Chapter 21

1.

In incremental analysis, total variable costs will always change under alternative courses of
action, and total fixed costs will always remain constant.

2.In incremental analysis, total fixed costs will always remain constant under alternative courses of
action.
3.

An opportunity cost is the potential benefit obtained by using resources in an alternative course
of action.

4.The basic decision rule in a sell or process further decision is: process further if the incremental
revenue from processing exceeds the incremental processing costs.
5.

From a quantitative standpoint, a segment should be eliminated if its contribution margin is less
than the fixed costs that can be eliminated.

6.

A revenue that differs between alternatives and makes a difference in decision-making is called
a(n)
a. sales revenue.
c. incremental revenue.
b. irrelevant revenue.
d. unavoidable revenue.

7.Alvarez Company is considering the following alternatives:

Revenues
Variable costs
Fixed costs

Alternative A
$50,000
30,000
10,000

What is the incremental profit?

a. $10,000
b. $6,000
8.

Alternative B
$60,000
30,000
16,000

c. $0
d. $4,000

Which of the following is an irrelevant cost?

a. An avoidable cost
c. An incremental cost
b. A sunk cost
d. An opportunity cost

9.Relevant costs are always

a. fixed costs.
b. sunk costs

c. variable costs.
d. avoidable costs.

10.Miley, Inc. has excess capacity. Under what situations should the company accept a special order
for less than the current selling price?
a. Never
b. When additional fixed costs must be incurred to accommodate the order
c. When the company thinks it can use the cheaper materials without the customer's
knowledge
d. When incremental revenues exceed incremental costs

11.

12.

A factory is operating at less than 100% capacity. Potential additional business will not use up
the remainder of the plant capacity. Given the following list of costs, which one should be ignored in
a decision to produce additional units of product?
a. Variable selling expenses
b. Fixed factory overhead
c. Direct labor
d. Contribution margin of additional units

A companys unit costs based on 100,000 units are:

Variable costs
$75
Fixed costs
30
The normal unit sales price per unit is $165.

A special order from a foreign company has been received for 5,000 units at $135 a unit. In order to
fulfill the order, 3,000 units of regular sales would have to be foregone.
The opportunity cost associated with this order is
a. $225,000.
c. $495,000.
b. $270,000.
d. $405,000.
13.In the analysis concerning the acceptance or rejection of a special order, which items are relevant?
a. Variable costs only
c. Variable costs and fixed costs
b. Fixed costs only
d. Variable costs and unavoidable costs
14.What of the following would not be relevant in a make-or-buy decision?
a. Opportunity costs
c. Unavoidable variable costs
b. Avoidable fixed cost
d. Incremental fixed costs
15.

Max Company uses 20,000 units of Part A in producing its products. A supplier offers to make
Part A for $7. Max Company has relevant costs of $8 a unit to manufacture Part A. If there is excess
capacity, the opportunity cost of buying Part A from the supplier is
a. $0.
c. $20,000.
b. $140,000.
d. $160,000.

16.

Costs incurred before the split-off point are

a. sunk costs.
c. incremental costs.
b. relevant costs.
d. opportunity costs.

17.

The point in the production process when joint products are readily identifiable is the
a. separation point.
c. split-off point.
b. common point.
d. break-even point.

18.

What will most likely occur if a company eliminates an unprofitable segment when a portion of
fixed costs are unavoidable?
a. All expenses of the eliminated segment will be eliminated.
b. Net income will decrease.
c. Net income will increase.
d. The company's variable costs will increase.

19.If an unprofitable segment is eliminated

a. it is impossible for net income to decrease.

b. fixed expenses allocated to the eliminated segment will be eliminated.

c. variable expenses of the eliminated segment will be eliminated.
d. it is impossible for net income to increase.

Chapter 22
20.
21.
22.
23.
24.
25.

