Multiple choice

1. Calculate the conversion costs from the following information:

A. $3,000
B. $4,000
C. $4,500
D. $5,000
E. $7,000

Mukwonago Industries has developed two new products but has only enough plant capacity to introduce one product during the current year. The following data will assist management in deciding which product should be selected.

Mukwonago's fixed overhead includes rent and utilities, equipment depreciation, and supervisory salaries. Selling and administrative expenses are not allocated to individual products.

2. Research and development costs for Mukwonago's two new products are
A. Prime costs.
B. Conversion costs.
C. Opportunity costs.
D. Sunk costs.
E. Avoidable costs.

3. Which of the following statements is (are) true?

(1). The term full cost refers to the cost of manufacturing and selling a unit of product and includes both fixed and variable costs.
(2). The fixed cost per unit is considered constant despite changes in volume of activity within the relevant range.
A. Only (1) is true.
B. Only (2) is true.
C. Both (1) and (2) are true.
D. Neither (1) or (2) are true.

4. The advertising costs for the product selected by Mukwonago will be
A. Prime costs.
B. Conversion costs.
C. Discretionary costs.
D. Opportunity costs.
E. Product costs.

5. Net income will always be lower than operating income.
True False

6. Only direct costs can be classified as product costs; indirect costs are classified as period costs.
True False

7. Labor costs are traditionally the largest cost category for service organizations.
True False

8. An opportunity cost is the benefit forgone by selecting one alternative over another alternative.
True False

9. Which of the following costs are irrelevant to the make-or-buy decision?
A. Indirect materials and indirect labor if the item is manufactured internally
B. Direct materials and direct labor if the item is purchased
C. Variable overhead if the item is manufactured internally
D. Fixed overhead that can be avoided if the item is purchased
E. Fixed overhead that will continue if the item is purchased

10. The Regal Baking Company is considering the expansion of its business into door-to-door delivery service. This would require an additional $12,500 in labor costs per month. Company-owned vehicles now used to make morning deliveries to restaurants could be used in the afternoons to make the home deliveries. However, it is estimated that an additional $5,000 would be required per month for gas, oil, and maintenance. It is further estimated that the home delivery use of the trucks would be allocated 45% of the existing $6,500 fixed vehicle costs. What is the differential delivery cost per month for expanding into the home delivery market?
A. $12,500
B. $17,500
C. $19,750
D. $20,425
E. some other answer _______________.

11. The theory of constraints focuses on maximizing throughput contribution margin while minimizing all of the following except
A. fixed overhead costs.
B. production bottlenecks.
C. investment in buildings.
D. investment in inventories.

12. The following information relates to the Tram Company for the upcoming year.

The cost of goods sold includes $1,200,000 of fixed manufacturing overhead; the operating expenses include $100,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $7.50 per unit has been made to Tram. Fortunately, there will be no additional operating expenses associated with the order and Tram has sufficient capacity to handle the order. How much will operate profits be increased if Tram accepts the special order?
A. $ 25,000
B. $ 62,500
C. $100,000
D. $125,000
E. Operating profits will not increase as a result of accepting the special order.

13. Opportunity costs are the benefits foregone by selecting one alternative over another alternative.
True False

14. If there is only one alternative course of action and the status quo is unacceptable, then there really is no decision to make.
True False

15. The slope of the cost line for the "buy" alternative in graphical analysis of the make-or-buy decision is the variable product costs per unit.
True False

16. The alternative courses of action in a make-or-buy decision are (a) manufacture needed items internally or (b) purchase needed items externally.
True False

17. If the fixed costs for a product decrease and the variable costs (as a percentage of sales dollars) decrease, what will be the effect on the contribution margin ratio and the breakeven point respectively?

A.
B.
C.
D.

18. In a decision analysis situation, which one of the following costs is not likely to contain a variable cost component? (CMA adapted, 6/96)
A. Labor
B. Overhead
C. Depreciation
D. Selling
E. Material

19. You have been provided with the following information:

If sales decrease by 500 units, how much will fixed expenses have to be reduced by to maintain the current operating profit of $6,000?
A. $9,000.
B. $7,500.
C. $6,000.
D. $3,000.
E. Some other answer ___________.

20. A decrease in the margin of safety would be caused by a(n):
A. increase in the total fixed costs.
B. increase in total revenue (sales).
C. decrease in the break-even point.
D. decrease in the variable cost per unit.

