TRUE or FALSE

1. Relevant costs are expected future costs that differ among alternatives. TRUE
2. The fixed cost per unit of a product should stay the same throughout the relevant range
of production. FALSE
3. If a company increases fixed costs, then the breakeven point will be lower.( F )
4. Sunk costs are past costs that are unavoidable. TRUE
5. Full costs of a product include variable costs, but not fixed costs. FALSE
6. The variable cost per unit of a product should stay the same throughout the relevant
range of production. TRUE
7. Merchandising companies hold only one type of inventory: direct material. FALSE
8. Operating income is sales revenue minus operating expenses. FALSE
9. Period costs are never included as part of inventory. TRUE
10. The degree of operating leverage at a specific level of sales helps the managers
calculate the effect that potential changes in sales will have on operating income.
TRUE
11. Managerial accounting is highly regulated by rules and regulations (False financial)
12. A variable cost remains constant on a per-unit basis as production increases (T )
13. Absorption costing is more useful than variable costing in determining a company’s
break-even point (False )
14. Dividing total fixed costs by the contribution margin ratio yields break-even point
in units(FALSE in dollrs)
15. Degree of Operating Leverage in Dollars = Contribution Margin / Profit before
Taxes (FALSE )
16.
17. Financial accounting is most concerned with meeting the needs of internal users
(FALSE)
18. A cost object is anything for which management wants to collect or accumulate
costs (TRUE)
19. A cost that shifts upward or downward when activity changes by a certain interval
is referred to as a mixed cost (FALSE)
20. A company’s break-even point is the level where total revenues equal total costs
(TRUE)
21. Unit sale to attain target profit= (Total Fixed Costs + target profit) / Contribution
Margin per unit (TRUE)
22. If a company increases fixed costs, then the breakeven point will be lower. FALSE
23. The cost of a machine purchased last year will be irrelevant in a decision for next
year. TRUE
24. A linear cost function can only represent fixed cost behavior. FALSE
25. All manufacturing costs are inventoriable costs. TRUE
26. Period costs are never included as part of inventory. TRUE
27. Conversion costs include all direct manufacturing costs. FALSE
28. Depreciation on a factory can be classified as a period cost. FALSE
29. Managerial accounting is highly regulated by GAAP ( F )
30. Dividing total fixed costs by the contribution margin ratio yields break-even point
in dollars( T )

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31. Degree of Operating Leverage in Dollars = Contribution Margin / Profit after Taxes
(T )
Multiple choices
1. Direct materials are $20, direct labor is $5, variable overhead costs are $15, and fixed
overhead costs are $10. In the short term, the incremental cost of one unit is:
A) $15 B) $25 C) $40 D) $50
2.Which of the following would not need to be allocated to a cost object?
a. direct material
b. direct labor
c. direct production costs
d. all of the above
Answer the questions (3-5) using the information below:
K Manufacturing is approached by a European customer to fulfill a one-time-only special
order for a product similar to one offered to domestic customers. K Manufacturing has
excess capacity. The following per unit data apply for sales to regular customers:
Variable costs:
Direct materials $80
Direct labor 40
Manufacturing support 70
Marketing costs 30
Fixed costs:
Manufacturing support 90
Marketing costs 30
Total costs 340
Markup (50%) 170
Targeted selling price $510
3. What is the full cost of the product per unit?
A) $220 B) $340 C) $510 D) $170
Explanation: B) $80 + $40 + $70 + $30 + $90 + $30 = $340
4. What is the contribution margin per unit?
A) $170 B) $220 C) $290 D) $510
Explanation: C) $510 - ($80 + $40 + $70 + $30) = $290
5. For K Manufacturing, what is the minimum acceptable price of this special order?
A) $220 B) $290 C) $340 D) $510
Explanation: A) $80 + $40 + $70 + $30 = $220

The East Company manufactures several different products. Unit costs associated
with Product ORD203 are as follows:
Direct materials $50
Direct manufacturing labor 8
Variable manufacturing overhead 10
Fixed manufacturing overhead 23
Sales commissions (2% of sales) 5
Administrative salaries 9
Total $105
1. What are the variable costs per unit associated with Product ORD203?
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 A) $60 B) $82 C) $73 D) $105

