Cost Concepts and Cost-Volume-Profit Analysis

1) An example of a fixed cost is

a. total indirect material cost.
b. total hourly wages.
c. cost of electricity.
d. straight-line depreciation.

2) The method of cost accounting that lends itself to break-even analysis is

a. variable.
b. standard.
c. absolute.
d. absorption.

3) Abair Company's manufacturing overhead is 20% of its total conversion costs. If direct labor is $38,000 and if direct materials are
$35,000, the manufacturing overhead is:
A) $18,250
B) $9,500
C) $8,750
D) $152,000

4) The term contribution margin is best defined as the:

A. difference between fixed costs and variable costs.
B. difference between revenue and fixed costs.
C. amount available to cover fixed costs and profit.
D. amount available to cover variable costs

5) Which of the following is not a product cost component?

a. rent on a factory building
b. indirect production labor wages
c. janitorial supplies used in a factory
d. commission on the sale of a product

6) Cost-volume-profit analysis is a technique available to management to understand better the interrelationships of several factors that
affect a firm's profit. As with many such techniques, the accountant oversimplifies the real world by making assumptions. Which of
the following is not a major assumption underlying CVP analysis?
a. All costs incurred by a firm can be separated into their fixed and variable components.
b. The product selling price per unit is constant at all volume levels.
c. Operating efficiency and employee productivity are constant at all volume levels.
d. For multi-product situations, the sales mix can vary at all volume levels.

7) Which of the following will decrease the break-even point?

Decrease in Increase in direct Increase in

fixed cost labor cost selling price

a. yes yes yes

b. yes no yes
c. yes no no
d. no yes no

Below is an income statement for Thompson Company:

Sales $400,000
Variable costs (125,000)
Contribution margin $275,000
Fixed costs (200,000)
Profit before taxes $ 75,000

8) Refer to Thompson Company. What is Thompson’s degree of operating leverage?

a. 3.67 b. 5.33 c. 1.45 d. 2.67

9) Refer to Thompson Company. Based on the cost and revenue structure on the income statement, what was Thompson’s break-even
point in dollars?
a. $200,000 b. $325,000 c. $300,000 d. $290,909

10) Refer to Thompson Company. What was Thompson’s margin of safety?

a. $200,000 b. $75,000 c. $100,000 d. $109,091

Budgeting

11) 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. Forecasting. C. Continuous budgeting.
B. Zero-based budgeting. D. Program budgeting.

12) The master budget is a

a. static budget.
b. flexible budget.
c. qualitative expression of a prior goal.
d. qualitative expression of a future goal.

13) Chronologically, in what order are the sales, purchases, and production budgets prepared?
a. sales, purchases, production
b. sales, production, purchases
c. production, sales, purchases
d. purchases, sales, production

14) Lorie Company plans to sell 400,000 units of finished product in July an anticipates a growth rate in sales of 5% per month. The
desired monthly ending inventory in units of finished product is 80% of the next month’s estimated sales. There are 300,000 finished
units in the inventory on June 30. Each unit of finished product requires four pounds of direct materials at a cost of P2.50 per pound.
There are 800,000 pounds of direct materials in the inventory on June 30.
How many units should be produced for the three-month period ending September 30?
A. 1,260,000 B. 1,328,000 C. 1,331,440 D. 1,424,050

15) Generous Company began its operations on January 1 of the current year. Budgeted sales for the first quarter are P240,000,
P300,000, and P420,000, respectively, for January, February and March. Generous Company expects 20% of its sales cash and the
remainder on account. Of the sales on account, 70% are expected to be collected in the month of sale, 25% in the month following the
sale, and the remainder in the following month.
How much should Generous receive from sales in March?
A. P304,800 B. 294,000 C. P388,800 D. P295,200

