Question 1

Moonwalker's CVP income statement included sales of 5,000 units, a selling price of $100, variable expenses of $60 per unit, and fixed expenses of $110,000. Contribution margin is
A) $500,000.
B) $300,000.
C) $200,000.
D) $90,000.

Accepted Answer

The contribution margin is calculated as (Selling Price per Unit - Variable Expenses per Unit) * Number of Units Sold. Here, it is ($100 - $60) * 5,000 = $200,000.

Question 2

Hinge Manufacturing's cost of goods sold is $420,000 variable and $240,000 fixed. The company's selling and administrative expenses are $300,000 variable and $360,000 fixed. If the company's sales is $1,580,000, what is its net income?
A) $260,000
B) $860,000
C) $920,000
D) $980,000

Accepted Answer

Net income is calculated by subtracting total expenses from sales. Total expenses include both cost of goods sold (COGS) and selling and administrative expenses. COGS = $420,000 (variable) + $240,000 (fixed) = $660,000. Selling and administrative expenses = $300,000 (variable) + $360,000 (fixed) = $660,000. Total expenses = $660,000 (COGS) + $660,000 (selling and administrative expenses) = $1,320,000. Sales = $1,580,000. Therefore, net income = Sales - Total expenses = $1,580,000 - $1,320,000 = $260,000.

Question 3

When units produced exceed units sold, income under absorption costing is higher than income under variable costing.

Accepted Answer

Under absorption costing, fixed manufacturing overhead costs are included in the cost of goods sold and are only expensed when a unit is sold. If units produced exceed units sold, some of these fixed costs will be deferred to future periods and will be included in inventory. This results in a higher inventory value and a higher income under absorption costing compared to variable costing, where fixed manufacturing overhead is expensed in the period incurred.

Question 4

Moonwalker's CVP income statement included sales of 5,000 units, a selling price of $100, variable expenses of $60 per unit, and fixed expenses of $110,000. Net income is
A) $500,000.
B) $200,000.
C) $190,000.
D) $90,000.

Accepted Answer

Net income is calculated as (Sales - Variable Expenses - Fixed Expenses). Sales = 5,000 units * $100 = $500,000. Variable Expenses = 5,000 units * $60 = $300,000. Contribution Margin = $500,000 - $300,000 = $200,000. Net Income = $200,000 - $110,000 = $90,000.

Question 5

When absorption costing is used for external reporting, variable costing can still be used for internal reporting purposes.

Accepted Answer

Absorption costing is legally required for external financial reporting, but variable costing can still be used for internal reporting purposes since it provides a better picture of the contribution margin and the impact of changes in production levels on profitability.

Question 6

The CVP income statement classifies costs
A) as variable or fixed and computes contribution margin.
B) by function and computes a contribution margin.
C) as variable or fixed and computes gross margin.
D) by function and computes a gross margin.

Accepted Answer

CVP income statement separates costs into variable or fixed categories and computes contribution margin, which is the sales revenue less variable costs. The statement does not classify costs by function, nor does it compute gross margin.

Question 7

Selling and administrative costs are period costs under both absorption and variable costing.

Accepted Answer

Selling and administrative costs are not product costs, but rather expenses incurred during a specific period, regardless of the level of production. Therefore, they are treated as period costs under both absorption and variable costing.

Question 8

Cost-volume-profit analysis is the study of the effects of
A) changes in costs and volume on a company's profit.
B) cost, volume, and profit on the cash budget.
C) cost, volume, and profit on various ratios.
D) changes in costs and volume on a company's profitability ratios.

Accepted Answer

Cost-volume-profit analysis specifically focuses on how changes in costs and volume (or sales) can impact a company's profitability or profit levels. B, C, and D may be related to the financial analysis of a company, but they are not directly related to cost-volume-profit analysis.

Question 9

The use of absorption costing facilitates cost-volume-profit analysis.

Accepted Answer

Absorption costing allocates all manufacturing costs to products, making it difficult to directly analyze the impact of changes in production volume on costs and profitability, which is central to cost-volume-profit analysis. Variable costing is more suited for this purpose as it separates variable and fixed costs.

Question 10

The difference between absorption costing and variable costing is the treatment of fixed manufacturing overhead.

Accepted Answer

The treatment of fixed manufacturing overhead is the key difference between absorption and variable costing. In absorption costing, fixed manufacturing overhead is included as part of the cost of each unit produced, while in variable costing, fixed manufacturing overhead is treated as a period expense and is not included in the cost of goods sold.

Question 11

In a CVP income statement, a selling expense is generally
A) completely a variable cost.
B) completely a fixed cost.
C) neither a variable cost nor a fixed cost.
D) partly a variable cost and partly a fixed cost.

Accepted Answer

Selling expenses can include both variable costs, such as sales commissions or shipping costs, and fixed costs, such as salaries for sales staff or advertising expenses. Therefore, they are partly a variable cost and partly a fixed cost in a CVP income statement.

