SANTIAGO, ERICKA S.

BSA 2- B

MULTIPLE CHOICE

1. The costing procedure that treats fixed manufacturing costs as period costs is:
A. full costing
B. absorption costing
C. direct costing
D. conventional costing
E. none of the above

2. The following must be known about a production process in order to institute a direct costing
system:
A. the contribution margin and break-even point for all goods in production
B. the gross profit and margin of safety for all goods in production
C. the variable and fixed components of all costs related to production
D. the controllable and noncontrollable components of all costs related to production
E. standard production rates and times for all elements of production

3. A cost that is included as part of product costs under both absorption costing and direct
costing is:
A. managerial staff costs
B. insurance
C. variable marketing expenses
D. taxes on factory building
E. variable materials handling labor

4. When inventories increase from one period to the next and all other factors remain constant,
income under direct costing:
A. will be irrelevant for decision making
B. will be smaller than under absorption costing

291
 C. cannot be accurately computed
D. leads to smaller federal income tax payments
E. will be greater than under absorption costing

5. Of the following, the organization most likely to support direct costing is the:
A. American Institute of Certified Public Accountants
B. Securities and Exchange Commission
C. Institute of Management Accountants
D. Internal Revenue Service
E. Financial Accounting Standards Board

292
 6. The following unit costs for the production of laser guns were based on expected capacity in
the coming period:
Direct materials.................................................................................................................. $4
Direct labor......................................................................................................................... 7
Variable overhead.............................................................................................................. 2
Fixed overhead.................................................................................................................. 5
Variable marketing and administrative expenses............................................................... 6
Fixed marketing and administrative expenses................................................................... 4

Under the direct costing method, these units are recorded in inventory at a cost of:
A. $11
B. $16
C. $18
D. $19
E. none of the above

7. A basic tenet of direct costing is that period costs should be currently expensed. The
rationale behind this procedure is that:
A. allocation of period costs is arbitrary at best and could lead to erroneous decisions by
management
B. since period costs will occur whether or not production occurs, it is improper to allocate
these costs to production and defer a current cost of doing business
C. period costs are uncontrollable and should not be charged to a specific product
D. period costs are generally immaterial in amount and the cost of assigning the amounts
to specific products would outweigh the benefits
E. all of the above

8. A term more descriptive of the type of cost accounting often called direct costing is:
A. relevant costing
B. prime costing
C. variable costing
D. out-of-pocket costing
E. full costing
9. Costs that are treated as product costs under variable (direct) costing are:
A. only variable production costs
B. all variable costs
C. all variable and fixed manufacturing costs
D. variable manufacturing costs and fixed general and administrative costs
E. only direct costs
 10. Direct costing is not in accordance with generally accepted accounting principles because:
A. fixed manufacturing costs are assumed to be period costs
B. direct costing includes variable administrative costs in inventory
C. direct costing procedures are not well known in industry
D. net earnings are always overstated when using direct costing procedures
E. direct costing ignores the concept of lower of cost or market when valuing inventory

11. In an income statement prepared as an internal report using the direct costing method, fixed
selling and administrative expenses would:
A. be used in the computation of the contribution margin
B. be inventoried
C. appear in the same section as variable selling and administrative expenses
D. be used in the computation of operating income but not in the computation of the
contribution margin
E. not be used

12. A company had income of $50,000 using direct costing for a given period. Beginning and
ending inventories for that period were 13,000 units and 18,000 units, respectively. Ignoring
income taxes, if the fixed overhead application rate were $2.00 per unit, what would the
income have been using absorption costing?
A. $86,000
B. $40,000
C. $50,000
D. $60,000
E. cannot be determined from the information given

00

13. In an income statement prepared as an internal report using the direct costing method, which
of the following terms should appear?

Gross Profit
(Margin) Operating Income (Loss)
A. Yes Yes
B. Yes No
C. No No
D. No Yes
E. No Sometimes
14. Using absorption costing, which of the following columns includes only product costs?

............................................................................................ A B C D
Direct labor.................................................................................... X X X
Direct materials.............................................................................. X X X
Sales materials.............................................................................. X
Advertising costs............................................................................ X
Indirect factory materials................................................................ X X X
Indirect labor.................................................................................. X X X
Sales commissions........................................................................ X
Factory utilities............................................................................... X X X
Administrative supplies expense.................................................... X
Administrative labor....................................................................... X
Depreciation on administration building......................................... X
Cost of research on customer demographics................................ X

A. A
B. B
C. C
D. D
E. none of the above

15. A company manufactures 50,000 units of a product and sells 40,000 units. Total
manufacturing cost per unit is $50 (variable manufacturing cost, $10; fixed manufacturing cost,
$40). Assuming no beginning inventory, the effect on net income if absorption costing is used
instead of variable costing is that:
A. net income is $400,000 lower
B. net income is $400,000 higher
C. net income is the same
D. net income is $200,000 higher
E. none of the above
Solution
$40 (50,000 - 40,000) = $400,000
16. A company has the following cost data:

