Question 1

Managers in service firms do not find contribution margin reports useful because their firms do not sell inventory.

Accepted Answer

Contribution margin reports are useful for managers in service firms as they help in understanding the profitability of their services by showing the margin that remains after variable costs are subtracted from service revenues, similar to how they are used in product-based businesses.

Question 2

Service firms can only have one activity base for analyzing changes in costs.

Accepted Answer

Service firms, like manufacturing firms, can have multiple activity bases to analyze changes in costs, as different services and operational aspects may drive costs in various ways.

Question 3

In a service firm, it may be necessary to have several activity bases to properly match the change in costs with the changes in various activities.

Accepted Answer

In a service firm, different activities (like consulting hours, number of transactions, or client support instances) can drive costs in different ways, necessitating multiple activity bases to accurately allocate costs to services provided.

Question 4

Which of the following terms is commonly used to describe the concept whereby the cost of manufactured products is composed of direct materials cost, direct labor cost, and variable factory overhead cost?
A)absorption costing
B)differential costing
C)standard costing
D)variable costing

Accepted Answer

Variable costing is the accounting method that includes only direct materials, direct labor, and variable manufacturing overhead costs as product costs. This approach does not allocate fixed manufacturing overhead to products, distinguishing it from absorption costing.

Question 5

Direct labor cost is an example of a controllable cost for the supervisor of a manufacturing department.

Accepted Answer

Direct labor cost is considered controllable by a supervisor because they can influence the amount of labor used, through scheduling, hiring, and managing the efficiency of workers.

Question 6

Which of the following terms is commonly used to describe the concept whereby the cost of manufactured products is composed of direct materials cost, direct labor cost, and all factory overhead cost?
A)standard costing
B)variable costing
C)absorption costing
D)marginal costing

Accepted Answer

Absorption costing, also known as full costing, is the accounting method that includes all manufacturing costs - direct materials, direct labor, and both variable and fixed factory overhead - in the cost of a product.

Question 7

In evaluating the performance of salespersons, the salesperson with the highest level of sales dollars should be evaluated as the best performer.

Accepted Answer

Evaluating sales performance solely on sales dollars can be misleading as it doesn't account for factors like profitability, customer satisfaction, sales territory potential, or the difficulty of sales made. A comprehensive evaluation should consider multiple metrics to accurately assess a salesperson's performance.

Question 8

Variable costing is appropriate only for manufacturing firms, not for service firms.

Accepted Answer

Variable costing can be applied to both manufacturing and service firms as it involves analyzing costs that vary with the level of output or service delivery, such as materials and labor.

Question 9

The contribution margin ratio is computed as contribution margin divided by sales.

Accepted Answer

The contribution margin ratio is calculated by dividing the contribution margin (sales minus variable costs) by sales revenue.

Question 10

Sales mix is generally defined as the relative distribution of sales among the various products sold.

Accepted Answer

Sales mix refers to the proportion in which different products or services contribute to a company's total sales, indicating the relative distribution of sales among the company's offerings.

Question 11

In the long run, for a business to remain in operation, the revenues from products sold should normally cover all costs and expenses and provide a reasonable income.

Accepted Answer

For a business to sustain operations and grow in the long run, it must generate enough revenue to cover all its costs and expenses, including production, operation, and overhead costs, while also providing a profit margin that ensures a reasonable income for its owners or shareholders.

Question 12

Another name for variable costing is
A)indirect costing
B)process costing
C)direct costing
D)differential costing

Accepted Answer

Variable costing is also known as direct costing because it includes only the costs that vary directly with the production volume, such as direct materials and direct labor, in the cost of goods sold.

Question 13

EBITDA represents operating income after income tax, depreciation, and amortization have been deducted.

Accepted Answer

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, meaning it represents operating income before these expenses have been deducted, not after.

Question 14

In the short run, the selling price of a product should normally not be less than the variable costs and expenses of making and selling it.

Accepted Answer

In the short run, selling a product for less than its variable costs and expenses would mean the company is not covering these costs, leading to losses on each unit sold. This is unsustainable for maintaining operations.

Question 15

If the ability to sell and the amount of production facilities devoted to each of two products are equal, it is profitable to increase the sales of that product with the highest contribution margin.

Accepted Answer

The contribution margin is the difference between the selling price of a product and its variable costs. A higher contribution margin means that each additional unit sold contributes more to covering fixed costs and generating profit. Therefore, focusing on the product with the highest contribution margin maximizes profitability when sales ability and production capacity are equal for both products.

Question 16

For short-run production planning, information in the absorption costing format is more useful to management than is information in the variable costing format.

Accepted Answer

In short-run production planning, variable costing is more useful because it provides information about the costs that are directly variable with production, helping management make decisions about pricing, production levels, and cost control without being affected by fixed overhead costs allocated to each unit as in absorption costing.

Question 17

EBITDA removes a significant fixed and noncash cost from the operating income number and may approximate the contribution margin.

Accepted Answer

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) removes interest, taxes, depreciation, and amortization from operating income, which are significant fixed and non-cash costs. This adjustment can provide a clearer view of a company's operational performance and its ability to generate cash flow from its core business activities, similar to the concept of contribution margin which measures the incremental profit earned for each unit sold.

Question 18

For short-run production planning, information in the variable costing format is more useful to management than is information in the absorption costing concept format.

Accepted Answer

Variable costing provides information that helps management make decisions about pricing and production levels by only including variable costs in product costs, making it more relevant for short-run decisions compared to absorption costing which includes both fixed and variable manufacturing costs, potentially obscuring short-term profitability analysis.

Question 19

For internal decision-making purposes, managers may use EBITDA as a substitute for the contribution margin.

Accepted Answer

EBITDA (earnings before interest, taxes, depreciation, and amortization) is a measure of a company's profitability that is often used as a substitute for the contribution margin for internal decision-making purposes. This is because EBITDA is a more comprehensive measure of profitability than the contribution margin, as it takes into account all of a company's operating expenses, including depreciation and amortization.

Question 20

If the ability to sell and the amount of production facilities devoted to each of two products are equal, it is profitable to increase the sales of that product with the lowest contribution margin.

Accepted Answer

Increasing sales of the product with the highest contribution margin would be more profitable because the contribution margin represents the amount each product contributes to covering fixed costs and generating profit.

Quiz 21: Variable Costing for Management Analysis