In a competitive environment, the company must set a target cost and a target selling price.
The cost-plus pricing approach establishes a cost base and adds a markup to this base to
determine a target selling price.
Sales volume plays a large role in determining per unit costs in the cost-plus pricing approach.
In time-and-material pricing, the material charge is based on the cost of direct materials used
and a material loading charge for related overhead costs.
A negotiated transfer price should be used when an outside market for the goods does not exist.
The absorption-cost approach is consistent with generally accepted accounting principles
because it defines the cost base as the manufacturing cost.

26.

In most cases, prices are set by the

a. customers.
c. competitive market.
b. largest competitor.
d. selling company.

27.

All of the following are correct statements about the target price except it
a. is the price the company believes would place it in the optimal position for its target
audience.
b. is used to determine a product's target cost.
c. is determined after the company has identified its market and does market research.
d. is determined after the company sets its desired profit amount.

28.

Target cost is comprised of

a. variable and fixed manufacturing costs only.
b. variable manufacturing and selling and administrative costs only.
c. total manufacturing and selling and administrative costs.
d. fixed manufacturing and selling and administrative costs only.

29.

30.

Bond Co. is using the target cost approach on a new product. Information gathered so far
reveals:
Expected annual sales
400,000 units
Desired profit per unit
$0.35
Target cost
$168,000
What is the target selling price per unit?
a. $0.42
c. $0.70
b. $0.35
d. $0.77
In cost-plus pricing, the markup consists of
a. manufacturing costs.

b. desired ROI.
c. selling and administrative costs.
d. total cost and desired ROI.
31.

Bellingham Suit Co. has received a shipment of suits that cost $200 each. If the company uses
cost-plus pricing and applies a markup percentage of 60%, what is the sales price per suit?
a. $333
c. $320
b. $280
d. $500

32.

Why does the unit selling price increase when expected volume is lower than budgeted volume?
a. Variable costs and fixed costs have to be spread over fewer units.
b. Fixed costs and desired ROI have to be spread over fewer units.
c. Variable costs and desired ROI have to be spread over fewer units.
d. Fixed costs only have to be spread over fewer units.

33.

In time-and-material pricing, a material loading charge covers all of the following except
a. purchasing costs.
b. related overhead.
c. desired profit margin.
d. All of these are covered.

34.

The labor charge per hour in time-and-material pricing includes all of the following except
a. an allowance for a desired profit.
b. charges for labor loading.
c. selling and administrative costs.
d. overhead costs.

35.

Dudly Drafting Services uses a 45% material loading charge and a labor rate of $20 per hour.
How much will be charged on a job that requires 3.5 hours of work and $40 of materials?
a. $128
c. $110
b. $88
d. $133

36.

All of the following are approaches for determining a transfer price except the
a. cost-based approach.
b. market-based approach.
c. negotiated approach.
d. time-and-material approach.

37.

The transfer price approach that is often considered the best approach because it generally
provides the proper economic incentives is the
a. cost-based approach.
b. market-based approach.
c. negotiated price approach.
d. time-and-material pricing approach.

38.

The transfer price approach that will result in the largest contribution margin to the buying
division is the
a. cost-based approach.
b. market-based approach.

c. negotiated price approach.

d. time-and-material pricing approach.
39.

Transfers between divisions located in countries with different tax rates

a. simplify the determination of the appropriate transfer price.
b. are decreasing in number as more companies "localize" operations.
c. encourage companies to report more income in countries with low tax rates.
d. all of these are correct.

Chapter 23
40.

A benefit of budgeting is that it provides definite objectives for evaluating performance.

41.

A budget can be a means of communicating a company's objectives to external parties.

42.

The budget itself and the administration of the budget are the responsibility of the accounting
department.

43.

The flow of input data for budgeting should be from the highest levels of responsibility to the
lowest.

44.

Budgets can have a positive or negative effect on human behavior depending on the manner in
which the budget is developed and administered.

45.

The budget is developed within the framework of a sales forecast.

46.

The master budget reflects management's long-term plans encompassing five years or more.

47.

If a monthly cash budget is prepared properly, there will never be a cash deficiency at the end of
any month.

48.

If budgets are to be effective, there must be

a. a history of successful operations.
b. independent verification of budget goals.
c. an organizational structure with clearly defined lines of authority and responsibility.
d. excess plant capacity.

