Chapter 15 - Multiple Choice Questions 1.
A variable cost is a cost that a. varies per unit at every level of activity b. occurs at various times during the year c. varies in total in proportion to changes in the level of activity d. may not be incurred, depending on management's discretion
C is correct. Section “Cost behaviour analysis” – A variable cost varies in total in proportion to changes in the level of activity. 2.
A cost which remains constant per unit at various levels of activity is a a. variable cost b. fixed cost c. mixed cost d. manufacturing cost
A is correct. Section “Cost behaviour analysis” – A variable cost remains constant per unit at various levels of activity. 3.
A fixed cost is a cost which a. varies in total with changes in the level of activity b. remains constant per unit with changes in the level of activity c. varies inversely in total with changes in the level of activity d. remains constant in total with changes in the level of activity
D is correct. Section “Cost behaviour analysis” – A fixed cost remains constant in total with changes in the level of activity.
5.
Cost behaviour analysis is a study of how a firm's costs a. relate to competitors' costs b. relate to general price level changes c. respond to changes in activity levels within the company d. respond to changes in the gross national product
C is correct. Section “Cost behaviour analysis” – Cost behaviour analysis is a study of how a firm’s costs respond to changes in activity levels within the company.
6.
Cost behaviour analysis applies to a. retailers b. wholesalers c. manufacturers d. all entities
D is correct. Section “Cost behaviour analysis” – Cost behaviour analysis applies to all entities. 9.
If the activity level increases 10%, total variable costs will a. remain the same b. increase by more than 10% c. decrease by less than 10% d. increase by10%
D is correct. Section “Cost behaviour analysis” – If the level of activity increases 10%, total variable costs will also increase by 10%. 10.
Which of the following costs are variable? Cost 1 2 3 4 a. b. c. d.
5,000 Units $100,000 $ 40,000 $ 90,000 $ 50,000
15,000 Units $300,000 240,000 90,000 150,000
1 and 2 1 and 4 only 1 only 2
B is correct. Section “Cost behaviour analysis” – Costs 1 & 4 increase in direct proportion to the two activity levels. A is correct. Section “Cost behaviour analysis” – Direct materials is a variable cost.
13.
The relevant range of activity refers to the a. geographical areas where the company plans to operate b. activity level where all costs are curvilinear c. levels of activity over which the company expects to operate d. level of activity where all costs are constant
C is correct. Section “Cost behaviour analysis” – The relevant range of activity refers to the levels of activity over which the company expects to operate. 14.
Which of the following is not a plausible explanation of why variable costs often behave in a curvilinear fashion? a. Labour specialisation b. Overtime wages c. Total variable costs are constant within the relevant range d. Availability of quantity discounts
C is correct. Section “Cost behaviour analysis” – Total variable costs are constant within the relevant range is not a plausible explanation of why variable costs often behave in a curvilinear fashion. 15.
Firms operating constantly at 100% capacity a. are common b. are the exception rather than the rule c. have no fixed costs d. have no variable costs
B is correct. Section “Cost behaviour analysis” – Firms operating constantly at 100% are the exception rather than the rule. 16.
Which one of the following is a name for the range over which a company expects to operate? a. Mixed range b. Fixed range c. Variable range d. Relevant range
D is correct. Section “Cost behaviour analysis” – The range over which a company expects to operate is called the relevant range.
17
The graph of variable costs that behave in a curvilinear fashion will a. approximate a straight line within the relevant range b. be sharply kinked on both sides of the relevant range c. be downward sloping d. be a stair-step pattern
A is correct. Section “Cost behaviour analysis” – The graph of variable costs that behave in a curvilinear fashion will approximate a straight line within the relevant range. 18.
A mixed cost contains a. a variable cost element and a fixed cost element b. both selling and administrative costs c. both retailing and manufacturing costs d. both operating and non-operating costs
A is correct. Section “Cost behaviour analysis” – A mixed cost contains a variable cost element and a fixed cost element.
21.
If American Airlines cuts its domestic fares by 30%, a. its fixed costs will decrease. b profit will increase by 30%. c. a profit can only be earned by decreasing the number of flights. d. a profit can be earned either by increasing the number of passengers or by decreasing variable costs.
D is correct. Section “Cost behaviour analysis” – If American Airlines cuts its domestic fares by 30%, a profit can be earned by either increasing the number of passengers or decreasing variable costs.
24.
The variable costing method is also known as the a. direct costing method b. indirect costing approach c. absorption costing method d. period costing approach
A is correct. Section “Absorption vs. variable costing” – Variable costing is also know as direct costing.
27.
The costing approach that charges all manufacturing costs to the product is referred to as a. variable costing b. contribution margin costing c. direct costing d. absorption costing
D is correct. Section “Absorption vs. variable costing” – Absorption costing charges all manufacturing costs to the product. 28.
Variable costing is acceptable for a. financial statement purposes b. profit tax purposes c. internal use by management only d. profit tax purposes and for internal use by management
C is correct. Section “Absorption vs. variable costing” – Variable costing is acceptable for internal use by management only. 29.
