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Fundamentals of Cost Accounting William Lanen 6th Edition-Test Bank
Sample Questions
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Chapter 2 Cost Concepts and Behavior
1) The cost of an item is the sacrifice of resources made to acquire it.
Answer: TRUE
Explanation: This statement is true. This statement is the definition of cost.
Difficulty: 1 Easy
Topic: What is a Cost?
Learning Objective: 02-01 Explain the basic concept of “cost.”
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
2) An expense is a cost charged against revenue in an accounting period.
Answer: TRUE
Explanation: This statement is the definition of an expense.
Difficulty: 1 Easy
Topic: What is a Cost?
Learning Objective: 02-01 Explain the basic concept of “cost.”
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
3) If a cost is recorded as an asset (for example, prepaid rent for an office building), it becomes an expense when the asset has been consumed.
Answer: TRUE
Explanation: This statement is true. This statement describes the appropriate transition between assets and expenses.
Difficulty: 2 Medium
Topic: What is a Cost?
Learning Objective: 02-01 Explain the basic concept of “cost.”
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
4) Accounting systems typically record opportunity costs as assets and treat them as intangible items on the financial statements.
Answer: FALSE
Explanation: Opportunity costs are not reflected in the accounting system—they are what did not happen.
Difficulty: 2 Medium
Topic: What is a Cost?
Learning Objective: 02-01 Explain the basic concept of “cost.”
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
5) Total cost of goods purchased minus beginning merchandise inventory plus ending merchandise inventory equals cost of goods sold.
Answer: FALSE
Explanation: This statement is false. Purchases plus beginning inventory minus ending inventory equals cost of goods sold.
Difficulty: 2 Medium
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
6) Cost of goods sold includes the actual costs of the goods sold and the costs required to sell them to the customer.
Answer: FALSE
Explanation: This statement is false. Cost of goods sold does not include selling costs.
Difficulty: 2 Medium
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
7) Period costs are those costs assigned to units of production in the period in which they are incurred.
Answer: FALSE
Explanation: This statement is false. This statement describes product costs, not period costs.
Difficulty: 2 Medium
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
8) Only direct costs can be classified as product costs; indirect costs are classified as period costs.
Answer: FALSE
Explanation: This statement is false. Product costs can include both direct and indirect costs.
Difficulty: 2 Medium
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
9) The three categories of product costs are direct materials, direct labor, and manufacturing overhead.
Answer: TRUE
Explanation: This statement is true. This statement is the definition of product cost.
Difficulty: 1 Easy
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
10) The first step in determining whether a cost is direct or indirect is to specify the cost allocation rule.
Answer: FALSE
Explanation: The first step in determining whether a cost is direct or indirect is defining the cost object.
Difficulty: 2 Medium
Topic: Cost Allocation
Learning Objective: 02-03 Explain the process of cost allocation.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
11) Total work-in-process during the period is the sum of the beginning work-in-process inventory and the total manufacturing costs incurred during the period.
Answer: TRUE
Explanation: This statement is true. This is the correct formula for total work-in-process.
Difficulty: 2 Medium
Topic: How Costs Flow through the Statements
Learning Objective: 02-04 Understand how material, labor, and overhead costs are added to a product at each stage of the production process.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
12) Cost of goods sold plus the ending finished goods inventory minus the beginning finished goods inventory equals the cost of goods manufactured.
Answer: TRUE
Explanation: This statement is true. This statement works backwards from cost of goods sold to cost of goods manufactured.
Difficulty: 2 Medium
Topic: How Costs Flow through the Statements
Learning Objective: 02-04 Understand how material, labor, and overhead costs are added to a product at each stage of the production process.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
13) If the cost of goods manufactured during the period exceeds the cost of goods sold, the ending balance of Finished Goods Inventory account increased.
Answer: TRUE
Explanation: This statement is true. Cost of goods sold = cost of goods manufactured + beginning finished goods inventory – ending finished goods inventory.
Difficulty: 2 Medium
Topic: How Costs Flow through the Statements
Learning Objective: 02-04 Understand how material, labor, and overhead costs are added to a product at each stage of the production process.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
14) Total variable costs change inversely with changes in the volume of activity.
Answer: FALSE
Explanation: This statement is false. Total variable costs are linear and vary directly with changes in the volume of activity, fixed costs vary inversely.
Difficulty: 2 Medium
Topic: Cost Behavior
Learning Objective: 02-05 Define basic cost behaviors, including fixed, variable, semivariable, and step costs.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
15) Fixed costs per unit change inversely with changes in the volume of activity.
Answer: TRUE
Explanation: This statement is true. Fixed costs per unit would vary inversely with the volume of activity.
Difficulty: 2 Medium
Topic: Cost Behavior
Learning Objective: 02-05 Define basic cost behaviors, including fixed, variable, semivariable, and step costs.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
16) The range within which fixed costs remain constant as volume of activity varies is known as the relevant range.
Answer: TRUE
Explanation: This statement is true. This statement is the definition of a relevant range.
Difficulty: 1 Easy
Topic: Cost Behavior
Learning Objective: 02-05 Define basic cost behaviors, including fixed, variable, semivariable, and step costs.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
17) The term full cost refers to the cost of manufacturing and selling a unit of product and includes both fixed and variable costs.
Answer: TRUE
Explanation: This statement is true. We need to distinguish between full cost (which includes selling costs) and full absorption cost (which does not include selling costs.)
Difficulty: 2 Medium
Topic: Components of Product Costs
Learning Objective: 02-06 Identify the components of a product’s costs.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
18) Variable marketing and administrative costs are included in determining full absorption costs.
Answer: FALSE
Explanation: The two costs are included in full cost, but not in determining full absorption costs.
Difficulty: 2 Medium
Topic: Components of Product Costs
Learning Objective: 02-06 Identify the components of a product’s costs.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
19) Revenue minus cost of goods sold equals contribution margin.
Answer: FALSE
Explanation: This statement is false. Revenue minus cost of goods sold equals gross margin.
Difficulty: 2 Medium
Topic: How to Make Cost Information More Useful to Managers
Learning Objective: 02-07 Understand the distinction between financial and contribution margin income statements.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
20) The primary goal of the cost accounting system is to provide managers with information to prepare their annual financial statements.
