Deck 30: Cost-Revenue Analysis for Decision Making

Question 1

If a segment of a business is expected to produce an annual contribution margin of $30,000 but is also expected to incur controllable fixed costs of about $40,000 annually,that segment should probably be discontinued.

Answer 1

True

Question 2

Under direct costing,all fixed manufacturing overhead is charged off as a current expense.

Answer 2

True

Question 3

It is appropriate to consider nonfinancial factors in the decision-making process.

Answer 3

True

Question 4

Income statements prepared on an absorption-costing basis normally are more useful for internal decision making than income statements prepared on a direct costing basis.

Question 5

Fixed costs are associated with the capacity to produce goods,not to the actual goods produced.

Question 6

Common costs are allocated to each segment of a business to determine the segment's contribution margin.

Question 7

Direct costing is the process of tracing only direct material and direct labor costs through the factory cost centers and into the cost of goods sold.

Question 8

A cost that does not change regardless of the option selected need not be considered in the decision-making process.

Question 9

A segment of a business shows a contribution margin of $30,000 but incurs controllable fixed costs of $26,000.Eliminating that segment will result in an increase in company-wide net income.

Question 10

Under absorption costing,a portion of the fixed manufacturing overhead is deferred to future periods as part of the inventory value.

Question 11

The first step in the decision-making process is to determine relevant cost and revenue data.

Question 12

GAAP requires the use of absorption costing method for financial reporting.

Question 13

The direct costing procedure is used for financial reporting.

Question 14

Marginal income on sales is the equivalent of contribution margin since both take all variable costs into consideration.

Question 15

Fixed costs often are not relevant in the decision-making process as costs do not vary in total within a relevant range of activity.

Question 16

Generally Accepted Accounting Principles require the use of direct costing for financial reporting purposes.

Question 17

The direct costing procedure is sometimes referred to as variable costing.

Question 18

Opportunity costs are earnings or potential benefits foregone because a certain course of action is taken.

Question 19

Company Zee produces a widget that requires $15 of material per unit along with ½ hour of labor,the average rate being $18/hour.The company's predetermined overhead rate includes $5 of variable cost and $6 of fixed cost per labor hour when the activity level is 10,000 labor hours.Direct costing would cost this widget at $29.50 per unit.

Question 20

Differential cost analysis emphasizes evaluating alternatives by computing the differences in relevant costs.

Question 21

If a decision must be made to replace a machine,the book value of the existing machine is a sunk cost.

Question 22

Direct costing is extremely useful in setting prices of products in special-order situations.

Question 23

The difference in net income reported under direct costing versus reported under absorption costing is calculated based on the change in the inventory levels times the unit fixed manufacturing overhead cost.

Question 24

The contribution margin income statement with segment margin information assists management in making sound decisions regarding whether to drop,keep or add a segment.

Question 25

Segment managers can never control fixed costs.

Question 26

In managerial decisions,nonmanufacturing costs can be ignored.

Question 27

Net income under variable costing will differ from reported net income under absorption costing when finished good inventory levels change.

Question 28

If the finished goods inventory decreases during the period,the reported net income will be larger under variable costing than under absorption costing.

Question 29

When inventories increase,the direct costing income statement will report lower net income than reported under absorption costing.

Question 30

The difference in net income reported under direct costing versus reported under absorption costing is calculated based on the increase or decrease in the units available for sale.

Question 31

Opportunity costs are calculated as the difference between two alternatives.

Question 32

If the finished goods inventory increases during the period,the reported net income will be larger under direct costing than under absorption costing.

Question 33

When inventories decrease,the absorption costing income statement will report lower net income than reported under variable costing.

Question 34

Manufacturing margin less the sum of variable manufacturing overhead and variable selling and administrative expenses equals marginal income.

Question 35

Net income under direct costing and absorption costing approaches will always equal.

Question 36

Manufacturing margin less variable selling and administrative expenses equal marginal income.

Question 37

Under direct costing,all fixed costs are expensed in the period incurred,including fixed selling and administrative costs.

Question 38

The profitability of a segment is judged by its contribution margin.

Question 39

Irrelevant costs are those that will not impact the decision maker's options and thus can be eliminated from analyses.

Question 40

Under the contribution margin approach,common costs are deducted from the total of all segment contributions to determine the company's profit.

Question 41

Costs that are not directly traceable to any specific department are called ____________________ costs.

Question 42

The increase in a cost from one alternative to another is called a(n)____________________ cost.

Question 43

The difference in cost between one alternative and another is called a(n)____________________ cost.

Question 44

In deciding whether to manufacture or to purchase a product,____________________ costs are generally ignored.

Question 45

The excess of net sales over the cost of goods sold,based on variable costs only,is referred to as the ___________________.

Question 46

Before deciding whether to purchase new equipment,a firm should consider employee morale and the quality of the new equipment's output.

Question 47

The difference between revenue and variable costs is referred to as the ___________________.

Question 48

Under ____________________ costing,a portion of fixed manufacturing overhead is deferred to future periods as part of the inventory value.

Question 49

A cost that has already been incurred and is irrelevant for decision-making purposes is called a(n)____________________ cost.

Question 50

Before deciding to accept a special order,the company should evaluate if it has adequate manufacturing ____________.