49.

An unrealistic budget is more likely to result when it

a. has been developed in a top down fashion.
b. has been developed in a bottom up fashion.
c. has been developed by all levels of management.
d. is developed with performance appraisal usages in mind.

50.

A master budget consists of

a. an interrelated long-term plan and operating budgets.
b. financial budgets and a long-term plan.
c. interrelated financial budgets and operating budgets.
d. all the accounting journals and ledgers used by a company.

51.

The starting point in preparing a master budget is the preparation of the

a.
b.
c.
d.

production budget.
sales budget.
purchasing budget.
personnel budget.

52.

Doe Manufacturing plans to sell 6,000 purple lawn chairs during May, 5,700 in June, and 6,000
during July. The company keeps 15% of the next months sales as ending inventory. How many
units should Doe produce during June?
a. 5,745
c. 6,600
b. 5,655
d. Not enough information to determine.

53.

Lorie Nursery plans to sell 320 potted plants during April and 240 units in May. Lorie Nursery
keeps 15% of the next months sales as ending inventory. How many units should Lorie Nursery
produce during April?
a. 308
c. 332
b. 320
d. 356

54.

Pell Manufacturing is preparing its direct labor budget for May. Projections for the month are that
33,400 units are to be produced and that direct labor time is three hours per unit. If the labor cost
per hour is $12, what is the total budgeted direct labor cost for May?
a. 1,159,200
c. 1,180,800
b. 1,202,400
d. 1,296,000

55.

The cash budget reflects

a. all revenues and all expenses for a period.
b. expected cash receipts and cash disbursements from all sources.
c. all the items that appear on a budgeted income statement.
d. all the items that appear on a budgeted balance sheet.

56.

Which one of the following items would never appear on a cash budget?
a. Office salaries expense
b. Interest expense
c. Depreciation expense
d. Travel expense

57.

The primary benefits of budgeting include all of the following except it

a. requires only top management to plan ahead and formalize their future goals.
b. provides definite objectives for evaluating performance.
c. creates an early warning system for potential problems.
d. motivates personnel throughout the organization.

Chapter 24
58.
59.
60.

A static budget is one that is geared to one level of activity.

A static budget is changed only when actual activity is different from the level of activity
expected.
A flexible budget is a series of static budgets at different levels of activities.

61.

Flexible budgeting relies on the assumption that unit variable costs will remain constant within
the relevant range of activity.

62.

Management by exception means that management will investigate areas where actual results
differ from planned results if the items are material and controllable.

63.

A distinction should be made between controllable and noncontrollable costs when reporting
information under responsibility accounting.

64.

More costs become controllable as one moves down to each lower level of managerial
responsibility.

65.

Top management's reaction to a difference between budgeted and actual sales often depends
on
a.
b.
c.
d.

whether the difference is favorable or unfavorable.

whether management anticipated the difference.
the materiality of the difference.
the personality of the top managers.

66.

What is the primary difference between a static budget and a flexible budget?
a. The static budget contains only fixed costs, while the flexible budget contains only
variable costs.
b. The static budget is prepared for a single level of activity, while a flexible budget is
adjusted for different activity levels.
c. The static budget is constructed using input from only upper level management, while a
flexible budget obtains input from all levels of management.
d. The static budget is prepared only for units produced, while a flexible budget reflects the
number of units sold.

67.

What budgeted amounts appear on the flexible budget?

a. Original budgeted amounts at the static budget activity level
b. Actual costs for the budgeted activity level
c. Budgeted amounts for the actual activity level achieved
d. Actual costs for the estimated activity level

68.

Under management by exception, which differences between planned and actual results should
be investigated?
a. Material and noncontrollable
b. Controllable and noncontrollable
c. Material and controllable
d. All differences should be investigated

69.

In the Dichter Co., indirect labor is budgeted for $72,000 and factory supervision is budgeted for
$24,000 at normal capacity of 160,000 direct labor hours. If 180,000 direct labor hours are worked,
flexible budget total for these costs is
a. $ 96,000
c. $108,000
b. $105,000
d. $ 99,000

70.