Answer: FALSE
Explanation: This statement is false. The primary goal is to provide managers with information for decision making.
Difficulty: 1 Easy
Topic: How to Make Cost Information More Useful to Managers
Learning Objective: 02-07 Understand the distinction between financial and contribution margin income statements.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
21) An opportunity cost is
- A) a cost that is charged against revenue in an accounting period.
- B) the foregone benefit from the best alternative course of action.
- C) the excess of operating revenues over operating costs.
- D) the cost assigned to the products sold during the period.
Answer: B
Explanation: Opportunity cost is the forgone benefit that could have been realized from the best forgone alternative use of a resource. Opportunity cost is not attached to products.
Difficulty: 1 Easy
Topic: What is a Cost?
Learning Objective: 02-01 Explain the basic concept of “cost.”
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
22) Which of the following statements is (are) true?
(1) An asset is a cost that will be matched with revenues in a future accounting period.
(2) Opportunity costs are recorded as intangible assets in the current accounting period.
- A) Only (1) is true.
- B) Only (2) is true.
- C) Both of these are true.
- D) None of these are true.
Answer: A
Explanation: Opportunity costs are not recorded.
Difficulty: 1 Easy
Topic: What is a Cost?
Learning Objective: 02-01 Explain the basic concept of “cost.”
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
23) Which of the following statements is (are) false?
(1) In general, the term expense is used for managerial purposes, while the term cost refers to external financial reports.
(2) An opportunity cost is the benefit forgone by selecting one alternative over another.
- A) Only (1) is false.
- B) Only (2) is false.
- C) Both of these are false.
- D) None of these are false.
Answer: A
Explanation: Expense is for external financial statements.
Difficulty: 2 Medium
Topic: What is a Cost?
Learning Objective: 02-01 Explain the basic concept of “cost.”
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
24) Which of the following best distinguishes an opportunity cost from an outlay cost?
- A) Opportunity costs are recorded, whereas outlay costs are not.
- B) Outlay costs are speculative in nature, whereas opportunity costs are easily traceable to products.
- C) Opportunity costs have very little utility in practical applications, whereas outlay costs are always relevant.
- D) Opportunity costs are sacrifices from foregone alternative uses of resources, whereas outlay costs are cash outflows.
Answer: D
Explanation: Opportunity cost is the forgone benefit that could have been realized from the best forgone alternative use of a resource, whereas outlay cost is a past, present, or future cash outflow.
Difficulty: 1 Easy
Topic: What is a Cost?
Learning Objective: 02-01 Explain the basic concept of “cost.”
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
25) Which of the following accounts would be a period cost rather than a product cost?
- A) Depreciation on manufacturing machinery.
- B) Maintenance on factory machines.
- C) Production manager’s salary.
- D) Freight out.
Answer: D
Explanation: Freight out is a selling cost while all the others are production costs.
Difficulty: 2 Medium
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
26) A company which manufactures custom-made machinery routinely incurs sizable telephone costs in the process of taking sales orders from customers. Which of the following is a proper classification of this cost?
- A) Product cost
- B) Period cost
- C) Conversion cost
- D) Prime cost
Answer: B
Explanation: Telephone costs are a selling cost rather than a production cost.
Difficulty: 2 Medium
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
27) For a manufacturing company, which of the following is an example of a period cost rather than a product cost?
- A) Wages of salespersons.
- B) Salaries of machine operators.
- C) Insurance on factory equipment.
- D) Depreciation of factory equipment.
Answer: A
Explanation: Wages of salespeople would be a selling cost which is a period cost.
Difficulty: 2 Medium
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
28) Tallon Company manufactures a single product. The product’s prime costs consist of
- A) direct materials and direct labor.
- B) direct materials and manufacturing overhead.
- C) direct labor and manufacturing overhead.
- D) direct materials, direct labor and manufacturing overhead.
Answer: A
Explanation: Prime costs are direct materials and direct labor.
Difficulty: 1 Easy
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
29) The cost of fire insurance for a manufacturing plant is generally considered to be a:
- A) product cost.
- B) period cost.
- C) variable cost.
- D) prime cost.
Answer: A
Explanation: Fire insurance for the manufacturing plant is part of product costs.
Difficulty: 2 Medium
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
30) An example of a period cost is:
- A) fire insurance on a factory building.
- B) salary of a factory supervisor.
- C) direct materials.
- D) rent on a headquarters building.
Answer: D
Explanation: Rent on the headquarters building is a period cost whereas the other answer choices are product costs.
Difficulty: 2 Medium
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
31) Transportation costs incurred by a manufacturing company to ship its product to its customers would be classified as which of the following?
- A) Product cost
- B) Manufacturing overhead
- C) Period cost
- D) Administrative cost
Answer: C
Explanation: Transportation costs incurred to ship a company’s product are a period cost.
Difficulty: 2 Medium
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
32) Doran Technical Company has set up a toll-free telephone line for customer inquiries regarding computer hardware produced by the company. The cost of this toll-free line would be classified as which of the following?
- A) Product cost
- B) Manufacturing overhead
- C) Direct labor
- D) Period cost
Answer: D
Explanation: The cost of the toll-free line is a period cost as it belongs in the selling department.
Difficulty: 2 Medium
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
33) Which of the following costs is both a prime cost and a conversion cost?
- A) direct materials
- B) direct labor
- C) manufacturing overhead
- D) administrative costs
Answer: B
Explanation: Direct labor is the only cost that fits both terms.
Difficulty: 2 Medium
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
34) Marketing costs include all of the following except:
- A) Advertising.
- B) Shipping costs.
- C) Sales commissions.
- D) Legal and accounting fees.
Answer: D
Explanation: Legal and accounting are administrative rather than marketing.
Difficulty: 1 Easy
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
35) Property taxes on the manufacturing facility are an element of
Conversion Cost Period Cost
- No No
- No Yes
- Yes No
- Yes Yes
- A) Option A
- B) Option B
- C) Option C
- D) Option D
Answer: C
Explanation: Property taxes on the manufacturing facility is a product cost since it is a part of manufacturing, but taxes are also indirect, so they are a conversion cost.
Difficulty: 2 Medium
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
36) The cost of direct labor will be treated as an expense on the income statement when the resulting:
- A) payroll costs are paid.
