MULTIPLE CHOICE

1. A logical structure of activities designed to analyze and evaluate management of expenditures is a cost
a. consciousness system.
b. understanding system.
c. avoidance system.
d. control system.
ANS: D DIF: Easy OBJ: 15-1

2. For cost control purposes, actual costs should be compared to

a. the original budget.
b. actual costs for the prior period.
c. a flexible budget.
d. a static budget.
ANS: C DIF: Easy OBJ: 15-3

3. When the organizational output is difficult to define, management may rely on ___________ for cost
control.
a. qualitative measures
b. program budgeting
c. surrogate measures of output
d. all of the above
ANS: D DIF: Easy OBJ: 15-1

4. Setting organizational goals and objectives and preparing a budget are aspects of control
a. during an event.
b. before an event.
c. after an event.
d. before, during, and after an event.
ANS: B DIF: Easy OBJ: 15-2

5. Which of the following does not create a specific price level change?
a. change in production technology
b. change in the rate of inflation
c. changes due to supply and demand
d. changes in the number of competing suppliers
ANS: B DIF: Easy OBJ: 15-3

6. As the economy becomes more and more depressed, a company's management decides to slash spending
on research and development. What is the likely effect of this action on net income? Net income will be
a. higher this period and lower in future periods.
b. higher this period and higher in future periods.
c. lower this period and higher in future periods.
d. lower this period and lower in future periods.
ANS: A DIF: Easy OBJ: 15-3
 7. Spending levels in prior years are often the basis of
a. traditional budgets.
b. Zero-base budgets.
c. variance targets.
d. engineered cost analyses.
ANS: A DIF: Easy OBJ: 15-3

8. Minimizing period-by-period increases in unit variable costs and total fixed costs defines efforts of cost
a. control.
b. avoidance.
c. containment.
d. reduction.
ANS: C DIF: Easy OBJ: 15-3

9. Cost containment practices by a firm would not be effective for cost increases caused by
a. inflation.
b. a reduction in the quantity of an input purchased.
c. normal seasonality.
d. a reduction in the number of suppliers.
ANS: A DIF: Easy OBJ: 15-3

10. All of the following are explanations of cost changes. Which of these influences can be substantially
affected by cost containment measures?
a. inflation/deflation
b. changes in quantities purchased
c. technological change
d. changes in supply chain costs
ANS: B DIF: Moderate OBJ: 15-3

11. The greatest degree of control for committed fixed costs is exerted
a. in the post-investment audit.
b. during the life of the investment.
c. prior to acquisition.
d. by equipment operators.
ANS: C DIF: Easy OBJ: 15-4

12. Careful analysis of the capital budget is an important control activity for
a. variable costs.
b. discretionary costs.
c. committed costs.
d. period costs.
ANS: C DIF: Easy OBJ: 15-4
13. An effective control system functions before, during, and after an event. However, little control is
possible during the event for most
a. variable manufacturing costs.
b. variable period costs.
c. discretionary fixed costs.
d. committed fixed costs.
ANS: D DIF: Easy OBJ: 15-4

14. The term "committed costs" refers to costs that

a. management decides to incur in the current period to enable the company to achieve
objectives other than the filling of orders placed by customers.
b. are likely to respond to the amount of attention devoted to them by a specified manager.
c. are governed mainly by past decisions that established the present levels of operating and
organizational capacity and that only change slowly in response to small changes in
capacity.
d. fluctuate in total in response to small changes in the rate of utilization of capacity.
ANS: C DIF: Easy OBJ: 15-4

15. A committed fixed cost can

a. never be eliminated.
b. be eliminated in the short term and in the long term.
c. be eliminated in the long term but not in the short term.
d. be eliminated in the short term but not in the long term.
ANS: C DIF: Easy OBJ: 15-4

16. Which of the following is an example of a committed fixed cost?

a. investment in production facilities
b. advertising
c. preventive maintenance
d. employee training programs
ANS: A DIF: Easy OBJ: 15-4

17. A company would be reducing its discretionary costs if it

a. fired a production supervisor.
b. closed its research and development department.
c. successfully negotiated a reduction in its factory rent.
d. reduced its direct labor costs by hiring temporary workers.
ANS: B DIF: Moderate OBJ: 15-5

18. If a discretionary cost can be treated like an engineered cost, cost control may be achieved through the use
of
a. program budgeting.
b. zero-base budgeting.
c. capital budgeting.
d. flexible budgeting.
ANS: D DIF: Moderate OBJ: 15-5
19. Most discretionary costs relate to
a. plant and equipment acquisitions.
b. long-term investments.
c. basic personnel costs.
d. service activities.
ANS: D DIF: Easy OBJ: 15-5

