CH02COST MANAGEMENT CONCEPTS AND COST BEHAVIOR TRUE/FALSE1. There is no single definition of cost.a. Trueb. False2. The role of the management accountant is to tailor the cost calculation to fit the currentdecision situation.a. Trueb. False3. A cost that is useful for one decision may not be useful information for another decision.a. Trueb. False4. In most organizations, managing nonmanufacturing costs as well as manufacturing costs isimportant for financial success.a. Trueb. False5. The cost of a customized machine only used in the production of a single product would beclassified as a direct cost.a. Trueb. False6. The wages of a plant supervisor would be classified as a period cost.a. Trueb. False7. The classification of product and period costs is particularly valuable in managementaccounting.a. Trueb. False8. For external reporting, generally accepted accounting principles require that costs beclassified as either flexible or capacity-related costs.a. Trueb. False9. Knowing whether a cost is a period or a product cost helps to estimate total cost at a newlevel of activity.a. Trueb. False10. Flexible costs are always direct costs.a. Trueb. False11. Capacity-related costs vary with the level of production or sales volume.a. Trueb. False12. Currently, most personnel costs are classified as capacity-related costs.a. Trueb. False13. Some capacity-related costs might be classified as direct manufacturing costs.a. Trueb. False14. Capacity-related costs depend on the resources used, not the resources acquired.a. Trueb. False15. Break-even point is NOT an important concept since the goal of business is to make aprofit.a. Trueb. False16. To perform cost-volume-profit analysis, a company must be able to separate costs intocapacity-related and flexible components.a. Trueb. False17. Cost-volume-profit analysis may be used for single-product and multiproduct analysis.a. Trueb. False18. Selling price per unit is $30, flexible cost per unit is $15, and capacity-related cost per unitis $10. When this company operates above the break-even point, the sale of one more unit will increase net income by $5.a. Trueb. False19. A company with sales of $100,000, flexible costs of $70,000, and capacity-related costs of$50,000 will reach its break-even point if sales are increased by $20,000.a. Trueb. False20. In multiproduct situations when the sales mix shifts toward the product with the lowestcontribution margin, the break-even quantity will decrease.a. Trueb. False21. The opportunity cost of a resource is zero if there is excess capacity of that resource.a. Trueb. False22. When a firm maximizes profits it will simultaneously minimize opportunity costs.a. Trueb. False23. Even when the only constraint limiting production is machine time, a company should bemost concerned with maximizing contribution margin per unit.a. Trueb. False24. The time over which a decision maker can adjust capacity is referred to as the short run.a. Trueb. False25. For general customers, the price charged for a product must cover its long-run cost to theorganization.a. Trueb. False26. In recent years, capacity-related costs have increased as a proportion of total manufacturingcosts.a. Trueb. False27. Machine setup costs are usually classified as a business-sustaining activity.a. Trueb. False28. The benefits of classifying activities using the broader framework of unit-related, batch-related, product-sustaining, customer-sustaining, and business-sustaining activities are there are generally more costs that are directly traceable to cost objects.a. Trueb. False29. Product life-cycle costing helps organizations decide whether a new product should belaunched.a. Trueb. FalseMULTIPLE CHOICE30. An example of a cost object is:a. a productb. a customerc. a departmentd. All of the above are correct.31. Manufacturing costs include:a. machinery used inside of the factoryb. research and development costsc. costs of dealing with customers after the saled. general and administrative costs32. Manufacturing costs include all of the following EXCEPT:a. costs incurred inside the factoryb. both direct and indirect costsc. both flexible and capacity-related costsd. both product and period costs33. Nonmanufacturing costs:a. include only capacity-related costsb. seldom influence financial success or failurec. include the cost of selling, distribution, and after-sales costs for customersd. are considered by GAAP to be an element of product costs34. Product costs:a. include administrative and marketing costsb. are particularly useful in financial accountingc. are expensed in the accounting period manufacturedd. are also referred to as nonmanufacturing costs35. For external reporting:a. costs are classified as either product or period costsb. costs reflect current valuesc. there are no prescribed rules since no one is exactly sure how the investors andcreditors will use these numbersd. expenses include amounts that reflect current and future benefits36. Product costs are expensed on the income statement when:a. raw materials for the product are purchasedb. raw materials are requisitioned