- B) payroll costs are incurred.
- C) products are completed.
- D) products are sold.
Answer: D
Explanation: Direct labor is expensed when the products are sold. This supports the matching principle.
Difficulty: 2 Medium
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
37) Calculate the conversion costs from the following information:
Fixed manufacturing overhead $ 2,000
Variable manufacturing overhead 1,000
Direct materials 2,500
Direct labor 1,500
- A) $3,000
- B) $4,000
- C) $4,500
- D) $5,000
Answer: C
Explanation: $1,500 + $1,000 + $2,000 = $4,500
Difficulty: 3 Hard
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
38) The corporate controller’s salary would be considered a(n):
- A) manufacturing cost.
- B) product cost.
- C) administrative cost.
- D) selling expense.
Answer: C
Explanation: The corporate controller’s salary is an administrative cost.
Difficulty: 2 Medium
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
39) The costs of direct materials are classified as:
Conversion cost Manufacturing cost Prime cost
- A) Yes Yes Yes
- B) No No No
- C) Yes Yes No
- D) No Yes Yes
- A) Choice A
- B) Choice B
- C) Choice C
- D) Choice D
Answer: D
Explanation: Direct materials are a manufacturing cost and a prime cost; they are not a conversion cost.
Difficulty: 2 Medium
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
40) Grover Company has the following data for the production and sale of 2,000 units.
Sales price per unit $ 800 per unit
Fixed costs:
Marketing and administrative $ 400,000 per period
Manufacturing overhead $ 200,000 per period
Variable costs:
Marketing and administrative $ 50 per unit
Manufacturing overhead $ 80 per unit
Direct labor $ 100 per unit
Direct Materials $ 200 per unit
What is the conversion cost per unit?
- A) $100
- B) $180
- C) $280
- D) $380
Answer: C
Explanation: $100 + $80 + ($200,000/2,000) = $280.
Difficulty: 3 Hard
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
41) Grover Company has the following data for the production and sale of 2,000 units.
Sales price per unit $ 800 per unit
Fixed costs:
Marketing and administrative $ 400,000 per period
Manufacturing overhead $ 200,000 per period
Variable costs:
Marketing and administrative $ 50 per unit
Manufacturing overhead $ 80 per unit
Direct labor $ 100 per unit
Direct Materials $ 200 per unit
What is the prime cost per unit?
- A) $100
- B) $280
- C) $300
- D) $480
Answer: C
Explanation: $200 + $100 = $300.
Difficulty: 3 Hard
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
42) Which one of the following costs is classified as a period cost? (CIA adapted)
- A) The wages of the workers on the shipping docks who load completed products onto outgoing trucks.
- B) The wages of a worker paid for idle time resulting from a machine breakdown in the molding department.
- C) The payments for employee (fringe) benefits paid on behalf of the workers in the manufacturing plant.
- D) The wages paid to workers for reworking defective products that failed the quality inspection upon completion.
Answer: A
Explanation: Shipping to customers is a selling (period) cost.
Difficulty: 3 Hard
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
43) The following cost data for the month of May were taken from the records of the Terrence Manufacturing Company: (CIA adapted)
Depreciation on factory equipment $ 1,000
Depreciation on sales office 500
Advertising 7,000
Wages of production workers 28,000
Raw materials used 47,000
Sales salaries and commissions 10,000
Factory rent 2,000
Factory insurance 500
Materials handling 1,500
Administrative salaries 2,000
Based upon this information, the manufacturing cost incurred during the month was:
- A) $78,500.
- B) $80,000.
- C) $80,500.
- D) $83,000.
Answer: B
Explanation: $1,000 + $28,000 + $47,000 + $2,000 + $500 + $1,500 = $80,000.
Difficulty: 3 Hard
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
44) Which of the following is not a name for indirect resources?
- A) Overhead costs
- B) Burden
- C) Direct costs
- D) Common costs
Answer: C
Explanation: All answer options are names for indirect resources except direct costs.
Difficulty: 1 Easy
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
45) Which of the following should be considered part of a manufacturing company’s direct labor cost?
- A) Factory supervisor’s salary
- B) Forklift operator’s hourly wages
- C) Employer-paid health insurance on factory assemblers’ wages
- D) Cost of idle time
Answer: C
Explanation: Only wages and benefits of the workers that transform the materials into a finished product should be included in direct labor cost.
Difficulty: 2 Medium
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
46) Tulsa Company, (a merchandising co.) has the following data pertaining to the year ended December 31, 2019: (CPA adapted)
Purchases $ 450,000
Beginning inventory 170,000
Ending inventory 210,000
Freight-in 50,000
Freight-out 75,000
What is the cost of goods sold for the year?
- A) $385,000
- B) $460,000
- C) $485,000
- D) $536,000
Answer: B
Explanation: $170,000 + $450,000 + $50,000 − $210,000 = $460,000.
Difficulty: 3 Hard
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
47) The Shoal Company’s manufacturing costs for the third quarter of 2019 were as follows: (CPA adapted)
Direct materials and direct labor $ 700,000
Other variable manufacturing costs 100,000
Depreciation of factory building and manufacturing equipment 80,000
Other fixed manufacturing costs 18,000
What amount should be considered product costs for external reporting purposes?
- A) $700,000
- B) $800,000
- C) $880,000
- D) $898,000
Answer: D
Explanation: $700,000 + $100,000 + $80,000 + $18,000 = $898,000.
Difficulty: 3 Hard
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
48) The three basic elements of manufacturing cost are direct materials, direct labor, and:
- A) cost of goods manufactured.
- B) cost of goods sold.
- C) work in process.
- D) manufacturing overhead.
Answer: D
Explanation: The three elements of manufacturing cost are direct materials, direct labor and manufacturing overhead.
Difficulty: 1 Easy
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
49) Prime cost consists of direct materials combined with:
- A) direct labor.
- B) manufacturing overhead.
- C) indirect materials.
- D) cost of goods manufactured.
Answer: A
Explanation: Direct materials and direct labor = Prime costs
Difficulty: 1 Easy
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
50) Classifying a cost as either direct or indirect depends upon
- A) whether an expenditure is unavoidable because it cannot be changed regardless of any action taken.
