Question 1

The calculation of contribution margin ratio for service companies is significantly different from that of manufacturing companies.

Accepted Answer

A) True 
 B)False

Question 2

By separating costs by behavior, fixed and variable, a service company can calculate the contribution margin ratio by dividing the contribution margin by revenues.

Accepted Answer

A) True 
 B)False

Question 3

Periphery, Inc. has two products-picture frames and candle holders. Financial data for both the products follow: $\begin{array}{|l|r|r}
\hline &\text { Picture } & \text { Candle } \
&\text { Frames } & \text { Holders }\
\hline\text { Units sold } & 2100 \text { units } & 700 \text { units } \
\hline \text { Sales price per unit } & \$ 700 & \$ 1200 \
\hline \text { Variable manufacturing cost per unit } & 300 & 650 \
\hline \text { Sales commission ( } \% \text { of sales) } & 5 \% & 3 \%\
\hline
\end{array}$ Periphery has two sales representatives-Andrew Novak and Liu Wei. Each sales representative sold a total of 1400 units during the month of March. Andrew had a sales mix of 70% picture frames and 30% candle holders. Liu had a sales mix of 80% picture frames and 20% candle holders. What is the contribution margin ratio for picture frames and candle holders, respectively?

Accepted Answer

A)  57%; 46% 
B)  52%; 43% 
C)  5%; 3% 
D)  43%; 54% 
A)  57%; 46% 
B)  52%; 43% 
C)  5%; 3% 
D)  43%; 54%

Question 4

In its first year of business, Talula, Inc. produced and sold 600 units. If Talula uses variable costing, ________.

Accepted Answer

A)  its operating income for the period will be higher than under absorption costing 
B)  its operating income for the period will be lower than under absorption costing 
C)  its value of ending Finished Goods Inventory reported in the balance sheet will be higher than under absorption costing 
D)  its operating income will be the same as under absorption costing 
A)  its operating income for the period will be higher than under absorption costing 
B)  its operating income for the period will be lower than under absorption costing 
C)  its value of ending Finished Goods Inventory reported in the balance sheet will be higher than under absorption costing 
D)  its operating income will be the same as under absorption costing

Question 5

Variable costing can also be used in service companies, especially in making short-term decisions.

Accepted Answer

A) True 
 B)False

Question 6

Absorption costing considers fixed selling and administrative costs as product costs.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following is considered a period cost in absorption costing?

Accepted Answer

A)  variable manufacturing overhead costs 
B)  fixed selling and administrative costs 
C)  fixed manufacturing overhead costs 
D)  semi-variable manufacturing overhead costs 
A)  variable manufacturing overhead costs 
B)  fixed selling and administrative costs 
C)  fixed manufacturing overhead costs 
D)  semi-variable manufacturing overhead costs

Question 8

Framework Company provides architectural services. The company provides the following financial data:
 $$\begin{array} { l l } 
\text { Service Revenue } & \$ 30,000 \
\text { Salaries and Othe Variable Costs } & 20,350 \
\text { Rent Expense } & 4,500 \
\text { Depreciation Expense } & 500
\end{array}$$ Requirements:
a) Calculate the contribution margin, contribution margin ratio, and operating income.
b) Framework provided service to 150 customers during the month. Determine the average amount the company charged each customer.

Accepted Answer

(a)
 Service Revenue@#LAT-DLM&@#LAT-DLM&@#LAT-DLM&@#LAT-DLM&@#LAT-DLM&
 Variable Costs:
 \

Question 9

When more units are sold than produced, operating income is higher under absorption costing than variable costing.

Accepted Answer

A) True 
 B)False

Question 10

The traditional income statement format calculates operating income as gross profit minus selling and administrative expenses.

Accepted Answer

A) True 
 B)False

Question 11

Which is the following is the most appropriate reason that sales mix decisions should be made using variable costing?