Fixed manufacturing costs............................................................................................ $2,000

Fixed selling, general, and administrative costs........................................................... 1,000
Variable selling costs per unit sold.............................................................................. 1
Variable manufacturing costs per unit.......................................................................... 2

Beginning inventory....................................................................... 0 units

Production...................................................................................... 100 units
Sales ............................................................................................ 90 units at $40 per unit

Variable and absorption-cost net incomes are:

A. $320 variable, $520 absorption
B. $330 variable, $530 absorption
C. $520 variable, $320 absorption
D. $530 variable, $330 absorption
E. none of the above
Solution
Variable: $3,600 - $180 - $90 - $2,000 - $1,000 = $330
Absorption: $3,600 - $180 - [(90 100) x $2,000] - $90 - $1,000 = $53

17. All of the following statements related to the use of break-even analysis are true except:
A. a change in fixed costs changes the break-even point but not the contribution margin
figure
B. a combined change in fixed and variable costs in the same direction causes a sharp
change in the break-even point
C. a change in fixed costs changes the contribution margin figure but not the break-even
point
D. a change in per-unit variable costs changes the contribution margin ratio
E. a change in sales price changes the break-even point

18. The costing method that lends itself most readily to the preparation of break-even analysis is:
 A. weighted average costing
B. absorption costing
C. first-in, first-out costing
D. semivariable costing
E. direct costing

19. The break-even volume in units is found by dividing fixed expenses by the:
A. unit gross profit
B. total variable expenses
C. unit net profit
D. contribution margin ratio
E. unit contribution margin
20. A major assumption concerning cost and revenue behavior that is important to the
development of break-even charts is that:
A. all costs are variable
B. total costs are quadratic
C. costs and revenues are linear
D. the relevant range is greater than sales volume
E. costs will not exceed revenues

21. If the fixed cost attendant to a product increases while the variable cost and sales price
remain constant, the contribution margin and break-even point will:

Contribution Margin Break-Even Point

A. increase increase
B. not change increase
C. not change not change
D. increase decrease
E. decrease increase

22. If current sales are $1,000,000 and break-even sales are $600,000, the margin of safety
ratio is:
A. 6%
B. 60%
C. 167%
D. 100%
E. 40%

23. Assuming that there is no effect on other products that are manufactured, a company should
discontinue a product line for economic reasons when the:
A. contribution margin from the product line is negative
B. sales of the product are less than the break-even point
C. profit from the product line is less than that for the other products
D. profit from the product line is negative
E. contribution margin from the product line is less than that for other products
24. When referring to the "margin of safety," an accountant would be thinking of:
A. the excess of sales revenue over variable costs
B. the excess of budgeted or actual sales over the contribution margin
C. the excess of budgeted or actual sales revenue over fixed costs
D. the excess of actual sales over budgeted sales
E. none of the above
C 25. Based on the cost-volume-profit chart in Figure 20-1 for a manufacturing company, the correct
statement is:
A. line b graphs total fixed costs
B. point c represents the point at which the marginal contribution per unit increases
C. lined graphs total costs
D. area e (between lines b and d) represents the contribution margin
E. area a represents the area of net loss

26. A valid assumption for cost-volume-profit analysis is:

A. an increase in fixed costs will cause the break-even point to rise
B. demand is constant regardless of price
 C. a decrease in variable cost per unit will lower the break-even point
D. variable costs per unit are assumed to remain constant within the range of activity
analyzed
E. all of the above are invalid assumptions

27. The following information pertains to Izzy Co.:

Sales (50,000 units).............................................................................................. $1,000,000

Direct materials and direct labor............................................................................. 300,000
Factory overhead:
Variable............................................................................................................. 40,000
Fixed................................................................................................................. 70,000
Selling and general expenses:
Variable............................................................................................................. 10,000
Fixed................................................................................................................. 60,000

How much was Izzy's break-even point in number of units?

A. 18,571
B. 26,000
C. 9,848
D. 10,000
E. none of the above
Solution:

$70000 + $60000 = $10000

($1,000,00 / 50000) - ($350,000 / 50,000)
28. The following information pertains to Izzy Co.:

Sales (50,000 units).............................................................................................. $1,000,000

Direct materials and direct labor............................................................................. 300,000
Factory overhead:
Variable............................................................................................................. 40,000
Fixed................................................................................................................. 70,000
Selling and general expenses:
Variable............................................................................................................. 10,000
Fixed................................................................................................................. 60,000

What was Izzy's contribution margin ratio?