20. If a cost can be reduced to zero in the short run without significantly harming the organization, the cost is
a
a. variable cost.
b. committed cost.
c. discretionary cost.
d. product cost.
ANS: C DIF: Easy OBJ: 15-5

21. Discretionary costs are often difficult to control because

a. it is difficult to measure the cost.
b. they cannot be changed in the short run.
c. they cannot be changed from period to period.
d. it is difficult to measure the benefits of discretionary activities.
ANS: D DIF: Moderate OBJ: 15-5

22. Which of the following is likely to be a discretionary cost in most organizations?

a. managerial training programs
b. managerial labor costs
c. factory utilities
d. factory rent
ANS: A DIF: Easy OBJ: 15-5

23. The level of discretionary costs

a. are set by management for one period at a time.
b. cannot be changed in the short run.
c. are determined when capital investment is undertaken.
d. always varies with sales.
ANS: A DIF: Easy OBJ: 15-5

24. Which of the following is not a factor that directly affects the budget for a discretionary cost?
a. the importance of the activity to the achievement of the organization's goals
b. last period's budget
c. the expected level of operations
d. managerial negotiations in the budgeting process
ANS: B DIF: Easy OBJ: 15-5
25. If an actual discretionary cost is exactly equal to the budgeted level of that cost, which of the following
statements is true?
a. Funds were appropriately spent.
b. The discretionary activity was efficient.
c. The discretionary activity was effective.
d. None of the above.
ANS: D DIF: Moderate OBJ: 15-5

26. Discretionary activities in an organization are determined based on

a. organizational policies and managerial preferences.
b. the budgeted amount from the prior period.
c. the level of long-term investment.
d. an organization's internal control.
ANS: A DIF: Moderate OBJ: 15-5

27. The term "discretionary costs" refers to

a. costs that management decides to incur in the current period to enable the company to
achieve objectives other than the filling of orders placed by customers.
b. costs that are likely to respond to the amount of attention devoted to them by a specified
manager.
c. costs that are governed mainly by past decisions that established the present levels of
operating and organizational capacity and that only change slowly in response to small
changes in capacity.
d. amortization of costs that were capitalized in previous periods.
ANS: A DIF: Easy OBJ: 15-5

28. Avoidable costs are usually

a. committed.
b. common.
c. discretionary.
d. joint.
ANS: C DIF: Easy OBJ: 15-5

29. Which of the following is least likely to be a discretionary cost?

a. salaries of salespeople
b. advertising
c. maintenance
d. insurance
ANS: A DIF: Easy OBJ: 15-5

30. For cost control purposes, fixed costs are classified as

a. product or period costs.
b. discretionary or committed.
c. direct or common.
d. sunk or avoidable.
ANS: B DIF: Easy OBJ: 15-5
31. If economic activity slows down, total costs could easily decline in which of the following categories?
a. variable costs and committed fixed costs
b. variable costs and discretionary fixed costs
c. variable costs only
d. committed fixed costs only
ANS: B DIF: Easy OBJ: 15-5

32. Usually, with respect to a variable cost, optimal control is exerted when the cost
a. can be controlled prior to incurrence.
b. is compared to its budget amount.
c. increases steadily over time.
d. is closely monitored.
ANS: D DIF: Easy OBJ: 15-5

33. Which kind of costs could be eliminated by closing a sales office?

Direct Discretionary Committed

a. yes yes no
b. yes no yes
c. yes no no
d. no no yes

ANS: A DIF: Moderate OBJ: 15-5

34. A major difference between committed and discretionary fixed costs is that
a. incurring committed fixed costs is less risky than using discretionary costs.
b. managers are usually responsible for committed fixed costs but not for discretionary fixed
costs.
c. incurring discretionary fixed costs rather than committed fixed costs gives a company
more flexibility in controlling costs.
d. companies are using more discretionary fixed costs because labor is easier to "remove"
than technology.
ANS: C DIF: Easy OBJ: 15-5

35. The distinction between avoidable and unavoidable costs is similar to the distinction between
a. variable costs and fixed costs.
b. variable costs and mixed costs.
c. step-variable costs and fixed costs.
d. discretionary costs and committed costs.
ANS: D DIF: Moderate OBJ: 15-5