- B) whether the cost is expensed in the period in which it is incurred.
- C) the behavior of the cost in response to volume changes.
- D) the cost object to which the cost is being related.
Answer: D
Explanation: The first step in classifying a cost as either direct or indirect is defining the cost object to which the cost is being related.
Difficulty: 2 Medium
Topic: Cost Allocation
Learning Objective: 02-03 Explain the process of cost allocation.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
51) The process of assigning indirect costs to products, services, people, business units, etc., is
- A) cost object.
- B) cost pool.
- C) cost allocation.
- D) opportunity cost.
Answer: C
Explanation: This statement is a definition of cost allocation.
Difficulty: 1 Easy
Topic: Cost Allocation
Learning Objective: 02-03 Explain the process of cost allocation.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
52) A(n) ________ is any end to which a cost is assigned.
- A) cost object
- B) cost pool
- C) cost allocation
- D) opportunity cost
Answer: A
Explanation: This statement is a definition of a cost object.
Difficulty: 1 Easy
Topic: Cost Allocation
Learning Objective: 02-03 Explain the process of cost allocation.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
53) A cost allocation rule is the method or process used to assign the costs in the ________ to the ________.
- A) cost allocation; cost pool
- B) cost pool; opportunity cost
- C) cost object; cost pool
- D) cost pool; cost object
Answer: D
Explanation: Correct! This statement is a definition of a cost allocation rule.
Difficulty: 2 Medium
Topic: Cost Allocation
Learning Objective: 02-03 Explain the process of cost allocation.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
54) The beginning Work-in-Process Inventory plus the total of the manufacturing costs equals
- A) total finished goods during the period.
- B) cost of goods sold for the period.
- C) total work-in-process during the period.
- D) cost of goods manufactured for the period.
Answer: C
Explanation: Beginning WIP Inventory + Total Manufacturing Costs = Total WIP during the period.
Difficulty: 2 Medium
Topic: How Costs Flow through the Statements
Learning Objective: 02-04 Understand how material, labor, and overhead costs are added to a product at each stage of the production process.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
55) A product cost is deducted from revenue when
- A) the finished goods are sold.
- B) the expenditure is incurred.
- C) the production process takes place.
- D) the production process is completed.
Answer: A
Explanation: Product costs are expensed when the goods are sold. This supports the matching principle.
Difficulty: 2 Medium
Topic: Presentation of Costs in Financial Statements
Learning Objective: 02-02 Explain how costs are presented in financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
56) The amount of direct materials issued to production is found by
- A) subtracting ending work in process from total work in process during the period.
- B) adding beginning direct materials inventory and the delivered cost of direct materials.
- C) subtracting ending direct materials from direct materials available for production.
- D) adding delivered cost of materials, labor, and manufacturing overhead.
Answer: C
Explanation: DM available for production − Ending DM Inventory = DM issued to production.
Difficulty: 2 Medium
Topic: Details of Manufacturing Cost Flows
Learning Objective: 02-04 Understand how material, labor, and overhead costs are added to a product at each stage of the production process.
Bloom’s: Understand
Fundamentals of Cost Accounting, 6e (Lanen)
Chapter 4 Fundamentals of Cost Analysis for Decision Making
1) Differential analysis involves the comparison of one or more alternative courses of action with the status quo.
Answer: TRUE
Explanation: This statement is a definition of differential analysis.
Difficulty: 1 Easy
Topic: Differential Analysis
Learning Objective: 04-01 Use differential analysis to analyze decisions.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
2) If there is only one alternative course of action and the status quo is unacceptable, then there really is no decision to make.
Answer: TRUE
Explanation: A decision needs at least two alternatives.
Difficulty: 1 Easy
Topic: Differential Analysis
Learning Objective: 04-01 Use differential analysis to analyze decisions.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
3) A decision must involve at least two alternative courses of action.
Answer: TRUE
Explanation: If there is only one alternative there is no decision to make.
Difficulty: 1 Easy
Topic: Differential Analysis
Learning Objective: 04-01 Use differential analysis to analyze decisions.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
4) Differential analysis cannot be used for long-run decisions because it cannot incorporate the timing of revenues and costs (i.e., the time value of money).
Answer: FALSE
Explanation: The time value of money can be incorporated into the analysis for long-run decisions.
Difficulty: 2 Medium
Topic: Differential Analysis
Learning Objective: 04-01 Use differential analysis to analyze decisions.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
5) Short-run decisions often have long-run implications.
Answer: TRUE
Explanation: Most decisions have long-run implications.
Difficulty: 1 Easy
Topic: Differential Analysis
Learning Objective: 04-01 Use differential analysis to analyze decisions.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
6) Only variable costs can be differential costs.
Answer: FALSE
Explanation: Fixed costs can differ between alternatives as well.
Difficulty: 1 Easy
Topic: Differential Analysis
Learning Objective: 04-01 Use differential analysis to analyze decisions.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
7) Fixed costs are always classified as sunk costs in differential cost analysis.
Answer: FALSE
Explanation: Fixed costs can also be differential.
Difficulty: 1 Easy
Topic: Differential Analysis
Learning Objective: 04-01 Use differential analysis to analyze decisions.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
8) The full-cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in the product’s cost.
Answer: FALSE
Explanation: The fallacy occurs when fixed costs are included.
Difficulty: 2 Medium
Topic: Differential Analysis and Pricing Decisions
Learning Objective: 04-02 Understand how to apply differential analysis to pricing decisions.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
9) When deciding whether or not to accept a special order, a decision-maker should focus on differential costs instead of full costs.
Answer: TRUE
Explanation: Full costs will include some costs that do not differ and should be excluded.
Difficulty: 2 Medium
Topic: Differential Analysis and Pricing Decisions
Learning Objective: 04-02 Understand how to apply differential analysis to pricing decisions.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
10) The differential analysis approach to pricing for special orders could lead to underpricing in the long-run because fixed costs are not included in the analysis.
Answer: TRUE
Explanation: In the long run, fixed costs become differential and should be included.
Difficulty: 2 Medium
Topic: Differential Analysis and Pricing Decisions
Learning Objective: 04-02 Understand how to apply differential analysis to pricing decisions.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
11) Target costs equal the difference between the target selling price and the desired profit margin.