2. What are the fixed costs per unit associated with Product ORD203?
A) $23 B) $32 C) $35 D) $44

3. Wheel and Tire Manufacturing currently produces 1,000 tires per month. The
following per unit data apply for sales to regular customers:
Direct materials $20
Direct manufacturing labor 3
Variable manufacturing overhead 6
Fixed manufacturing overhead10
Total manufacturing costs $39
The plant has capacity for 3,000 tires and is considering expanding production to
2,000 tires. What is the total cost of producing 2,000 tires?
A) $39,000 B) $78,000 C) $68,000 D) $62,000

1. A linear cost function can represent:

A) mixed cost behaviors B) fixed cost behaviors
C) variable cost behaviors D) All of these answers are correct.
Answer the questions (2:5) using the information below:
For last year, AMR Manufacturing reported the following:
$420,000Revenue
22,000Beginning inventory of direct materials, January 1
146,000Purchases of direct materials
16,000Ending inventory of direct materials, December 31
18,000Direct manufacturing labor
40,000Indirect manufacturing costs
35,000Beginning inventory of finished goods, January 1
104,000Cost of goods manufactured
36,000Ending inventory of finished goods, December 31
140,000Operating costs
2. What was AMR's cost of goods sold?
A) $103,000 B) $152,000 C) $268,000 D) $317,000
3. What was AMR's gross margin (or gross profit)?
A) $103,000 B) $152,000 C) $268,000 D) $317,000
4. What was AMR's operating income?
A) $76,000 B) $128,000 C) $177,000 D) $280,000

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5. How much of the above would be considered period costs for AMR
Manufacturing?
A) $104,000 B) $140,000 C) $246,000 D) $390,000
1. A cost that varies in total but remains constant on a per-unit basis with changes in activity is
called a(n):
a. expired cost.
b. fixed cost.
c. variable cost.
d. mixed cost.

2. CVP analysis requires costs to be categorized as

a. either fixed or variable.
b. direct or indirect.
c. product or period.
d. standard or actual.

3. After the level of volume exceeds the break-even point

a. the contribution margin ratio increases.
b. the total contribution margin exceeds the total fixed costs.
c. total fixed costs per unit will remain constant.
d. the total contribution margin will turn from negative to positive.

4. The contribution margin ratio always increases when the

a. variable costs as a percentage of net sales increase.
b. variable costs as a percentage of net sales decrease.
c. break-even point increases.
d. break-even point decreases.

The following information has been taken from the cost records of AMR Company for the past
year:
Raw material used in production $326
Total manufacturing costs charged to production during the year 686
(includes direct material, direct labor, and overhead equal to 60% of
direct labor cost)
Cost of goods available for sale 826
Selling and Administrative expenses 25

Inventories Beginning Ending

Raw Material $75 $ 85
Work in Process 80 30
Finished Goods 90 110

5.Refer to AMR Company. The cost of raw material purchased during the year was
a. $316.
b. $336.
c. $360.
d. $411.
6. Refer to AMR Company. Direct labor cost charged to production during the year was
a. $135.
b. $216.
c. $225.

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 d. $360.
7. Refer to AMR Company. Cost of Goods Manufactured was
a. $636.
b. $716.
c. $736.
d. $766.

8. Refer to AMR Company. Cost of Goods Sold was

a. $691.
b. $716.
c. $736.
d. $801.

9. If selling price per unit is $30, variable costs per unit are $20, total fixed costs are $10,000, the
tax rate is 30%, and the company sells 5,000 units, net income is:
a. $12,000
b. $14,000
c. $28,000
d. $40,000

10. N Company sells several products. Information of average revenue and costs is as follows:
Selling price per unit $20.00
Variable costs per unit:
Direct material $4.00
Direct manufacturing labor $1.60
Manufacturing overhead $0.40
Selling costs $2.00
Annual fixed costs $96,000
The contribution margin per unit is:
a. $6
b. $8
c. $12
d. $14

11. A cost that remains constant in total but varies on a per-unit basis with changes in activity is
called a(n):
a. expired cost.
b. fixed cost.
c. variable cost.
d. mixed cost.

12. Product costs are deducted from revenue

a. as expenditures are made.
b. when production is completed.
c. as goods are sold.
d. to minimize taxable income.

