Chapter 6 - test bank of managerial accounting book PDF

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CHAPTER 6 COST-VOLUME-PROFIT ANALYSIS: ADDITIONAL ISSUES SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S

TAXONOMY I t e m

L O

BT

I t e m

L O

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I t e m

L O

BT

I t e m

L O

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I t e m

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True-False Statements 1. 2. 3. 4. 5. 6.

1 1 2 2 3 3

K K K K K K

7. 8. 9. 10. 11. 12.

3 3 3 3 3 4

K AP AP K K K

13. 14. 15. 16. 17. 18.

4 4 4 5 5 5

C C K K K K

19. 20. a 21. a 22. a 23. a 24.

a

5 5 6 6 6 7

C K K K K AP

25. 26. a 27. a 28. a 29. a 30.

7 7 7 8 8 8

C K K K K K

88. 89. 90. 91. 92. a 93. a 94. a 95. a 96. a 97. a 98. a 99. a 100. a 101. a 102. a 103. a 104. a 105. a 106.

5 5 5 5 5 6 6 6 6 6 6 6 6 6 6 7 7 7 7

C K K K K K K K K K K K K K K AP AP AP AP

107. 108. a 109. a 110. a 111. a 112. a 113. a 114. a 115. a 116. a 117. a 118. a 119. a 120. a 121. a 122. a 123. a 124. a 125.

7 7 7 7 7 7 7 7 7 7 7 7 7 7 8 8 8 8 8

AP K K C K K K AP AP AP AP C C C K K C K K

a

132. 133.

6 6

AP AP

a

134. 135.

7 7

AP AP

a

6 7 7 7

AP AP AP AP

a

8 8

AP AP

7 7 8

K K K

a

Multiple Choice Questions 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49.

1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2

K K K AP AP AP AP K K AP AP AP K AP AP AP AP AP AP

50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68.

2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3

AP K AP AP AP K K AP AP AP K C AP AP AP AP AP AP AP

126. 127.

3 3

AP AP

128. 129.

4 4

AP AP

69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87.

3 3 3 3 3 3 3 4 4 4 4 4 5 5 5 5 5 5 5

AP AP C C AP AP AP C C K AP AP K C C K AP AP C

a

a

Brief Exercises 130. 131.

5 5

AP AP

a

a

Exercises 136. 137. 138. 139.

2, 5 3 3 3

AP AP AP AP

140. 141. 142. 143.

3 4 4 4

AP AN AN AN

144. 145. 146. a 147.

5 5 5 6

AN AP AP K

148. 149. a 150. a 151. a

Completion Statements 154. 155. 156.

1 2 3

K K K

157. 158. 159.

3 4 5

K K K

160. 161. a 162.

a

5 6 6

K K K

a

163. 164. a 165.

a

FOR INSTRUCTOR USE ONLY

152. 153.

a

6-2

Test Bank for Managerial Accounting, Sixth Edition

a

This topic is dealt with in an Appendix to the chapter.

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE I t e m

T y p e

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T y p e

I t e m

1. 2. 31.

TF TF MC

32. 33. 34.

MC MC MC

35. 36. 37.

3. 4. 43.

TF TF MC

44. 45. 46.

MC MC MC

47. 48. 49.

T y pe

I t e m

T y p e

I t e m

Learning Objective 1 MC 38. MC 41. MC 39. MC 42. MC 40. MC 154. Learning Objective 2 MC 50. MC 53. MC 51. MC 54. MC 52. MC 55.

5. 6. 7. 8. 9.

TF TF TF TF TF

10. 11. 60. 61. 62.

TF TF MC MC MC

63. 64. 65. 66. 67.

12. 13. 14.

TF TF TF

15. 76. 77.

TF MC MC

78. 79. 80.

Learning Objective 3 MC 68. MC 73. MC 69. MC 74. MC 70. MC 75. MC 71. MC 126. MC 72. MC 127. Learning Objective 4 MC 128. BE 142. MC 129. BE 143. MC 141. Ex 158.

84. 85. 86. 87.

Learning Objective 5 MC 88. MC 92. MC 89. MC 130. MC 90. MC 131. MC 91. MC 144.

16. 17. 18. 19.

TF TF TF TF

20. 81. 82. 83.

TF MC MC MC

21. 22. 23.

TF TF TF

93. 94. 95.

MC MC MC

24. 25. 26. 27. 103.

TF TF TF TF MC

104. 105. 106. 107. 108.

MC MC MC MC MC

28. 29.

TF TF

30. 121.

TF MC

Learning Objective 6a 96. MC 99. MC 102. 97. MC 100. MC 132. 98. MC 101. MC 133. Learning Objective 7a 109. MC 114. MC 119. 110. MC 115. MC 120. 111. MC 116. MC 134. 112. MC 117. MC 135. 113. MC 118. MC 149. Learning Objective 8a 122. MC 124. MC 152. 123. MC 125. MC 153.

Note: TF = True-False MC = Multiple Choice

T y p e

I t e m

T y p e

I t e m

T y p e

MC MC C MC MC MC

56. 57. 58.

MC MC MC

59. 136. 155.

MC Ex C

MC MC MC BE BE

137. 138. 139. 140. 156.

Ex Ex Ex Ex C

157.

C

145. 146. 159. 160.

Ex Ex C C

MC BE BE

147. 148. 161.

Ex Ex C

162.

C

MC MC BE BE Ex

150. 151. 163. 164.

Ex Ex C C

Ex Ex

165.

C

Ex Ex C MC BE BE Ex

C = Completion BE = Brief Exercise

The chapter also contains four Short-Answer Essay questions.

