Managerial Exam 2

Question 1

T/F Selling and administrative expenses are treated as period costs under both variable costing and absorption costing

Answer 1

True

Question 2

T/F Common costs should be allocated to segments on the basis of sales dollars

Answer 2

False

Question 3

What happens if a segment has a negative segment margin?

Answer 3

the segment is not covering its own traceable costs, but it still may be of benefit to the company

Question 4

What happens to FMOH costs when production > Sales?

Answer 4

are deferred in inventory under absorption costing

Question 5

T/F The terms “traceable costs” and “variable cost” mean the same thing

Answer 5

False

Question 6

T/F Variable costing net operating income will always be higher than absorption costing net operating income

Answer 6

False

Question 7

T/F Absorption costing data are generally better suited for cost-volume-profit analysis than variable costing data

Answer 7

False

Question 8

T/F When production and sales are equal, the same net operating income will be reported regardless of whether variable costing or absorption costing is used

Answer 8

True

Question 9

T/F Fixed manufacturing overhead costs are treated the same way under both the variable costing and absorption costing methods

Answer 9

False

Question 10

T/F When production exceeds sales, the net operating income reported under absorption costing will generally be greater than the net operating income reported under variable costing

Answer 10

True

Question 11

T/F Under absorption costing, it is possible to defer some of the fixed manufacturing overhead costs of the current period to future periods

Answer 11

True

Question 12

What costs are treated as period costs under variable costing ?

Answer 12

Fixed manufacturing overhead and both variable and fixed selling and administrative expenses

Question 13

Armco, Inc., produces and sells five products. Which of the following costs would typically be a traceable fixed cost of a product?
-depreciation of facilities jointly used to produce several products
-the salary of the company’s president
-advertising costs of the product
-all the answers are correct

Answer 13

advertising costs of the product

Question 14

T/F Under absorption costing, product costs consist of direct material, direct labor, and both variable and fixed manufacturing overhead

Answer 14

True

Question 15

Last year, Peck Company produced 10,000 units and sold 9,000 units. Fixed manufacturing overhead costs were $20,000, and variable manufacturing overhead costs were $3 per unit. For the year, one would expect net operating income under absorption costing to be

Answer 15

$2,000 more than net operating income under variable costing (FMOH $2 per unit, 1,000 units get deferred to inventory. 2*1,000= $2,000)

Question 16

When sales are constant but production fluctuates

Answer 16

net operating income will be erratic under absorption costing

Question 17

T/F As an organization is broken down into smaller segments, costs that were traceable to the larger segments may become common to the smaller segments

Answer 17

True

Question 18

T/F Changes in the level of production do not affect net operating income under the variable costing method

Answer 18

True

Question 19

T/F In activity-based costing, some manufacturing costs may not be assigned to products

Answer 19

True

Question 20

T/F Direct labor-hours should never be used as an allocation base in activity-based costing.

Answer 20

False

Question 21

A software company orders 100,000 copies of a DVD from a supplier. This DVD contains a computer game designed and publish by the software company and will be sold to customers in a special box. Ordering the DVDs would be considered what kind of activity?

Answer 21

batch-level activity

Question 22

T/F In activity-based costing, the first-stage allocation of costs to activity costs pools is often based on the results of interviews with employees.

Answer 22

True

Question 23

Advertising a product would be considered what kind of activity

Answer 23

product-level activity

Question 24

T/F In designing and activity-based costing system, managers should keep in mind that the system must confirm to GAAP

Answer 24

False

Question 25

T/F If direct labor is used as the base for overhead cost assignment and direct labor is not highly correlated with the overhead costs, the result will be distorted product costs

Answer 25

True

Question 26

A company that provides photocopying services has an activity-based costing system with three activity cost pools--making photocopies, serving customers, and setting up machines. The activity rates are $.02 per photocopy, $2.15 per customer, and $0.75 per machine-setup. If a customer requires set-ups on two different machines and makes 200 copies in total, how much cost would be assigned by the activity-based costing system for this transaction?

Answer 26

$7.65

Question 27

T/F In activity-based costing, the overhead costs of the entire company are distributed to products and other cost objects on the basis of a single well-chosen measure of activity.

Answer 27

False

Question 28

Providing legal advice to the president concerning a possible merger with another company would be considered what kind of activity?

Answer 28

organization-sustaining activity

Question 29

Writing software for a new computer game at a software company that produces and sells computer games would be considered what kind of activity?

Answer 29

product-level activity

Question 30

T/F In activity-based costing, nonmanufacturing costs are not assigned to products

Answer 30

False

Question 31

T/F Costs that are relevant in one decision are not necessarily relevant in another decision

Answer 31

True

Question 32

Products A and B are joint products. Product A can be sold for $1,200 at the split-off point, or processed further at a cost of $600 and then sold for $1,700. Product B can be sold for $3,000 at the split-off point, or processed further at a cost of $800 and then sold for $4,000. What product should the company process further?

