1.

Ch 01 Practice Test Question 01

Which of the following statements doesnt properly describe managerial
accounting?
It is important that managerial accounting information is verifiable and
objective.
2. Ch 01 Practice Test Question 02
Which of the following statements is true?
The assembly-line supervisors wages are considered to be indirect labor.
3. Ch 01 Practice Test Question 04
Which of the following costs is not a period cost?
Indirect materials
4. Ch 01 Practice Test Question 05
All of the following are product costs for financial reporting except:
advertising.
5. Ch 01 Practice Test Question 07
If the activity level increases, one would expect the fixed cost per unit to:
decrease.
6. Ch 01 Practice Test Question 08
If the activity level drops by 5%, variable costs should:
drop in total by 5%.
7. Ch 01 Practice Test Question 16
Which of the following would be considered an indirect cost?
Lubricants for a machine
8. Ch 01 Practice Test Question 17
Which of the following would be considered a direct cost?
Wood pulp used to produce paper
9. Ch 01 Practice Test Question 18
Harry is considering whether to produce and sell classic wooden surfboards in
his spare time in his garage. Which of the following would be considered a
differential cost?
1. Original cost of garage
2. Wood for each surfboard
3. Workers salary
4. Tool rental
5. Advertising costs
6. Sales commissions

all costs except 1

10.
Ch 01 Practice Test Question 19
Yolanda is planning a trip to the beach instead of staying at home during the
next Spring break. Which of the following would be considered an opportunity
cost?
The money she can make by working during Spring break
11.
Exercise 1-2 Classifying Manufacturing Costs [LO1-2]
The PC Works assembles custom computers from components supplied by
various manufacturers. The company is very small and its assembly shop and
retail sales store are housed in a single facility in a Redmond, Washington,
industrial park. Listed below are some of the costs that are incurred at the
company.

Required:
For each cost, indicate whether it would most likely be classified as direct
labor, direct materials, manufacturing overhead, selling, or an administrative
cost. (You may select more than one answer. Single click the box with the
question mark to produce a check mark for a correct answers and
double click the box with the question mark to empty the box for a
wrong answers.)

1. The cost of a hard drive installed in a computer.

Direct labor cost

Direct materials cost
Manufacturing overhead cost
Marketing and selling cost
Administrative cost

2. The cost of advertising in the Puget Sound Computer User newspaper.

Direct labor cost

Direct materials cost
Manufacturing overhead cost
Marketing and selling cost
Administrati
ve cost
3. The wages of employees who assemble computers from components.

Direct labor cost

Direct materials cost
Manufacturing overhead cost
Marketing and selling cost
Administrative cost

4. Sales commissions paid to the companys salespeople.

Direct labor cost

Direct materials cost
Manufacturing overhead cost
Marketing and selling cost
Administrati
ve cost
5. The wages of the assembly shops supervisor.

Direct labor cost

Direct materials cost
Manufacturing overhead cost
Marketing and selling cost
Administrative cost

6. The wages of the companys accountant.

Direct labor cost

Direct materials cost
Manufacturing overhead cost
Marketing and selling cost
Administrative cost

7.

Depreciation on equipment used to test assembled computers before

release to customers.

Direct labor cost

Direct materials cost
Manufacturing overhead cost
Marketing and selling cost
Administrative cost

8. Rent on the facility in the industrial park.

Direct labor cost

Direct materials cost
Manufacturing overhead cost
Marketing and selling cost
Administrative cost

12. Exercise 1-5 High-Low Method [LO1-5]

The Cheyenne Hotel in Big Sky, Montana, has accumulated records of the
total electrical costs of the hotel and the number of occupancy-days over
the last year. An occupancy-day represents a room rented out for one day.
The hotel's business is highly seasonal, with peaks occurring during the ski
season and in the summer.

Required:

1
. Using the high-low method, estimate the fixed cost of electricity per month
and the variable cost of electricity per occupancy-day. (Do not round your
intermediate calculations. Round your Variable cost answer to 2
decimal places and Fixed cost element answer to nearest whole dollar
amount)

Variable cost = Change in cost/ Change in activity

1.56 = 3,560/ 2,282

Fixed Cost element = Total cost Variable cost
element

3.753 = 5.148 - (1.56 * 2.406)

2.
What other factors other than occupancy-days are likely to affect the
variation in electrical costs from month to month? (You may select more
than one answer. Single click the box with the question mark to
produce a check mark for a correct answers and double click the box
with the question mark to empty the box for a wrong answers.)