A cost is considered controllable at a given level of managerial responsibility if

a. the manager has the power to incur the cost within a given time period.

b. the cost has not exceeded the budget amount in the master budget.
c. it is a variable cost, but it is uncontrollable if it is a fixed cost.
d. it changes in magnitude in a flexible budget.
71.

As one moves up to each higher level of managerial responsibility,

a. fewer costs are controllable.
b. the responsibility for cost incurrence diminishes.
c. a greater number of costs are controllable.
d. performance evaluation becomes less important.

72.

Management by exception
a. is most effective at top levels of management.
b. can be implemented at each level of responsibility within an organization.
c. can only be applied when comparing actual results with the master budget.
d. is the opposite of goal congruence.

73.

The linens department of a large department store is

a. not a responsibility center.
b. a profit center.
c. a cost center.
d. an investment center.

74.

Trails and Paths, Inc. had average operating assets of $6,000,000 and sales of $3,000,000 in
2013. If the controllable margin was $600,000, the ROI was
a. 50%
c. 40%
b. 20%
d. 10%

75.

A distinguishing characteristic of an investment center is that

a. revenues are generated by selling and buying stocks and bonds.
b. interest revenue is the major source of revenues.
c. the profitability of the center is related to the funds invested in the center.
d. it is a responsibility center which only generates revenues.

76.

Which of the following will cause an increase in ROI?

a. An increase in variable costs
b. An increase in average operating assets
c. An increase in sales
d. An increase in controllable fixed costs

Chapter 25
77.

Standard cost is the industry average cost for a particular item.

78.

Actual costs that vary from standard costs always indicate inefficiencies.

79.

In developing a standard cost for direct materials, a price factor and a quantity factor must be
considered.

80.

A variance is the difference between actual costs and standard costs.

81.

If actual costs are less than standard costs, the variance is favorable.

82.

The total overhead variance is the difference between actual overhead costs and overhead
costs applied to work done.

83.

What is a standard cost?

a. The total number of units times the budgeted amount expected
b. Any amount that appears on a budget
c. The total amount that appears on the budget for product costs
d. The amount management thinks should be incurred to produce a good or service

84.

The difference between a budget and a standard is that

a. a budget expresses what costs were, while a standard expresses what costs should be.
b. a budget expresses management's plans, while a standard reflects what actually
happened.
c. a budget expresses a total amount, while a standard expresses a unit amount.
d. standards are excluded from the cost accounting system, whereas budgets are generally
incorporated into the cost accounting system.

85.

Marburg Co. expects direct materials cost of $6 per unit for 100,000 units (a total of $600,000 of
direct materials costs). Marburgs standard direct materials cost and budgeted direct materials cost
is
Standard
Budgeted
a. $6 per unit
$600,000 per year
b. $6 per unit
$6 per unit
c. $600,000 per year
$6 per unit
d. $600,000 per year
$600,000 per year

86.

Which of the following statements about standard costs is false?

a. Properly set standards should promote efficiency.
b. Standard costs facilitate management planning.
c. Standards should not be used in "management by exception."
d. Standard costs can simplify the costing of inventories.

87.

An unfavorable materials quantity variance would occur if

a. more materials were purchased than were used.
b. actual pounds of materials used were less than the standard pounds allowed.
c. actual labor hours used were greater than the standard labor hours allowed.
d. actual pounds of materials used were greater than the standard pounds allowed.

88.

Which of the following statements is true?

a. Variances are the differences between total actual costs and total standard costs.
b. When actual costs exceed standard costs, the variance is favorable.

c. An unfavorable variance results when actual costs are decreasing but standards are not
changed.
d. All of the above are true.
89.

If actual direct materials costs are greater than standard direct materials costs, it means that
a. actual costs were calculated incorrectly.
b. the actual unit price of direct materials was greater than the standard unit price of direct
materials.
c. the actual unit price of raw materials or the actual quantities of raw materials used was
greater than the standard unit price or standard quantities of raw materials expected.
d. the purchasing agent or the production foreman is inefficient.