Answer 32

Neither of the products Product A incremental revenue = $500 (1,700-1,200) Product A incremental costs = $600 Incremental cost > incremental revenue; don't process further Product B incremental revenue = $1,000 Product B incremental costs = $800 Incremental revenue> incremental costs; Process further

Question 33

T/F A joint product should continue to be processed after the split-off point so long as the incremental revenue from such processing exceeds the incremental processing costs.

Answer 33

True

Question 34

T/F If a company is able to avoid more in fixed costs than it loses in contribution margin by dropping a product, the it will be better off financially if the product is eliminated.

Answer 34

True

Question 35

If there is a constrained resource, the product that has the highest contribution margin per unit should be emphasized.

Answer 35

False

Question 36

One of Simplex Company's products has a contribution margin of $50,000 and fixed costs totaling $60,000. If the product is dropped, $40,000 of the fixed cost will continue unchanged. As a result of dropping the product, the company's net operating income should:

Answer 36

decrease by $30,000. Contribution margin lost = $(50,000) less avoidable fixed cost = $ 20,000 decrease in operating income $(30,000)

Question 37

Product A has a contribution margin of $8 per unit, a contribution margin ratio of 50% and requires 4 machine hours to produce. Product B has a contribution margin of $12 per unit, a contribution margin ratio of 40%, and requires 5 machine hours to product. If the constraint is machine hours, then the company should emphasize:

Answer 37

Product B Product A = $8/ 4 machine hours = $2 CM per unit/machine hour Product B = $12/ 5 machine hours = $2.40 CM per unit/machine hour

Question 38

T/F In a decision, variable costs are relevant costs and fixed costs are irrelevant.

Answer 38

False

Question 39

All costs are relevant in a decision except costs that do not differ between alternatives.

Answer 39

True

Question 40

Allocation of common fixed costs to product lines and to other segments of a company helps the manager determine if the product line or segment is profitable.

Answer 40

False

Question 41

T/F Sunk cost may be relevant in a decision.

Answer 41

False

Question 42

T/F Future costs are always relevant in a decision.

Answer 42

False

Question 43

Joint product costs are irrelevant in decisions regarding what to do with joint products after the split-off point.

Answer 43

True

Question 44

T/F Opportunity cost may be a key factor in a make or buy decision.

Answer 44

True

Question 45

Refer to the data for Rumberger, Inc. two questions above. Suppose advertising for Product Y is increased by $20,000 per month, which results in increased sales of $90,000 per month. This should have the following effect on Product Y's monthly segment margin: Sales: 300,000 VE: 100,000 CM: 200,000 Traceable FE: 150,000 SM: 50,000

Answer 45

Using the contribution margin ratio method, the $90,000 increase in sales should lead to a $60,000 (=.6666 x $90,000) increase in the contribution margin. This would be offset by the $20,000 increase in advertising expenses, a traceable fixed expenses, to yield a net $40,000 increase in segment margin. CM ratio = $200,000 / $300,000 = .6666

Question 46

What would be the effect of the increase in adverting by 20,000 and sales by 90,000 of Product Y on the company's overall net operating income? Sales: 300,000 VE: 100,000 CM: 200,000 Traceable FE: 150,000 SM: 50,000

Answer 46

Increase by 40,000 Because their is no mention of any changes in common fixed expenses, the change in the company's overall net operating income should be the same as the change in Product Y's segment margin.

Question 47

What is the unit product cost under absorption costing? Variable cost per unit: Direct materials $3 Direct labor $4 Variable manufacturing overhead $1 Variable selling and admin. expense $2 Fixed cost per month: Fixed manufacturing overhead $100,000 Fixed selling and admin. expense$60,000

Answer 47

$13

Question 48

What is the unit product cost under absorption costing? Variable cost per unit: Direct materials $3 Direct labor $4 Variable manufacturing overhead $1 Variable selling and admin. expense $2 Fixed cost per month: Fixed manufacturing overhead $100,000 Fixed selling and admin. expense$60,000

Answer 48

$8

Question 49

If a company produces less than it sells What happens to FMOH under Absorbtion costing

Answer 49

fixed manufacturing overhead costs will be released from inventory, increasing COGS.

Question 50

A company that provides photocopying services has an activity-based costing system with three activity cost pools--making photocopies, serving customers, and setting up machines. The activity rates are $.02 per photocopy, $2.15 per customer, and $0.75 per machine-setup. If a customer requires set-ups on two different machines and makes 200 copies in total, how much cost would be assigned by the activity-based costing system for this transaction?

Answer 50

The costs would be assigned as follow: Making Photocopies( 200 copies @ $.02) = $4.00 Setting Up machines(2 set-ups @ $.0.75)= $1.50 Serving Customers(1 customer @ $2.15) = $2.15 Total cost = $7.65

Question 51

Providing legal advice to the president concerning a possible merger with another company would be considered what kind of activity?

Answer 51

organization-sustaining activity

Question 52

T/F If variable costing NOI is greater than Absorbtion costing NOI Sales > Production

Answer 52

True