B2-1 Flashcards
Which of the following costing methods provide(s) the added benefit of usefulness for external reporting purposes?
I.
Variable.
II.
Absorption.
a.
Both I and II.
b.
Neither I nor II.
c.
II only.
d.
I only.
Choice “c” is correct. Absorption costing methods represent generally accepted accounting principles generally used for the presentation of external financial statements and are, therefore, for the benefit of external users.
Choice “d” is incorrect. Variable (sometimes called direct) costing is used for the benefit of internal users. Variable costs excludes fixed costs from product (inventoried) costs and thereby produces a contribution margin based income statement highly useful to internal managers in computing break even points and other analysis of performance.
Choice “a” is incorrect. Although item II, absorption costing, is designed for external reporting, item I, variable costing, primarily benefits internal managers.
Choice “b” is incorrect. Although item I, variable costing, is not designed to add usefulness to external users, item II is designed for that purpose.
Breakeven analysis assumes that over the relevant range:
a.
Unit revenues are nonlinear
b.
Unit variable costs are unchanged
c.
Total fixed costs are nonlinear
d.
Total costs are unchanged
Choice “b” is correct. Breakeven analysis assumes that all variable costs and revenues are constant on a per unit basis and are linear over a relevant range. Fixed costs in total are constant.
Choice “a” is incorrect. Breakeven analysis assumes that all variable costs and revenues are constant on a per unit basis and linear over a relevant range.
Choice “d” is incorrect. Total costs do change over a relevant range. Breakeven analysis assumes that all variable costs and revenues are constant per unit and linear within a relevant range.
Choice “c” is incorrect. Total fixed costs are assumed to be constant (representing a linear relationship) over a relevant range.
Which of the following costing methods will yield the lowest inventory value?
a.
Hybrid.
b.
Variable.
c.
Process.
d.
Absorption.
Choice “b” is correct. Variable costing typically produces the lowest inventory values since only variable costs are capitalized. Other methodologies of inventory accounting will account for fixed costs in inventory and result in greater values than variable costing.
Choice “d” is incorrect. Absorption costing accounts for fixed manufacturing overhead costs in inventory and produces inventory values greater than variable costing.
Choice “a” is incorrect. Hybrid costing methods may blend different inventory methodologies but would likely include valuations greater than pure direct cost approaches that only include variable costs.
Choice “c” is incorrect. Process costing methods represent a cost accumulation approach that uses any number of assumptions. Process costing will normally include fixed costs in the valuation of inventory and would thereby result in higher amounts than direct costing approaches.
Almo developed its business plan based on the assumption that canopies would sell at a price of $400 each. The variable costs for each canopy were projected at $200, and the annual fixed-costs were budgeted at $100,000. Almo’s after-tax profit objective was $240,000; the company’s effective tax rate is 40 percent. If no changes are made to the selling price or cost structure, determine the number of units that Almo Company must sell in order to break-even.
a.
250 units.
b.
750 units.
c.
167 units.
d.
500 units.
Choice “d” is correct. 500 units must be sold to breakeven.
Total fixed cost $100,000 ÷ contribution margin per unit of $200 = 500 units to breakeven.
Choices “c”, “a”, and “b” are incorrect, based on the above calculation.
A delivery company is implementing a system to compare the costs of purchasing and operating different vehicles in its fleet. Truck 415 is driven 125,000 miles per year at a variable cost of $0.13 per mile. Truck 415 has a capacity of 28,000 pounds and delivers 250 full loads per year. What amount is the truck’s delivery cost per pound?
a.
$0.00232 per pound.
b.
$0.58036 per pound.
c.
$1.72000 per pound.
d.
$0.00163 per pound.
Choice “a” is correct. Delivery cost per pound is $0.00232 and is determined by dividing total variable costs by total delivered pounds. The computations are as follows:
Total variable costs for Truck 415 is $16,250 (125,000 miles times $0.13 per mile).
Total pounds delivered are 7,000,000 (28,000 pounds times 250 loads).
Cost per delivered pound is $16,250 divided by 7,000,000, or $0.00232.
Choices “d”, “b”, and “c” are incorrect, based on the above explanation.
The method of inventory costing in which direct manufacturing costs and manufacturing overhead costs, both variable and fixed, are considered as inventoriable costs is best described as:
a.
Conversion costing.
b.
Direct costing.
c.
Variable costing.
d.
Absorption costing.
Choice “d” is correct. Absorption costing (required for external reporting) charges direct material, direct labor, variable overhead and fixed overhead as inventoriable costs.
