be reduced from $70,000 to $45,000 if the new machine is purchased. The net differential increase or decrease in cost for the entire five years for the new equipment is
a. $10,000 increase.
b. $25,000 decrease.
c. $10,000 decrease.
d. $25,000 increase.
Q19. In using the product cost concept of applying the cost-plus approach to product pricing, selling expenses, administrative expenses, and profit are covered in the markup.
a. true
b. false
Q20. Hill Co. can further process Product O to produce Product P. Product O is currently selling for $65 per pound and costs $42 per pound to produce. Product P would sell for $82 per pound and would require an additional cost of $13 per pound to produce.
The differential revenue of producing Product P is $17 per pound.
a. true
b. false
Q21. The budgeted direct materials purchases are based on the sum of (1) the materials needed for production and (2) the desired ending materials inventory, less (3) the estimated beginning materials inventory.
a. true
b. false
Q22. The first budget to be prepared is usually the sales budget.
a. true
b. false
Q23. The master budget of a small manufacturer would normally include all component budgets that impact the financial statements.
a. true
b. false
Q24. The following data relate to direct labor costs for the current period:
Standard costs 9,000 hours at $5.50
Actual costs 8,750 hours at $5.25
What is the direct labor rate variance?
a. $2,250.00 unfavorable
b. $2,187.50 unfavorable
c. $2,250.00 favorable
d. $2,187.50 favorable
Q25. The process of developing budget estimates by requiring all levels of management to estimate sales, production, and other operating data as though operations were being initiated for the first time is referred to as
a. flexible budgeting.
b. continuous budgeting.
c. zero-based budgeting.
d. master budgeting.
Q26. Supervisor salaries, maintenance, and indirect factory wages would normally appear in the factory overhead cost budget.
a. true
b. false
Q27. The master budget of a small manufacturer would normally include all necessary component budgets EXCEPT the capital expenditures budget.
a. true
b. false
Q28. Production estimates for August are as follows:
Estimated inventory (units), August 1
3,000
Desired inventory (units), August 31
2,000
Expected sales volume (units), August
40,000
For each unit produced, the direct materials requirements are as follows:
Direct material A ($2 per lb.)
5 lbs.
Direct material B ($11 per lb.)
1 lb.
The number of pounds of materials A and B required for August production is
a. 195,000 lbs. of A; 39,000 lbs. of B.
b. 200,000 lbs. of A; 40,000 lbs. of B.
c. 205,000 lbs. of A; 41,000 lbs. of B.
d. 210,000 lbs. of A; 42,000 lbs. of B.
Q29. The standard factory overhead rate is $7.50 per machine hour ($6.20 for variable factory overhead and $1.30 for fixed factory overhead) based on 100% capacity of 80,000 machine hours. The standard cost and the actual cost of factory overhead for the production of 15,000 units during August were as follows:
Actual: Variable factory overhead $360,000
Fixed factory overhead 104,000
Standard: 60,000 hours at $7.50 450,000
What is the amount of the fixed factory overhead volume variance?
a. $26,000 unfavorable
b. $12,000 favorable
c. $26,000 favorable
d. $12,000 unfavorable
Q30. Benjamin Corporation began its operations on September 1 of the current year. Budgeted sales for the first three months of business are $250,000, $300,000, and $420,000, respectively, for September, October, and November. The company expects to sell 20% of its merchandise for cash. Of sales on account, 70% are expected to be collected in the month of the sale, 25% in the month following the sale, and the remainder in the following month.
The cash collections from accounts receivable in November are
a. $305,200.
b. $294,000.
c. $235,200.
d. $381,500.
Q31. Assume that divisional income from operations amounts to $187,000 and top management has established 12% as the minimum rate of return on divisional assets totaling $1,000,000. The residual income for the division is
a. $67,000.
b. $22,440.
c. $120,000.
d. $0.
Q32. If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the profit margin is 24%.
a. true
b. false
Q33. By use of the rate of return on investment as a divisional performance measure, divisional managers will always be motivated to invest in proposals that will increase the overall rate of return for the company.
a. true
b. false
Q34. How do the responsibilities of a manager in an investment center compare to the responsibilities of a cost or profit center?
a. Investment center managers have more authority and responsibility than managers of a cost or profit center.
b. Investment center managers have more authority and responsibility than managers of a cost center but less than managers of a profit center.
c. Investment center managers have about the same authority and responsibility than managers of a cost or profit center.
d. Investment center managers have more authority and responsibility than managers of a profit center but less than managers of a cost center.
Q35. Division Q for Mott Company has a rate of return on investment of 28% and an investment turnover of 1.4. What is the profit margin?
a. 28%
b. 20%
c. 14%
d. 39.2%
Q36. If income from operations for a division is $120,000, sales are $975,000, and invested assets are $750,000, the investment turnover is 6.3.
a. true
b. false
Q37. A decentralized business organization is one in which all major planning and operating decisions are made by top management.
a. true
b. false
Q38. Which of the following expenses incurred by the sporting goods department of a department store is a direct expense?
a. Depreciation expense--office equipment
b. Insurance on inventory of sporting goods
c. Uncollectible accounts expense
d. Office salaries
Q39. The major shortcoming of income from operations as an investment center performance measure is that it ignores the amount of assets invested in the center.
a. true
b. false
Q40. Identify the formula for the rate of return on investment.
a. Invested Assets/Income From Operations
b. Sales/Invested Assets
c. Income From Operations/Sales
d. Income From Operations/Invested Assets
Q41. A qualitative characteristic that may impact upon capital investment analysis is manufacturing productivity.
a. true
b. false
Q42. Leasing assets may be a favorable alternative to purchasing assets if the asset has a high risk of becoming obsolete.
a. true
b. false
Q43. When evaluating a proposal by use of the net present value method, if there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be accepted.
a. true
b. false
Q44. In capital rationing, an initial screening of alternative proposals is usually performed by establishing minimum standards. Which of the following evaluation methods are normally used?
a. Cash payback method and average rate of return method
b. Average rate of return method and net present value method
c. Net present value method and cash payback method
d. Internal rate of return and net present value methods
Q45. Average rate of return equals estimated average annual income divided by average investment.
a. true
b. false
Q46. The rate of earnings is 10% and the cash to be received in two years is $10,000. Determine the present value amount, using the following partial table of present value of $1 at compound interest.
Year 6% 10% 12%
1 .943 .909 .893
2 .890 .826 .797
3 .840 .751 .712
4 .792 .683 .636
a. $8,900
b. $8,260
c. $7,970
d. $9,090
Q47. The expected average rate of return for a proposed investment of $3,000,000 in a fixed asset giving effect to depreciation (straight-line method) with a useful life of 20 years, no residual value, and an expected total income of $6,000,000 is
a. 25%.
b. 18%.
c. 40%.
d. 20%.
Q48. When evaluating a proposal by use of the cash payback method, if net cash flows exceed the capital investment within the time deemed acceptable by management, the proposal should be accepted.
a. true
b. false
Q49. The average rate of return method of capital investment analysis gives consideration to the present value of future cash flows.
a. true
b. false
Q50. Internal rate of return is often called the payback rate of return.
a. true
b. false