B2 Optional Questions

Question 1

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.

Answer 1

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.

Question 2

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.

Answer 2

Choice “d” is correct. Regression analysis is a statistical model that can estimate the dependent cost variable based on changes in the independent variable.

Question 3

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.

Answer 3

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.

Question 4

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.

Answer 4

Choice “c” is correct. The contribution margin is the difference between the sales price and total variable costs.

Question 5

Contribution margin is the excess of revenues over:

a. Cost of goods sold.
b. Direct cost.
c. All variable costs.
d. Manufacturing cost.

Answer 5

Choice “c” is correct. Contribution margin is the excess of revenues over all variable costs.

Question 6

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.

Answer 6

Choice “b” is correct. Depreciation is not likely to contain a variable cost component in a decision analysis situation.

Question 7

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.

Answer 7

Choice “c” is correct. Sunk costs refer to past costs that have been incurred and are not relevant to any future decisions.

Question 8

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.

Answer 8

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.

Question 9

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.

Answer 9

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.

Question 10

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.

Answer 10

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.

Question 11

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.

Answer 11

Choice “c” is correct. Target pricing is least associated with (full) cost-based pricing.

Question 12

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.

Answer 12

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.

Question 13

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.

Answer 13

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.

Question 14

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.

Answer 14

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.

Question 15

The master budget process usually begins with the:

a. Production budget.
b. Sales budget.
c. Operating budget.
d. Financial budget.

Answer 15

Choice “b” is correct. The master budget process usually begins with the sales budget.

Question 16

The production budget process usually begins with the:

a. Direct materials budget.
b. Ending inventory budget.
c. Direct labor budget.
d. Sales budget.

Answer 16

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.

Question 17

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.

Answer 17

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.

Question 18

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.

Answer 18

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.

Question 19

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.

Answer 19

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.

Question 20

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.

Answer 20

Choice “b” is correct. Budgeting is the process of creating a formal plan and translating goals into a quantitative format.

Question 21

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.

Answer 21

Choice “d” is correct. A flexible budget uses budgeted revenue and costs per unit, but it is adjusted based on actual units of output.

Question 22

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.

Answer 22

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.

Question 23

The cash receipts budget includes:

a. Funded depreciation.
b. Extinguishment of debt.
c. Interest expense.
d. Loan proceeds.

Answer 23

Choice “d” is correct. The cash receipts budget includes loan proceeds.

Question 24

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.

Answer 24

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.

Question 25

A budget that accommodates many levels of production volume is a:

a. Sales budget.
b. Flexible budget.
c. Zero based budget.
d. Cash budget.

Answer 25

Choice “b” is correct. A flexible budget has fixed and variable components and can accommodate many levels of production.

Question 26

When preparing a performance report for a cost center using flexible budgeting techniques, the “planned cost” column should be based on the:

a. Budgeted amount in the original budget prepared before the beginning of the year.
b. Budget adjusted to the planned level of activity for the period being reported.
c. Budget adjusted to the actual level of activity for the period being reported.
d. Costs incorporated in the master budget.

Answer 26

Choice “c” is correct. Planned cost using a flexible budget is adjusted to the actual level of activity.

Question 27

Comparing actual results with a budget based on achieving volume is possible with the use of a:

a. Master budget.
b. Rolling budget.
c. Step budget.
d. Flexible budget.

Answer 27

Choice “d” is correct. A flexible budget allows comparison of actual results with a budget based on achieved volume. The flexible nature of this type of budget allows adjustment to the actual volume.

Question 28

Which is the true statement regarding flexible budgets?

a. They are budgets used to evaluate capacity utilization.
b. They are designed to accommodate changes in the activity level.
c. They are designed to accommodate changes in the inflation rate.
d. They are similar to static budgets but are adjusted for inflation.

Answer 28

Choice “b” is correct. A flexible budget is one where the budgeted amounts are adjusted for the actual level of activity.

Question 29

Under a standard cost system, the material price variances are usually the responsibility of the:

a. Industrial engineering manager.
b. Cost accounting manager.
c. Production manager.
d. Purchasing manager.

Answer 29

Choice “d” is correct. The purchasing manager would usually be responsible for a material price variance.

Question 30

Under a standard cost system, labor price variances are usually not attributable to:

a. Union contracts approved before the budgeting cycle.
b. The payment of hourly rates instead of prescribed piecework rates.
c. Labor rate predictions.
d. The use of a single average standard rate.

Answer 30

Choice “a” is correct. Labor price variances would not be attributable to union contracts approved before the budgeting cycle. If the contracts are approved before, they would be used as the basis for the budget.

