Accounting Practice Problems MCQs and short Questions

1. Occular is studying whether to drop a product because of ongoing losses. Costs that would berelevant in this situation would include variable manufacturing costs as well as:A. factory depreciation.B. avoidable fixed costs.C. unavoidable fixed costs.D. allocated corporate administrative costs.E. general corporate advertising.2. The difference between the revenue or cost projection that a person provides, and a realisticestimate of the revenue or cost, is called:A. passing the buck.B. budgetary slack.C. false budgeting.D. participative budgeting.E. resource allocation processing.3. A budget serves as a benchmark against which:A. actual results can be compared.B. allocated results can be compared.C. actual results become inconsequential.D. allocated results become inconsequential.E. cash balances can be compared to expense totals.4. Cost-volume-profit analysis is based on certain general assumptions. Which of the followingis not one of these assumptions?A. Product prices will remain constant as volume varies within the relevant range.B. Costs can be categorized as fixed, variable, or semivariable.C. The efficiency and productivity of the production process and workers will change toreflect manufacturing advances.D. Total fixed costs remain constant as activity changes.E. Unit variable cost remains constant as activity changes.5. A company’s plan for the acquisition of long-lived assets, such as buildings and equipment, iscommonly called a:A. pro-forma budget.B. master budget.C. financial budget.D. profit plan.E. capital budget.6. A manufacturing firm would begin preparation of its master budget by constructing a:A.B.C.D.E.sales budget.production budget.cash budget.capital budget.set of pro-forma financial statements.7. The underlying difference between absorption costing and variable costing lies in thetreatment of:A. direct labor.B. variable manufacturing overhead.C. fixed manufacturing overhead.D. variable selling and administrative expenses.E. fixed selling and administrative expenses.8. Which of the following conditions would cause absorption-costing net income to be lowerthan variable-costing net income?A. Units sold exceeded units produced.B. Units sold equaled units produced.C. Units sold were less than units produced.D. Sales prices decreased.E. Selling expenses increased.9.For external-reporting purposes, generally accepted accounting principles require that netincome be based on:A. absorption costing.B. variable costing.C. direct costing.D. semivariable costing.E. activity-based costing.10. The break-even point is that level of activity where:A. total revenue equals total cost.B. variable cost equals fixed cost.C. total contribution margin equals the sum of variable cost plus fixed cost.D. sales revenue equals total variable cost.E. profit is greater than zero.11. Which of the following would take place if a company experienced an increase in fixedcosts?A. Net income would increase.B. The break-even point would increase.C. The contribution margin would increase.D. The contribution margin would decrease.12. Assuming no change in sales volume, an increase in company’s per-unit contribution marginwould:A. increase net income.B. decrease net income.C. have no effect on net income.D. increase fixed costs.13. Which of the following costs would be classified as an external failure cost on a qualityreport?A. Reliability engineering.B. Materials inspection.C. Rework.D. Warranty repairs.E. Pilot studies/focus-group sessions.14. If goods are inspected and found to be defective, any rework costs related to these unitsbefore the units are transferred to the finished-goods warehouse would be classified as a(n):A. external failure cost.B. internal failure cost.C. production inefficiency cost.D. prevention cost.E. appraisal cost.15. Which of the following would be the best measure on which to base a segment manager’sperformance evaluation for purposes of granting a bonus?A. Segment sales revenue.B. Segment contribution margin.C. Profit margin controllable by the segment manager.D. Segment profit margin.E. Segment net income.3|Page16. Lido manufactures A and B from a joint process (cost = $80,000). Ten thousand pounds of Bcan be sold at split-off for $18 per pound or processed further at an additional cost of $20,000and later sold for $17. If Lido decides to process B beyond the split-off point, operatingincome will:A. increase by $10,000.B. increase by $20,000.C. decrease by $30,000.D. decrease by $20,000.E. decrease by $58,000.17. When deciding whether to sell a product at the split-off point or process it further, joint costsare not usually relevant because:A. such amounts do not help to increase sales revenue.B. such amounts only slightly increase a company’s sales