Seasonal factors like winter or summer.

Systematic factors like guests, switching off fans and lights.

Number of days present in a month.
Fixed salary paid to hotel receptionist.
Income taxes paid on hotel income.
13. Exercise 1-12 Cost Classification [LO1-2, LO1-3, LO1-4, LO1-7]
Wollogong Group Ltd. of New South Wales, Australia, acquired its factory
building about 10 years ago. For several years, the company has rented out a
small annex attached to the rear of the building. The company has received a
rental income of $30,000 per year on this space. The renters lease will
expire soon, and rather than renewing the lease, the company has decided to
use the space itself to manufacture a new product.
Direct materials cost for the new product will total $80 per unit. To have a
place to store finished units of product, the company will rent a small
warehouse nearby. The rental cost will be $500 per month. In addition, the
company must rent equipment for use in producing the new product; the
rental cost will be $4,000 per month. Workers will be hired to manufacture
the new product, with direct labor cost amounting to $60 per unit. The space
in the annex will continue to be depreciated on a straight-line basis, as in
prior years. This depreciation is $8,000 per year.
Advertising costs for the new product will total $50,000 per year. A
supervisor will be hired to oversee production; her salary will be $1,500 per
month. Electricity for operating machines will be $1.20 per unit. Costs of
shipping the new product to customers will be $9 per unit.
To provide funds to purchase materials, meet payrolls, and so forth, the
company will have to liquidate some temporary investments. These
investments are presently yielding a return of about $3,000 per year.
Required:
For each of the costs associated with the new product decision, indicate
whether it would be variable or fixed. If it is a product cost, indicate whether

it would be direct materials, direct labor or a manufacturing overhead cost. If

it is not a product cost, indicate whether it is a period, opportunity or a sunk
cost. Select "None" if none of the categories apply for a particular item.
NOTE: Opportunity cost is a special category, and to avoid confusion, do not
attempt to classify the cost in any other way except as an opportunity cost.

14. Exercise 1-13 Traditional and Contribution Format Income

Statements [LO1-6]
The Alpine House, Inc., is a large retailer of snow skis. The company assembled
the information shown below for the quarter ended March 31:

Required:
1.
Prepare a traditional income statement for the quarter ended March 31.

Cost of goods sold = (Beginning Merchandise.

Inventory + Merchandise Purchases) Ending
Merchandise
(30,000 + 100,000) 40,000 = 90,000
Gross margin = Sales Cost of goods sold
150,000 90,000 = 60,000
Selling expenses = (Variable selling expense per unit *
number of units sold) + selling fixed expenses
(50*200) +20,000=30,000
Administrative expenses = (Variable administrative
expense per unit + number of unit sold) + fixed
administrative expense
(10 * 200) + 20,000 = 22,000
Number of units sold = Total Sales Revenue / Selling
price per pair of skis

150,000/750=200

2.
Prepare a contribution format income statement for the quarter ended
March 31.

Cost of goods sold = (Beginning Merchandise.

Inventory + Merchandise Purchases) Ending
Merchandise
(30,000 + 100,000) 40,000 = 90,000
Selling expenses = (Variable selling expense per unit *
number of units sold

(50*200) = 10,000
Administrative expenses = (Variable administrative
expense per unit + number of unit sold) + fixed
administrative expense
(10 * 200) = 2,000
3.
What was the contribution toward fixed expenses and profits for each pair
of skis sold during the quarter?

Contribution of each pair of skis = Contribution margin /

Number of units sold
48,000/200 pair = 240
15. Exercise 1-14 High-Low Method; Predicting Cost [LO1-4, LO1-5]
The Lakeshore Hotels guest-days of occupancy and custodial supplies expense
over the last seven months were:

Guest-days is a measure of the overall activity at the hotel. For example, a guest
who stays at the hotel for three days is counted as three guest-days.

Required:
1.
Using the high-low method, estimate a cost formula for custodial supplies
expense. (Round the Variable cost per guest-day to 2 decimal points.)