Question 31

Price variances and efficiency variances can be key to the performance measurement within a company. In evaluating the performance within a company, a material efficiency variance can be caused by all of the following, except the:

a. Skill level of the labor force.
b. Sales volume of the product.
c. Actions of the Purchasing Department.
d. Design of the product.

Answer 31

Choice “b” is correct. Material efficiency variance cannot be caused by sales volume of the product.

Material efficiency variance can be caused by:

c. Actions of the purchasing department
d. Design of the product
a. Skill level of the labor force

Question 32

The production volume variance is due to:

a. A significant shift in the mix and yield of direct labor relative to the static budget.
b. Difference from the planned level of the base used for overhead allocation and the actual level achieved.
c. Inefficient or efficient use of direct labor hours.
d. Efficient or inefficient use of variable overhead.

Answer 32

Choice “b” is correct. The production volume variance is due to difference from:

Planned level of the base used for overhead allocation 1,000
Actual level achieved 800
Production volume variance (difference) 200

Question 33

Variable overhead is applied on the basis of standard direct labor hours. If for a given period, the direct labor efficiency variance is unfavorable, the variable overhead efficiency variance will be:

a. Favorable.
b. Unfavorable.
c. Indeterminable since it is not related to the labor efficiency variance.
d. The same amount as the labor efficiency variance.

Answer 33

Choice “b” is correct. If variable overhead is applied on the basis of standard direct labor hours, and direct labor efficiency variance is unfavorable, the variable overhead efficiency will (also) be unfavorable.

Question 34

The difference between the actual amounts and the flexible budget amounts for the actual output achieved is the:

a. Flexible budget variance.
b. Production volume variance.
c. Standard cost variance.
d. Sales volume variance.

Answer 34

Choice “a” is correct. Flexible budget variance is the difference between the actual amounts and the flexible budget amounts for the actual output achieved.

Question 35

The variance in an absorption costing system that measures the departure from the denominator level of activity that was used to set the fixed overhead rate is the:

a. Production volume variance.
b. Efficiency variance.
c. Flexible budget variance.
d. Sales volume variance.

Answer 35

Choice “a” is correct. Production volume variance is the variance in an absorption costing system that measures the departure from the denominator level of activity that was used to set the fixed overhead rate.

Question 36

Which one of the following variances is most controllable by the production control supervisor?

a. Fixed overhead volume variance.
b. Material usage variance.
c. Fixed overhead budget variance.
d. Variable overhead spending variance.

Answer 36

Choice “b” is correct. Material usage variance is most controllable by the production control supervisor.

Question 37

In a standard cost system, the investigation of an unfavorable material use variance should begin with the:

a. Production manager only.
b. Engineering manager and/or the purchasing manager.
c. Production manager and/or the purchasing manager.
d. Purchasing manager only.

Answer 37

Choice “c” is correct. In a standard cost system, the investigation of an unfavorable material use variance should begin with the production manager and/or the purchasing manager.

Question 38

David Rogers, purchasing manager at Fairway Manufacturing Corporation, was able to acquire a large quantity of raw material from a new supplier at a discounted price. Marion Conner, inventory supervisor, is concerned because the warehouse has become crowded and some things had to be rearranged. Brian Jones, vice president of production, is concerned about the quality of the discounted material. However, the Engineering Department had tested the new raw material and indicated that it is of acceptable quality. At the end of the month, Fairway experienced a favorable material usage variance, a favorable labor usage variance, and a favorable material price variance. The usage variances were solely the result of a higher yield from the new raw material. The favorable material price variance would be considered the responsibility of the:

a. Inventory supervisor.
b. Engineering manager.
c. Vice president of production.
d. Purchasing manager.

Answer 38

Choice “d” is correct. The purchasing manager would be responsible for a price variance.

Question 39

The most direct way to prepare a cash budget for a manufacturing firm is to include:

a. Projected purchases, percentages of purchases paid, and net income.
b. Projected sales and purchases, percentages of collections, and terms of payments.
c. Projected net income, depreciation, and goodwill amortization.
d. Projected sales, credit terms, and net income.

Answer 39

Choice “b” is correct. The simplest (most direct) cash budget would include the components of cash collections (sales and percentage of collection) and cash disbursements (purchases and terms of payment).

Question 40

The process of developing plans for a company’s expected operations and controlling the operations to help carry out those plans is known as:

a. Participative budgeting.
b. Budgetary control.
c. Preparing a master budget.
d. Preparing a period budget.

Answer 40

Choice “b” is correct. Budgetary control is the process of developing plans for a company’s expected operations and controlling the operations to help carry out those plans.