margin.C. such amounts are sunk and do not change with the decision.D. the sales revenue does not decrease to the extent that it should, if compared with separableprocessing.E. such amounts reflect opportunity costs.18. Ortega Interiors provides design services to residential and commercial clients. Theresidential services produce a contribution margin of $460,000 and have traceable fixedoperating costs of $480,000. Management is studying whether to drop the residentialoperation. If closed, the fixed operating costs will fall by $390,000 and Ortega’s income will:A. increase by $30,000.B. increase by $90,000.C. increase by $400,000.D. decrease by $90,000.E. decrease by $70,000.19. An architecture firm currently offers services that appeal to both individuals and commercialclients. If the firm decides to discontinue services to individuals because of ongoing losses,which of the following costs could the company likely avoid?A. General corporate overhead that was allocated to individual clients.B. Building depreciation.C. Insurance.D. Variable operating costs.E. Monthly installment payments on general-purpose, computer drafting equipment.20. Flowers Company is operating at capacity and desires to add a new service to its rapidlyexpanding business. The service should be added as long as service revenues exceed:A. variable costs.B. fixed costs.C. the sum of variable costs and fixed costs.D. the sum of variable costs and any related opportunity costs.E. the sum of variable costs, fixed costs, and any related opportunity costs.21. The cost of inventory currently owned by a company is an example of a(n):A. opportunity cost.B. sunk cost.C. relevant cost.D. differential cost.E. future cost.22. Consider the following statements about activity-based costing and its use in pricing:I. A company that uses target costing generally would have little need for activity-basedcosting.II. Companies that use cost-plus pricing methods would have little need for activity-basedcosting.III. The use of activity-based costing will often lead to better pricing decisions by managers.Which of the above statements is (are) true?A. I only.B. II only.C. III only.D. I and III.E. I, II, and III.23. Which of the following features is typically absent in target costing?A. An approach that begins with the determination of a product or service’s target cost.B. An approach that begins with the determination of a product or service’s target sellingprice.C. A focus on the customer.D. A focus on product design.E. A focus on process design.24. Which of the following terms describes a pricing strategy in which a new product’s initialprice is set relatively low in order to gain a large market share?A. Penetration pricing.B. Price skimming.C. Customer pricing.D. Designed pricing.E. Market-share pricing.25. If a company has excess capacity, which of the following is a sensible bidding strategy?A. Set a price to cover all costs.B. Base the bid on the incremental costs incurred because the job will contribute toward thecompany’s profit.C. Base the bid solely on direct labor hours.D. Downplay the potential impact of competitors.E. Allocate common fixed costs to individual jobs before preparing the bid.5|PageMake sure you show your work on the problems, so you can earn partial credit.Problem 1 Worth 6 pts.Combs, Inc., reports the following information for December sales:Sales$65,000Variable costs35,000Fixed costs15,000Operating income$15,000Required: The questions below are independent of each other, so go back to the original informationabove when you answer the question. You can use the table below to answer the questions.1. If sales volume doubles in December, what is the projected operating income?2. If sales volume decrease by 40%, what is the projected operating income?OriginalSales$65,000Variable costs35,000Fixed costs15,000Operating income$15,000Sales doubleDecrease of 40%in salesProblem 2: The information that follows is the total for the period when the company sold200,000 units. Worth 10 pts.Sales$1,000,000Variable costs$400,000Fixed costs$420,000Required:A. Compute the company’s per-unit contribution margin.B. Compute the company’s break-even point in units.C. What is the safety margin in units?D. How many total units must company sell to produce a target net profit of $90,000?E. The sales manager believes the company could increase sales by 10,000 units if advertisingexpenditures were increased by $25,000. Determine the effect on income if the company increasesadvertising expenditures. Would you recommend this advertising campaign? Why?.7|PageProblem 3 Worth 10 pts.Bruster Company sells its products for $65 each. The current production level is22,000 units and only 18,000 units were sold this month.Unit manufacturing costs are:Direct materials$10.00Direct manufacturing