FOR INSTRUCTOR USE ONLY

a

Ex = Exercise

Cost-Volume-Profit Analysis: Additional Issues

6-3

CHAPTER LEARNING OBJECTIVES 1. Describe the essential features of a cost-volume-profit income statement. The CVP income statement classifies costs and expenses as variable or fixed and reports contribution margin in the body of the statement. 2. Apply basic CVP concepts. Contribution margin is the amount of revenue remaining after deducting variable costs. It can be expressed as a per unit amount or as a ratio. The breakeven point in units is fixed costs divided by contribution margin per unit. The break-even point in dollars is fixed costs divided by the contribution margin ratio. These formulas can also be used to determine units or sales dollars needed to achieve target net income, simply by adding target net income to fixed costs before dividing by the contribution margin. Margin of safety indicates how much sales can decline before the company is operating at a loss. It can be expressed in dollar terms or as a percentage. 3. Explain the term sales mix and its effects on break-even sales. Sales mix is the relative proportion in which each product is sold when a company sells more than one product. For a company with a small number of products, break-even sales in units is determined by using the weighted-average unit contribution margin of all the products. If the company sells many different products, then calculating the break-even point using unit information is not practical. Instead, in a company with many products, break-even sales in dollars is calculated using the weighted-average contribution margin ratio. 4 Determine sales mix when a company has limited resources. When a company has limited resources, it is necessary to find the contribution margin per unit of limited resource. This amount is then multiplied by the units of limited resource to determine which product maximizes net income. 5. Understand how operating leverage affects profitability. Operating leverage refers to the degree to which a company’s net income reacts to a change in sales. Operating leverage is determined by a company’s relative use of fixed versus variable costs. Companies with high fixed costs relative to variable costs have high operating leverage. A company with high operating leverage will experience a sharp increase (decrease) in net income with a given increase (decrease) in sales. The degree of operating leverage can be measured by dividing contribution margin by net income. a

6. Explain the difference between absorption costing and variable costing. Under absorption costing, fixed manufacturing costs are product costs. Under variable costing, fixed manufacturing costs are period costs.

a

7. Discuss net income effects under absorption costing versus variable costing. If production volume exceeds sales volume, net income under absorption costing will exceed net income under variable costing by the amount of fixed manufacturing costs included in ending inventory that results from units produced but not sold during the period. If production volume is less than sales volume, net income under absorption costing will be less than under variable costing by the amount of fixed manufacturing costs included in the units sold during the period that were not produced during the period.

a

8. Discuss the merits of absorption versus variable costing for management decisionmaking. The use of variable costing is consistent with cost-volume-profit analysis. Net income under variable costing is unaffected by changes in production levels. Instead, it is closely tied to changes in sales. The presentation of fixed costs in the variable costing approach makes it easier to identify fixed costs and to evaluate their impact on the company’s profitability.

FOR INSTRUCTOR USE ONLY

6-4

Test Bank for Managerial Accounting, Sixth Edition

TRUE-FALSE STATEMENTS 1.

The CVP income statement classifies costs as variable or fixed and computes a contribution margin.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

2.

In CVP analysis, cost includes manufacturing costs but not selling and administrative expenses.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic/Critical Thinking, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

3.

When a company is in its early stages of operation, its primary goal is to generate a target net income.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

4.

The margin of safety tells a company how far sales can drop before it will be operating at a loss.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

5.

Sales mix is a measure of the percentage increase in sales from period to period.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

6.

Sales mix is not important to managers when different products have substantially different contribution margins.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

7.

The weighted-average contribution margin of all the products is computed when determining the break-even sales for a multi-product firm.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

8.

If Buttercup, Inc. sells two products with a sales mix of 75% : 25%, and the respective contribution margins are $80 and $240, then weighted-average unit contribution margin is $120.

Ans: T, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

9.

If fixed costs are $100,000 and weighted-average unit contribution margin is $50, then the break-even point in units is 2,000 units.

Ans: T, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

10.

Net income can be increased or decreased by changing the sales mix.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

11.

The break-even point in dollars is variable costs divided by the weighted-average contribution margin ratio.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

FOR INSTRUCTOR USE ONLY

Cost-Volume-Profit Analysis: Additional Issues 12.

6-5

When a company has limited resources, management must decide which products to make and sell in order to maximize net income.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

13.

When a company has limited resources to manufacture products, it should manufacture those products which have the highest contribution margin per unit.

Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

14.

If a company has limited machine hours available for production, it is generally more profitable to produce and sell the product with the highest contribution margin per machine hour.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

15.

According to the theory of constraints, a company must identify its constraints and find ways to reduce or eliminate them.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

16.

Cost structure refers to the relative proportion of fixed versus variable costs that a company incurs.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

17.

Operating leverage refers to the extent to which a company’s net income reacts to a given change in fixed costs.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

18.

The degree of operating leverage provides a measure of a company’s earnings volatility.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

19.

If Sprinkle Industries has a margin of safety ratio of .60, it could sustain a 60 percent decline in sales before it would be operating at a loss.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

20.

A company with low operating leverage will experience a sharp increase in net income with a given increase in sales.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics a

21.

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

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting a

22.

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

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

FOR INSTRUCTOR USE ONLY

6-6 a

23.

Test Bank for Managerial Accounting, Sixth Edition Selling and administrative costs are period costs under both absorption and variable costing.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting a

24.

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

Ans: F, LO: 7, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics a

25.

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

Ans: F, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting a

26.

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

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics a

27.

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

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting a

28.

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

Ans: T, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting a

29.

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

Ans: T...