True/ False Questions and Multiple choice problems

True/False

1.                  Variable costs are costs that vary
in total in direct proportion to changes in the activity level.

2.                  The contribution margin ratio is
the same as the profit-volume ratio.

3.                  If employees accept a wage contract
that increases the unit contribution margin, the break-even point will
decrease.

4.                  If a business sells four products,
it is not possible to estimate the break-even point.

5.                  Absorption costing is required for
financial reporting under generally accepted accounting principles.

6.                  The dollars available from each
unit of sales to cover fixed cost and profit is the unit variable cost.

7.                  Companies with large amounts of
fixed costs will generally have a high operating leverage.

8.                  Budgets are normally used only by
profit-making business.

9.                  The cash budget summarizes future
plans for acquisition of plant facilities and equipment.

10.              Flexible budgeting builds the effect of
changes in level of activity into the budget system.

11.              Budgets are prepared in the Accounting
Department and monitored by various department managers.

12.              Detailed supplemental schedules based on
department responsibility are often prepared for major items in the
operating expenses budget.

13.              The first budget to be prepared is usually
the cash budget.

14.              The production budget is the starting
point for preparation of the direct labor cost budget.

15.              Employees view budgeting more positively
when senior management establishes goals for them.

16.              Supervisor salaries, maintenance, and
indirect factory wages would normally appear in the operating expenses
budget.

17.              Differential revenue is the amount of
income that would result from the best available alternative proposed
use of cash.

18.              A cost that will not be affected by later
decisions is termed a sunk cost.

19.              The product cost concept includes all
manufacturing costs in the cost amount to which the markup is added to
determine product price.

20.              A budget performance report compares
actual results with the budgeted amounts and reports differences for
possible investigation.

21.              In using the total cost concept of
applying the cost-plus approach to product pricing, selling expenses,
administrative expenses, and profit are covered in the markup.

22.              Break-even analysis is one type of
cost-volume-profit analysis.

23.              If direct materials cost per unit
decreases, the amount of sales necessary to earn a desired amount of
profit will decrease.

24.              A budget procedure that provides for the
maintenance at all times of a twelve-month projection into the future is
called master budgeting.

25.              The flexible budget is, in effect, a
series of static budgets for different levels of activity.

Multiple-Choice

1. Which of the following costs is an example of a cost that remains the
same in total as the number of units produced changes?

A.                 Direct labor

B.                 Salary of a factory supervisor

C.                 Units of production depreciation

D.                 Direct materials

Most operating decisions of management focus on a narrow range of
activity called the:

A.                 Relevant range of production

B.                 Strategic level of production

C.                 Optimal level of production

D.                 Tactical operating level of
production

Which of the following is NOT an example of a cost that varies in total
as the number of units produced changes?

A.                 Electricity per KWH to operate
equipment

B.                 Direct materials cost

C.                 Straight-line depreciation on factory
equipment

D.                 Wages of assembly worker

For purposes of analysis, mixed costs are generally:

A.                 Classified as fixed costs

B.                 Classified as variable costs

C.                 Classified as period costs

D.                 Separated into their variable and
fixed cost components

The contribution margin ratio is:

A.                 The same as the variable cost ratio

B.                 The same as profit

C.                 The portion of equity contributed by
the stockholders

D.                 The same as the profit-volume ratio

If sales are $800,000, variable costs are 64% of sales, and operating
income is $240,000, what is the contribution margin ratio?

A.                 36%

B.                 53.2%

C.                 64%

D.                 30%

If fixed costs are $850,000 and the unit contribution margin is $10,
what amount of units must be sold in order to have a zero profit?

A.                 9,444

B.                 8,500

C.                 85,000

D.                 850,000

If fixed costs are $561,000 and the unit contribution margin is $8, what
is the break-even point in units if variable costs are decreased $0.50 a
unit?

A.                 70,125

B.                 66,000

C.                 74,800

D.                 60,000

Which of the following costs is a mixed cost?

A.                 Salary of a factory supervisor

B.                 Electricity cost of $2 per
kilowatt-hour

C.                 Rental costs of $5,000 per month plus
$0.30 per machine hour of use

D.                 Straight-line depreciation on factory
equipment

A firm operated at 90% of capacity for the past year, during which fixed
costs were $320,000, variable costs were 60% of sales and sales were
$1,000,000.  Operating profit was:

A.                 $680,000

B.                 $80,000

C.                 $1,320,000

D.                 $200,000

A variant of fiscal-year budgeting whereby a twelve-month projection
into the future is maintained at all times is termed:

A.                 Flexible budgeting

B.                 Continuous budgeting

C.                 Zero-base budgeting

D.                 Master budgeting

A disadvantage of static budgets is that they:

A.                 Start with a clean slate

B.                 Cannot be used by service companies

C.                 Do not show possible changes in
underlying activity levels

D.                 Show the expected results of a
responsibility center

Which of the following budgets provides the starting point for the
preparation of the direct labor cost budget:

A.                 Direct materials purchases budget

B.                 Cash budget

C.                 Production budget

D.                 Sales budget

A series of budgets for varying rates of activity is termed a(n)

A.                 Flexible budget

B.                 Variable budget

C.                 Master budget

D.                 Activity budget

The first budget customarily prepared as part of an entity’s master
budget is the:

A.                 Production budget

B.                 Cash budget

C.                 Sales budget

D.                 Direct materials purchases

When management seeks to achieve personal departmental objectives that
may work to the detriment of the entire company, the manger is
experiencing:

A.                 Budgetary slack

B.                 Padding

C.                 Goal conflict

D.                 Cushions

If the expected sales volume for the current period is 7,000 units, the
desired ending inventory is 200 units and the beginning inventory is 300
units the number of units set forth in the production budget,
representing total production for the current period, is:

A.                 6,900

B.                 7,000

C.                 7,100

D.                 7,200

The budget that summarized future plans for the acquisition of plant
facilities and equipment is the:

A.                 Direct materials purchases budget

B.                 Production budget

C.                 Sales budget

D.                 Capital expenditures budget

Principal components of a master budget include which of the following:

A.                 Production budget

B.                 Sales budget

C.                 Capital expenditures budget

D.                 All of the above

If fixed costs are $600,000 and the unit contribution margin is $12,
what amount of units must be sold in order to realize an operating
income of $100,000?

A.                 5,000

B.                 41,667

C.                 50,000

D.                 58,333

The amount of increase of decrease in cost that is expected from a
particular course of action as compared with an alternative is termed:

A.                 Period cost

B.                 Product cost

C.                 Differential cost

D.                 Discretionary cost

What ratio indicates the percentage of each sales dollar that is
available to cover fixed costs and to provide a profit?

A.                 Margin of safety ratio

B.                 Contribution margin ratio

C.                 Costs and expenses ratio

D.                 Profit ratio

Forde Co. has an operating leverage of 4.  Sales are expected to
increase by 8% next year.  Operating income is:

A.                 Unaffected

B.                 Expected to increase by 2%

C.                 Expected to increase by 32%

D.                 Expected to increase by 4 times

Which of the following conditions would cause the break-even point to
increase?

A.                 Total fixed costs increase

B.                 Unit selling price increases

C.                 Unit variable cost decreases

D.                 Total fixed costs decrease

The process of developing budget estimates by requiring all levels of
management to estimate sales, production, and other operating data as
though operations were being initiated for the first time is referred to
as:

A.                 Flexible budgeting

B.                 Continuous budgeting

C.                 Zero-based budgeting

D.                 Master budgeting