Question 51

The sum of unit variable and fixed costs are used as a basis for determining whether to accept or reject a special order.

Question 52

Earnings or potential benefits foregone because a certain course of action is taken are called ____________________ costs.

Question 53

Evaluation of available capacity is irrelevant when making decisions on whether to accept or reject a special order.

Question 54

The inventory costing system not acceptable for financial reporting is ____________________ costing.

Question 55

Income statements prepared on a(n)____________________ costing basis usually provide data in a form more useful for internal decision making.

Question 56

In deciding whether to manufacture or to purchase a product,fixed costs are generally ignored.

Question 57

A segment of a business probably should be discontinued if it cannot produce a(n)___________________.

Question 58

Under ____________________ costing procedures,fixed manufacturing costs are included in the cost of goods manufactured.

Question 59

If a decision must be made about whether to replace a machine,the ____________________ value of the existing machine is irrelevant.

Question 60

The variable operating expenses are deducted from the manufacturing margin to arrive at the ____________________ on sales.

Question 61

Costs that are not directly traceable to a segment of a business are called

A) sunk costs.
B) common costs.
C) fixed costs.
D) incremental costs.

Question 62

Which of the following is NOT a step in the decision-making process?

A) Explore workable alternatives
B) Determine relevant cost and revenue data
C) Consider appropriate nonfinancial factors
D) Make a decision

Question 63

Which is the final step in the decision-making process?

A) Consider appropriate nonfinancial factors
B) Make a decision
C) Identify workable alternatives
D) Evaluate the cost and revenue data

Question 64

Which inventory costing system is required by GAAP for financial reporting purposes?

A) direct costing
B) absorption costing
C) standard costing
D) variable costing

Question 65

Which of the following cost amounts can be found in a firm's accounting records?

A) opportunity costs
B) differential costs
C) incremental costs
D) sunk costs

Question 66

Which of the following is not relevant in decision making?

A) opportunity costs
B) differential costs
C) sunk costs
D) variable costs

Question 67

In making a decision to replace a machine,which of the following is not relevant?

A) the training that workers will need in order to use the new machine
B) the variable costs of operating the new machine
C) the variable costs of operating the old machine
D) the book value of the old machine

Question 68

When direct costing is used,cost of goods sold reflects

A) both variable and fixed manufacturing costs.
B) variable manufacturing costs and variable selling and administrative expenses.
C) variable manufacturing costs only.
D) fixed manufacturing costs only.

Question 69

Which of the following represents a valid reason for rejecting a special order?

A) shipment is expected to go overseas.
B) profits will exceed that of current customer orders.
C) jeopardizes delivery of a loyal customer's order.
D) special tooling is required.

Question 70

Which of the following is NOT a consideration regarding the purchase of new equipment when looking at the net income under each alternative?

A) depreciation expense per year on the new equipment
B) annual sales
C) differential labor costs
D) additional fixed costs under an alternative

Question 71

Which of the following is NOT a consideration regarding a special order?

A) If the company has sufficient capacity
B) If the special order jeopardized sales to existing customers
C) Federal laws regarding the price
D) Whether employee morale would be affected

Question 72

Which of the following is not true of the direct costing procedure?

A) Variable and fixed costs are considered as part of the cost of goods manufactured.
B) The cost of goods sold,based solely on variable costs,is subtracted from net sales to arrive at the manufacturing margin.
C) Variable selling expenses are deducted from the manufacturing margin.
D) Variable administrative expenses are deducted from the manufacturing margin.

Question 73

Fixed manufacturing costs are written off as current expenses of the period in which they occurred when using

A) direct costing.
B) standard costing.
C) absorption costing.
D) differential costing.

Question 74

Which of the following is NOT relevant in evaluating whether to accept or reject a special order?

A) variable manufacturing costs
B) variable selling costs
C) incremental fixed costs unique to the order
D) fixed manufacturing costs

Question 75

Contribution margin is calculated by

A) deducting variable costs from revenue.
B) deducting variable costs and controllable fixed costs from revenue.
C) deducting variable costs and common costs from revenue.
D) deducting fixed costs from revenue.

Question 76

On an income statement prepared with a direct costing approach,the excess of sales over the cost of goods sold,based on variable costs only,is referred to as

A) the marginal gross profit on sales.
B) the manufacturing margin.
C) the marginal income on sales.
D) the contribution margin.

Question 77

Which of the following is NOT a consideration when determining whether to continue making a part or to buy that part?

A) the timing of the cash receipts and expenditures
B) the opportunity cost
C) the impact on employees
D) the sunk cost

Question 78

Which of the following would not be relevant to a decision about whether to continue making a part or whether to buy it from an outside supplier?

A) alternative uses for the plant where the part was produced if the part is purchased
B) a fee previously spent for design of the part
C) the variable costs of making the part
D) the number of additional employees needed to make the part

Question 79

Which of the following is the first step in the decision-making process?

A) Evaluate the cost and revenue data
B) Identify workable alternatives
C) Define the problem
D) Consider appropriate nonfinancial factors

Question 80

A segment of a business probably should be discontinued if

A) its common costs exceed its contribution margin.
B) its contribution margin exceeds its controllable fixed costs and its common costs.
C) it cannot produce a contribution margin.
D) it has a net loss.