36. The maximum allowable expenditure is the

a. appropriation.
b. allowance.
c. allocation.
d. committed fixed cost.
ANS: A DIF: Easy OBJ: 15-5
37. If a firm is successful in meeting its output goal for a period, the firm has been
a. efficient.
b. effective.
c. profitable.
d. exercising cost containment measures.
ANS: B DIF: Easy OBJ: 15-5

38. A reasonable measure of efficiency relies on

a. qualitative measures of inputs and outputs.
b. a match of inputs in one period with outputs in subsequent periods.
c. a causal relationship between inputs and outputs.
d. a ratio of planned output to actual output.
ANS: C DIF: Easy OBJ: 15-5

39. A ratio of outputs to inputs is a(n)

a. effectiveness measure.
b. efficiency measure.
c. qualitative measure.
d. cost reduction measure.
ANS: B DIF: Easy OBJ: 15-5

40. A small manufacturing company recently stated its sales goal for a period was $100,000. At this level of
activity, its budgeted expenses were $80,000. Its actual sales were $100,000, but its actual expenses were
$85,000. This company operated
a. effectively and efficiently.
b. neither effectively nor efficiently.
c. effectively but not efficiently.
d. efficiently but not effectively.
ANS: C DIF: Easy OBJ: 15-5

41. Proficient Corporation has a sales goal of $500,000 for the coming year. Based on this level of activity,
Proficient budgets its total expenses at $450,000. Actual sales are $480,000 and actual costs are $460,000.
Proficient Corporations operations were
a. both efficient and effective.
b. neither efficient nor effective.
c. efficient but not effective.
d. effective but not efficient.
ANS: B DIF: Easy OBJ: 15-5

42. The difference between actual sales and budgeted sales is

a. a flexible budget variance.
b. an efficiency measure.
c. required in program budgeting.
d. an effectiveness measure.
ANS: D DIF: Easy OBJ: 15-5
43. A cost that is found to bear an observable and known relationship to a quantifiable activity base is a(n)
a. discretionary cost.
b. product cost.
c. period cost.
d. engineered cost.
ANS: D DIF: Easy OBJ: 15-5

44. Control of engineered costs is frequently achieved through the use of

a. zero-base budgeting.
b. program budgeting.
c. standards.
d. cash budgeting.
ANS: C DIF: Easy OBJ: 15-5

45. A variance represents the difference between a budgeted and an actual cost. Thus, the variance measures
a. only controllable cost differences.
b. only uncontrollable cost differences.
c. both uncontrollable and controllable cost differences.
d. the effectiveness of management.
ANS: C DIF: Easy OBJ: 15-5

46. Assume actual output exceeds the level of output in the original budget. You would expect costs in which
of the following categories to exceed the original budget?
a. total variable costs
b. committed fixed costs
c. discretionary fixed costs
d. all of the above
ANS: A DIF: Easy OBJ: 15-5

47. An organization plans to produce and sell 50,000 units. It actually produces and sells 45,000 units. Total
costs would be expected to be below the planned level due to cost
a. consciousness.
b. control.
c. reductions.
d. behavior.
ANS: D DIF: Easy OBJ: 15-5
 Edwards Company

The following information is provided for Edwards Company for the month of June

Actual Standard
1,800 units 5 DLHs per unit @ $10.00 per DLH
8,900 DLHs @ $10.50 per DLH VOH rate per DLH $ .75
Variable OH $6,400 FOH rate per DLH $1.90
Fixed OH $17,500 Budgeted FOH $16,910

48. Refer to Edwards Company. What is the price variance?

a. $4,450 F
b. $4,450 U
c. $1,000 F
d. $1,000 U
ANS: B

AQ*(AP - SP) = Price Variance

8,900 DLH * ($10.50/DLH - $10.00/DLH) = $4,450 U

DIF: Moderate OBJ: 15-5

49. Refer to Edwards Company. What is the efficiency variance?

a. $4,450 F
b. $4,450 U
c. $1,000 F
d. $1,000 U
ANS: C
SP*(AQ - SQ) = Price Variance
$10/DLH * (8,900 DLH - 9,000 DLH) = $1,000 F

DIF: Moderate OBJ: 15-5

50. Refer to Edwards Company. What is the spending variance?

a. $590 U
b. $590 F
c. $190 F
d. $190 U
ANS: A
Spending Variance = Actual Cost - Budgeted Fixed Cost
= $(17,500 - $16,910)
= $590 U

DIF: Moderate OBJ: 15-5