B2 Optional Questions Flashcards
A manufacturing company prepares income statements using both absorption and variable costing methods. At the end of a period actual sales revenues, total gross profit, and total contribution margin approximated budgeted figures; whereas net income was substantially greater than the budgeted amount. There were no beginning or ending inventories. The most likely explanation of the net income increase is that, compared to budget, actual:
a. Sales prices had declined proportionately less than variable costs.
b. Sales prices and variable costs had increased proportionately.
c. Manufacturing fixed costs had increased.
d. Selling and administrative fixed expenses had decreased.
Choice “d” is correct. Under absorption costing, selling and administrative fixed expenses are not a component of gross profit, but rather are deducted from gross profit to arrive at net income. Therefore, if gross profit approximates the budgeted figure and these expenses are less than the budgeted amount, net income will be greater than the budgeted amount. Similarly, under variable costing, selling and administrative fixed expenses are not included in contribution margin. Again, if these expenses are less than the budgeted amount, when they are deducted from a contribution margin that approximates the budgeted amount, net income will be greater than that budgeted.
Regression analysis:
a. Uses probability assumptions to determine total project costs.
b. Estimates the independent cost variable.
c. Ignores the coefficient of determination.
d. Estimates the dependent cost variable.
Choice “d” is correct. Regression analysis is a statistical model that can estimate the dependent cost variable based on changes in the independent variable.
Probability (risk) analysis is:
a. An extension of sensitivity analysis.
b. Used only for situations involving five or fewer possible outcomes.
c. Incompatible with sensitivity analysis.
d. Used only for situations in which the summation of probability weights is greater than one.
Choice “a” is correct. Probability (risk) analysis is used to examine the possible outcomes given different alternatives. Sensitivity analysis uses a trial and error method in which the sensitivity of the solution to changes in variables is calculated. Therefore, probability analysis is an extension of sensitivity analysis.
The difference between the sales price and total variable costs is:
a. Cost-volume-profit analysis.
b. Gross operating profit.
c. The contribution margin.
d. The break-even point.
Choice “c” is correct. The contribution margin is the difference between the sales price and total variable costs.
Contribution margin is the excess of revenues over:
a. Cost of goods sold.
b. Direct cost.
c. All variable costs.
d. Manufacturing cost.
Choice “c” is correct. Contribution margin is the excess of revenues over all variable costs.
In a decision analysis situation, which one of the following costs is not likely to contain a variable cost component?
a. Overhead.
b. Depreciation.
c. Selling.
d. Labor.
Choice “b” is correct. Depreciation is not likely to contain a variable cost component in a decision analysis situation.
The term that best refers to past costs that have been incurred and are not relevant to any future decisions is:
a. Incurred marginal costs.
b. Full absorption costs.
c. Sunk costs.
d. Discretionary costs.
Choice “c” is correct. Sunk costs refer to past costs that have been incurred and are not relevant to any future decisions.
The opportunity cost of making a component part in a factory with no excess capacity is the:
a. Fixed manufacturing cost of the component.
b. Total manufacturing cost of the component.
c. Net benefit given up from the best alternative use of the capacity.
d. Cost of the production given up in order to manufacture the component.
Definition: Opportunity cost is the maximum benefit foregone by using a scarce resource for a given purpose. It is the benefit provided by the next best use of that resource.
Choice “c” is correct. Opportunity cost is the net benefit given up from the best alternative use of the capacity.
An important concept in decision-making is described as “the contribution to income that is foregone by not using a limited resource to its best alternative use.” This concept is called:
a. Incremental cost.
b. Irrelevant cost.
c. Opportunity cost.
d. Marginal cost.
Choice “c” is correct. Opportunity cost is the contribution to income that is foregone by not using a limited resource for its best alternative use.
The breakeven point in units increases when unit costs:
a. Decrease and sales price increases.
b. Increase and sales price increases.
c. Remain unchanged and sales price increases.
d. Increase and sales price remain unchanged.
Choice “d” is correct. The breakeven point in units will increase when units costs increase and sales price remain unchanged. Higher unit costs, without a change in sales price, will decrease contribution margin and increase the number of units required to break even.
Several surveys point out that most managers use full product costs, including unit fixed-costs and unit variable costs, in developing cost-based pricing. Which one of the following is least associated with cost-based pricing?
a. Price stability.
b. Price justification.
c. Target pricing.
d. Fixed-cost recovery.