Accepted Answer

A)  All costs, including fixed costs, are controllable by upper management in the long run. 
B)  To increase profits, businesses should emphasize the products with the highest contribution margin per unit. 
C)  Sales mix decisions primarily focus on fixed costs. 
D)  Fixed costs do not affect the operating income in the long run. 
A)  All costs, including fixed costs, are controllable by upper management in the long run. 
B)  To increase profits, businesses should emphasize the products with the highest contribution margin per unit. 
C)  Sales mix decisions primarily focus on fixed costs. 
D)  Fixed costs do not affect the operating income in the long run.

Question 12

Llywelyn, Inc. reports the following information for July: $$\begin{array} { | l | r | } 
\hline \text { Sales Revenue } & \$ 960,000 \
\hline \text { Variable Costs } & 110,000 \
\hline \text { Operating Income } & 360,000 \
\hline
\end{array}$$ What is the total fixed cost using variable costing?

Accepted Answer

A)  $850,000 
B)  $490,000 
C)  $250,000 
D)  $470,000 
A)  $850,000 
B)  $490,000 
C)  $250,000 
D)  $470,000

Question 13

Barrett, Inc. reports the following information for the year ended December 31: $\begin{array}{|l|r|l|}
\hline \text { Beginning Finished Goods Inventory } & 60 & \text { units } \
\hline \text { Units produced } & 400 & \text { units } \
\hline \text { Units sold } & 460 & \text { units } \
\hline \text { Sales price } & \$ 160 & \text { per unit } \
\hline \text { Direct materials } & \$ 30 & \text { per unit } \
\hline \text { Direct labor } & \$ 12 & \text { per unit } \
\hline \text { Variable manufacturing overhead } & \$ 15 & \text { per unit } \
\hline \text { Fixed manufacturing overhead } & \$ 15,900 & \text { per year } \
\hline \text { Variable selling and administrative costs } & \$ 10 & \text { per unit } \
\hline \text { Fixed selling and administrative costs } & \$ 12,500 & \text { per year }\
\hline
\end{array}$
 The beginning Finished Goods Inventory costs were $3300 under absorption costing and $3420 under variable costing.
What is the operating income using variable costing?

Accepted Answer

A)  $42,780 
B)  $45,200 
C)  $14,380 
D)  $4780 
A)  $42,780 
B)  $45,200 
C)  $14,380 
D)  $4780

Question 14

For which of the following decisions is absorption costing most appropriate?

Accepted Answer

A)  decisions related to using the sales mix to maximize profitability 
B)  decisions related to controlling short-term costs 
C)  decisions related to setting sales prices in the long run 
D)  decisions related to increasing contribution margin 
A)  decisions related to using the sales mix to maximize profitability 
B)  decisions related to controlling short-term costs 
C)  decisions related to setting sales prices in the long run 
D)  decisions related to increasing contribution margin

Question 15

Variable costing is used for external reporting purposes, and absorption costing is used for internal decision-making purposes.

Accepted Answer

A) True 
 B)False

Question 16

Variable costing is more appropriate than absorption costing when the decision ________.

Accepted Answer

A)  relates to production planning within the capacity limits in the short run 
B)  involves reducing fixed costs that are controllable by the upper management 
C)  does not involve analysis of profitability based on sales mix 
D)  does not involve analysis of contribution margin 
A)  relates to production planning within the capacity limits in the short run 
B)  involves reducing fixed costs that are controllable by the upper management 
C)  does not involve analysis of profitability based on sales mix 
D)  does not involve analysis of contribution margin

Question 17

Spruce-Up Company provides cleaning services to commercial and residential customers. The commercial business segment provided services to 250 customers and the residential business segment provided services to 625 customers. $$\begin{array} { | l | r | r | r | } 
\hline & \text { Commercial } & \text { Residential } & { \text { Total } } \
\hline \text { Service Revenue } & \$ 86,000 & \$ 115,000 & \$ 201,000 \
\hline \text { Variable Costs } & 31,000 & 56,000 & 87,000 \
\hline \text { Fixed Costs } & \underline { 46,000 } & \underline { 53,000 } & \underline { 99,000 } \
\hline \text { Operating Income } & \$ 9000 & \$ 6000 & \$ 15,000 \
\hline
\end{array}$$ Identify the segment with the lower contribution margin ratio and show the amount of its contribution margin ratio. (Round your answer to two decimals.)

