Deck 30: Cost-Revenue Analysis for Decision Making

Question 1

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.

Answer 1

False

Question 2

The direct costing procedure is not used for financial reporting.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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.

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

Segment managers can never control fixed costs.

Question 19

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 20

In managerial decisions, nonmanufacturing costs can be ignored.

Question 21

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

Question 22

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 23

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

Question 24

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

Question 25

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

Question 26

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 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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 33

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 34

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

Question 35

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

Question 36

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 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

Using the absorption method, the net income for year is:

A) $200,000
B) $180,000
C) $170,000
D) $16,000

Question 42

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 43

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 44

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 45

Using the absorption method, the gross profit on sales is:

A) $550,000
B) $540,000
C) $480,000
D) $450,000

Question 46

Using the absorption method, cost of goods manufactured for the year is:

A) $450,000
B) $550,000
C) $660,000
D) $900,000

Question 47

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.

Question 48

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 49

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 50

A company has sales of $100,000, ending finished goods inventory of $9,000, variable manufacturing costs of $50,000, and fixed manufacturing costs of $28,000 for the year. Assuming the company uses direct costing, the cost of goods sold for the year is

A) $22,000.
B) $31,000.
C) $59,000.
D) $13,000.

Question 51

Using the absorption method, the cost of goods sold is:

A) $550,000
B) $540,000
C) $480,000
D) $450,000

Question 52

Which of the following is not relevant in decision making?

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

Question 53

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 54

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 55

Using the absorption method, the value of ending inventory of finished goods is:

A) $100,000
B) $120,000
C) $140,000
D) $220,000

Question 56

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 57

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 58

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 59

A company has sales of $100,000, ending finished goods inventory of $9,000, variable manufacturing costs of $50,000, and fixed manufacturing costs of $28,000 for the year. Assuming the company uses direct costing, the manufacturing margin for the year is

A) $22,000.
B) $31,000.
C) $59,000.
D) $13,000.

Question 60

Which inventory costing system is not acceptable for financial reporting purposes?

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

Question 61

The data given below is taken from the budgeted income statement of the Arrow Corporation for 2013. It shows the projected net income or loss for each of the firm's three products. Management is concerned about the budgeted loss for Product C and wants to discontinue it. Prepare an analysis indicating the effects of discontinuing Product C. Based on the analysis, indicate the decision that should be made.
Additional information:
(a.) Materials and labor are variable costs.
(b.) Total manufacturing overhead is applied at 50 percent of the direct labor costs.
(c.) Variable overhead is 10 percent of the direct labor costs.
(d.) Fixed overhead totals $11,600 a year.
(e.) Operating expenses include variable costs at 20 percent of sales dollars.
(f.) Fixed operating expenses total $18,000.
(g.) Fixed overhead costs and fixed operating expenses are expected to continue if Product C is eliminated.

Question 62

When the balance in ending finished goods inventory increases, net income under absorption costing

A) is lower than under direct costing.
B) is higher than under direct costing.
C) is the same under direct costing.
D) is unaffected by the increase.

Question 63

The Sloan Corporation is considering the purchase of a new factory machine at a cost of $30,000. The machine would perform a function that is now being performed by hand. The new machine would have a life of five years and would produce 5,000 units a year (the current output). Direct labor costs would be reduced by $1.10 a unit. Variable overhead costs would be reduced by $0.35 a unit. Fixed costs, other than depreciation, would increase by $2,500 a year.
1. Should the machine be purchased?
2. What impact would the decision have on net income?

Question 64

If a decision must be made to close a warehouse, non-refundable prepaid rent on the warehouse is

A) an opportunity cost.
B) a common cost.
C) a sunk cost.
D) a variable cost.

Question 65

A segment of a business reported a contribution margin of $36,000 and common costs of $12,000. If the segment had been eliminated, the company-wide net income would have been

A) $12,000 higher.
B) $24,000 lower.
C) $36,000 lower.
D) $24,000 higher.

Question 66

Direct costing differs from absorption costing in that

A) under direct costing all fixed overhead is expensed in the current period.
B) under absorption costing all fixed manufacturing overhead is expensed in the current period.
C) under direct costing a portion of the fixed manufacturing overhead is included in the finished goods inventory.
D) under absorption costing an increase in finished goods inventory does not affect the amount of fixed costs expensed.

