Deck 30: Cost-Revenue Analysis for Decision Making

Question 1

A segment of a business shows a contribution margin of $30,000 but incurs controllable fixed costs of $26,000. Eliminating that segment will result in an increase in company-wide net income.

Answer 1

False

Question 2

Differential cost analysis emphasizes evaluating alternatives by calculating the differences in relevant costs.

Answer 2

True

Question 3

Direct costing is the process of tracing only direct material and direct labor costs through the factory cost centers and into the cost of goods sold.

Answer 3

False

Question 4

It is appropriate to consider nonfinancial factors in the decision-making process.

Question 5

Common costs are allocated to each segment of a business to determine the segment's contribution margin.

Question 6

Opportunity costs are earnings or potential benefits foregone because a certain course of action is taken.

Question 7

Fixed costs often are not relevant in the decision-making process as fixed costs do not vary in total within a relevant range of activity.

Question 8

Under absorption costing, a portion of the fixed manufacturing overhead is deferred to future periods as part of the inventory value.

Question 9

The direct costing procedure is sometimes referred to as variable costing.

Question 10

A cost that does not change regardless of the option selected need not be considered in the decision-making process.

Question 11

Income statements prepared on an absorption-costing basis are usually more useful for internal decision making than income statements prepared on a direct costing basis.

Question 12

If a segment of a business is expected to produce an annual contribution margin of $30,000 but is also expected to incur controllable fixed costs of about $40,000 annually, that segment should probably be discontinued.

Question 13

Under direct costing, all fixed manufacturing overhead is charged off as a current expense.

Question 14

The first step in the decision-making process is to determine relevant cost and revenue data.

Question 15

Fixed costs are associated with the capacity to produce goods, not to the actual goods produced.

Question 16

Marginal income on sales is the equivalent of contribution margin since both take all variable costs into consideration.

Question 17

The direct costing procedure is used for financial reporting.

Question 18

Generally Accepted Accounting Principles require the use of direct costing for financial reporting purposes.

Question 19

Company Zee produces a widget that requires $15 of material per unit along with ½ hour of labor, the average rate being $18/hour. The company's predetermined overhead rate includes $5 of variable cost and $6 of fixed cost per labor hour when the activity level is 10,000 labor hours. Direct costing would cost this widget at $29.50 per unit.

Question 20

GAAP requires the use of the absorption costing method for financial reporting.

Question 21

The difference in net income reported under direct costing versus the net income reported under absorption costing is calculated based on the change in the inventory levels times the unit fixed manufacturing overhead cost.

Question 22

Under the contribution margin approach, common costs are deducted from the total of all segment contributions to determine the company's profit.

Question 23

Irrelevant costs are those that will not impact the decision maker's options and thus can be eliminated from analyses.

Question 24

Under direct costing, all fixed costs are expensed in the period incurred, including fixed selling and administrative costs.

Question 25

The contribution margin income statement with segment margin information assists management in making sound decisions regarding whether to drop, keep or add a segment.

Question 26

Net income under both the direct costing and absorption costing approaches will always equal.

Question 27

Opportunity costs are calculated as the difference between two alternatives.

Question 28

Manufacturing margin less the sum of variable manufacturing overhead and variable selling and administrative expenses equals marginal income.

Question 29

The difference in net income reported under direct costing versus the net income reported under absorption costing is calculated based on the increase or decrease in the units available for sale.

Question 30

If the finished goods inventory increases during the period, the reported net income will be larger under variable costing than under absorption costing.

Question 31

If the finished goods inventory decreases during the period, the reported net income will be larger under variable costing than under absorption costing.

Question 32

When inventories decrease, the absorption costing income statement will report a lower net income than the net income reported under variable costing.

Question 33

Segment managers can never control fixed costs.

Question 34

When inventories increase, the direct costing income statement will report a lower net income than the net income reported under absorption costing.

Question 35

The profitability of a segment is judged by its contribution margin.

Question 36

If a decision must be made to replace a machine, the book value of the existing machine is a sunk cost and is, therefore, ignored in the decision process.

Question 37

Net income under variable costing will differ from reported net income under absorption costing when finished good inventory levels change.

Question 38

Manufacturing margin less variable selling and administrative expenses equals marginal income.

Question 39

In managerial decisions, nonmanufacturing costs can be ignored.

Question 40

Direct costing is extremely useful in setting prices of products in special-order situations.

Question 41

The excess of net sales over the cost of goods sold, based on variable costs only, is referred to as the .

Question 42

The difference in cost between two alternatives is called a(n)cost.

Question 43

If a decision must be made about whether or not to replace a machine, the of the existing machine is irrelevant.

Question 44

Costs that are not directly traceable to any specific department are called costs.

Question 45

The variable operating expenses are deducted from the manufacturing margin to arrive at the
on sales.

Question 46

Under costing, a portion of fixed manufacturing overhead is deferred to future periods as part of the inventory value.

Question 47

A cost that has already been incurred and is irrelevant for decision-making purposes is called a(n)
cost.

Question 48

In deciding whether to manufacture or to purchase a product, fixed costs are generally ignored.

Question 49

Evaluation of available capacity is irrelevant when making decisions on whether to accept or reject a special order.