Accepted Answer

A)  Residential, 51.30% 
B)  Commercial, 40.00% 
C)  Residential, 48.70% 
D)  Commercial, 10.47% 
A)  Residential, 51.30% 
B)  Commercial, 40.00% 
C)  Residential, 48.70% 
D)  Commercial, 10.47%

Question 18

The traditional income statement format is prepared under absorption costing.

Accepted Answer

A) True 
 B)False

Question 19

Tidy Turf, Inc. provides housekeeping services. The following financial data have been provided. $$\begin{array} { | l | r | } 
\hline \text { Service Revenue } & \$ 60,000 \
\hline \text { Cleaning Supplies Used } & 21,000 \
\hline \text { Wages Expense } & 20,350 \
\hline \text { Office Rent Expense } & 5350 \
\hline \text { Depreciation Expense- } & \
\text { Machinery } & 550 \
\hline
\end{array}$$ Calculate the contribution margin and the contribution margin ratio. (Round your contribution margin to the nearest dollar, and your contribution margin ratio to two decimal places.)

Accepted Answer

A)  $54,650; 91.08% 
B)  $39,650; 66.08% 
C)  $12,750; 21.25% 
D)  $18,650; 31.08% 
A)  $54,650; 91.08% 
B)  $39,650; 66.08% 
C)  $12,750; 21.25% 
D)  $18,650; 31.08%

Question 20

Some costs are not controllable in the long run. However, in the short run, all costs are controllable.

Accepted Answer

A) True 
 B)False

Exam 21: Variable Costing

The calculation of contribution margin ratio for service companies is significantly different from that of manufacturing companies.

By separating costs by behavior, fixed and variable, a service company can calculate the contribution margin ratio by dividing the contribution margin by revenues.

In its first year of business, Talula, Inc. produced and sold 600 units. If Talula uses variable costing, ________.

Variable costing can also be used in service companies, especially in making short-term decisions.

Absorption costing considers fixed selling and administrative costs as product costs.

Which of the following is considered a period cost in absorption costing?

When more units are sold than produced, operating income is higher under absorption costing than variable costing.

The traditional income statement format calculates operating income as gross profit minus selling and administrative expenses.

Which is the following is the most appropriate reason that sales mix decisions should be made using variable costing?

Llywelyn, Inc. reports the following information for July: Sales Revenue \ 960,000 Variable Costs 110,000 Operating Income 360,000 What is the total fixed cost using variable costing?

For which of the following decisions is absorption costing most appropriate?

Variable costing is used for external reporting purposes, and absorption costing is used for internal decision-making purposes.

Variable costing is more appropriate than absorption costing when the decision ________.

The traditional income statement format is prepared under absorption costing.

Some costs are not controllable in the long run. However, in the short run, all costs are controllable.

Accounting and the Business Environment

Recording Business Transactions

The Adjusting Process

Completing the Accounting Cycle

Merchandising Operations

Merchandise Inventory

Internal Control and Cash

Receivables

Plant Assets, Natural Resources, and Intangibles

Investments

Current Liabilities and Payroll

Long-Term Liabilities

Stockholders Equity

The Statement of Cash Flows

Financial Statement Analysis

Introduction to Managerial Accounting

Job Order Costing

Process Costing

Cost Management Systems: Activity-Based Just-In-Time

Cost Volume Profit Analysis

Master Budgets

Flexible Budgets and Standard Cost Systems

Responsibility Accounting and Performance Evaluation

Short-Term Business Decisions

Capital Investment Decisions

Understanding Accounting Information Systems and their Components

Filters