Chapter 2 Managerial Accounting and Cost Concepts

Question 1

The nursing station on the fourth floor of Central Hospital is responsible for the care of orthopedic surgery patients. The costs of prescription drugs administered by the nursing station to patients should be classified as:

direct patient costs.
indirect patient costs.
overhead costs of the nursing station.
period costs of the hospital.

Answer 1

direct patient costs.

Question 2

All of the following costs would be found in a company’s accounting records except:

sunk cost.
opportunity cost.
indirect costs.
direct costs.

Answer 2

opportunity cost.

Question 3

The costs of the Accounting Department at Central Hospital would be considered by the Surgery Department to be:
direct costs.
indirect costs.
incremental costs.
opportunity costs.

Answer 3

indirect costs.

Question 4

In a manufacturing company, direct labor costs combined with direct materials costs are known as:
period costs.
conversion costs.
prime costs.
opportunity costs.

Answer 4

prime costs.

Question 5

Which of the following would most likely be included as part of manufacturing overhead in the production of a wooden table?

The amount paid to the individual who stains the table.
The commission paid to the salesperson who sold the table.
The cost of glue used in the table.
The cost of the wood used in the table.

Answer 5

The cost of glue used in the table.

Question 6

Indirect labor is a(n):
Prime cost.
Conversion cost.
Period cost.
Opportunity cost.

Answer 6

Conversion cost.

Question 7

For planning, control, and decision-making purposes:

fixed costs should be converted to a per unit basis.
discretionary fixed costs should be eliminated.
variable costs should be ignored.
mixed costs should be separated into their variable and fixed components.

Answer 7

mixed costs should be separated into their variable and fixed components.

Question 8

Contribution margin means:
what remains from total sales after deducting fixed expenses.
what remains from total sales after deducting cost of goods sold.
the sum of cost of goods sold and variable expenses.
what remains from total sales after deducting all variable expenses.

Answer 8

what remains from total sales after deducting all variable expenses.

Question 9

Conversion cost = ? + ?

Answer 9

Direct labor + Manufacturing overhead

Question 10

Management of Lewallen Corporation has asked your help as an intern in preparing some key reports for September. Direct materials cost was $57,000, direct labor cost was $43,000, and manufacturing overhead was $71,000. Selling expense was $15,000 and administrative expense was $32,000.

The conversion cost for September was:
$114,000
$131,000
$171,000
$103,000

Answer 10

$114,000

Question 11

Prime cost = ? + ?

Answer 11

Prime cost = Direct materials + Direct labor

Question 12

At a sales volume of 37,000 units, Maks Corporation’s property taxes (a cost that is fixed with respect to sales volume) total $802,900.

To the nearest whole cent, what should be the average property tax per unit at a sales volume of 40,300 units? (Assume that this sales volume is within the relevant range.)
$21.70
$20.22
$19.92
$20.81

Answer 12

Average property tax per unit = Total property tax ÷ Unit sales = $802,900 ÷ 40,300 units = $19.92 per unit

Question 13

Emerton Corporation leases its corporate headquarters building. This lease cost is fixed with respect to the company’s sales volume. In a recent month in which the sales volume was 32,000 units, the lease cost was $716,800.

To the nearest whole cent, what should be the average lease cost per unit at a sales volume of 34,400 units in a month? (Assume that this sales volume is within the relevant range.)
$23.20
$21.62
$20.84
$22.40

Answer 13

Average lease cost per unit = Total lease cost ÷ Unit sales

= $716,800 ÷ 34,400 units = $20.84 per unit

Question 14

Erkkila Inc. reports that at an activity level of 6,400 machine-hours in a month, its total variable inspection cost is $423,680 and its total fixed inspection cost is $154,368.

What would be the average fixed inspection cost per unit at an activity level of 6,700 machine-hours in a month? Assume that this level of activity is within the relevant range.
$23.04
$90.32
$24.12
$45.83

Answer 14

Average fixed inspection cost = Total fixed inspection cost ÷ Total activity
= $154,368 ÷ 6,700 machine-hours
= $23.04 per machine-hour

Question 15

Tolden Marketing, Inc., a merchandising company, reported sales of $2,861,800 and cost of goods sold of $1,492,400 for December. The company’s total variable selling expense was $77,900; its total fixed selling expense was $70,600; its total variable administrative expense was $98,400; and its total fixed administrative expense was $193,400. The cost of goods sold in this company is a variable cost.

The gross margin for December is:
$1,193,100
$929,100
$1,369,400
$2,597,800

Answer 15

Gross Margin = Sales - COGS = 2,861,800 - 1,492,400 = $1,369,400

Question 16

Dechico Corporation purchased a machine 3 years ago for $456,000 when it launched product G92L. Unfortunately, this machine has broken down and cannot be repaired. The machine could be replaced by a new model 330 machine costing $474,000 or by a new model 260 machine costing $418,000. Management has decided to buy the model 260 machine. It has less capacity than the model 330 machine, but its capacity is sufficient to continue making product G92L. Management also considered, but rejected, the alternative of dropping product G92L and not replacing the old machine. If that were done, the $418,000 invested in the new machine could instead have been invested in a project that would have returned a total of $496,000.

In making the decision to buy the model 260 machine rather than the model 330 machine, the differential cost was:
$18,000
$56,000
$38,000
$40,000

Answer 16

Differential cost = $474,000 − $418,000 = $56,000

Question 17

Dechico Corporation purchased a machine 3 years ago for $456,000 when it launched product G92L. Unfortunately, this machine has broken down and cannot be repaired. The machine could be replaced by a new model 330 machine costing $474,000 or by a new model 260 machine costing $418,000. Management has decided to buy the model 260 machine. It has less capacity than the model 330 machine, but its capacity is sufficient to continue making product G92L. Management also considered, but rejected, the alternative of dropping product G92L and not replacing the old machine. If that were done, the $418,000 invested in the new machine could instead have been invested in a project that would have returned a total of $496,000.

In making the decision to buy the model 260 machine rather than the model 330 machine, the sunk cost was:
$418,000
$456,000
$474,000
$496,000

Answer 17

Sunk cost = Cost of old machine = $456,000

Question 18

Dechico Corporation purchased a machine 3 years ago for $456,000 when it launched product G92L. Unfortunately, this machine has broken down and cannot be repaired. The machine could be replaced by a new model 330 machine costing $474,000 or by a new model 260 machine costing $418,000. Management has decided to buy the model 260 machine. It has less capacity than the model 330 machine, but its capacity is sufficient to continue making product G92L. Management also considered, but rejected, the alternative of dropping product G92L and not replacing the old machine. If that were done, the $418,000 invested in the new machine could instead have been invested in a project that would have returned a total of $496,000.

In making the decision to invest in the model 260 machine, the opportunity cost was:
$418,000
$456,000
$474,000
$496,000

Answer 18

Opportunity cost = Return from alternative investment = $496,000