Question 50

The inventory costing system not acceptable for financial reporting is costing.

Question 51

The difference between revenue and variable costs is referred to as the .

Question 52

Income statements prepared on a(n)costing basis usually provide data in a form more useful for internal decision making.

Question 53

A segment of a business should probably be discontinued if it does not produce a positive
.

Question 54

The sum of unit variable and fixed costs is used as a basis for determining whether to accept or reject a special order.

Question 55

In deciding whether to manufacture or to purchase a product, costs are generally ignored.

Question 56

Before deciding whether to purchase new equipment, a firm should consider employee morale and the quality of the new equipment's output.

Question 57

The increase in a cost from one alternative to another is called a(n)cost.

Question 58

Before deciding to accept a special order, the company should evaluate if it has adequate manufacturing .

Question 59

Earnings or potential benefits foregone because a certain course of action is taken are called
costs.

Question 60

Under costing procedures, fixed manufacturing costs are included in the cost of goods manufactured.

Question 61

Which inventory costing system is required by GAAP for financial reporting purposes?
A)absorption costing

A)standard costing
B)direct costing
D)variable costing

Question 62

Which is the final step in the decision-making process?

A)Make a decision
B)Consider appropriate nonfinancial factors
C)Identify workable alternatives
D)Evaluate the cost and revenue data

Question 63

A segment of a business should probably be discontinued if

A)its common costs exceed its contribution margin.
B)its contribution margin exceeds its controllable fixed costs and its common costs.
C)it has a net loss.
D)cannot produce a positive contribution margin.

Question 64

Which of the following is NOT considered regarding a special order?

A)If the company has sufficient capacity
B)If employee morale would be affected
C)Federal laws regarding the price
D)If the special order jeopardized sales to existing customers

Question 65

In making a decision to replace a machine, which of the following would not be relevant?

A)the training that workers will need in order to use the new machine
B)the variable costs of operating the new machine
C)the book value of the old machine
D)the variable costs of operating the old machine

Question 66

Which of the following is NOT a step in the decision-making process?

A)Consider appropriate nonfinancial factors
B)Determine relevant cost and revenue data
C)Explore workable alternatives
D)Make a decision

Question 67

Which of the following is NOT relevant in evaluating whether to accept or reject a special order?

A)variable manufacturing costs
B)variable selling costs
C)fixed manufacturing costs
D)incremental fixed costs unique to the order

Question 68

On an income statement prepared with a direct costing approach, the excess of sales over the cost of goods sold, based on variable costs only, is referred to as

A)the manufacturing margin.
B)the marginal gross profit on sales.
C)the marginal income on sales.
D)the contribution margin.

Question 69

Costs that are not directly traceable to a segment of a business are called

A)sunk costs.
B)fixed costs.
C)common costs.
D)incremental costs.

Question 70

Fixed manufacturing costs are written off as current expenses of the period in which they occurred when using

A)absorption costing.
B)standard costing.
C)direct costing.
D)differential costing.

Question 71

Which of the following is not relevant in decision making?

A)sunk costs
B)differential costs
C)opportunity costs
D)variable costs

Question 72

Which of the following is NOT considered regarding the purchase of new equipment when looking at the net income under each alternative?

A)annual sales
B)depreciation expense per year on the new equipment
C)differential labor costs
D)additional fixed costs under an alternative

Question 73

Which of the following is NOT considered when determining whether to continue making a part or to buy that part?

A)the timing of the cash receipts and expenditures
B)the sunk cost
C)the impact on employees
D)the opportunity cost

Question 74

When direct costing is used, cost of goods sold reflects

A)both variable and fixed manufacturing costs.
B)variable manufacturing costs and variable selling and administrative expenses.
C)fixed manufacturing costs only.
D)variable manufacturing costs only.

Question 75

Which of the following is the first step in the decision-making process?

A)Evaluate the cost and revenue data
B)Identify workable alternatives
C)Consider appropriate nonfinancial factors
D)Define the problem

Question 76

Which of the following is not true of the direct costing procedure?

A)Variable selling expenses are deducted from the manufacturing margin.
B)The cost of goods sold, based solely on variable costs, is subtracted from net sales to arrive at the manufacturing margin.
C)Variable and fixed costs are considered part of the cost of goods manufactured.
D)Variable administrative expenses are deducted from the manufacturing margin.

Question 77

Which of the following costs can be found in a firm's accounting records?

A)opportunity costs
B)sunk costs
C)incremental costs
D)differential costs

Question 78

Which of the following would not be relevant to a decision about whether to continue making a part or buy it from an outside supplier?

A)alternative uses for the plant where the part was produced if the part is purchased
B)the number of additional employees needed to make the part
C)the variable costs of making the part
D)a fee previously spent for design of the part

Question 79

Which of the following represents a valid reason for rejecting a special order?

A)the shipment is expected to go overseas.
B)it will jeopardize delivery of a loyal customer's order.
C)the profits will exceed that of current customer orders.
D)the sales price per unit will be lower for the special order.

Question 80

Contribution margin is calculated by

A)deducting variable costs and common costs from revenue.
B)deducting variable costs and controllable fixed costs from revenue.
C)deducting variable costs from revenue.
D)deducting fixed costs from revenue.