21. If the fixed costs are $2,400, targeted operating profit is $1,200, selling price per unit is $2, and the contribution margin ratio is 40%, then the sales volume is 9,000 units.
True False

22. If the average selling price is $.60 per unit, the average variable cost is $.36 per unit, and the total fixed costs are $1,500, then sales of 15,000 units will result in operating profits of $3,600.
True False

23. An increase in an organization's tax rate will cause an increase in its break-even point.
True False

24. The break-even point in sales dollars is fixed costs divided by the contribution margin ratio.
True False

The Business School at Eastern College is accumulating data as a first step in the preparation of next year's budget development. One cost that is being looked at closely is administrative costs as a function of student credit hours. Data on administrative costs and credit hours for the most recent academic year is shown below:

The controller's office has analyzed the data and has given you the results from the regression analysis:

25. Based on the results of the above regression analysis, the estimate of administrative costs in a month with 1,000 credit hours would be:
A. $198,808.
B. $201,000.
C. $199,969.
D. $96,409.
E. Some other amount.

26. A cost driver is defined as: (CMA adapted, 6/93)
A. the largest cost in a manufacturing process
B. a fixed cost that cannot be avoided
C. the significant factor in developing a new product
D. an indirect cost that cannot be traced to a particular cost objective but is essential to the business
E. a causal factor that increases the total cost of a cost objective

The Armer Company is accumulating data to be used in preparing its annual profit plan for the coming year. The cost behavior pattern of the maintenance costs must be determined. The accounting staff has suggested that linear regression be employed to derive an equation in the form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for last year and the results of the regression analysis are as follows: (CMA adapted, May 1981)

27. At 400 hours of activity, Armer management can be approximately two-thirds confident that the maintenance costs will be in the range of
A. $3,537.62 $3,662.40.
B. $3,551.37 $3,648.51.
C. $3,586.18 $3,613.93.
D. $3,565.54 $3,634.47.
E. $3,574.15 $3,626.02.
F. Some other answer __________.

28. A manager is trying to estimate the manufacturing costs of a new product. The company makes several other products that utilize some of the same manufacturing procedures as the new product. Which cost estimation method would be the best method to determine the total cost of manufacturing the new product?
A. engineering estimates
B. regression analysis
C. account analysis
D. scattergraph
E. high-low

29. In general, the use of multiple independent variables increases the proportion of the variation in the dependent variable explained by the cost equation.
True False

30. In general, "garbage-in, garbage-out;" i.e., the quality of the cost equation depends on collecting appropriate data.
True False

31. The most important step in obtaining cost behavior estimates is identifying the appropriate cost driver.
True False

32. The engineering method of determining cost behavior is particularly useful for totally new activities or products.
True False

33. The loan department of a financial corporation makes loans to businesses. The costs of processing these loans are often several thousand dollars. All loans are initially evaluated using the same financial analysis software, but some require outside services such as appraisals and legal services. Which is the most appropriate costing system for the loan department?
A. job-order costing
B. process costing
C. operation costing
D. batch costing

34. Which of the following statements is (are) false regarding cost allocations and product costing?

(A) It is easier to determine the individual product cost for a manufacturer than it is for a wholesaler.
(B) In general, indirect costs are assigned, while direct costs are allocated.
A. Only A is false.
B. Only B is false.
C. Both A and B are false.
D. Neither A nor B is false.

35. Which of the following would be the least appropriate allocation base for allocating overhead in a highly automated (i.e., capital-intensive) manufacturing company?
A. electricity used
B. machine hours
C. direct labor hours
D. material consumed

36. For which of the following businesses would the job order cost system be appropriate?
A. auto repair shop
B. crude oil refinery
C. paint manufacturer
D. beer distillery

37. 10,000 units that are 75% complete are equivalent to 9,375 units that are 80% complete.
True False

38. The term "product" often refers to an organization's output and includes both tangible items (e.g., chair, desk, etc.) and intangible items (e.g., services provided).
True False

39. For work in process, if there is no Beginning Balance (BB), the Transfers In (TI) costs are assigned to both the Finished Goods inventory (i.e., Transfers Out) and the ending balance.
True False

40. It is easier to determine the individual product cost for a manufacturer than it is for a wholesaler.
True False

4 1. The relevant range for activities does not apply to fixed costs.
True False