Answer: TRUE
Explanation: Target cost focuses on what level of costs would be allowed.
Difficulty: 2 Medium
Topic: Long-Run Pricing Decisions
Learning Objective: 04-03 Understand several approaches for establishing prices based on costs for long-run pricing decisions.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
12) Dumping occurs when a company exports its product to consumers in another country at an export price that is below the domestic price.
Answer: TRUE
Explanation: This statement is the definition of dumping.
Difficulty: 1 Easy
Topic: Legal Issues Relating to Costs and Sales Prices
Learning Objective: 04-03 Understand several approaches for establishing prices based on costs for long-run pricing decisions.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
13) Price discrimination is the practice of selling identical goods or services to different customers at different prices.
Answer: TRUE
Explanation: This statement is the definition of price discrimination.
Difficulty: 1 Easy
Topic: Legal Issues Relating to Costs and Sales Prices
Learning Objective: 04-03 Understand several approaches for establishing prices based on costs for long-run pricing decisions.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
14) Peak-load pricing is the practice of setting prices lowest when the quantity demanded for the product approaches the physical capacity to produce it.
Answer: FALSE
Explanation: Prices are set highest when capacity is being approached.
Difficulty: 1 Easy
Topic: Legal Issues Relating to Costs and Sales Prices
Learning Objective: 04-03 Understand several approaches for establishing prices based on costs for long-run pricing decisions.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
15) The alternative courses of action in a make-or-buy decision are (a) manufacture needed items internally or (b) purchase needed items externally.
Answer: TRUE
Explanation: Make = internal; buy = external
Difficulty: 1 Easy
Topic: Use of Differential Analysis for Production Decisions
Learning Objective: 04-04 Understand how to apply differential analysis to production decisions.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
16) The reason opportunity costs are not included in the accounting system is because they involve estimates.
Answer: FALSE
Explanation: Opportunity costs are not included in the system because they are not the result of a transaction. Many items included in the accounting system involve estimates (such as depreciation).
Difficulty: 2 Medium
Topic: Use of Differential Analysis for Production Decisions
Learning Objective: 04-04 Understand how to apply differential analysis to production decisions.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
17) Financial statements prepared in accordance with generally accepted accounting principles (GAAP) provide differential cost information.
Answer: FALSE
Explanation: GAAP has a focus of comparability, not decision relevance.
Difficulty: 1 Easy
Topic: Use of Differential Analysis for Production Decisions
Learning Objective: 04-04 Understand how to apply differential analysis to production decisions.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
18) In the short-run, plant capacity is fixed and product choices have to be made that optimize the use of available capacity.
Answer: TRUE
Explanation: In the short run, capacity is set and cannot be expanded.
Difficulty: 1 Easy
Topic: Use of Differential Analysis for Production Decisions
Learning Objective: 04-04 Understand how to apply differential analysis to production decisions.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
19) With constrained resources, the important measure of profitability is the contribution margin per unit of scarce resource.
Answer: TRUE
Explanation: You are concerned with the best use of the resource, so you want to maximize the profit.
Difficulty: 1 Easy
Topic: Use of Differential Analysis for Production Decisions; The Theory of Constraints
Learning Objective: 04-04 Understand how to apply differential analysis to production decisions.; 04-05 Understand the theory of constraints.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
20) The theory of constraints focuses on determining the optimal product mix when one or more resources restrict the attainment of a goal or objective.
Answer: TRUE
Explanation: This is the core idea of the theory of constraints.
Difficulty: 1 Easy
Topic: The Theory of Constraints
Learning Objective: 04-05 Understand the theory of constraints.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
21) The relevance of a particular cost to a decision is determined by the: (CMA adapted)
- A) riskiness of the decision.
- B) number of decision variables.
- C) amount of the cost.
- D) potential effect on the decision.
Answer: D
Explanation: Relevance is predicated upon whether it affects a decision.
Difficulty: 1 Easy
Topic: Differential Analysis
Learning Objective: 04-01 Use differential analysis to analyze decisions.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
22) In a decision analysis situation, which one of the following costs is not likely to contain a variable cost component? (CMA adapted)
- A) Labor.
- B) Overhead.
- C) Straight-line Depreciation.
- D) Selling.
Answer: C
Explanation: Straight-line depreciation is a fixed cost since it is the same amount each period.
Difficulty: 2 Medium
Topic: Differential Analysis
Learning Objective: 04-01 Use differential analysis to analyze decisions.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
23) Differential costs are: (CMA adapted)
- A) the difference in total costs that result from selecting one choice instead of another.
- B) the profit foregone by selecting one choice instead of another.
- C) a cost that continues to be incurred in the absence of activity.
- D) a cost common to all choices in questions and not clearly allocable to any of them.
Answer: A
Explanation: Differential costs are costs that differ among or between alternatives.
Difficulty: 1 Easy
Topic: Differential Analysis
Learning Objective: 04-01 Use differential analysis to analyze decisions.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
24) The period of time over which capacity will be unchanged is:
- A) long run.
- B) sunk cost.
- C) short run.
- D) product life cycle.
Answer: C
Explanation: In the long run, capacity can be adjusted; in the short run, it cannot.
Difficulty: 1 Easy
Topic: Differential Analysis and Pricing Decisions
Learning Objective: 04-02 Understand how to apply differential analysis to pricing decisions.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
25) Which of the following statements regarding differential costs is (are) false?
(A) The full-cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in the product’s cost.
(B) When deciding whether or not to accept a special order, a decision-maker should focus on differential costs instead of full costs.
- A) Only A.
- B) Only B.
- C) Neither A nor B is false.
- D) Both A and B are false.
Answer: A
Explanation: The full-cost fallacy is when fixed costs are included.
Difficulty: 2 Medium
Topic: Differential Analysis and Pricing Decisions
Learning Objective: 04-02 Understand how to apply differential analysis to pricing decisions.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
26) Which of the following costs are irrelevant for a special order that will allow an organization to utilize some of its present idle capacity?
- A) Direct materials.
- B) Indirect materials.
- C) Variable overhead.
- D) Unavoidable fixed overhead.
Answer: D
Explanation: Unavoidable fixed costs will be incurred whether the special order is undertaken or not.