13. The three primary inventory accounts in a manufacturing company are

a. Merchandise Inventory, Supplies Inventory, and Finished Goods Inventory.
b. Merchandise Inventory, Work in Process Inventory, and Finished Goods Inventory.

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 c. Supplies Inventory, Work in Process Inventory, and Finished Goods Inventory.
d. Raw Material Inventory, Work in Process Inventory, and Finished Goods Inventory.

14. Cost of Goods Sold is an

a. unexpired product cost.
b. expired product cost.
c. unexpired period cost.
d. expired period cost.

15. Which of the following would need to be allocated to a cost object?

a. direct material
b. direct labor
c. direct production costs
d. indirect production costs

Answer the questions (6:8) using the information below:

Beginning finished goods, 1/1/2023 $ 90,000
Ending finished goods, 12/31/2023 77,000
Cost of goods sold 270,000
Sales revenue 500,000
Operating expenses 155,000
6. What is cost of goods manufactured for 2023?
A) $230,000 B) $257,000 C) $283,000 D) $355,000
7. What is gross margin for 2023?
A) $283,000 B) $355,000 C) $230,000 D) $257,000
8. What is operating income for 2023?
A) $75,000B) $112,000C) $62,000 D) $230,000

Answer the questions (9:12) using the information below:

For last year, AMR Manufacturing reported the following:
$420,000Revenue
22,000Beginning inventory of direct materials, January 1
146,000Purchases of direct materials
16,000Ending inventory of direct materials, December 31
18,000Direct manufacturing labor
40,000Indirect manufacturing costs
35,000Beginning inventory of finished goods, January 1
104,000Cost of goods manufactured
36,000Ending inventory of finished goods, December 31
140,000Operating costs
9. What was AMR's cost of goods sold?
A) $103,000 B) $152,000 C) $268,000 D) $317,000
10. What was AMR's gross margin (or gross profit)?
A) $103,000 B) $152,000 C) $268,000 D) $317,000

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11. What was AMR's operating income?
A) $76,000 B) $128,000 C) $177,000 D) $280,000
12. How much of the above would be considered period costs for AMR
Manufacturing?
A) $104,000 B) $140,000 C) $246,000 D) $390,000

Suppose that management believes that a 20% reduction in the selling price will
result in a 20% increase in sales. If this proposed reduction in selling price is
implemented:
A) operating income will decrease by $9,000
B) operating income will increase by $9,000
C) operating income will decrease by $20,000
D) operating income will increase by $15,000

Answer the questions (13:14) using the information below:

R's Custom Jewelry sells a single product. 700 units were sold resulting in $7,000 of
sales revenue, $2,800 of variable costs, and $1,200 of fixed costs.
13. Breakeven point in units is:
A) 200 units B) 300 units C) 500 units D) Other
14. The number of units that must be sold to achieve $6,000 of operating income is:
A) 1,000 units B) 1,166 units C) 1,200 units D) Other

Below is an income statement for ALI Company:

Sales $400,000
Variable costs (125,000)
Contribution margin $275,000
Fixed costs (200,000)
Profit before taxes $ 75,000

1. What is ALI’s degree of operating leverage?

2. Based on the cost and revenue structure on the income statement, what was ALI’s break-even
point in dollars?
3. What was ALI’s margin of safety in dollars?
4. Assuming that the fixed costs are expected to remain at $200,000 for the coming year and the
sales price per unit and variable costs per unit are also expected to remain constant, how much
profit before taxes will be produced if the company anticipates sales for the coming year rising
to 130 percent of the current year’s level?

Answer the questions (1:6) using the information below:

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 ABC Company was concerned that increased sales didn’t result in increased
profits for 2022. Both variable unit and total fixed manufacturing costs for 2021
and 2022 remained constant at $20 and $2,000,000 respectively.
In 2021, the company produced 100,000 units and sold 80,000 units at a price of
$50 per unit. There was no beginning inventory in 2021. In 2022, the company
made 70,000 units and sold 90,000 units at a price of $50. Selling and
administrative expenses were all fixed at $100,000 each year. After Preparing
income statement for each year using absorption costingand variable costing
answer the following questions:
1. By using absorption costing, ABCgross profit for the year 2022 are:

