Chapter 1 HW & Quiz Review

Question 1

In account analysis, an account is classified as either variable or fixed based on an analyst’s prior knowledge of how the cost in the account behaves. True or False?

Answer 1

True

Question 2

Contribution format income statements are prepared primarily for external reporting purposes. True or False?

Answer 2

False

Question 3

A direct cost is a cost that can be easily traced to the particular cost object under consideration. True or False?

Answer 3

True

Question 4

Variable costs per unit are not affected by changes in activity. True or False?

Answer 4

True.

Question 5

A contribution format income statement separates costs into fixed an variable categories, first deducting variable expenses from sales to obtain the contribution margin. True or False?

Answer 5

True.

Question 6

In a traditional format income statement, the gross margin is sales minus cost of goods sold. True or False?

Answer 6

True

Question 7

In a contribution format income statement for a merchandising company, the cost of goods sold reports the product costs attached to the merchandise sold during the period. True or False?

Answer 7

False

Question 8

Depreciation on equipment a company uses in its selling an administrative activities would be classified as a period cost. True or False?

Answer 8

True.

Question 9

The potential benefit that is given up when one alternative is selected over another is called a sunk cost. True or False?

Answer 9

False.

Question 10

As activity decreases within the relevant range, fixed costs remain constant on a per unit basis. True or False?

Answer 10

FAlse

Question 11

A merchandising company typically will have a high proportion of which type of cost in its cost structure?

A) Step-Variable
B) Variable
C) Mixed
D) Fixed

Answer 11

Variable

Question 12

Contribution margin is:

A) Sales less variable production expense.
B) Sales less cost of goods sold.
C) Sales less variable production, variable selling, and variable administrative expenses.
D) Sales less all variable and fixed expenses.

Answer 12

C) Sales less variable production, variable selling, and variable administrative expenses.

Question 13

Differential costs can:

A) Be either fixed or variable.
B) Only be fixed costs.
C) Only be variable costs.
D) Be sunk costs.

Answer 13

Be either fixed or variable.

Question 14

Factory overhead is typically a(n):

A) Variable cost.
B) Fixed cost.
C) Irrelevant cost.
D) Mixed cost.

Answer 14

Mixed cost.

Question 15

In the standard cost formula Y= a + bX, what does the “X” represent?

A) Total cost
B) Variable cost per unit.
C) The level of activity.
D) Total fixed cost.

Answer 15

The level of activity.

Question 16

Which costs will change with a decrease in activity within the relevant range?

A) Unit variable cost and unit fixed cost.
B) Unit fixed costs and total variable cost.
C) United fixed cost and total fixed cost.
D) Total fixed costs and total variable cost.

Answer 16

Unit fixed costs and total variable cost.

Question 17

For an automobile manufacturer, the cost of a driver’s side air bag purchased from a supplier and installed in every automobile would best be described as:

A) Fixed Cost
B) Variable Cost
C) Mixed Cost
D) Step-Variable Cost

Answer 17

Variable Cost

Question 18

In the standard cost formula Y= a + bX, what does the “Y” represent?

A) Total Cost
B) Variable Cost per Unit
C) Total Variable Cost
D) Total Fixed Cost

Answer 18

Total Cost

Question 19

Direct labor cost is classified as:

   Conversion Cost     Prime Cost A)                Yes                     Yes B)                 No                      No C)                 No                     Yes D)                Yes                      No

Answer 19

Yes; Yes

Question 20

Manufacturing overhead includes:

A) All direct material, direct labor, and administrative costs.
B) All manufacturing costs except direct labor and direct materials.
C) All manufacturing costs except direct labor.
D) All selling and administrative costs.

Answer 20

All manufacturing costs except direct labor and direct materials.

Question 20

The PC Works assembles custom computers from components supplied by various manufacturers. The company is very small and its assembly shop and retail sales store are housed in a single facility in a Redmond, Washington, industrial park. Listed below are some of the costs that the company incurs.

Required:
For each cost, indicate whether it would most likely be classified as direct materials, direct labor, manufacturing overhead, selling, or an administrative cost.

1) The costs of a hard drive installed in a computer:

Answer 20

Direct materials cost.

Question 21

The PC Works assembles custom computers from components supplied by various manufacturers. The company is very small and its assembly shop and retail sales store are housed in a single facility in a Redmond, Washington, industrial park. Listed below are some of the costs that the company incurs.

Required:
For each cost, indicate whether it would most likely be classified as direct materials, direct labor, manufacturing overhead, selling, or an administrative cost.

2) The cost of advertising in the Puget Sound Computer User newspaper.

Answer 21

Selling cost.

Question 22

The PC Works assembles custom computers from components supplied by various manufacturers. The company is very small and its assembly shop and retail sales store are housed in a single facility in a Redmond, Washington, industrial park. Listed below are some of the costs that the company incurs.

Required:
For each cost, indicate whether it would most likely be classified as direct materials, direct labor, manufacturing overhead, selling, or an administrative cost.

3) The wages of employees who assemble computers from components.