Difficulty: 2 Medium
Topic: Differential Analysis and Pricing Decisions
Learning Objective: 04-02 Understand how to apply differential analysis to pricing decisions.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
27) Which of the following statements regarding special orders is (are) true?
(A) The primary decision for special orders is determining whether the differential revenue is greater than the differential costs associated with the order.
(B) The differential analysis approach to pricing for special orders could lead to underpricing in the long-run because fixed costs are not included in the analysis.
- A) Only A.
- B) Only B.
- C) Neither A nor B is true.
- D) Both A and B are true.
Answer: D
Explanation: Both statements are true – (A) looks at the short-run, while (B) has a long-run view.
Difficulty: 2 Medium
Topic: Differential Analysis and Pricing Decisions
Learning Objective: 04-02 Understand how to apply differential analysis to pricing decisions.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
28) The Arthur Company manufactures kitchen utensils. The company is currently producing well below its full capacity. The Benton Company has approached Arthur with an offer to buy 20,000 utensils at $0.75 each. Arthur sells its utensils wholesale for $0.85 each; the average cost per unit is $0.83, of which $0.12 is fixed costs. If Arthur were to accept Benton’s offer, what would be the increase in Arthur’s operating profits?
- A) $400.
- B) $800.
- C) $1,600.
- D) $2,000.
Answer: B
Explanation: [$0.75 – ($0.83 – $0.12)] × 20,000 = $800
Difficulty: 3 Hard
Topic: Differential Analysis and Pricing Decisions
Learning Objective: 04-02 Understand how to apply differential analysis to pricing decisions.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
29) The Minton Company has gathered the following information for a unit of its most popular product:
Direct materials $ 6
Direct labor 3
Overhead (40% variable) 5
Cost to manufacture 14
Desired markup (50%) 7
Target selling price $ 21
The above cost information is based on 4,000 units. A foreign distributor has offered to buy 1,000 units at a price of $16 per unit. This special order would not disturb regular sales. Variable shipping and other selling expenses would be an additional $1 per unit for the special order. If the special order is accepted, Minton’s operating profits will increase by:
- A) $1,000.
- B) $1,600.
- C) $2,000.
- D) $4,000.
Answer: D
Explanation: [$16 − $6 − $3 − ($5 × 40%) − $1] × 1,000 = $4 × 1,000 = $4,000.
Difficulty: 3 Hard
Topic: Differential Analysis and Pricing Decisions
Learning Objective: 04-02 Understand how to apply differential analysis to pricing decisions.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
30) The following information relates to the Magna Company for the upcoming year, based on 400,000 units.
Amount Per Unit
Sales $ 4,000,000 $ 10.00
Cost of goods sold 3,200,000 8.00
Gross margin 800,000 2.00
Operating expenses 300,000 0.75
Operating profits $ 500,000 $ 1.25
The cost of goods sold includes $1,200,000 of fixed manufacturing overhead; the operating expenses include $100,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $7.50 per unit has been made to Magna. Fortunately, there will be no additional operating expenses associated with the order and Magna has sufficient capacity to handle the order. How much will operate profits be increased if Magna accepts the special order?
- A) $25,000.
- B) $62,500.
- C) $100,000.
- D) $125,000.
Answer: C
Explanation: Cost of sales: ($3,200,000 − $1,200,000)/400,000 = $5; Operating Expenses: ($300,000 − $100,000)/400,000 = $0.50; Sales $7.50 − $5 − $0.50 = $2 × 50,000 units = $100,000.
Difficulty: 3 Hard
Topic: Differential Analysis and Pricing Decisions
Learning Objective: 04-02 Understand how to apply differential analysis to pricing decisions.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
31) The following information relates to a product produced by Faulkland Company:
Direct materials $ 10
Direct labor 7
Variable overhead 6
Fixed overhead 8
Unit cost $ 31
Fixed selling costs are $1,000,000 per year. Variable selling costs of $4 per unit sold are added to cover the transportation cost. Although production capacity is 500,000 units per year, Faulkland expects to produce only 400,000 units next year. The product normally sells for $40 each. A customer has offered to buy 60,000 units for $30 each. The customer will pay the transportation company directly for the transportation charges on the units purchased. If Faulkland accepts the special order, the effect on operating profits would be a:
- A) $60,000 increase.
- B) $180,000 increase.
- C) $420,000 increase.
- D) $600,000 decrease.
Answer: C
Explanation: $30 – ($10 + $7 + $6) = $7 × 60,000 = $420,000 increase. The selling costs do not need to be included because the customer will pay those directly to the transportation company.
Difficulty: 3 Hard
Topic: Differential Analysis and Pricing Decisions
Learning Objective: 04-02 Understand how to apply differential analysis to pricing decisions.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
32) If there is excess capacity, the minimum acceptable price for a special order must cover:
- A) only variable costs associated with the special order.
- B) variable and fixed manufacturing costs associated with the special order.
- C) variable and incremental fixed costs associated with the special order.
- D) variable costs and incremental fixed costs associated with the special order, plus the contribution margin usually earned on regular units.
Answer: C
Explanation: The differential costs must be covered. There are no opportunity costs since there is excess capacity.
Difficulty: 2 Medium
Topic: Differential Analysis and Pricing Decisions
Learning Objective: 04-02 Understand how to apply differential analysis to pricing decisions.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
33) Park Corporation is preparing a bid for a special order that would require 720 liters of material SUN100. The company already has 560 liters of this raw material in stock that originally cost $6.30 per liter. Material SUN100 is used in the company’s main product and is replenished on a periodic basis. The resale value of the existing stock of the material is $5.80 per liter. New stocks of the material can be readily purchased for $6.65 per liter. What is the relevant cost of the 720 liters of the raw material when deciding how much to bid on the special order? (CIMA adapted)
- A) $4,592.
- B) $4,788.
- C) $4,456.
- D) $4,176.
Answer: B
Explanation: 720 liters × current market $6.65 = $4,788.