16) Violet Company manufactures a single product. It keeps its inventory of finished goods at twice the coming month’s budgeted sales,
inventory of raw materials at 150% of the coming month’s budgeted production requirements. Each unit of product requires two
pounds of materials. The production budgets in units consist of the following:.
May 1,000
June 1,200
July 1,300
August 1,600
Raw material purchases in June would be
A. 2,600 pounds C. 2,400 pounds
B. 1,800 pounds D. 2,700 pounds
Responsibility Accounting and Transfer Pricing

17) A management decision may be beneficial for a given profit center, but not for the entire company. From the
overall company viewpoint, this decision would lead to
A. goal congruence C. suboptimization
B. centralization D. maximization

18) Gata Co. plans to discontinue a department with a P48,000 contribution to overhead, and allocated overhead of
P96,000, of which P42,000 cannot be eliminated. What would be the effect of this discontinuance on Gata’s pretax
profit?
A. increase of P48,000 C. increase of P6,000
B. decrease of P48,000 D. increase of P6,000

19) Pili Company plans to discontinue a segment with a P32,000 segment margin. Common expenses allocated to
the segment amounted to P45,000, of which P20,000 cannot be eliminated if the segment were closed. The effect of
closing down the segment on Pili Company’s before tax profit would be
A. P 12,000 decrease C. P 12,000 increase
B. P 7,000 decrease D. P 7,000 increase

20) Company L had its operating asset turnover increased by 50% and the operating income margin increased by 50%. Company U
had its operating asset turnover increased by 30% and the operating income margin decreased by 30%. What changes are expected
for ROI of Company L and Company U, respectively?
A. B. C. D.
Company L 50% increase 125% increase 225% increase 125% increase
Company U 9% decrease 9% decrease no change no change

21) Ace Division of Card, Inc. expects the following result for 2014:
Unit sales P 70,000
Unit selling price 10
Unit variable cost 4
Total fixed costs 300,000
Total investment 500,000
22) The minimum required ROI is 15 percent, and divisions are evaluated on residual income. A foreign customer
has approached Houston’s manager with an offer to buy 10,000 units at P7 each. Houston Division has capacity of
75,000 units and the foreign customer will not accept fewer than 10,000 units. Accepting the order would increase
fixed costs by P10,000 and investment by P40,000.
At the price of P7 offered by foreign customer, what is the maximum number of units in regular sales that Houston
could sacrifice and still maintain its expected residual income?
A. 2,333 C. 2,667
B. 3,333 D. 3,667

23) Family Company has two division, Ma and Pa. Information for each division is as follows:
Ma Pa
Net earnings for division P20,000 P65,000
Asset base for division P50,000 P300,000
Target rate of return 15% 18%
Operating income margin 10% 20%
Weighted average cost of capital 12% 12%
What is the Economic Value Added for Ma and Pa, respectively?
A. P 20,000, P 36,000 C. P 12,500, P 11,000
 B. P 14,000, P 29,000 D. P 20,000, P 29,000

24) An appropriate transfer price between two divisions of the Star Corporation can be determined from the following
data:
Fabrication Division
Market price of subassembly P50
Variable cost of subassembly P20
Excess capacity (in units) 1,000
Assembling Division
Number of units needed 900
25) What is the natural bargaining range for the two divisions?
A. Between P20 and P50 C. Any amount less than P50
B. Between P50 and P70 D. P50 is the only acceptable price

Activity-based Management and AB Costing

26) An objective of activity-based management is to

a. eliminate the majority of centralized activities in an organization.
b. reduce or eliminate non-value-added activities incurred to make a product or provide a service.
c. institute responsibility accounting systems in decentralized organizations.
d. all of the above

Hazel Company uses activity-based costing. The company produces two products: coats and hats. The annual production and sales
volume of coats is 8,000 units and of hats is 6,000 units. There are three activity cost pools with the following expected activities
and estimated total costs:

Activity Estimated Expected Expected

Cost Pool Cost Activity Activity
Coats Hats Total
Activity 1 $20,000 100 400 500
Activity 2 $37,000 800 200 1,000
Activity 3 $91,200 800 3,000 3,800

