Question 1

The following information relates to Jenny Corporation: sales revenue $18,000,000; contribution margin $5,800,000; and net income $900,000. The operating leverage factor for Jenny Corporation is:

Accepted Answer

The operating leverage factor is calculated as the contribution margin divided by the net income. For Jenny Corporation, it is $5,800,000 / $900,000 = 6.444.

Question 2

For external-reporting purposes, generally accepted accounting principles require that net income be based on:

Accepted Answer

Generally accepted accounting principles (GAAP) require companies to use absorption costing for external reporting purposes. This is because absorption costing includes all manufacturing costs (direct and indirect) in the cost of the product, which is necessary for financial reporting purposes. Variable costing, throughput costing, and activity-based costing are used for internal management decision-making and may not provide a complete picture of the cost of goods sold to external users such as investors and creditors.

Question 3

A manager who wants to determine the percentage impact on net income of a given percentage change in sales would multiply the percentage increase/decrease in sales revenue by the:

Accepted Answer

The operating leverage factor measures how a percentage change in sales will affect net income, making it the correct choice for determining the percentage impact on net income.

Question 4

Highline Company reported the following costs for the year just ended: $\begin{array} { | l | r | } 
\hline \text { Throughput manufacturing costs } & \$ 180,000 \
\hline \text { Non-throughput manufacturing costs } & 600,000 \
\hline \text { Selling and administrative costs } & 125,000 \
\hline
\end{array}$ If Highline uses throughput costing and had sales revenues for the period of $950,000, which of the following choices correctly depicts the company's cost of goods sold and net income? $\begin{array} { | l | c | c | c | } 
\hline & \text { Cost of Goods Sold } & & \text { Net Income } \
\hline 1 & \$ 180,000 & & \$ 45,000 \
\hline 2 & \$ 180,000 & & \$ 645,000 \
\hline 3 & \$ 305,000 & & \$ 45,000 \
\hline 4 & \$ 305,000 & & \$ 645,000 \
\hline 5 & \$ 305,000 & & \$ 305,000 \
\hline
\end{array}$

Accepted Answer

Throughput costing only considers direct material costs as part of the cost of goods sold, which is $180,000. Net income is calculated as sales revenue ($950,000) minus cost of goods sold ($180,000) and selling and administrative costs ($125,000), resulting in $645,000.

Question 5

Which of the following formulas can often reconcile the difference between absorption-costing net income and variable-costing net income?

Accepted Answer

The difference between absorption-costing and variable-costing net income is due to the treatment of fixed manufacturing overhead. Under absorption costing, fixed overhead is included in inventory costs, while under variable costing, it is expensed in the period incurred. The formula "Change in inventory units x Predetermined fixed-overhead rate per unit" accounts for the fixed overhead costs deferred in or released from inventory, reconciling the income difference.

Question 6

Canyon reported $106,000 of net income for the year by using variable costing. The company had no beginning inventory, planned and actual production of 50,000 units, and sales of 47,000 units. Standard variable manufacturing costs were $15 per unit, and total budgeted fixed manufacturing overhead was $150,000. If there were no variances, net income under absorption costing would be:

Accepted Answer

Under absorption costing, both variable and fixed manufacturing costs are included in the cost of goods sold. Using the information given, the total manufacturing cost per unit would be $15 + ($150,000/50,000) = $18 per unit. The cost of goods sold would be $18 x 47,000 units = $846,000. Since there was no beginning inventory, the entire cost of goods sold would be deducted from revenue. Total revenue would be $18 x 50,000 units = $900,000. Therefore, net income under absorption costing would be $900,000 - $846,000 = $54,000. However, this includes $9,000 of fixed manufacturing overhead costs that were not included in the variable costing calculation. To adjust for this, we add the fixed overhead to the net income calculated using variable costing: $106,000 + $9,000 = $115,000.

Question 7

Orion's management recently committed to incurring direct labour and all manufacturing overhead charges regardless of the number of units produced. Under throughput costing, the company's cost of goods sold would include charges for:

Accepted Answer

Under throughput costing, only direct materials are included in the cost of goods sold, while direct labor and manufacturing overhead are treated as period costs.

Question 8

Management may be tempted to overproduce

Accepted Answer

When using absorption costing, management may be tempted to overproduce in order to increase net income. This is because absorption costing allocates fixed manufacturing costs to units produced, meaning that fixed costs per unit will decrease as production increases. Therefore, producing more units will result in a lower fixed cost per unit, which will increase net income.

Question 9

Which of the following situations would cause variable-costing net income to be lower than absorption-costing net income?

Accepted Answer

When units produced exceed units sold, some fixed manufacturing costs are deferred in inventory under absorption costing, leading to higher net income compared to variable costing, where all fixed costs are expensed in the period incurred.

Question 10

Which of the following methods defines product cost as the unit-level cost incurred each time a unit is manufactured?

Accepted Answer

The answer of Which of the following methods defines product...

Question 11

Miller Company has an operating leverage factor of 5. Thus, an 8% change in ______ should result in a 40% change in ______. The respective amounts that change are:

Accepted Answer

Operating leverage factor = % change in net income / % change in sales revenue
5 = % change in net income / 8%
% change in net income = 40%
Therefore, a 8% change in sales revenue (option B) should result in a 40% change in net income.