Difficulty: 3 Hard
Topic: Differential Analysis and Pricing Decisions
Learning Objective: 04-02 Understand how to apply differential analysis to pricing decisions.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
34) Tori Inc. has some material that originally cost $68,400. The material has a scrap value of $30,100 ‘as is’, but if reworked at a cost of $1,400, it could be sold for $30,800. What would be the incremental effect on the company’s overall profit of reworking and selling the material rather than selling it ‘as is’ as scrap? (CIMA adapted)
- A) $(69,100)
- B) $(700)
- C) $29,400
- D) $(39,000)
Answer: B
Explanation:
Sales value of reworked material $ 30,800
Less: Cost to rework material 1,400
Net sales value $ 29,400
Current scrap value 30,100
Net disadvantage $ (700 )
Difficulty: 3 Hard
Topic: Differential Analysis and Pricing Decisions
Learning Objective: 04-02 Understand how to apply differential analysis to pricing decisions.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
35) Lafferty Corporation is a specialty component manufacturer with idle capacity. Management would like to use its unused capacity to generate additional profits. A potential customer has offered to buy 6,200 units of component Rocket. Each unit of Rocket requires 8 units of material CES4 and 6 units of material XES7. Data concerning these two materials follow:
Material Units in Stock Original Cost Per Unit Current Market Price Per Unit Disposal Value Per Unit
CES4 32,420 $ 3.80 $ 3.35 $ 3.10
XES7 31,060 $ 9.30 $ 9.60 $ 8.35
Material CES4 is in use in many of the company’s products and is routinely replenished. Material XES7 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product Rocket? (CIMA adapted)
- A) $528,551
- B) $523,280
- C) $476,350
- D) $484,455
Answer: D
Explanation:
6,200 units Rocket × 8 units CES4 = 49,600 units × $3.35 current market $ 166,160
6,200 units Rocket × 6 units XES7 = 37,200 units:
In inventory 31,060 units × $8.35 disposal value 259,351
Purchase 6,140 units × $9.60 current market 58,944
Relevant cost of materials $ 484,455
Difficulty: 3 Hard
Topic: Differential Analysis and Pricing Decisions
Learning Objective: 04-02 Understand how to apply differential analysis to pricing decisions.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
36) Alpha Inc. regularly uses material FLAV4 and currently has in stock 460 liters of the material for which it paid $2,622 several weeks ago. If this were to be sold as is on the open market as surplus material, it would fetch $5.25 per liter. New stocks of the material can be purchased on the open market for $5.85 per liter, but it must be purchased in lots of 1,000 liters. You have been asked to determine the relevant cost of 800 liters of the material to be used in a job for a customer. The relevant cost of the 800 liters of material FLAV4 is: (CIMA adapted)
- A) $5,850.
- B) $4,200.
- C) $4,404.
- D) $4,680.
Answer: D
Explanation: 800 liters × current market $5.85 = $4,680
Difficulty: 3 Hard
Topic: Differential Analysis and Pricing Decisions
Learning Objective: 04-02 Understand how to apply differential analysis to pricing decisions.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
37) Starla Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 4,200 units of component JOLT. Each unit of JOLT requires 6 units of material OX8 and 9 units of material POW6. Data concerning these two materials follow:
Material Units in Stock Original Cost Per Unit Current Market Price Per Unit Disposal Value Per Unit
OX8 18,600 $ 3.60 $ 3.70 $ 3.35
POW6 38,280 $ 3.20 $ 2.80 $ 1.65
Material OX8 is in use in many of the company’s products and is routinely replenished. Material POW6 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product JOLT? (CIMA adapted)
- A) $146,790.
- B) $199,080.
- C) $155,610.
- D) $212,340.
Answer: C
Explanation:
4,200 units JOLT × 6 units OX8 = 25,200 units × $3.70 current market $ 93,240
4,200 units JOLT × 9 units POW6 = 37,800 units:
In inventory 37,800 units × $1.65 disposal value 62,370
Relevant cost of materials $ 155,610
Difficulty: 3 Hard
Topic: Differential Analysis and Pricing Decisions
Learning Objective: 04-02 Understand how to apply differential analysis to pricing decisions.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
38) Tara Inc. is considering using stocks of an old raw material in a special project. The special project would require all 160 kilograms of the raw material that are in stock and that originally cost the company $1,136 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $7.25 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $6.50 per kilogram if it were not used in the special project. The sale of the raw material would involve delivery to the purchaser at a total cost of $75.00 for all 160 kilograms. What is the relevant cost of the 160 kilograms of the raw material when deciding whether to proceed with the special project? (CIMA adapted)
- A) $1,040
- B) $965
- C) $1,136
- D) $1,160
Answer: B
Explanation: 160 kg × discounted price of $6.50 per kg = $1,040
$1,040 − $75.00 delivery cost = $965 relevant cost.
Difficulty: 3 Hard
Topic: Differential Analysis and Pricing Decisions
Learning Objective: 04-02 Understand how to apply differential analysis to pricing decisions.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
39) Which of the following costs are not considered in a differential analysis for a make-or-buy decision?
- A) Indirect materials and indirect labor if the item is manufactured internally.
- B) Direct materials and direct labor if the item is purchased.
- C) Variable overhead if the item is manufactured internally.
- D) Fixed overhead that will continue if the item is purchased.
Answer: D
Explanation: A cost that does not change is not included in the analysis.
Difficulty: 3 Hard
Topic: Differential Analysis and Pricing Decisions
Learning Objective: 04-02 Understand how to apply differential analysis to pricing decisions.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
40) The Crispy Baking Company is considering the expansion of its business into door-to-door delivery service. This would require an additional $12,500 in labor costs per month. Company-owned vehicles now used to make morning deliveries to restaurants could be used in the afternoons to make the home deliveries. However, it is estimated that an additional $5,000 would be required per month for gas, oil, and maintenance. It is further estimated that the home delivery use of the trucks would be allocated 45% of the existing $6,500 fixed vehicle costs. What is the differential delivery cost per month for expanding into the home delivery market?
- A) $12,500
- B) $17,500
- C) $19,750
- D) $20,425
Answer: B
Explanation: $12,500 + $5,000 = $17,500.
Difficulty: 3 Hard
Topic: Use of Differential Analysis for Production Decisions
Learning Objective: 04-04 Understand how to apply differential analysis to production decisions.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
41) The time from initial research and development to the time that support to the customer ends is the:
- A) product life cycle.
- B) short run.
- C) target time.