Choices “b” and “c” are incorrect. Direct costing (also called variable costing) is the same as absorption costing except that it does not consider fixed manufacturing overhead as an inventoriable cost.
Choice “a” is incorrect. Conversion costing does not include direct material in inventoriable cost.
Jago Co. has 2 products that use the same manufacturing facilities and cannot be subcontracted. Each product has sufficient orders to utilize the entire manufacturing capacity. For short-run profit maximization, Jago should manufacture the product with the:
a.
Greater contribution margin per hour of manufacturing capacity.
b.
Greater gross profit per hour of manufacturing capacity.
c.
Lower total variable manufacturing costs for the manufacturing capacity.
d.
Lower total manufacturing costs for the manufacturing capacity.
Choice “a” is correct. To maximize profit at full capacity, contribution margin per hour should be maximized.
Choice “d” is incorrect. To maximize profit, the sales price of the products must also be considered.
Choice “c” is incorrect. To maximize profit, the sales price of the products must also be considered.
Choice “b” is incorrect. Contribution margin is a better measure of profit maximization than gross profit because it includes all variable costs. Gross margin includes consideration of cost of goods sold, but may exclude other variable costs, such as selling, general, and administrative costs.
Based on potential sales of 500 units per year, a new product has estimated traceable costs of $990,000. What is the target price to obtain a 15% profit margin on sales?
a.
$1,935
b.
$2,277
c.
$1,980
d.
$2,329
Choice “d” is correct. Since a 15% profit is desired, the cost of $990,000 would be 85% of sales. (Remember that profit + cost = sales.) Thus, sales are $1,164,700 ($990,000 ÷ 85%). $1,164,700 ÷ 500 units equals $2,329 per unit.
Choice “b” is incorrect. The 15% margin should be based on sales, not on costs.
Choice “c” is incorrect. $1,980 is the cost per unit, not the selling price per unit. In order to earn the desired 15% profit, the selling price would have to exceed this amount.
Choice “a” is incorrect. If a profit margin of 15% is to be achieved, the target price cannot be less than the cost per unit of $1,980.
Which of the following statements is correct regarding the difference between the absorption costing and variable costing methods?
a.
When production equals sales, absorption costing income is greater than variable costing income.
b.
When production equals sales, absorption costing income is less than variable costing income.
c.
When production is greater than sales, absorption costing income is greater than variable costing income.
d.
When production is less than sales, absorption costing income is greater than variable costing income.
Choice “c” is correct. When production is greater than sales, absorption costing income is greater than variable costing income. Production in excess of sales result in increases in inventory that include capitalization of fixed product costs that are immediately expensed under variable costing. Since costs that are used in the determination of net income for variable costing are accounted for in inventory for absorption costing, absorption costing will produce higher net income than variable costing when production is greater than sales.
Choice “a” is incorrect. When production equals sales, there is no change in inventory and absorption costing and variable costing produce identical results.
Choice “b” is incorrect. When production equals sales, there is no change in inventory and absorption costing and variable costing produce identical results.
Choice “d” is incorrect. When production is less than sales, inventory declines and absorption costing produces earnings less than variable costing because fixed product costs included in inventory in prior years are charged to earnings when inventory declines. These “extra” costs were already recognized in prior periods under variable costing. As a result, absorption costing produces lower net income than variable costing when production is less than sales and inventory declines.
In managerial accounting, the term “relevant range” is often used to describe:
a.
The range over which relevant costs are incurred.
b.
The theoretical maximums and minimum ranges the company could operate in.
c.
The range over which costs fluctuate.
d.
The range over which cost relationships are valid.
Choice “d” is correct. Relevant range is the range of activity within which the relationships of fixed costs and variable costs are meaningful and valid.
Choice “b” is incorrect. Theoretical maximums and minimums may have nothing to do with actual operating characteristics of a given firm.
Choice “c” is incorrect. For most companies, costs fluctuate over the entire range of operations.
Choice “a” is incorrect. Costs are incurred at every possible operating point.
A company that produces 10,000 units has fixed costs of $300,000, variable costs of $50 per unit, and a sales price of $85 per unit. After learning that its variable costs will increase by 20%, the company is considering an increase in production to 12,000 units. Which of the following statements is correct regarding the company’s next steps?
a.
If production is increased to 12,000 units, profits will increase by $100,000.
b.
If production remains at 10,000 units, profits will decrease by $50,000.
c.
If production remains at 10,000 units, profits will decrease by $100,000.
d.
If production is increased to 12,000 units, profits will increase by $50,000.
