Managerial Accounting and Operating Leverages

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Study Guide
Managerial Accounting

1. Whirl Company sells cordless razors for $50. Variable costs are 40% of sales and total fixed costs are $40,000. What is the firm's magnitude of operating leverage if 2,000 units are sold?
A) 3.0
B) 2.0
C) 1.5
D) None of the above

2. Select the incorrect statement regarding costs and expenses.
A) Some costs are initially recorded as expenses while others are initially recorded as assets.
B) Expenses are incurred when assets are used to generate revenue.
C) Manufacturing-related costs are initially recorded as expenses.
D) Non-manufacturing costs should be expensed in the period in which they are incurred.

3. All of the following are features of managerial accounting except:
A) Information is historically based and reported annually.
B) Information includes economic and non-financial data as well as financial data.
C) Information is provided primarily to insiders such as managers.
D) Information is reported continuously with a present or future orientation.

4. During her first year with the company, Ann mistakenly accumulated some of the company's period costs in ending inventory. Which of the following indicates how this error affects the company's financial statements assuming number of units produced exceeded number of units sold during the period?
A) Cash flows from operations are understated.
B) Gross margin is understated
C) Net income is understated
D) Inventory is overstated

5. The excess of a product's selling price over its variable costs is referred to as:
A) Gross profit.
B) Contribution margin.
C) Gross margin.
D) Manufacturing margin.
6. Assuming a company's inventory increased during the period, which of the following misclassifications increases net income?
A) Recording administrative salaries as a product cost
B) recording depreciation on production equipment as an expense
C) Expensing raw material costs instead of including them in inventory
D) B and C
7. Based on the following cost data, items labeled (a) and (b) in the table below are which of the following amounts, respectively?

A) (a) = $3.00; (b) = $3.00
B) (a) = $5.00; (b) = $2.00
C) (a) = $2.50; (b) = $2.00
D) (a) = $5.00; (b) = $4.00

8. Identify the true statement regarding how product costs in a manufacturing company differ from product costs in a service company.
A) Manufacturing companies incur costs for supplies but service companies do not.
B) Manufacturing companies accumulate product costs in inventory accounts, while services companies do not.
C) Service companies generally incur less labor costs than manufacturing companies.
D) Service companies are less competitive than manufacturing companies.

9. Hico Bottling Company pays its production manager a salary of $5,000 per month. Salespersons are paid strictly on commission, at $2 for each case of product sold. For Hico Bottling Company, the salespersons' commissions are an example of:
A) A variable cost.
B) A fixed cost.
C) A mixed cost.
D) None of the above.

10. Casters, Inc. normally produces between 150,000 and 175,000 units each year. Producing more than 175,000 units alters the company's cost structure. For example, fixed costs increase because more space must be rented, and additional supervisors must be hired. The production range between 150,000 and 175,000 is called the:
A) Differential range.
B) Relevant range.
C) Opportunity range.
D) Leverage range.

11. Gypsy Joe's operates a chain of coffee shops. The company pays rent of $10,000 per year for each shop. Supplies (napkins, bags and condiments) are purchased as needed. The managers of each shop are paid a salary of $2,500 per month and all other employees are paid on an hourly basis. The costs of supplies relative to the number of customers in a particular shop and relative to the number of customers in the entire chain of shops are which kind of cost, respectively?
A) Variable cost / fixed cost
B) Fixed cost / fixed cost
C) Variable cost / fixed cost
D) Variable cost / variable cost

12. Select the correct statement from the following.
A) A fixed cost structure offers less risk (i.e., less earnings volatility) and higher opportunity for profitability than does a variable cost structure.
B) A variable cost structure offers less risk and higher opportunity for profitability than does a fixed cost structure.
C) A fixed cost structure offers greater risk but higher opportunity for profitability than does a variable cost structure.
D) A variable cost structure offers greater risk but higher opportunity for profitability than does a fixed cost structure.

13. The following income statement is provided for Barron Company in 2006:

What amount was the company's contribution margin?
A) $11,000
B) $25,000
C) $26,000
D) $30,000

14. The following information relates to Minimart's 2007 accounting period:

Based on this information, what is the company's net income for 2007?
A) $15,000
B) $35,000
C) $18,000
D) $21,000

15. The following information is provided for Steinberg Company:

What is this company's contribution margin?
A) $135,000
B) $35,000
C) $90,000
D) $60,000

16. Wall Company incurred $30,000 of fixed cost and $40,000 of variable cost when 2,000 units of product were made and sold. If the company's volume increases to 2,500 units, the company's total costs will be:
A) $80,000.
B) $70,000.
C) $87,500.
D) $140,000.

17. What is the effect on the financial statements of recording a $100 purchase of raw materials?

A) Item A
B) Item B
C) Item C
D) Item D

18. Which of the following costs is not considered to be a product cost?
A) Raw materials costs
B) Depreciation of delivery vehicles
C) Wages paid to production workers
D) Factory utilities costs

19. Which of the following should be recorded as an asset?
A) Paid for a new advertising campaign
B) Paid rent on the warehouse used to store finished goods
C) Paid salary for the vice president of marketing
D) Paid for raw materials to be used in production