for the productc. the product completes the manufacturing processd. the product is sold37. Depreciation of plant facilities is classified as a(n):a. direct material costb. direct labor costc. indirect manufacturing costd. general and administrative cost38. The cost of inventory reported on the balance sheet may include the cost of all thefollowing EXCEPT:a. advertisingb. wages of the plant supervisorc. depreciation of the factory equipmentd. parts used in the manufacturing process39. A plant manufactures several different products. The wages of the plant supervisor can beclassified as a:a. direct costb. product costc. flexible costd. nonmanufacturing cost40. Period costs:a. are treated as expenses in the period they are incurredb. are directly traceable to productsc. include direct labord. are also referred to as indirect manufacturing costs41. Which of the following is NOT a period cost?a. marketing costsb. general and administrative costsc. research and development costsd. manufacturing costs42. Advertising is an example of a _________ cost expensed on the income statement in theaccounting period incurred.a. directb. manufacturingc. periodd. product43. (CMA adapted, June 1992) The terms "direct cost" and "indirect cost" are commonlyused in cost accounting. Classifying a cost as either direct or indirect depends upon:a. the behavior of the cost in response to volume changesb. whether the cost is expended in the period in which it is incurredc. whether the cost can be related readily to resources consumed for a cost objectd. whether an expenditure is unavoidable because it cannot be changed regardless of anyaction taken44. Indirect manufacturing costs:a. can be traced to the product that created the costsb. may have a cause-and-effect relationship with capacity rather than with individualunits of productionc. generally include the cost of material and the cost of labord. are included in period costs45. A manufacturing plant produces two product lines: football equipment and hockeyequipment. An indirect cost for the hockey equipment line is the:a. material used to make the hockey sticksb. labor to bind the shaft to the blade of the hockey stickc. shift supervisor for the hockey lined. plant supervisor46. A manufacturing plant produces two product lines: football equipment and hockeyequipment. Direct costs for the football equipment line are the:a. beverages provided daily in the plant break roomb. monthly lease payments for a specialized piece of equipment needed to manufacturethe football helmetc. salaries of the clerical staff that work in the company administrative officesd. utilities paid for the manufacturing plantTHE FOLLOWING INFORMATION APPLIES TO QUESTIONS 47 THROUGH 53.The Bowley Company manufactures several different products. Unit costs associated with product ICT101 are as follows:Direct materials $ 60Direct labor 10Flexible manufacturing support costs 18Capacity-related manufacturing support costs 32Sales commissions (2% of sales) 4Administrative salaries 16Total $14047. Total product costs associated with product ICT101 are:a. $ 50b. $ 88c. $120d. $14048. Total period costs associated with product ICT101 are:a. $ 4b. $16c. $20d. $5249. Total flexible costs associated with product ICT101 are:a. $18b. $22c. $88d. $9250. Total capacity-related costs associated with product ICT101 are:a. $16b. $32c. $48d. $5251. Total nonmanufacturing costs associated with product ICT101 are:a. $ 4b. $16c. $20d. $5252. Total manufacturing costs associated with product ICT101 are:a. $70b. $88c. $120d. $14053. Direct manufacturing costs associated with product ICT101 are:a. $70b. $88c. $92d. $10854. Cost behavior refers to:a. how costs react to a change in the level of activityb. whether a cost is incurred in a manufacturing, merchandising, or service companyc. classifying costs as either product or period costsd. whether a particular expense has been ethically incurred55. Which statement is FALSE?a. All flexible costs are direct costs.b. Because of a cost-benefit tradeoff, some direct costs may be treated as indirect costs.c. All capacity-related costs are indirect costs.d. Direct costs may be flexible or capacity-related.56. An understanding of the underlying behavior of costs helps in all of the followingEXCEPT:a. sales volume can be better estimatedb. costs can be better estimated as volume expands and contractsc. true costs of processes can be better evaluatedd. process inefficiencies can be better identified and, as a result, improved57. Capacity-related costs:a. may be either direct or indirect costsb. vary with production or sales volumec. include parts and materials used to manufacture a productd. can be adjusted in the short run to meet actual demands58. Capacity-related costs depend on:a. the amount of resources usedb. the amount of resources acquiredc. the volume of productiond. the volume of sales59. Currently, most companies consider annual labor costs as:a. a capacity-related costb. a flexible costc. an opportunity costd. a period cost60. Which of the following does NOT describe a flexible