Strategic Cost Management Coordinated Quiz 1

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Strategic Cost Management

Coordinated Quiz 1

Name:____________________________ Year and Section:____ Date:__________

TEST I. CONCEPTUAL. 40% (2 points each). STRICTLY NO ERASURES.


1. An ending inventory valuation on an absorption costing balance sheet would
a. Sometimes be less than the ending inventory valuation under variable costing.
b. Always be less than the ending inventory valuation under variable costing.
c. Always be the same as the ending inventory valuation under variable costing.
d. Always be greater than or equal to the ending inventory valuation under variable
costing.

2.Under absorption costing, fixed manufacturing overhead costs:


a. Are deferred in inventory when production exceeds sales.
b. Are always treated as period costs.
c. Are released from inventory when production exceeds sales.
d. None of these.

3.A single-product company prepares income statements using both absorption and variable
costing methods. Manufacturing overhead cost applied per unit produced under absorption
costing in year 2 was the same as in year 1. The year 2 variable costing statement reported a
profit whereas the year 2 absorption costing statement reported a loss. The difference in
reported income could be explained by units produced in year 2 being:
a. Less than units sold in year 2.
b. Less than the activity level used for allocating overhead to the product.
c. In excess of the activity level used for allocating overhead to the product.
d. In excess of units sold in year 2.

4. Company A has a lower variable cost per unit and higher total fixed cost than Company B.
The selling prices of their are the same. Sales fluctuate considerably for both companies.
Therefore,
a. Company A has a lower break-even point than Company B.
b. Company A earns more profit than Company B.
c. Company A is more risky than Company B.
d. Company A has a lower contribution margin percentage than Company B.

5. The margin of safety is


a. The profit currently earned in excess of the target profit.
b. The difference between current sales and sales at break-even.
c. The ratio of contribution margin to variable cost.
d. The difference between contribution margin currently earned and contribution margin
at break even.
6. The indifference point is the level of volume at which a company
a. Earns the same profit under different operating schemes.
b. Earns no profit.
c. Earns its target profit.
d. Any of the above.

7. If the sales mix shifts toward higher contribution margin products, the break-even point
a. Decreases.
b. Increases.
c. Remains constant.
d. It is impossible to tell without more information.

8. A fixed cost is the same percentage of sales in three different months. Which of the
following is true?
a. The company had the same sales in each of those months.
b. The cost is both fixed and variable.
c. The company is operating at its break-even point.
d. The company is achieving its target level of profit.

9.A company that desires to lower its break-even point should strive to:
a. Decrease selling prices.
b. Reduce variable costs.
c. Increase fixed costs.
d. Sell more units.
e. Pursue more than one of the above actions.

10. The extent to which an organization uses fixed costs in its cost structure is measured by:
a. Financial leverage.
b. Operating leverage.
c. Fixed cost leverage.
d. Contribution leverage.
e. Efficiency leverage.

11. Which of the following decreases per-unit contribution margin the most for a company
currently earning a profit?
a. A 10% decrease in selling price.
b. A 10% increase in variable cost per unit.
c. A 10% increase in fixed costs.
d. A 10% increase in fixed cost per unit.

12. If all goes according to plan except that unit variable cost falls,
a. Total contribution margin will be lower than expected.
b. The contribution margin percentage will be lower than expected.
c. Profit will be higher than expected.
d. Per-unit contribution margin will be lower than expected.

13. At the break-even point, total contribution margin is


a. Zero.
b. b. Equal to total fixed costs.
c. Equal to total costs.
d. Equal to total variable costs.

14. In a recent period, Marvel Co. Incurred $20,000 of fixed manufacturing overhead and
deducted $30,000 of fixed manufacturing overhead. Marvel Co. Must be using
a. Absorption costing.
b. Variable costing.
c. Direct costing.
d. Standard costing.

15. How will a favorable volume variance affect net income under each of the following
methods?
Absorption Variable
a. Reduce no effect
b. Reduce increase
c. Increase no effect
d. Increase reduce

16. A basic tenet of variable costing is that period costs should be currently expensed. What is
the rationale behind this procedure?
a. Period costs are uncontrollable and should not be charged to a specific product.
b. Period costs are generally immaterial in amount and the cost of assigning the amounts
to specific products would outweigh the benefits
c. Allocation of period costs is arbitrary at best and could lead to erroneous decision by
management.
d. Because period costs will occur whether production occurs, it is improper to allocate
these costs to production and defer a current cost of doing business.