labor$11.00Variable manufacturing overhead costs$9.00Total fixed manufacturing overheadcostsMarketing expenses$60,000 per month$2.00 per unit, plus $26,000 per monthRequired:A. Assuming the use of variable costing, compute the unit inventoriable cost for the month.Hint: What is the product cost under variable costing?B. Determine the fixed manufacturing overhead rate under absorption costing. Hint: I am askingfor the predetermined overhead rate per unit.C. Compute the unit inventoriable cost by using absorption costing. Hint: What is the productcost under absorption costingD. What is the ending finished goods balance using variable costing? Hint: I am asking for theending finished goods balance in dollar terms.E. What is the ending finished goods balance using Absorption costing? Hint: I am asking forthe ending finished goods balance in dollar terms.F. What will be the difference in the dollar amount of income between variable costing andabsorption costing? Which one will have the highest income? Why?Hint: You do not need to prepare income statements, since you can reconcile the difference inthe change in inventory times the FOH rate.Problem 4 Budgeted sales for Katie Company for the second quarter of the current year are asfollows: Worth 6 pts.Budgeted SalesApril$180,000May200,000June150,000The company collects 30 percent in the month of sale, 60 percent in the first month followingthe sale, and 9 percent in the second month following the sale. From past experience, thecompany has found an average of 1% of sales to be uncollectible.Budgeted purchases for Katie Company for the second quarter of the current year are as follows:Budgeted Purchases$ 70,00080,000100,000AprilMayJuneThe company pays for 55 percent of its purchases in the month of purchase and 45 percent inthe following month.Required: Complete the partial cash budget below. You need to compute the cash receipts fromcredit sales collected in June and the cash disbursement from payment of purchases for June.Make sure you show your work and how you determined the cash receipts and payments forJune.Budgeted Sales AprilApril180,000May200,000June150,000Total cash receipts from credit sales in JuneMayJuneDisbursementsfor APApril70,000May80,000June100,000Total cash disbursements from payment for Purchases in June9|PageProblem 5 Worth 6 pts.Majestic Company manufactures a product which has the following unit costs: direct materials, $7;direct labor, $6; variable overhead, $3; and general fixed overhead allocated, $4 (The total fixed costswill remain the same within the relevant range). Although production capacity is 96,000 units per year,the company expects to produce only 80,000 units next year. The product normally sells for $30 each. Acustomer has offered to buy 15,000 units for $19 each. There are no legal ramifications if this specialorder is accepted.Required:a. What is the relevant (incremental) cost to make a unit for the special order?b. What is the effect on Majestic’s income if the special order is accepted? Another way to ask thisquestion, what is the profit/loss on the special order?c. Should the company accept the special order? Why?Problem 6 Worth 6 pts.The Dot Company manufactures two products: X and Y. Contribution margin per unit is determined asfollows:XYRevenue$150$100Variable costs5040Contribution margin100$60Total demand for X is 2,000 units and for Y is 5,000 units. Machine hours are a scarce resource. 16,000machine hours are available during the year. Product X requires 4 machine hours per unit while product Yrequires 2 machine hours per unit.How many units of X and Y should Dot Company produce to maximize profits? Why? Make sure youshow your work.11 | P a g eProblem 7 Worth 6 pts.Solomon Company manufactures 10,000 XYZ components per year. The manufacturing cost per unit ofthe XYZ components follows:Direct materialsDirect laborVariable overheadGeneral Fixed overheadTotal unit cost$7624**$19===**Assume that the fixed overhead reflects the allocated cost of Solomon’s manufacturing facility to thiscomponent. Solomon Company manufactures many different types of components, which will still bemanufactured if Solomon Company buys the XYZ Component. An outside supplier has offered to sellthe component to Solomon for $18.Required: Answer all the parts to the question! Show your work1. What is the relevant(incremental) cost to make a unit?2. What is the effect on income if Solomon purchases(buys) the 10,000 components from the outsidesupplier? (Give the total dollar amount of the change in income/loss and whether it is an increase ordecrease in income) From a financial point of view s hould Solomon buy from the outsider or make itinternally? Assume the manufacturing of other components will not change and do not take into accountthe impact on employees.