Variable cost = Change in cost/ Change in activity

6,000/8,000 = 0.75
Fixed Cost element = Total cost Variable cost element

13,500 (0.75 * 12,000) = 4,500

2.
Using the cost formula, you derived above, what amount of custodial
supplies expense would you expect to be incurred at an occupancy level of
11,000 guest-days? (Do not round your intermediate calculations.)

11,000 guest-days * 0.75 = 8,250

3
. Prepare a scatter graph using the data given above. (Place custodial
supplies expense on the vertical axis and guest-days on the horizontal axis.)

16. Problem 1-16A Cost Behavior; High-Low Method; Contribution

Format Income Statement [LO1-4, LO1-5, LO1-6]

Morrisey & Brown, Ltd., of Sydney is a merchandising company that is the

sole distributor of a product that is increasing in popularity among Australian
consumers. The companys income statements for the three most recent
months follow:

Required:
1.
Identify each of the companys expenses (including cost of goods sold) as
either variable, fixed, or mixed.

2.
Using the high-low method, separate each mixed expense into variable and
fixed elements. State the cost formula for each mixed expense.

3.
Redo the companys income statement at the 5,000-unit level of activity
using the contribution format.

17. Problem 1-19A Contribution Format versus Traditional Income Statement

[LO1-6]
Marwicks Pianos, Inc., purchases pianos from a large manufacturer and sells
them at the retail level. The pianos cost, on the average, $2,450 each from
the manufacturer. Marwicks Pianos, Inc., sells the pianos to its customers at
an average price of $3,125 each. The selling and administrative costs that
the company incurs in a typical month are presented below:

During August, Marwicks Pianos, Inc., sold and delivered 40 pianos.

Required:
1.
Prepare an income statement for Marwicks Pianos, Inc., for August. Use
the traditional format, with costs organized by function.

40 piano * 3,125 = 125,000

40 piano * 2,450 = 98,000
125,000 98,000 = 27,000
950+ ( 8% (0.08) * 125,000) = 10,950
Clerical 1,000 + ( 20* 40) = 1,800

2.
Prepare an income statement for Marwicks Pianos, Inc., for August, this
time using the contribution format, with costs organized by behavior.
Show costs and revenues on both a total and a per unit basis down through
contribution margin.

18. Problem 1-21A Cost Classification [LO1-1, LO1-3, LO1-4]

Listed below are costs found in various organizations. For each cost item,
indicate whether it would be variable or fixed with respect to the number of
units produced and sold; and then whether it would be a selling cost, an
administrative cost, or a manufacturing cost. If it is a manufacturing cost,
indicate whether it would typically be treated as a direct cost or an indirect
cost with respect to units of product. Three sample answers are provided for
illustration. (If a cost classification is not application to a cost item,
leave the cell blank.)

19. Exercise 1-5 High-Low Method [LO1-5]

The Cheyenne Hotel in Big Sky, Montana, has accumulated records of the
total electrical costs of the hotel and the number of occupancy-days over the
last year. An occupancy-day represents a room rented out for one day. The
hotel's business is highly seasonal, with peaks occurring during the ski
season and in the summer.

Required:
1.
Using the high-low method, estimate the fixed cost of electricity per
month and the variable cost of electricity per occupancy-day. (Do not
round your intermediate calculations. Round your Variable cost
answer to 2 decimal places and Fixed cost element answer to nearest
whole dollar amount)

2.
What other factors other than occupancy-days are likely to affect the
variation in electrical costs from month to month? (You may select more
than one answer. Single click the box with the question mark to
produce a check mark for a correct answers and double click the box
with the question mark to empty the box for a wrong answers.)

20. Exercise 1-13 Traditional and Contribution Format Income Statements

[LO1-6]

The Alpine House, Inc., is a large retailer of snow skis. The company
assembled the information shown below for the quarter ended March 31:

Required:
1.
Prepare a traditional income statement for the quarter ended March 31.

2.
Prepare a contribution format income statement for the quarter ended
March 31. (Round your answer to nearest whole dollar.)

3.
What was the contribution toward fixed expenses and profits for each pair
of skis sold during the quarter? (Round your answer to the nearest
whole dollar.)

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