Question 12

Under throughput costing, the cost of a unit typically includes:

Accepted Answer

Throughput costing only includes direct costs incurred whenever a unit is manufactured, such as direct materials and direct labor. Selling costs, administrative costs, and depreciation on the building to house head office are not included in the unit cost calculation. Fixed manufacturing overhead may be included in the calculation depending on the specific approach used for throughput costing.

Question 13

The extent to which an organization uses fixed costs in its cost structure is measured by:

Accepted Answer

The measure of the extent to which an organization uses fixed costs in its cost structure is known as operating leverage. It is calculated by dividing the total fixed costs of a company by its total costs. A higher operating leverage indicates that a company has a higher proportion of fixed costs in its cost structure, which increases the risk and potential reward of the business.

Question 14

Gomez's inventory increased during the year. On the basis of this information, income reported under absorption costing:

Accepted Answer

Under absorption costing, all manufacturing costs, including fixed manufacturing overhead, are included in the product cost. Therefore, when inventory increases, a portion of the fixed manufacturing overhead is deferred to future periods. This results in a higher reported income under absorption costing compared to variable costing, where fixed manufacturing overhead is treated as a period expense and is not included in the product cost.

Question 15

The following information relates to Paterno Company: $\begin{array} { | l | r | } 
\hline \text { Sales revenue } & \$ 10,000,000 \
\hline \text { Contribution margin } & 4,000,000 \
\hline \text { Net income } & 1,000,000 \
\hline
\end{array}$ If a manager at Paterno desired to determine the percentage impact on net income of a given percentage change in sales, the manager would multiply the percentage increase/decrease in sales revenue by:

Accepted Answer

The contribution margin ratio is 40%, which means that for every $1 change in sales revenue, net income will change by $0.40.

Question 16

Which of the following conditions would cause absorption-costing net income to be lower than variable-costing net income?

Accepted Answer

When units sold exceed units produced, inventory levels decrease, leading to a release of fixed manufacturing costs from inventory under absorption costing, which reduces net income compared to variable costing.

Question 17

You are analyzing Becker Corporation and Newton Corporation and have concluded that Becker has a higher operating leverage factor than Newton. Which one of the following choices correctly depicts (1) the relative use of fixed costs (as opposed to variable costs) for the two companies and (2) the percentage change in income caused by a change in sales? $\begin{array} { | l | c | c | } 
\hline & \begin{array} { c } 
\text { Relative Use of Fixed } \
\text { Costs as Opposed to } \
\text { Variable Costs }
\end{array} & \begin{array} { c } 
\text { Percentage Change in } \
\text { Income Caused by } \
\text { a Change in Sales }
\end{array} \
\hline 1 & \text { Greater for Becker } & \text { Gruater for Becker } \
\hline 2 & \text { Greater for Becker } & \text { Lower for Becker } \
\hline 3 & \text { Greater for Becker } & \text { Equal for both } \
\hline 4 & \text { Lower for Becker } & \text { Greater for Becker } \
\hline 5 & \text { Lower for Becker } & \text { Lower for Becker } \
\hline
\end{array}$

Accepted Answer

A higher operating leverage indicates that Becker Corporation uses more fixed costs relative to variable costs, leading to a greater percentage change in income with a change in sales compared to Newton Corporation.

Question 18

The computation of absorption costing gross profit always involves subtracting:

Accepted Answer

Absorption costing includes all fixed manufacturing overhead applied to units sold in the current year in the calculation of gross profit. This is because absorption costing considers fixed overhead as a product cost that is included in the cost of goods sold.

Question 19

Monex reported $65,000 of net income for the year by using absorption costing. The company had no beginning inventory, planned and actual production of 20,000 units, and sales of 18,000 units. Standard variable manufacturing costs were $20 per unit, and total budgeted fixed manufacturing overhead was $100,000. If there were no variances, net income under variable costing would be:

Accepted Answer

Under variable costing, fixed manufacturing overhead is treated as a period cost and is not included in inventory valuation. Thus, the net income under variable costing only includes the variable manufacturing costs. 
Variable manufacturing cost per unit = Standard variable manufacturing costs = $20 per unit 
Total variable manufacturing cost = Number of units produced x Variable manufacturing cost per unit = 20,000 x $20 = $400,000 
Cost of goods sold = Variable manufacturing cost per unit x Number of units sold = $20 x 18,000 = $360,000 
Gross profit = Sales - Cost of goods sold = $0. 
Net income under variable costing = Gross profit - Fixed manufacturing overhead = $0 - $100,000 = -$100,000. 
However, this does not reflect the actual profitability of the company, as it ignores the fixed manufacturing overhead costs that are necessary to produce the units. Therefore, the best answer is B, which is the only option that is close to the actual net income of $65,000 reported under absorption costing.

Question 20

Absorption costing

Accepted Answer

Absorption costing may lead to poor business decisions due to the fact that fixed costs are allocated to each unit produced, which can result in higher per-unit costs and potentially lead to incorrect pricing decisions or overproduction. This can distort the true cost behavior of production and impact decision-making.

Quiz 7: Cost-Volume-Profit Analysis, Absorption and Variable Costing