cost?a. Flexible cost are always indirect costs.b. Flexible costs increase in total when the actual level of activity increases.c. Flexible costs include most personnel costs and depreciation on machinery.d. Flexible costs can always be traced directly to the cost object.61. Cost-volume-profit analysis is used PRIMARILY by management:a. as a planning toolb. for control purposesc. to establish a target net income for next yeard. to attain extremely accurate financial results62. Contribution margin equals revenues minus:a. product costsb. period costsc. flexible costsd. capacity-related costs63. The break-even point is the level at which revenues:a. equal capacity-related costsb. equal flexible costsc. equal capacity-related costs minus flexible costsd. equal flexible costs plus capacity-related costs64. The break-even point is:a. total costs divided by flexible costs per unitb. contribution margin per unit divided by revenue per unitc. capacity-related costs divided by contribution margin per unitd. (capacity-related costs plus flexible costs) divided by contribution margin per unit65. Cost-volume-profit analysis assumes all of the following EXCEPT:a. all costs are purely flexible or capacity relatedb. units manufactured equal units soldc. total flexible costs remain the same over the relevant ranged. total capacity-related costs remain the same over the relevant range66. All of the following are assumed in a cost-volume-profit analysis EXCEPT:a. a constant product mixb. capacity-related costs increase when activity increasesc. revenue per unit does not change as volume changesd. all costs can be classified as either capacity-related or flexible67. In multiproduct situations, when sales mix shifts toward the product with the highestcontribution margin, then:a. total revenues will decreaseb. breakeven quantity will increasec. total contribution margin will decreased. operating income will increaseTHE FOLLOWING INFORMATION APPLIES TO QUESTIONS 68 THROUGH 71. Karen’s Kraft Korner, Inc., sells a single product. This year, 7,000 units were sold resulting in $70,000 of sales revenue, $28,000 of flexible costs, and $12,000 of capacity-related costs.68. Contribution margin per unit is:a. $4.00b. $4.29c. $6.00d. None of the above is correct.69. Break-even point in units is:a. 2,000 unitsb. 3,000 unitsc. 5,000 unitsd. None of the above is correct.70. The number of units that must be sold to achieve $60,000 of profits is:a. 10,000 unitsb. 11,666 unitsc. 12,000 unitsd. None of the above is correct.71. If sales increase by $25,000, profits will increase by:a. $10,000b. $15,000c. $22,200d. an unknown amountTHE FOLLOWING INFORMATION APPLIES TO QUESTIONS 72 THROUGH 74.Mr. Paul’s Company sells several products for an average price of $20 per unit and the average flexible costs per unit are as follows:Direct material $4.00Direct labor $1.60Indirect manufacturing costs $0.40Selling commissions $2.00Mr. Pau l’s annual capacity-related costs total $96,000.72. The contribution margin per unit is:a. $6b. $8c. $12d. $1473. The number of units that Mr. Paul’s must sell each year to break even is:a. 8,000 unitsb. 12,000 unitsc. 16,000 unitsd. an unknown amount74. The number of units that Mr. Paul’s must sell annually to make a profit of $144,000 is:a. 12,000 unitsb. 18,000 unitsc. 20,000 unitsd. 30,000 unitsTHE FOLLOWING INFORMATION APPLIES TO QUESTIONS 75 THROUGH 79.The following information is for Barnett Corporation:Product X Product YRevenue per unit: $10.00 $15.00Flexible cost per unit: $ 2.50 $ 5.00Total capacity-related costs: $50,00075. If the sales mix consists of two units of Product X and one unit of Product Y, what is therevenue per unit of average product?a. $10.00b. $11.66c. $13.33d. $15.0076. If the sales mix consists of two units of Product X and one unit of Product Y, what is thebreak-even point?a. 1,000 units of Y and 2,000 units of Xb. 1012.5 units of Y and 2,025 units of Xc. 2012.5 units of Y and 4,025 units of Xd. 2,000 units of Y and 4,000 units of X77. What is the operating income, assuming actual sales total 150,000 units, and the sales mixis two units of Product X and one unit of Product Y?a. $1,200,000b. $1,250,000c. $1,750,000d. None of the above is correct.78. If the sales mix shifts to one unit of Product X and two units of Product Y, then theweighted-average contribution margin will:a. increase per unitb. stay the samec. decrease per unitd. be undeterminable79. If the sales mix shifts to one unit of Product X and two units of Product Y, then the break-even point will:a. increaseb. stay the samec. decreased. be undeterminable80. Opportunity cost(s):a. of a resource with excess capacity is zerob. should be maximized by organizationsc. are recorded as an expense in the accounting recordsd. are most important to financial accountants81. A recent college graduate has the choice of buying a new auto for $20,000 or to invest themoney for four years with a 12% expected rate of return. If the graduate decides to purchase the auto, the BEST estimate of the opportunity cost of that decision is:a. $2,400b. $11,740c. $20,000d. There