Chapter 7 Sample Exam Questions True False Questions 25.

Net income can be increased or decreased by changing the sales mix. 26. 27. 2". 2%. &'. The breakeven point in dollars is variable costs divided by the weighted-average contribution margin ratio. ost structure re!ers to the relative proportion o! !ixed versus variable costs that a company incurs. #perating leverage re!ers to the extent to which a company$s net income reacts to a given change in !ixed costs. The degree o! operating leverage provides a measure o! a company$s earnings volatility. (! #$)rien ompany has a margin o! sa!ety ratio o! .6'* it could sustain a 6' percent decline in sales be!ore it would be operating at a loss.

Answers to True-False Statements

Item Ans.

25. 26. 27. 2". 2%.

T + T + T

Answers to Multiple Choice Statements

Item

Ans.

5%. 6'. 6,. 62. 6&. 6-. 65. 66. 67. 6". 6%. 7'. 7,. 72.

d c c c d a b a a d c a c c

5%.

.ariable costing a. is re/uired under 0112. b. is re/uired !or external reporting purposes. c. allows income to be manipulated through production decisions. d. highlights di!!erences between variable and !ixed costs. 1bsorption costing a. is not allowed under 0112. b. is not allowed !or external reporting purposes. c. may lead to poor business decisions d. highlights di!!erences between variable and !ixed costs. 3anagement may be tempted to overproduce a. when using variable costing* in order to increase net income. b. when using variable costing* in order to decrease net income. c. when using absorption costing* in order to increase net income. d. when using absorption costing* in order to decrease net income. (! a division manager$s compensation is based upon the division$s net income* the manager may decide to meet the net income targets by increasing production a. when using variable costing* in order to increase net income. b. when using variable costing* in order to decrease net income. c. when using absorption costing* in order to increase net income. d. when using absorption costing* in order to decrease net income.

6'.

6,.

62.

Use the following information for items 63 66: The Colin Division of Mochrie Company sells its product for $3 per unit! "aria#le costs per unit are: manufacturing$ $%&' and selling andadministrative$ $&! (i)ed costs are: $& $ manufacturing overhead$ and $* $ selling and administrative! There was no #eginning inventory at %+%+ *! ,)pected sales for ne)t year is - $ units! .yan /tiles$ the manager of the Colin Division$ is under pressure to improve the performance of the Division! 0s he plans for ne)t year$ he has to decide whether to produce - $ units or * $ units! 6&. 4hat would the manu!acturing cost per unit be under absorption costing !or each alternative5 -'*''' units 5'*''' units a. 6,2.'' 6,2.'' b. 6,-.'' 6,-.'' c. 6,6.'' 6,7.'' d. 6,7.'' 6,6.'' 4hat would the manu!acturing cost per unit be under variable costing !or each alternative5 -'*''' units 5'*''' units a. 6,2.'' 6,2.'' b. 6,-.'' 6,-.'' c. 6,6.'' 6,7.'' d. 6,7.'' 6,6.''

6-.

65.

4hat would the net income be under absorption costing !or each alternative5 -'*''' units 5'*''' units a. 6&%'*''' 6&%'*''' b. 6&%'*''' 6-&'*''' c. 6&%'*''' 6--'*''' d. 6-&'*''' 6&%'*''' 4hat would the net income be under variable costing !or each alternative5 -'*''' units 5'*''' units a. 6&%'*''' 6&%'*''' b. 6&%'*''' 6-&'*''' c. 6&%'*''' 6--'*''' d. 6-&'*''' 6&%'*''' 7xpected sales !or next year !or the )rady 8ivision is ,2'*''' units. 8rew arey* the manager o! the )rady 8ivision* is under pressure to improve the per!ormance o! the 8ivision. 1s he plans !or next year* he has to decide whether to produce ,2'*''' units or ,-'*''' units. The )rady 8ivision will have higher net income* i! 8rew arey decides to a. produce ,-'*''' units i! income is measured under absorption costing. b. produce ,-'*''' units i! income is measured under variable costing. c. produce ,2'*''' units i! income is measured under absorption costing. d. produce ,2'*''' units i! income is measured under variable costing. 4hich o! the !ollowing is not a potential advantage o! variable costing relative to aborption costing5 a. Net income computed under variable costing is una!!ected by changes in production levels. b. (t is easier to understand the impact o! !ixed and variable costs on the computation o! net income when variable costing is used. c. The use o! variable costing is consistent with cost-volume-pro!it analysis. d. Net income computed under variable costing is not closely tied to changes in sales levels. 4hich is not true concerning sales mix5 a. 9ales mix is the relative percentage in which each product is sold when a company sells more than one product. b. 9ales mix is important to managers because di!!erent products o!ten have substantially di!!erent contribution margins. c. 9ales mix does not a!!ect breakeven analysis. d. The computation o! weighted-average unit contribution margin is use!ul in sales mix analysis.

. 66.

67.

6".

6%.

Use the following information for items 1 13: 2rad /herwood Corporation sells two types of computers' one is designed more for audio applications and the other for video applications! /herwood incurs $&&-$ in fi)ed costs!

3er unit data on the two products is presented #low: Unit data 0udio computer "ideo computer /elling price $&$ $3$& "aria#le costs %$& %$6 Contri#ution margin $ 4 $%$6 9ales mix 6': -': 7'. The weighted-average contribution margin is; a. 6,*,2' b. 6,*2'' c. 6,*-'' d. 62*6'' The breakeven point in units is; a. ,-' b. ,"7 c. 2'' d. 2"' <ow many audio computers will be sold at the breakeven point5 a. "' b. ,,6 c. ,2' d. 2''

7,.