Question 12

For Buffalo Co., at a sales level of 4,000 units, sales is $75,000, variable expenses total $50,000, and fixed expenses are $21,000. What is the contribution margin per unit?
A) $5.25
B) $6.25
C) $12.50
D) $18.75

Accepted Answer

Contribution Margin per Unit = Sales Price per unit – Variable Cost per unit
Contribution Margin per Unit = ($75,000 / 4,000 units) – ($50,000 / 4,000 units)
Contribution Margin per Unit = $18.75 - $12.50
Contribution Margin per Unit = $6.25

Question 13

Contribution margin is the amount of revenue remaining after deducting
A) cost of goods sold.
B) fixed costs.
C) variable costs.
D) contra-revenue.

Accepted Answer

Contribution margin is calculated by subtracting the total variable costs from the total revenue. Therefore, the correct answer is option C, which lists variable costs. Options A and B are incorrect because they subtract fixed costs, and option D is incorrect because it refers to contra-revenue, which is a deduction from revenue, rather than a deduction from costs.

Question 14

Manufacturing cost per unit will be higher under variable costing than under absorption costing.

Accepted Answer

Manufacturing cost per unit will be lower under variable costing than under absorption costing because variable costing only considers direct materials, direct labor, and variable manufacturing overhead as product costs, while absorption costing includes fixed manufacturing overhead as well.

Question 15

When units sold exceed units produced, income under absorption costing is higher than income under variable costing.

Accepted Answer

When units sold exceed units produced, inventory decreases, leading to higher expenses under absorption costing due to fixed costs being spread over fewer units, resulting in lower income compared to variable costing.

Question 16

In a CVP income statement, cost of goods sold is generally
A) completely a variable cost.
B) completely a fixed cost.
C) neither a variable cost nor a fixed cost.
D) partly a variable cost and partly a fixed cost.

Accepted Answer

Cost of goods sold includes both variable costs (such as direct materials and direct labor) and fixed costs (such as rent and depreciation on production equipment). Therefore, it is partly a variable cost and partly a fixed cost.

Question 17

When absorption costing is used, management may be tempted to overproduce in a given period in order to increase net income.

Accepted Answer

Since absorption costing allocates fixed manufacturing overhead costs to each unit produced, producing more units will increase the amount of fixed overhead costs absorbed and thus decrease the cost per unit. This will result in a higher net income for the period. Therefore, management may be tempted to overproduce in order to inflate net income.

Question 18

Variable costing is the approach used for external reporting under generally accepted accounting principles.

Accepted Answer

Variable costing is not permitted for external reporting under generally accepted accounting principles (GAAP). GAAP requires the use of absorption costing for external reporting purposes.

Question 19

Some fixed manufacturing costs of the current period are deferred to future periods through ending inventory under variable costing.

Accepted Answer

Under variable costing, only variable manufacturing costs are assigned to inventory. Fixed manufacturing costs are expensed in the period they are incurred, not deferred to future periods through ending inventory.

Question 20

Hinge Manufacturing's cost of goods sold is $420,000 variable and $240,000 fixed. The company's selling and administrative expenses are $300,000 variable and $360,000 fixed. If the company's sales is $1,580,000, what is its contribution margin?
A) $260,000
B) $860,000
C) $920,000
D) $980,000

Accepted Answer

Contribution Margin = Sales - Variable Costs

Variable Costs = Cost of Goods Sold + Selling and Administrative Expenses (only variable portion)

Variable costs = $420,000 + $300,000 = $720,000

Sales = $1,580,000

Contribution Margin = $1,580,000 - $720,000 = $860,000

Quiz 6: Cost-Volume-Profit Analysis: Additional Issues

Moonwalker's CVP income statement included sales of 5,000 units, a selling price of $100, variable expenses of $60 per unit, and fixed expenses of $110,000. Contribution margin is

Hinge Manufacturing's cost of goods sold is $420,000 variable and $240,000 fixed. The company's selling and administrative expenses are $300,000 variable and $360,000 fixed. If the company's sales is $1,580,000, what is its net income?

When units produced exceed units sold, income under absorption costing is higher than income under variable costing.

Moonwalker's CVP income statement included sales of 5,000 units, a selling price of $100, variable expenses of $60 per unit, and fixed expenses of $110,000. Net income is

When absorption costing is used for external reporting, variable costing can still be used for internal reporting purposes.

The CVP income statement classifies costs

Selling and administrative costs are period costs under both absorption and variable costing.

Cost-volume-profit analysis is the study of the effects of

The use of absorption costing facilitates cost-volume-profit analysis.

The difference between absorption costing and variable costing is the treatment of fixed manufacturing overhead.

In a CVP income statement, a selling expense is generally

For Buffalo Co., at a sales level of 4,000 units, sales is $75,000, variable expenses total $50,000, and fixed expenses are $21,000. What is the contribution margin per unit?

Contribution margin is the amount of revenue remaining after deducting

Manufacturing cost per unit will be higher under variable costing than under absorption costing.

When units sold exceed units produced, income under absorption costing is higher than income under variable costing.

In a CVP income statement, cost of goods sold is generally

When absorption costing is used, management may be tempted to overproduce in a given period in order to increase net income.

Variable costing is the approach used for external reporting under generally accepted accounting principles.

Some fixed manufacturing costs of the current period are deferred to future periods through ending inventory under variable costing.

Hinge Manufacturing's cost of goods sold is $420,000 variable and $240,000 fixed. The company's selling and administrative expenses are $300,000 variable and $360,000 fixed. If the company's sales is $1,580,000, what is its contribution margin?