Answer 22

Direct labor cost.

Question 23

The PC Works assembles custom computers from components supplied by various manufacturers. The company is very small and its assembly shop and retail sales store are housed in a single facility in a Redmond, Washington, industrial park. Listed below are some of the costs that the company incurs.

Required:
For each cost, indicate whether it would most likely be classified as direct materials, direct labor, manufacturing overhead, selling, or an administrative cost.

4) Sales commissions paid to the company’s salespeople.

Answer 23

Selling cost

Question 24

The PC Works assembles custom computers from components supplied by various manufacturers. The company is very small and its assembly shop and retail sales store are housed in a single facility in a Redmond, Washington, industrial park. Listed below are some of the costs that the company incurs.

Required:
For each cost, indicate whether it would most likely be classified as direct materials, direct labor, manufacturing overhead, selling, or an administrative cost.

5) The salary of the assembly shop’s supervisor.

Answer 24

Manufacturing overhead cost.

Question 25

The PC Works assembles custom computers from components supplied by various manufacturers. The company is very small and its assembly shop and retail sales store are housed in a single facility in a Redmond, Washington, industrial park. Listed below are some of the costs that the company incurs.

Required:
For each cost, indicate whether it would most likely be classified as direct materials, direct labor, manufacturing overhead, selling, or an administrative cost.

6) The salary of the company’s accountant.

Answer 25

Administrative cost.

Question 26

The PC Works assembles custom computers from components supplied by various manufacturers. The company is very small and its assembly shop and retail sales store are housed in a single facility in a Redmond, Washington, industrial park. Listed below are some of the costs that the company incurs.

Required:
For each cost, indicate whether it would most likely be classified as direct materials, direct labor, manufacturing overhead, selling, or an administrative cost.

7) Depreciation on equipment used to test assembled computers before release to customers.

Answer 26

Manufacturing overhead cost.

Question 27

Classify each cost listed below as either a product cost or a period cost for the purpose of preparing financial statements for the bank.

1) Depreciation on a salespersons’ cars.
2) Rent on equipment used in the factory.
3) Lubricants used for machine maintenance.
4) Salaries of personnel who work in the finished goods warehouse.
5) Soap and paper towels used by factory workers at the end of a shift.
6) Factory supervisors’ salaries.
7) Heat, water, and power consumed in the factory.
8) Materials used for boxing products for shipment overseas. (Units are not normally boxed).
9) Advertising costs.
10) Workers’ compensation insurance for factory employees.
11) Depreciation on chairs and tables in the factory lunchroom.
12) The wages of the receptionist in the administrative offices.
13) Cost of leasing the corporate jet used by the company’s executives.
14) The cost of renting rooms at a Florida resort for the annual sales conference.
15) The cost of packaging the company’s product.

Answer 27

1) Period
2) Product
3) Product
4) Period
5) Product
6) Product
7) Product
8) Period
9) Period
10) Product
11) Product
12) Period
13) Period
14) Period
15) Product

Question 28

Espresso Express operates a number of espresso coffee stands in busy suburban malls. The fixed weekly expense of a coffee stand is $2,200 and the variable cost per cup of coffee served is $0.39.

1. Fill in the following table with your estimates of the company’s total cost and average cost per cup of coffee at the indicated levels of activity.

Answer 28

Cups of Coffee Served in a Week
2,200 2,300 2,400
Fixed Cost $2,200 $2,200 $2,200
Variable Cost 858 897 936
Total Cost $3,058 $3,097 $3,136
Avg. Cost Per Cup $1.390 $1.347 $1.037

Question 29

Espresso Express operates a number of espresso coffee stands in busy suburban malls. The fixed weekly expense of a coffee stand is $2,200 and the variable cost per cup of coffee served is $0.39.

2. Does the average cost per cup of coffee served increase, decrease, or remain the same as the number of cups of coffee served in a week increases?

Answer 29

Decrease

Question 30

Northeast Hospital’s Radiology Department is considering replacing an old inefficient X-ray machine with a state-of-the-art digital X-ray machine. The new machine would provide higher quality X-rays in less time and at a lower cost per X-ray. It would also require less power and would use a color laser printer to produce easily readable X-ray images. Instead of investing the funds in the new X-ray machine, the Laboratory Department is lobbying the hospital’s management to buy a new DNA analyzer.

Required:
Classify each item as a differential cost, a sunk cost, or an opportunity cost in the decision to replace the old X-ray machine with a new machine. If none of the categories apply for a particular item, select “None”.

1) Cost of the old X-ray machine.
2) The salary of the head of the Radiology Department
3) The salary of the head of the Laboratory Department
4) Cost of the new color laser printer.
5) Rent on the space occupied by Radiology
6) The cost of maintaining the old machine.
7) Benefits from a new DNA analyzer.
8) Cost of electricity to run the X-ray machines.

Answer 30

1) Sunk Cost
2) None
3) None
4) Differential Cost
5) None
6) Differential Cost
7) Opportunity Cost
8) Differential Cost