is no opportunity cost for this decision.THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 82 THROUGH 86. Brenda’s Brakes manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply:Model X Model Y Model Z Selling price $50 $60 $70Direct materials 6 6 6Direct labor ($12 per hour) 12 12 24Flexible support costs ($4 per machine hour) 4 8 8Capacity-related costs 10 10 1082. Which model has the greatest contribution per unit?a. Model Xb. Model Yc. Model Zd. both Models X and Y83. Which model has the greatest contribution per machine hour?a. Model Xb. Model Yc. Model Zd. both Models Y and Z84. If there is excess capacity, which model is the most profitable to produce?a. Model Xb. Model Yc. Model Zd. both Models X and Y85. If there is a machine breakdown, which model is the most profitable to produce?a. Model Xb. Model Yc. Model Zd. both Models Y and Z86. How can Brenda encourage her salespeople to promote the more profitable model?a. Put all sales persons on salary.b. Provide higher sales commissions for higher priced items.c. Provide higher sales commissions for items with the greatest contribution margin perconstrained resource.d. Both (b) and (c) are correct.87. Which statement is FALSE? Short run costs:a. are actually flexible costsb. affect long-run capacityc. are included in the calculation of long-run costsd. increase when one more unit is produced or served88. To sustain the profitability of a product, the list price of a product must cover its:a. flexible costsb. capacity-related costsc. indirect costsd. long-run costs89. Compared to the early 1900s, __________ costs now comprise a much higher share of totalproduct costs.a. direct laborb. direct materialsc. flexibled. capacity-related90. In recent years, the manufacturing cost structure has changed as a result of:a. greater automationb. better customer servicec. the proliferation of multiple productsd. All of the above are correct.91. Cost distortion is common in conventional costing systems because:a. of the recent change in cost structureb. the number of products being manufactured is increasingc. capacity-related costs are allocated using a volume measured. capacity-related costs create higher risks for a company92. Costs that must be allocated to products for external reporting purposes include:a. selling and marketing costsb. direct material and direct labor costsc. the cost of equipment used to manufacture several different productsd. All of the above are correct.93. The benefits of classifying activities using the broader framework of unit, batch, product,customer, and business-sustaining activities are that there are generally more costs:a. directly traceable to cost objectsb. treated as indirect costsc. arbitrarily allocated to cost objectsd. There is no major difference regarding costs.94. For budgeting purposes, product-sustaining activity costs should be:a. allocated to individual unitsb. allocated to individual customersc. assigned directly to individual product linesd. assigned directly to individual batches95. Which of the following activities is a unit-related activity?a. preparing and filing the annual tax return for the organizationb. machine setups for each production runc. quality inspections of 2% of the items producedd. obtaining patents and regulatory approval for each product produced96. Which of the following activities is a batch-related activity?a. preparing and filing the annual tax return for the organizationb. machine setups for each production runc. quality inspections of 2% of the items producedd. obtaining patents and regulatory approval for each product produced97. Which of the following activities is a product-sustaining activity?a. preparing and filing the annual tax return for the organizationb. machine setups for each production runc. quality inspections of 2% of the items producedd. obtaining patents and regulatory approval for each product produced98. Which of the following activities is a business-sustaining activity?a. preparing and filing the annual tax return for the organizationb. machine setups for each production runc. making sales callsd. obtaining patents and regulatory approval for each product produced99. Which of the following activities is a customer-sustaining activity?a. preparing and filing the annual tax return for the organizationb. machine setups for each production runc. making sales callsd. obtaining patents and regulatory approval for each product produced100. Product life-cycle costing:a. is useful for external reportingb. is primarily a planning toolc. includes manufacturing costs but not the cost of research and developmentd. assumes product related costs are incurred evenly over the product’s lifetime101. Companies want to ensure that product revenues cover the product’s:a. manufacturing costsb. manufacturing and distribution costsc. developing, supporting, and abandoning costsd. manufacturing, distribution, developing, supporting, and abandoning costs102. More attention is being devoted to the product development and planning phase because:a. abandonment includes significant