Choice “c” is correct. Target pricing is least associated with (full) cost-based pricing.
Costs relevant to a make-or-buy decision include variable labor and variable materials as well as:
a. Factory management costs.
b. Depreciation.
c. Avoidable fixed-costs.
d. Property taxes.
Choice “c” is correct. Costs relevant to a make-or-buy decision include variable labor and variable materials as well as avoidable fixed costs. Avoidable fixed costs “attach” to a specific decision and are incurred only if that decision is taken. They are relevant in a marginal analysis.
Which one of the following is correct regarding a relevant range?
a. The relevant range will remain the same as long as prices do not change.
b. Total variable costs will not change.
c. Total fixed costs will not change.
d. The relevant range cannot be changed after being established.
Choice “c” is correct. The relevant range is the range within which the relationship between a cost and its cost driver remain valid. Within this range the fixed cost will remain fixed and the variable cost per unit will not change.
The best basis upon which cost standards should be set to measure controllable production inefficiencies is:
a. Recent average historical performance.
b. Engineering standards based on attainable performance.
c. Normal capacity.
d. Practical capacity.
Choice “b” is correct. The best basis for setting standards is engineering standards based on attainable performance. Tight standards are good, but if unattainable, employees will not be motivated.
The master budget process usually begins with the:
a. Production budget.
b. Sales budget.
c. Operating budget.
d. Financial budget.
Choice “b” is correct. The master budget process usually begins with the sales budget.
The production budget process usually begins with the:
a. Direct materials budget.
b. Ending inventory budget.
c. Direct labor budget.
d. Sales budget.
Choice “d” is correct. The production budget process usually begins with sales budget and then adds in the effect of any changes in inventory levels.
Flexible budgets:
a. Provide for external factors affecting company profitability.
b. Are used to evaluate capacity utilization.
c. Accommodate changes in activity levels.
d. Are budgets that project costs based on anticipated future improvements.
Choice “c” is correct. Flexible budgets accommodate changes in activity levels. They contain both fixed and variable components. The actual activity level is used to create a budget for that level.
The use of standard costs in the budgeting process signifies that an organization has most likely implemented a:
a. Zero-based budget.
b. Flexible budget.
c. Strategic budget.
d. Static budget.
Choice “b” is correct. Standard costs usually means that a flexible budget is being used. Standard costs per unit can be used to adjust the flexible budget to the actual volume.
Which of the following standard costing variances would be least controllable by a production supervisor?
a. Labor efficiency.
b. Overhead volume.
c. Material usage.
d. Overhead efficiency.
Choice “b” is correct. The overhead volume variance is a function of the budgeted amount of overhead based on standard hours allowed compared with overhead applied, at a predetermined rate, to work-in-process. The production supervisor has little control over established standard and budgeted amounts.
The process of creating a formal plan and translating goals into a quantitative format is:
a. Job order costing.
b. Budgeting.
c. Variance analysis.
d. Activity-based costing.
Choice “b” is correct. Budgeting is the process of creating a formal plan and translating goals into a quantitative format.
A plan that is created using budgeted revenue and costs but is based on the actual units of output is known as a:
a. Continuous budget.
b. Master budget.
c. Static budget.
d. Flexible budget.
Choice “d” is correct. A flexible budget uses budgeted revenue and costs per unit, but it is adjusted based on actual units of output.
Individual budget schedules are prepared to develop an annual comprehensive or master budget. The budget schedule that would provide the necessary input data for the Direct Labor Budget would be the:
a. Raw materials purchases budget.
b. Production budget.
c. Schedule of manufacturing overhead.
d. Sales forecast.
Choice “b” is correct. The production budget (which includes projected units to be produced) would provide the necessary input data for the direct labor budget.
The cash receipts budget includes:
a. Funded depreciation.
b. Extinguishment of debt.
c. Interest expense.
d. Loan proceeds.
Choice “d” is correct. The cash receipts budget includes loan proceeds.
The first step in the sales planning process is to:
a. Develop management guidelines specific to sales planning, including the sales planning process and planning responsibilities.
b. Assemble all the data that are relevant in developing a comprehensive sales plan.
c. Prepare a sales forecast consistent with specified forecasting guidelines, including assumptions.
d. Apply management evaluation and judgment to develop a comprehensive sales plan.
Choice “a” is correct. The first step in the sales planning process is to develop management guidelines specific to sales planning, including the sales planning process and planning responsibilities.