90.

If actual costs are greater than standard costs, there is a(n)

a. normal variance.
b. unfavorable variance.
c. favorable variance.
d. error in the accounting system.

91.

A total materials variance is analyzed in terms of

a. price and quantity variances.
b. buy and sell variances.
c. quantity and quality variances.
d. tight and loose variances.

92.

Labor efficiency is measured by the

a. materials quantity variance.
b. total labor variance.
c. labor quantity variance.
d. labor rate variance.

93.

An unfavorable labor quantity variance may be caused by

a. paying workers higher wages than expected.
b. misallocation of workers.
c. worker fatigue or carelessness.
d. higher pay rates mandated by union contracts.

94.

Dillon has a standard of 2 hours of labor per unit, at $12 per hour. In producing 2,000 units,
Dillon used 3,850 hours of labor at a total cost of $46,970. Dillon's labor price variance is
a. $770 U.
b. $800 U.
c. $1,030 F.
d. $1,930 F.

95.

Dillon has a standard of 2 hours of labor per unit, at $12 per hour. In producing 2,000 units,
Dillon used 3,850 hours of labor at a total cost of $46,970. Dillon's labor quantity variance is
a. $770 U.
c. $770 F.
b. $1,800 F.
d. $1,930 F.

96.

The balanced scorecard

a. incorporates financial and nonfinancial measures in an integrated system.

b. is based on financial measures.

c. is based on nonfinancial measures.
d. does not use financial or nonfinancial measures.
97.

Which is not one of the four most commonly used perspectives on a balanced scorecard?
a. The financial perspective
b. The customer perspective
c. The external process perspective
d. The learning and growth perspective

Chapter 26
98.

Capital budgeting decisions usually involve large investments and often have a significant
impact on a company's future profitability.

99.

The cash payback method is frequently used as a screening tool but it does not take into
consideration the profitability of a project.

100.

The profitability index allows comparison of the relative desirability of projects that require
differing initial investments.

101.

Sensitivity analysis uses a number of outcome estimates to get a sense of the variability among
potential returns.

102.

A post-audit is an evaluation of how well a project's actual performance matches the projections
made when the project was proposed.

103.

A major advantage of the annual rate of return method is that it considers the time value of
money.

104.

Capital budgeting is the process

a. used in sell or process further decisions.
b. of determining how much capital stock to issue.
c. of making capital expenditure decisions.
d. of eliminating unprofitable product lines.

105.

The payback period is often compared to an assets

a. estimated useful life.
b. warranty period.
c. net present value.
d. internal rate of return.

106.

Which of the following ignores the time value of money?

a. Internal rate of return
b. Profitability index
c. Net present value
d. Cash payback

107.

Brady Corp. is considering the purchase of a piece of equipment that costs $20,000. Projected
net annual cash flows over the projects life are:
Year Net Annual Cash Flow
1.
$ 3,000
2.
8,000
3.
15,000
4.
9,000
The cash payback period is
b. 2.29 years
c. 2.60 years.
c. 2.40 years.
d. 2.31 years.

108.

The cash payback technique

a. considers cash flows over the life of a project.
b. cannot be used with uneven cash flows.
c. is superior to the net present value method.
d. may be useful as an initial screening device.

109.

A company's cost of capital refers to the

a. rate the company must pay to obtain funds from creditors and stockholders.
b. total cost of a capital project.
c. cost of printing and registering common stock shares.
d. rate of return earned on common stock.

110.

A project with a zero net present value indicates that it is

a. unacceptable.
b. profitable.
c. acceptable.
d. going to have an acceptable cash payback period.

111.

The profitability index

a. does not take into account the discounted cash flows.
b. is calculated by dividing total cash flows by the initial investment.
c. allows comparison of the relative desirability of projects that require differing initial
investments.
d. will never be greater than 1.

112.

A capital budgeting method that takes into consideration the time value of money is the
a. annual rate of return method.
b. return on stockholders' equity method.
c. cash payback technique.
d. internal rate of return method.