A. 65%
B. 59%
C. 35%
D. 66%
E. none of the above
Solution:
$300000 + $40000 + $10000 = .65
$10000000
29. A result from lowering the break-even point is:
A. an increase in the sales price per unit
B. an increase in the semivariable cost per unit
C. an increase in the variable cost per unit
D. a decrease in the contribution margin per unit
E. an increase in income tax rates

30. A company manufactures a single product that sells for $30. If the company has fixed costs of
$150,000 and a contribution margin of 40%, the break-even point in sales dollars is:
A. $250,000
B. $275,000
C. $375,000
D. $525,000
E. none of the above
 Solution:
$150,000 / .40 = $375,000

31. A company producing widgets expects to incur fixed costs during the next year of $3 million.
It also expects to incur handling costs of $1 per widget, labor costs of $3 per widget, and
materials costs of $2 per widget. The company produces widgets only when ordered and,
therefore, does not incur any carrying costs. It sells widgets for $10 each. The number of
widgets that must be sold next year in order to break even is:
A. 500,000 units
B. 600,000 units
C. 750,000 units
D. 1,000,000 units
E. none of the above
Solution:
$3,000,000 / ($10 - $6) = 750,000

32. Clark Co.'s operating percentages were as follows:

Sales....................................................................................................... 100 %
Cost of sales:
Variable............................................................................................ 50%
Fixed................................................................................................. 10 60
Gross profit............................................................................................. 40 %
Other operating expenses:
Variable............................................................................................ 20%
Fixed................................................................................................. 15 35
Operating income.................................................................................... 5%

Clark's sales totaled $2,000,000. At what sales level would Clark break even?
A. $1,900,000
B. $666,667
C. $1,250,000
D. $833,333
 E. $1,666,667
Solution:
[$2,000,000 x 25%] / [1 - (70% / 100%)] = $1,666,667

33. The following information pertains to Neon Co.'s cost-volume-profit relationships:

Break-even point in units sold................................................................................ 1,000

Variable costs per unit............................................................................................ $500
Total fixed costs...................................................................................................... $ 150,000

How much will be contributed to profit when unit 1,001 is sold?

A. $650
B. $500
C. $150
D. 0
E. none of the above
Solution:
Break-even point = (1,000 x $500) + $150,000 = $650,000
Selling price = $650,000 / 1,000 = $650
Contribution margin = $650 - $500 = $150
34. During June, a company expects sales revenue from its only product to be $300,000, fixed
costs to be $90,000, and variable costs to be $120,000. If the company's actual sales
revenue during June is $350,000, its profit would be:
A. $90,000
B. $105,000
C. $120,000
D. $140,000
E. none of the above
Solution:
Sales.............................................................................................................. $350,000
Variable costs............................................................................................ (140,000)
Contribution margin............................................................................... $210,000

Fixed costs.................................................................................................... (90,000)

Profit............................................................................................................. $120,000

35. A company has just completed the final development of its only product, general recombinant
bacteria, that kills most insects before dying. The product has taken three years and
$6,000,000 to develop. The following costs are expected to be incurred on a monthly basis
for the production of 1,000,000 pounds of the new product:

1,000,000 Pounds
Direct materials............................................................................................. $ 300,000
Direct labor................................................................................................... 1,250,000
Variable overhead........................................................................................ 450,000
Fixed overhead............................................................................................. 2,000,000
Variable selling, general, and administrative expenses............................... 900,000
Fixed selling, general, and administrative expenses.................................... 1,500,000
Total....................................................................................................... $ 6,400,000

At a sale price of $5.90 per pound, the sales in pounds necessary to ensure a $3,000,000
profit the first year would be (to the nearest thousand pounds):
A. 13,017,000 pounds
B. 14,000,000 pounds
C. 15,000,000 pounds
D. 25,600,000 pounds
E. none of the above
Solution:
(12($2000000 + $1500000)) +$3000000 =15,000,000 pounds
$5.90 - $.30 - $1.25 - $.45 - $.90
36. A specialized version of direct costing for short-run optimization is :
A. learning theory
B. absorption costing
C. the theory of constraints
D. variable costing
E. none of the above

37. The theory of constraints uses which of the following basic measures :
A. throughput
B. operating expense
C. assets
D. all of the above
E. none of the above

38. The practice of improving a reported volume or idle capacity variance by producing more than
is currently needed is viewed by the theory of constraints as :
A. a benefit with no cost increase
B. a cost increase with no benefit
C. both a cost increase and a benefit
D. worthwhile from a cost/benefit perspective
E. none of the above

39. The theory of constraints is a short-run optimization technique that views which of the following
as relatively constant :
A. resources
B. technology
C. product lines
D. demand
E. all of the above

40. The theory of constraints is primarily useful for :

A. short-run decisions
B. medium range decisions
C. long-run decisions
D