A) 4,000,000 B) 4,500,000 C) 800,000 D) 300,000

2. By using absorption costing, ABCoperating income for the year 2021 are:
A) 700,000 B) 200,000 C) 800,000 D) 300,000
3. By using absorption costing, ABCbeginning inventory for the year 2022 are:
A) 700,000 B) 200,000 C) 800,000 D) 300,000
4. By using variable costing, ABCcontribution margin for the year 2021 are:
A) 4,000,000 B) 4,500,000 C) 2,400,000 D) 2,700,000
5. By using variable costing, ABCoperating income for the year 2022 are:
A) 700,000 B) 200,000 C) 600,000 D) 300,000
6. The differences between net income according toabsorption costing and
variable costing for the year 2022 are:
A) 400,000 B) 600,000 C) 800,000 D) 1,000,000

R Company has a current production level of 20,000 units per month. Unit costs at
this level are:
Direct materials $0.25
Direct labor 0.40
Variable overhead 0.15
Fixed overhead 0.20
Marketing - fixed 0.20
Marketing/distribution - variable 0.40
Current monthly sales are 18,000 units. Jim Company has contacted R Company about
purchasing 1,500 units at $2.00 each. Current sales would NOT be affected by the one-
time-only special order, and variable marketing/distribution costs would NOT be incurred
on the special order. What is R Company's change in operating profits if the special
order is accepted?
A) $400 increase in operating profits B) $400 decrease in operating profits
C) $1,800 increase in operating profits D) $1,800 decrease in operating profits
Answer the questions (1:3) using the information below:
D's Engine Company manufactures part TE456 used in several of its engine models.
Monthly production costs for 1,000 units are as follows:
Direct materials $ 20,000
Direct labor 5,000
Variable overhead costs 15,000

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 Fixed overhead costs 10,000
Total costs $50,000
It is estimated that 10% of the fixed overhead costs assigned to TE456 will no longer be
incurred if the company purchases TE456 from the outside supplier. D's Engine Company
has the option of purchasing the part from an outside supplier at $42.50 per unit.
1. If D's Engine Company accepts the offer from the outside supplier, the
monthly avoidable costs (costs that will no longer be incurred) total:
A) $ 41,000 B) $ 49,000 C) $ 25,000 D) $50,000
2. If D's Engine Company purchases 1,000 TE456 parts from the outside supplier
per month, then its monthly operating income will:
A) increase by $1,000 B) increase by $40,000
C) decrease by $1,500 D) decrease by $42,500
3. The maximum price that D's Engine Company should be willing to pay the
outside supplier is:
A) $40 per TE456 part B) $41 per TE456 part
C) $49 per TE456 part D) $50 per TE456 part

Answer the questions (1:2) using the information below:

S Corporation currently manufactures a subassembly for its main product. The costs
per unit are as follows:
Direct materials $ 1.00
Direct labor 10.00
Variable overhead 5.00
Fixed overhead 8.00
Total $24.00
B Company has contacted S with an offer to sell them 5,000 of the subassemblies for
$22.00 each. S will eliminate $25,000 of fixed overhead if it accepts the proposal.
1. What are the relevant costs for S?
A) $140,000 B) $125,000 C) $105,000 D) $80,000
2. Should S make or buy the subassemblies? What is the difference between the
two alternatives?
A) Buy; savings = $20,000 B) Buy; savings = $50,000
C) Make; savings = $60,000 D) Make; savings = $5,000

Essay Questions
Q1: ALI Inc. had the following activities during 2022:
Direct materials:
Beginning inventory $ 20,000
Purchases 61,600
Ending inventory 10,400
Direct manufacturing labor 16,000
Manufacturing overhead 12,000
Beginning work-in-process inventory 800

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 Ending work-in-process inventory 4,000
Beginning finished goods inventory24,000
Ending finished goods inventory 16,000
Required:
a. What is the cost of direct materials used during 2022?
b. What is cost of goods manufactured for 2022?
c. What is cost of goods sold for 2022?
d. What amount of prime costs was added to production during 2022?
e. What amount of conversion costs was added to production during 2022?
Answer:
a. $20,000 + $61,600 - $10,400 = $71,200
b. $71,200 + $16,000 + $12,000 + $800 - $4,000 = $96,000
c. $96,000 + $24,000 - $16,000 = $104,000
d. $71,200 + $16,000 = $87,200
e. $16,000 + $12,000 = $28,000