17. Gomez's inventory increased during the year. On the basis of this information, income
reported under absorption costing:
a. Will be the same as that reported under variable costing.
b. Will be higher than that reported under variable costing.
c. Will be lower than that reported under variable costing.
d. Will differ from that reported under variable costing, the direction of which cannot be
determined from the information given.
e. Will be less than that reported in the previous period.
18. For external-reporting purposes, generally accepted accounting principles require that net
income be based on:
a. Absorption costing.
b. Variable costing.
c. Direct costing.
d. Semivariable costing.
e. Activity-based costing.

19. Which of the following methods defines product cost as the unit-level cost incurred each
time a unit is manufactured?
a. Throughput costing.
b. Indirect costing.
c. Process costing.
d. Absorption costing.
e. Back-flush costing.

20. The fixed-overhead volume variance under variable costing:


a. Coincides with the fixed manufacturing overhead that was applied to production.
b. Is deducted on the income statement.
c. Does not exist.
d. Will equal the fixed-overhead budget variance.
e. Must be unfavorable.
TEST II. PRACTICAL. 60%. (3 points each). STRICTLY NO ERASURES. Round off final answers up
to two decimal places.

PROBLEM 1. MALILYTO CORPORATION has the following budgeted total and per unit-cost at
250,000 unit level of production:
TOTAL PER-UNIT
Direct materials P 2,400,000 ?
Direct labor ? P 1.60
Variable overhead ? P 1.45
Fixed overhead 875,000 ?
The company expects to sell 175,000 of these units at P30 each to various customers next year.
At this level of salesz net income under absorption costing amounted to P1,015,000.

Assuming the same behavior of costs, determine the following:


1. Net income under variable costing
2. Net income under throughput costing
3. Selling and administrative expenses
4. Ending inventory under absorption costing

PROBLEM 2. Below is extracted from the absorption costing income statement of CONFUSED
COMPANY for the year 2019:
Units produced 100,000
Units sold 110,000
Beginning inventory (Units) 15,000

Variable costs per unit:


Direct materials P8
Direct labor 9
Factory Overhead 3
SG&A 4

Fixed costs:
Factory Overhead P5 per unit
SG&A P200,000

Selling price P50 per unit


Additional information:
Fixed overhead rate was determined using the normal capacity of 108,000 units.

Compute for the following:


5. Volume variance (Indicate whether favorable or unfavorable)
6. Net income under absorption costing
7. Ending inventory balance under variable costing
8. Net income under variable costing
9. Break-even point in revenue

PROBLEM 3. The following information pertains to ANGEL'S BURGER's cost-volume-profit


relationships:
Variable costs per unit P2,333
Total fixed costs 387,500
Break-even point in units 2,500
10. Determine the additional profit contributed by the 2,501st unit.

PROBLEM 4. LUFFY INC. manufactures shoelaces for specialized market. Budgeted cost and
revenue data for the shoelaces are given below, based on 20,000 units:
Total contribution margin P1,800,000
Operating income P720,000
Selling price per unit P120

Determine the following:


11. Margin of safety
12. Degree of operating leverage
13. If sales volume increased by 30%, compute for the increase in operating income.
14. If instead, margin of safety increased to P980,000 due to change in sales volume,
compute for the new operating income.

PROBLEM 5. ABC Company is currently considering changing its cost structure from labor-
intensive to automated system. Refer to the following information about the cost and profit
data of the company:
Labor-intensive Automated
Contribution margin ratio 45% 55%
Fixed costs 180,000 250,000
15. Which cost structure is more beneficial to the company at the following sales level?
Above indifference Below indifference
point point
a. Labor intensive Automated
b. Automated Labor intensive
c. Labor intensive Labor intensive
d. Automated Automated

PROBLEM 6. ABC Company produces three different graded products, Alpha, Bravo and Charlie.
The following cost and other information are available:
Products Alpha Bravo Charlie
Sales quantity mix 35% 40% 25%
Contribution margin 15% 35% 45%
ratio
Selling price per unit P 1.00 P 1.50 P 1.00

Fixed costs of the company totaled P2,460,000, compute for the following:
16. No. of units of Product Charlie to be sold to breakeven.
17. Break-even point in sales revenue (Php).

PROBLEM 7. A company has the following costs and revenue data for the current year:
Selling price per unit P10.50
Variable costs per unit 5.46
Total fixed costs P483,840
Operating income/(loss) before tax (P20,160)
Income tax rate 40%

Compute for the following:


18. Additional units to be sold to break-even.
19. Total no. of units to be sold to achieve an after-tax profit of P18,144.
20. Total Sales Revenue to achieve a pretax return on sales of 13%.

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