CVP analysis does not consider a. level of activity b. fixed cost per unit c. variable cost per unit d. sales mix
B is correct. Section “Cost-volume-profit analysis” – CVP does not consider the fixed cost per unit.
30.
Which of the following is not an underlying assumption of CVP analysis? a. Changes in activity are the only factors that affect costs b. Cost classifications are reasonably accurate c. Beginning inventory is larger than ending inventory d. Sales mix is constant
B is correct. Section “Cost-volume-profit analysis” – The accuracy of cost classifications is not an underlying assumption of CVP analysis.
33.
Which of the following would not be an acceptable way to express contribution margin? a. Sales minus variable costs b. Sales minus unit costs c. Unit selling price minus unit variable costs d. Contribution margin per unit divided by unit selling price
B is correct. Section “Contribution margin” – Contribution margin would not be expressed as “sales minus unit costs”. 34.
A company has contribution margin per unit of $18 and a contribution margin ratio of 40%. What is the unit selling price? a. $30.00 b. $45.00 c. $7.20 d. Cannot be determined
B is correct. Section “Cost-volume-profit analysis” – The unit selling price is $45 ($18/.4). 35.
The level of activity at which total revenues equal total costs is the a. variable point b. fixed point c. semi-variable point d. break-even point
D is correct. Section “Cost-volume-profit analysis” – The level of activity at which total revenues equal total costs is called the break-even point.
37.
The break-even point is where a. total sales equals total variable costs b. contribution margin equals total fixed costs c. total variable costs equal total fixed costs d. total sales equals total fixed costs
B is correct. Section “Break-even analysis” – The break even point is where the contribution margin equals fixed costs. 38.
The break-even point cannot be determined by a. computing it from a mathematical equation b. computing it using contribution margin c. reading the prior year's financial statements d. deriving it from a CVP graph
C is correct. Section “Break-even analysis” – The contribution margin cannot be determined by reading prior years’ financial statements. 41.
The break-even point in units is computed by dividing fixed costs by the a. contribution margin ratio. b. contribution margin per unit. c. total contribution margin. d. unit selling price.
B is correct. Section “Break-even analysis” – The break-even point in units if computed by dividing fixed costs by the contribution margin per unit. 42.
In a CVP graph, the break-even point is at the intersection of the sales line and the a. fixed cost line b. variable cost line c. total cost line d. mixed cost line
C is correct. Section “Break-even analysis” – In a CVP graph, the break-even point is at the intersection of the sales line and the total cost line.
43.
In evaluating the margin of safety, the a. break-even point is not relevant b. higher the ratio, the greater the margin of safety c. higher the dollar amount, the lower the margin of safety d. higher the ratio, the lower the fixed costs
B is correct. Section “Margin of safety” – In evaluating the margin of safety, the higher the ratio, the greater the margin of safety.
46.
The formula for computing required sales in units to meet target net profit is the sum of target net profit plus a. fixed costs divided by contribution margin ratio b. variable costs divided by contribution margin ratio c. fixed costs divided by contribution margin per unit d. variable costs divided by contribution margin per unit
C is correct. Section “Target profit” – The formula for computing required sales in units to meet target net profit is the sum of target net profit plus fixed costs divided by contribution margin per unit. 47.
A company requires $850,000 in sales to meet its target net profit. Its contribution margin is 30%, and fixed costs are $150,000. What is the target net profit? a. $255,000 b. $195,000 c. $350,000 d. $105,000
D is correct. Section “Target profit” – Target net profit is $105,000 ($850,000 x .30 - $150,000). 49.
Wombat Ltd requires sales of $2,000,000 to cover its fixed costs of $900,000 and to earn net profit of $400,000. What percent are variable costs of sales? a. 20% b. 35% c. 45% d. 65%
B is correct.
Section “Target profit” – Variable costs are 35% of sales (($2,000,000 – (900,000 + 400,000))/2,000,000). 50.
An increase in the unit variable cost will generally cause an increase in all of the following except a. the break-even point b. contribution margin c. total variable costs d. unit selling price
B is correct. Section “Target profit” – An increase in the unit variable cost will generally not cause an increase in the contribution margin. 51.
Break-even sales can be calculated for a mix of two or more products by determining the a. weighted average unit contribution margin of all products b. weighted average variable cost of each product c. total fixed cost of all products d. target profit margin of each product
A is correct. Section “Using CVP analysis with multiple products” –Break-even sales can be calculated for a mix of two or more products by determining the weighted average unit contribution margin for all products.
53.
The equation which reflects a CVP income statement is a. Sales = Cost of goods sold + Operating expenses + Net profit b. Sales + Fixed costs = Variable costs + Net profit c. Sales – Variable costs + Fixed costs = Net profit d. Sales – Variable costs – Fixed costs = Net profit
D is correct. Section “CVP income statement” – The equation which reflects a CVP income statement is sales – variable costs – fixed costs = net profit.