Choice “c” is correct. Currently, the contribution margin per unit is $35 ($85 sales price minus $50 variable costs). If variable costs increase by 20%, the contribution margin per unit becomes $25 ($85 sales price minus $60 ($50 x 1.2) variable costs). The contribution margin will decrease by $10 per unit. If production remains at 10,000 units, profits will decrease by $100,000 (10,000 units times a $10 decrease in contribution margin per unit). Fixed costs are not relevant in this determination.
Choice “d” is incorrect. Increasing production by 2,000 units would decrease profit by $50,000 from the current levels (12,000 units times the new contribution margin of $25 per unit [$85 selling price minus the revised variable costs of $60 per unit] minus fixed costs of $300,000).
Choices “a” and “b” are incorrect, based on the above explanations
Which of the following statements is correct regarding variable costing and absorption costing income statements for a company that has no beginning inventory and whose production exceeds sales for the current period?
a.
Net income is higher if absorption costing is used.
b.
The cost of goods sold amount is lower if absorption costing is used.
c.
The selling and administrative expense is higher if absorption costing is used.
d.
The ending inventory amount is lower if absorption costing is used.
Choice “a” is correct. A fundamental difference between absorption costing and variable costing is that the former treats fixed factory overhead as a product cost (included in inventory on the balance sheet), while the latter treats it as a period cost (included as an expense on the income statement). In a period where inventory production exceeds sales, fixed factory overhead under the absorption method will remain on the balance sheet as part of the unsold inventory; this keeps these costs off of the income statement until the inventory is actually sold (therefore raising net income). Under variable costing, fixed factory overhead would have been expensed to the income statement in the period incurred (therefore lowering net income).
Choice “d” is incorrect. The ending inventory amount will be higher under absorption costing because this amount will include fixed factory overhead costs.
Choice “b” is incorrect. The cost of goods sold amount under variable costing will not include fixed factory overhead, whereas under absorption costing the cost of goods sold amount will include both variable and fixed factory overhead (when the inventory is ultimately sold).
Choice “c” is incorrect. Selling and administrative expense is lower under absorption costing because fixed factory overhead remains in inventory. Under variable costing, fixed factory overhead will be included as a period cost (and therefore part of selling and administrative expense).
In an income statement prepared as an internal report using the direct (variable) costing method, fixed selling and administrative expenses would:
a.
Not be used.
b.
Be used in the computation of operating income but not in the computation of the contribution margin.
c.
Be treated the same as variable selling and administrative expenses.
d.
Be used in the computation of the contribution margin.
Choice “b” is correct. Contribution margin is defined as net sales revenue less variable costs. Operating income equals contribution margin less fixed costs.
Choice “a” is incorrect. All expenses are reported, including fixed selling and administrative expenses.
Choice “c” is incorrect. The direct (variable) costing income statement reports expenses under the categories of variable and fixed. Fixed selling and administrative expenses would not be treated in the same manner as variable selling and administrative expenses.
Choice “d” is incorrect. Contribution margin is defined as net sales revenue less variable costs.
Marston Enterprises sells three chemicals: petrol, septine, and tridol. Petrol is the company’s most profitable product; tridol is the least profitable. Which one of the following events will definitely decrease the firm’s overall breakeven point for the upcoming accounting period?
a.
An increase in anticipated sales of petrol relative to sales of septine and tridol.
b.
An increase in petrol’s raw material cost.
c.
The installation of new computer-controlled machinery and subsequent layoff of assembly-line workers.
d.
An increase in the overall market for septine.
Choice “a” is correct. An increase in anticipated sales of petrol relative to sales of septine and tridol will decrease the breakeven point. This is because the product mix has changed in favor of the more profitable (higher contribution margin) products. The composite contribution margin is higher, and the breakeven point is lower.
Choice “c” is incorrect. The effect on breakeven cannot be determined.
Choice “d” is incorrect. An increase in market will not affect breakeven unless the price of the product changes.
Choice “b” is incorrect. An increase in material cost will decrease contribution margin and increase breakeven.
Which of the following costs are included in product or inventoriable costs in an absorption costing system?
a.
Direct material, direct labor and all overhead.
b.
Direct material, direct labor, all overhead, and selling expenses.
c.
Direct material, direct labor, all overhead, and all period expenses.
d.
Direct material, direct labor and variable overhead.
Choice “a” is correct. In an absorption costing system, all product costs and no period expenses are put into product cost.
Choice “d” is incorrect. Fixed overhead is a product cost under absorption costing. This would be the correct answer if the question had used a direct or variable costing system.
Choice “b” is incorrect. Selling expenses are period costs and would not be included in product cost.
Choice “c” is incorrect, per above. No period expenses are capitalized in either absorption or variable costing.