- D) predatory price.
Answer: A
Explanation: The product life cycle covers the time from initial research and development to the time at which support to the customer is withdrawn.
Difficulty: 1 Easy
Topic: Differential Analysis
Learning Objective: 04-03 Understand several approaches for establishing prices based on costs for long-run pricing decisions.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
42) The price based on customers’ perceived value for the product and the price that competitors charge is the:
- A) predatory price.
- B) target price.
- C) target cost.
- D) dumping price.
Answer: B
Explanation: A target price is the estimated price for a product or service that potential customers will be willing to pay.
Difficulty: 2 Medium
Topic: Long-Run Pricing Decisions
Learning Objective: 04-03 Understand several approaches for establishing prices based on costs for long-run pricing decisions.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
43) The practice of setting the selling price below cost with the intent to drive competitors out of business is:
- A) predatory pricing.
- B) target pricing.
- C) target costing.
- D) peak-load pricing.
Answer: A
Explanation: For the practice to be predatory, managers must set the price below cost and intend to harm competition.
Difficulty: 2 Medium
Topic: Legal Issues Relating to Costs and Sales Prices
Learning Objective: 04-03 Understand several approaches for establishing prices based on costs for long-run pricing decisions.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
44) The practice of setting prices highest when the quantity demanded for the product approaches capacity is:
- A) predatory pricing.
- B) target pricing.
- C) peak-load pricing.
- D) price fixing.
Answer: C
Explanation: Peak-load pricing is the practice of setting prices highest when the quantity demanded for the product approaches the physical capacity to produce it.
Difficulty: 2 Medium
Topic: Legal Issues Relating to Costs and Sales Prices
Learning Objective: 04-03 Understand several approaches for establishing prices based on costs for long-run pricing decisions.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
45) Agreement among business competitors to set prices at a particular level is:
- A) predatory pricing.
- B) target pricing.
- C) peak-load pricing.
- D) price fixing.
Answer: D
Explanation: Price fixing is the agreement among business competitors to set prices at a particular level.
Difficulty: 2 Medium
Topic: Legal Issues Relating to Costs and Sales Prices
Learning Objective: 04-03 Understand several approaches for establishing prices based on costs for long-run pricing decisions.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
46) Exporting a product to another country at a price below the domestic price is:
- A) dumping.
- B) target pricing.
- C) peak-load pricing.
- D) price fixing.
Answer: A
Explanation: Dumping occurs when a company exports its product to consumers in another country at an export price that is below the domestic price.
Difficulty: 2 Medium
Topic: Legal Issues Relating to Costs and Sales Prices
Learning Objective: 04-03 Understand several approaches for establishing prices based on costs for long-run pricing decisions.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
47) A target cost is computed as:
- A) cost to manufacture plus a desired markup.
- B) cost to manufacture plus designated selling expenses.
- C) market willingness to pay – cost to manufacture.
- D) market willingness to pay – desired profit.
Answer: D
Explanation: Target cost is based on external market prices and desired profit. In essence, how much can a product cost?
Difficulty: 2 Medium
Topic: Long-Run Pricing Decisions
Learning Objective: 04-03 Understand several approaches for establishing prices based on costs for long-run pricing decisions.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
48) The operations of Bridgeton Corporation are divided into the Adams Division and the Carter Division. Projections for the next year are as follows:
Adams Division Carter Division Total
Sales $ 560,000 $ 336,000 $ 896,000
Variable costs 196,000 154,000 350,000
Contribution margin $ 364,000 $ 182,000 $ 546,000
Direct fixed costs 168,000 140,000 308,000
Segment margin $ 196,000 $ 42,000 $ 238,000
Allocated common costs 84,000 63,000 147,000
Operating income (loss) $ 112,000 $ (21,000 ) $ 91,000
Operating income for Bridgeton Corporation as a whole if the Carter Division were dropped would be:
- A) $133,000.
- B) $112,000.
- C) $91,000.
- D) $49,000.
Answer: D
Explanation: $112,000 – $63,000 = $49,000
Difficulty: 3 Hard
Topic: Use of Differential Analysis for Production Decisions
Learning Objective: 04-04 Understand how to apply differential analysis to production decisions.
Bloom’s: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
49) Damon Industries manufactures 20,000 components per year. The manufacturing costs of the components was determined as follows:
Direct materials $ 100,000
Direct labor 160,000
Variable manufacturing overhead 60,000
Fixed manufacturing overhead 80,000
An outside supplier has offered to sell the component for $17. If Damon purchases the component from the outside supplier, the manufacturing facilities would be unused and could be rented out for $10,000. If Damon purchases the component from the supplier instead of manufacturing it, the effect on operating profits would be a:
- A) $70,000 increase.
- B) $50,000 decrease.
- C) $10,000 decrease.
- D) $30,000 increase.
Answer: C
Explanation: Make: $100,000 + $160,000 + $60,000 = $320,000.
Buy: $20,000 × $17 = $340,000 − $10,000 = $330,000.
Make $320,000 − Buy $330,000 = −$10,000 decrease in operating profits to Buy.
Difficulty: 3 Hard
Topic: Use of Differential Analysis for Production Decisions
Learning Objective: 04-04 Understand how to apply differential analysis to production decisions.
Bloom’s: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
50) Brevard Industries produces two products. Information about the products is as follows:
Product 1 Product 2
Units produced and sold 4,000 10,000
Selling price per unit $ 15 $ 13
Variable costs per unit 9 8
The company’s fixed costs totaled $70,000, of which $15,000 can be directly traced to Product 1 and $40,000 can be directly traced to Product 2. The effect on the firm’s profits if Product 2 is dropped would be a:
- A) $10,000 increase.
- B) $35,000 increase.
- C) $35,000 decrease.
- D) $10,000 decrease.
Answer: D
Explanation: Product 2 Dropped: ($13 − $8) = $5 CM × 10,000 = $50,000 CM decrease.
$50,000 CM decrease − $40,000 FC decrease = $10,000 decrease in operating profits.
Difficulty: 3 Hard
Topic: Use of Differential Analysis for Production Decisions
Learning Objective: 04-04 Understand how to apply differential analysis to production decisions.
Bloom’s: Analyze
AACSB: Analytical Thinking
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