Q2: ALI Manufacturing Company had the following account balances for the
quarter ending March 31, unless otherwise noted:
Work-in-process inventory (January 1)$ 140,400
Work-in-process inventory (March 31) 171,000
Finished goods inventory (January 1) 540,000
Finished goods inventory (March 31) 510,000
Direct materials used 378,000
Indirect materials used 84,000
Direct manufacturing labor 480,000
Indirect manufacturing labor 186,000
Property taxes on manufacturing plant building28,800
Salespersons' company vehicle costs 12,000
Depreciation of manufacturing equipment264,000
Depreciation of office equipment 123,600
Miscellaneous plant overhead 135,000
Plant utilities 92,400
General office expenses 305,400
Marketing distribution costs 30,000
Required:
a. Prepare a cost of goods manufactured schedule for the quarter.
b. Prepare a cost of goods sold schedule for the quarter.

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Answer:
a. ALI Manufacturing Company
Cost of Goods Manufactured Schedule
For quarter ending March 31

Direct materials used $ 378,000

Direct manufacturing labor 480,000
Manufacturing overhead
Depreciation of manufacturing equipment$264,000
Indirect manufacturing labor 186,000
Indirect materials 84,000
Miscellaneous plant overhead 135,000
Plant utilities 92,400
Property taxes on building 28,800 790,200
Manufacturing costs incurred $1,648,200
Add beginning work-in-process inventory 140,400
Total manufacturing costs $1,788,600
Less ending work-in-process inventory (171,000)
Cost of goods manufactured $1,617,600
b. ALI Manufacturing Company
Cost of Goods Sold Schedule
For the quarter ending March 31
Beginning finished goods inventory $ 540,000
Cost of goods manufactured 1,617,600
Cost of goods available for sale 2,157,600
Ending finished goods inventory (510,000)
Cost of goods sold $1,647,600

Q3: As part of his job as cost analyst, AMR collected the following information
concerning the operations of the Machining Department:
Observation Machine-hoursTotal Operating Costs
January 4,000 $45,000
February 4,600 49,500
March 3,800 45,750
April 4,400 48,000
May 4,500 49,800
Required:
a. Use the high-low method to determine the estimating cost function with
machine-hours as the cost driver.
b. If June's estimated machine-hours total 4,200, what are the total estimated
costs of the Machining Department?

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Answer:
a. Slope coefficient = ($49,500 - $45,750) / (4,600 - 3,800) = $4.6875 per machine-
hour
Constant = $49,500 - ($4.6875 × 4,600) = $27,937.50
Estimating equation = $27,937.50 + $4.6875X
b. June's estimated costs = $27,937.50 + $4.6875 × 4,200 = $47,625

24) Renad Auto Company manufactures a part for use in its production of
automobiles. When 10,000 items are produced, the costs per unit are:
Direct materials $ 12
Direct manufacturing labor 60
Variable manufacturing overhead 24
Fixed manufacturing overhead 32
Total $128
Retal Company has offered to sell Renad Auto Company 10,000 units of the part for
$120 per unit. The plant facilities could be used to manufacture another part at a
savings of $180,000 if Renad Auto accepts the supplier's offer. In addition, $20 per
unit of fixed manufacturing overhead on the original part would be eliminated.
Required:
a. What is the relevant per unit cost for the original part?
b. Which alternative is best for Renad Auto Company? By how much?

Answer:
a. Direct materials $12
Direct manufacturing labor 60
Variable manufacturing overhead 24
Avoidable fixed manufacturing overhead20
Total relevant per unit costs $116

b. Make Buy Effect of Buying

Purchase price $1,200,000 $(1,200,000)
Savings in space (180,000) 180,000
Direct materials $120,000 120,000
Direct manufacturing labor600,000 600,000
Variable overhead 240,000 240,000
Fixed overhead saved (200,000) 200,000
Totals$960,000 $820,000 $140,000

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ABC firm’s capacity is 5,000 units of product (X). it produces and sell 4,000 units.
Variable cost per unit is 45 and the selling price is 60. The firm received a special
order of 500 units with variable cost of 50 and selling price of 60. Total fixed cost is
40,000.
Required: should the firm ABC accept the offer
Answer
in lectures

Answer
in lectures

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Answer
in lectures

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Answer
in lectures

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