72.

EXERCISES
,)! 54 8etermine whether each o! the !ollowing would bea product cost or a period cost under an absorption or a variable system !or arson ompany 1bsorption 2roduct 2eriod a. 8irect 3aterials b. 8irect >abor c. +actory ?tilities @variableA d. +actory Bent e. (ndirect >abor !. +actory 9upervisory 9alaries =========== ========= =========== ========== =========== ========== =========== ========== =========== ========== =========== ========== =========== ========== =========== ========== =========== ========== =========== ========== .ariable 2roduct 2eriod ====== ======= ====== ======= ====== ======== ====== ======== ====== ======== ======= ======= ====== ======= ====== ====== ======= =======

g. +actory 3aintenance @variableA h. +actory 8epreciation i. 9ales salaries C. 9ales commissions

======= =======

/olution 54 (1015 min.)

1bsorption 2roduct 2eriod =====D===== ========== =====D===== ========== =====D===== ========== =====D===== ========== =====D===== ========== =====D===== ========== =====D===== ========== =====D===== ========== =========== =====D==== =========== =====D==== .ariable 2roduct 2eriod =====D==== ========= =====D==== ========= =====D==== ========= ========== =====D=== =====D==== ========= ========== =====D=== =====D==== ========= ========== =====D=== ========== =====D=== ========== =====D===

a. b. c. d. e. !. g. h. i. C.

8irect 3aterials 8irect >abor +actory ?tilities @variableA +actory Bent (ndirect >abor +actory 9upervisory 9alaries +actory 3aintenance @variableA +actory 8epreciation 9ales salaries 9ales commissions

,)! 55 +resh 1ir 2roducts manu!actures and sells a variety o! camping products. Becently the company opened a new plant to manu!acture a deluxe portable cooking unit. ost and sales data !or the !irst month o! operations are shown below; 3anu!acturing osts +ixed overhead .ariable overhead 8irect labor 8irect material )eginning inventory ?nits produced ?nits sold 9elling and administrative costs +ixed .ariable sold The portable cooking unit sells !or 6,,'. 3anagement is interested in the opening month$s results and has asked !or an income statement. Instructions 1ssume the company uses absorption costing. alculate the production cost per unit* and prepare an income statement !or the month o! Eune 2''5. 6 ,'"*''' 6 & per unit 6 ,2 per unit 6 &' per unit ' units ,2*''' ,'*''' 6 2''*''' 6 - per unit

/olution 55 (812 min.) 2er ?nit 8irect materials 8irect labor .ariable overhead +ixed overhead @6,'"*''' F ,2*'''A Total cost 6&' ,2 & % 65-

+resh 1ir 2roducts (ncome 9tatement @1bsorption ostingA +or the 3onth 7nding Eune &'* 2''5 9ales @,'*''' x 6,,'A >ess; ost o! goods sold @,'*''' x 65-A 0ross pro!it >ess; 9elling G administrative costs .ariable @,'*''' x 6-A +ixed Net income 6,*,''*''' 5-'*''' 56'*''' 6 -'*''' 2''*''' 2-'*''' 6 &2'*'''

,)! % +resh 1ir 2roducts manu!actures and sells a variety o! camping products. Becently the company opened a new plant to manu!acture a deluxe portable cooking unit. ost and sales data !or the !irst month o! operations are shown below; 3anu!acturing osts +ixed overhead .ariable overhead 8irect labor 8irect material )eginning inventory ?nits produced ?nits sold 9elling and administrative costs +ixed .ariable 6 ,'"*''' 6 & per unit 6 ,2 per unit 6 &' per unit ' units ,2*''' ,'*''' 6 2''*''' 6 - per unit sold

The portable cooking unit sells !or 6,,'. 3anagement is interested in the opening month$s results and has asked !or an income statement. Instructions 1ssume the company uses variable costing. a. alculate the production cost per unit* and prepare an income statement !or the month o! Eune 2''5. b. 7xplain the amount by which absorption costing income would di!!er !rom variable costing income. @ ompute di!!erence without computing absorption costing incomeA

/olution % a.

(913 min.) 2er ?nit

8irect materials 8irect labor .ariable overhead Total cost

6&' ,2 & 6-5 +resh 1ir 2roducts (ncome 9tatement @.ariable ostingA +or the 3onth 7nding Eune &'* 2''5

9ales @,'*''' x 6,,'A >ess; .ariable costs .ariable cost o! goods sold @,'*''' x 6-5A6-5'*''' .ariable selling G administrative costs

6,*,''*'''

@,'*''' x 6-A ontribution margin >ess; +ixed costs +ixed overhead +ixed selling G administrative costs Net income

-'*''' ,'"*''' 2''*'''

-%'*''' 6,'*''' &'"*''' 6 &'2*'''

b. 4hen production exceeds sales* absorption costing net income will exceed variable costing net income by an amount e/ual to the !ixed overhead rate times the number o! units in ending inventory. The ending inventory !or Eune was 2*''' units and the !ixed overhead rate was 6% per unit @6,'"*''' F ,2*'''A. There!ore* absorption costing income would exceed variable costing income by 6,"*''' @%*''' D 62A.