27) Refer to Hazel Company. Using ABC, the cost per unit of coats is approximately:

a. $2.40 c. $ 6.60
b. $3.90 d. $10.59

28) Refer to Hazel Company. Using ABC, the cost per unit of hats is approximately:

a. $2.40 c. $12.00
b. $3.90 d. $15.90

Balanced Scorecard and other Value-based Concepts

29) Setting balanced objectives, setting target values, and aligning rewards are:
A. necessary steps in creating a balanced scorecard
B. important aspects of the capital budgeting process
C. the heart of process innovation
D. the ingredients for economic forecasting

30) Sequencing if-then statements is a simple method of:

A. testing a strategy C. creating lead measures
 B. prioritizing objectives D. evaluating performance

31) Small Computer Company has the following personnel:

I. Two inspectors: inspect the final computers
II. Four fabricators: make the computer cases
III. Two computer programmers: run all of the bookkeeping for the accounting records
IV. Seven assemblers: manufacture the mother boards
V. One owner: writes the paychecks

32) Which groups of employees are non-value-added workers?

A. I, II, and III C. I, III and V
B. III, IV, and V D. I, II, and IV

33) Which of the following is a nonvalue-added activity?

A. Engineering design. C. Inspection.
B. Machining. D. Packaging.

34) The sum of the non-value-added time and the value-added time equals
a. inspection time.
b. production time.
c. the product life cycle.
d. cycle time.

35) For one product that a firm produces, the manufacturing cycle efficiency is 20 percent. If the total production time is 12 hours,
what is the total manufacturing time?
a. 15.0 hours
b. 60.0 hours
c. 12.0 hours
d. 2.4 hours

36) The primary objective of just-in-time processing is to

A. accumulate overhead in activity cost pools
B. eliminate or reduce all manufacturing inventories
C. identify relevant activity cost drivers
D. none of them

37) The flow of goods through a JIT system is based on:

A. a workstation efficiently completing its processing of a batch of units so that the units can proceed forward to the next
workstation before the next workstation is ready to receive them.
B. processing goods in large batch sizes rather than less economical small batches.
C. maintaining a stockpile of raw materials in anticipation of materials shortages.
D. producing to meet customer demand with no buildup of inventory at any point in the production process.

38) Under just-in-time processing

A. raw materials are received just in time for use in production
B. subassembly parts are completed just in time for use in assembling finished goods
C. finished goods are completed just in time to be sold
D. all of the above

.39) JIT manufacturing emphasizes

A. large amounts of inventory on hand so that the company does not run out of it
B. small amounts of inventory on hand resulting in lower quality goods because production is rushed
C. reducing investment in inventory and increasing the emphasis on quality
D. both b and c
40) The benefits of a successful Just-In-Time system include all of the following except:
A. funds tied up in inventories are released for use elsewhere.
B. inventory buffers are increased.
C. throughput time is reduced.
D. defect rates are decreased.

EOQ
41) For Merchandise XYz, a company maintains a safety stock of 3,000 pounds. Its average inventory (taking into account the safety
stock) is 15,000 pounds. What is the apparent order quantity?
A. 18,000 lbs. C. 14,000 lbs.
B. 6,000 lbs. D. 24,000 lbs

42) A company has estimated its economic order quantity for Part A at 2,400 units for the coming year. If ordering costs are $200
and carrying costs are $0.50 per unit per year, what is the estimated total annual usage?
a. 6,000 units b. 28,800 units c. 7,200 units d. 2,400 units

43) M&L Co. has the following information on inventory:

Sales 20,000 units per year
Order quantity 4,000 units
Safety stock 2,600 units
Lead time 4 weeks
What is the re-order point? (For calculation purposes, use 50-week year)
a. 4,200 units. b. 5,600 units. c. 2,600 units. d. 1,600 units