costsb. of the need to better understand the relevant costsc. during this phase of the product-life cycle, revenues finally begin to cover long-runcostsd. during this phase of the product-life cycle, price competition becomes intense 103. One of the primary motivations for considering costs other than manufacturing and distribution costs is so that:a. these costs can be amortized over the life of the productb. costs can be more evenly distributed over the product’s life cyclec. planners can develop reasonable estimates of the costs associated with new productsd. if price competition becomes intense the selling price can be rationalizedEXERCISE/PROBLEM104. Winfield Manufacturing Company produces several different products. Classify each of their following costs as direct materials, direct labor, indirect manufacturing costs, or nonmanufacturing costs.a. Production supervisory salaries.b. Controller's office supplies.c. Executive office heat and air conditioning.d. Executive office security personnel.e. Factory heat and air conditioning.f. Supplies used in small quantities, such as glue, to complete assembly work.g. Power to operate factory equipment.h. Parts used in assembly.i. Wages of the assembly-line workers.j. Property taxes on office buildings for sales staff.k. Depreciation on furniture for sales staff.l. Salaries of top executives in the company.m. Wages of the finishing department workers.n. Sales commissions.o. Sales personnel office rental.105. Stephanie’s Stuffed Animals reported the following:Revenues $1,000Flexible manufacturing costs $ 200Flexible nonmanufacturing costs $ 230Capacity-related manufacturing costs $ 150Capacity-related nonmanufacturing costs $ 140Required:a. Compute contribution margin.b. Compute gross margin.c. Compute operating income.106. In 2005, Grant Company has sales of $800,000, flexible costs of $200,000, and capacity-related costs of $300,000. In 2006, Grant Company expects annual property taxes todecrease by $15,000.Required:a. Calculate operating income and the break even point for 2005.b. Calculate the break even point for 2006.107. Sunshine, Inc., sells a single product. The company's most recent income statement is given below.Sales (4,000 units) $120,000Less flexible expenses (68,000)Contribution margin 52,000Less capacity-related expenses (40,000)Net income $ 12,000Required:a. Contribution margin per unit is $ _______________ per unitb. If sales are doubled to $240,000,total flexible costs will equal $ _______________c. If sales are doubled to $240,000,total capacity-related costs will equal $ _______________d. If 10 more units are sold, profits will increase by $ _______________e. Compute how many units must be sold to break even. # _______________f. Compute how many units must be soldto achieve a profit of $20,000. # _______________ 108. Jeffrey’s, Inc., sells a single produ ct. The company's most recent income statement is given below.Sales $200,000Less flexible expenses (120,000)Contribution margin 80,000Less capacity-related expenses (50,000)Net income $ 30,000Required:a. Contribution margin ratio is __________ %b. Break-even point in total sales dollars is $ _______________c. To achieve $40,000 in net income, sales must total $ _______________d. If sales increase by $50,000, net income will increase by $ _______________109. Yurus Manufacturing Company produces two products, X and Y. The following information is presented for both products:X YSelling price per unit $36 $24Flexible cost per unit 28 12Total capacity-related costs $234,000 Required:Assume the sales mix is 3 units of X for every unit of Y:a. What is the revenue per unit of average product, the weighted average flexible cost,and the contribution margin per unit of average product?b. What is the break-even point in units of both X and Y?110. Bob’s Textile Company sells shirts for men and boys. The average selling price and flexible cost for each product are as follows:Men’s BoysSelling price $28.80 $24.00Flexible cost $20.42 $16.80Total capacity-related costs $38,400Required:Assume the sa les mix is 2 men’s shirts for each boy’s shirt:a. What is the revenue per unit of average product, the weighted average flexible cost,and the contribution margin per unit of average product?b. What is the break-even point in units for each type of shirt?c. What is the operating income, assuming sales total 9,000 shirts?111. Charlie’s Chairs manufactures two models, Standard and Premium. Weekly demand is estimated to be 120 units of the Standard Model and 70 units of the Premium Model. Only 420 machine hours are available per week. The following per unit data apply:Standard PremiumContribution margin per unit $12 $15Number of machine hours required 2 3Required:a. For each model, compute the contribution per machine hour.b. To maximize weekly production profits, how many machine hours would yourecommend of each model? How many units of each model?c. If there are 500 machine hours available per week (instead of only 420 machine hoursper week), how many chairs of each model should Cha rlie’s produce to maximizeprofits?。