Question 67

Assume that the Venus Company, which now sells its product for $75 per unit, has an opportunity to sell 3,000 units in a foreign country for $54 a unit. The order will not affect its current domestic sales. Shipping costs of $9 a unit would be incurred on the order. Current variable manufacturing costs are $31 per unit manufactured. Variable selling and administrative costs are $14 per unit sold. Included in variable selling expenses is a sales commission of $1 per unit, which would not apply to the special order. Fixed manufacturing costs are $75,000 per year and fixed selling and administrative expenses are $45,000 per year. The company is now manufacturing and selling 5,000 units per year.
1. Should the Venus Company take the order?
2. What impact would the special order have on profits?

Question 68

The Alvarado Equipment Corporation is currently manufacturing a part that goes into its main product. Each year 2,500 of these parts are used. Cost data for the past year that relates to the 2,500 parts is given below. Fixed costs are allocated on the basis of direct labor hours. An outside company has offered to supply the part for $45 a unit, plus a shipping charge of $2 a unit. The plant capacity now used by Alvarado to manufacture the part would not be used within the foreseeable future if the part is purchased outside. Prepare an analysis comparing the unit cost of manufacturing the part with the unit cost of purchasing it. Based on the analysis, indicate the decision that should be made.

Question 69

Which of the following should NOT be a consideration when deciding whether to make or buy a part?

A) differential fixed costs
B) opportunity costs
C) sunk costs
D) capacity costs

Question 70

The following information relates to a one-time special order from a flood relief organization for 200 of its book bags at $8.50. Current manufacturing costs are as follows. Fixed manufacturing overhead is based on capacity of 4,500 units per year. Normal sales are 4,000 book bags per year. Only $0.46 of the selling costs will be incurred for this special order. What are the relevant costs regarding this special order? Pose one nonfinancial consideration regarding the acceptance or rejection of this special offer.

Question 71

The data given below pertains to the operations of the Newton Products Corporation for the year ended December 31, 2013
Based on the information given prepare an income statement for the year using the absorption costing approach. Assume that the beginning finished goods inventory had a cost of $35 per unit.

Question 72

Using direct costing, the manufacturing margin is:

A) $550,000
B) $540,000
C) $480,000
D) $450,000

Question 73

The following information relates to the purchase of new machine being considered. The new machine would enable the company to make 13,500 units per year. The current capacity of 12,000 is based on the maximum number of units that the old machine can produce. The company has had to turn down orders in the past few years due to this limit on capacity and estimates that it can sell as many of the product as it can produce. The sales price per unit of the product is $34.50. Determine the relevant data. Pose one addition consideration regarding this decision.

Question 74

Using direct costing, the marginal income on sales is:

A) $550,000
B) $540,000
C) $414,000
D) $200,000

Question 75

Using direct costing, the value of ending inventory of finished goods is:

A) $100,000
B) $120,000
C) $140,000
D) $220,000

Question 76

A segment of a business reported a contribution margin of $36,000 and controllable fixed costs of $12,000. If the segment had been eliminated, the company-wide net income would have been

A) $12,000 higher.
B) $24,000 lower.
C) $36,000 lower.
D) $24,000 higher.

Question 77

Data for a firm's first year of operation is given below. The firm uses direct costing. 1. What is the ending inventory of finished goods?
2. What is the cost of goods sold?
3. What is the manufacturing margin for the year?
4. What is the net income (loss) for the year?

Question 78

Data for a firm's first year of operation is given below. The firm uses absorption costing. 1. What is the cost of goods manufactured for the year?
2. What is the ending inventory of finished goods?
3. What is the cost of goods sold?
4. What is the net income (loss) for the year?

Question 79

Which of the following should NOT be a consideration when deciding whether to make or buy a part?

A) impact on quality of the part under each set of circumstances
B) impact on factory employee morale
C) impact on continued supply of the part
D) impact on sales to existing customers

Question 80

The data given below pertains to the operations of the Newton Products Corporation for the year ended December 31, 2013
Based on the information given prepare an income statement for the year using the direct costing approach. Assume that the beginning finished goods inventory had a cost of $25 per unit.