Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty

Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

Test Bank for Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

Chapter 1: The role of accounting information in management decision making

True/false questions 1. A vision statement is a theoretical description of what an organisation should become. *a. True b. False Correct answer: a Learning objective 1.1 ~ Recognise the types of decisions managers make for an organisation

2. An organisational vision is a short-term plan for maximising financial results. a. True *b. False Correct answer: b Learning objective 1.1 ~ Recognise the types of decisions managers make for an organisation

3. Most organisations have one stakeholder. a. True *b. False Correct answer: b Learning objective 1.1 ~ Recognise the types of decisions managers make for an organisation

4. Organisational core competencies unrelated to the organisational vision. a. True *b. False Correct answer: b Learning objective 1.1 ~ Recognise the types of decisions managers make for an organisation

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

5. Organisational strategies are the tactics that managers use to take advantage of core competencies while working towards the organisational vision. *a. True b. False Correct answer: a Learning objective 1.1 ~ Recognise the types of decisions managers make for an organisation

6. Most organisations have databases that contain information collected formally or informally from internal sources only. a. True *b. False Correct answer: b Learning objective 1.1 ~ Recognise the types of decisions managers make for an organisation

7. Desirable employee behaviour can be motivated by tying employee performance evaluation and pay to long-term or short-term results. *a. True b. False Correct answer: a Learning objective 1.1 ~ Recognise the types of decisions managers make for an organisation

8. Organisational information systems only collect accounting information. a. True *b. False Correct answer: b Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

9. Cost accounting information is used for both management accounting and financial accounting activities. *a. True b. False Correct answer: a Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

10. Management accounting is the process of gathering, summarising and reporting financial and non-financial information used internally to make decisions. *a. True b. False Correct answer: a Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making 11. Intellectual capital is a type of financial resource that is captured by the organisation’s information system. a. True *b. False Correct answer: b Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

12. It is easy to differentiate between internal and external reports. a. True *b. False Correct answer: b Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

13. The design of the management accounting system structure is influenced by both external and internal factors. *a. True b. False Correct answer: a Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

14. Technological advances have allowed management accountants to develop previously infeasible cost and management accounting systems. *a. True b. False Correct answer: a Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

15. GAAP stands for generally agreed accounting practices. a. True *b. False Correct answer: b Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

16. Only large established organisations require a management accounting function. a. True *b. False Correct answer: b Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

17. Relevant information helps decision makers evaluate and choose between alternative courses of action. *a. True b. False Correct answer: a Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

18. Recent information system development has focussed on business intelligence and disruptive technologies and innovation. *a. True b. False Correct answer: a Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

19. Higher quality information is more certain, complete, relevant, timely and valuable. *a. True b. False Correct answer: a Learning objective 1.3 ~ Communicate how managers can make higher-quality decisions using accounting information

20. The use of sophisticated information systems means that uncertainty is eliminated. a. True *b. False Correct answer: b Learning objective 1.3 ~ Communicate how managers can make higher-quality decisions using accounting information

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

21. Opportunity costs are the benefits forgone when we choose one alternative over the next best alternative. *a. True b. False Correct answer: a Learning objective 1.3 ~ Communicate how managers can make higher-quality decisions using accounting information

22. Cost–benefit analysis means that all decisions will provide a financial benefit to the organisation. a. True *b. False Correct answer: b Learning objective 1.3 ~ Communicate how managers can make higher-quality decisions using accounting information

23. Tuition fees are an opportunity cost of earning a university degree. a. True *b. False Correct answer: b Learning objective 1.3 ~ Communicate how managers can make higher-quality decisions using accounting information

24. High quality information will generally have fewer uncertainties if it is based on viable assumptions. *a. True b. False Correct answer: a Learning objective 1.3 ~ Communicate how managers can make higher-quality decisions using accounting information

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

25. Michael Porter was the first person to apply the generic value chain to the wine industry. a. True *b. False Correct answer: b Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

26. The value chain represents the key activities engaged in by an organisation or industry. *a. True b. False Correct answer: a Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

27. The central feature of the value chain is its focus on activities and processes rather than functions or departments. *a. True b. False Correct answer: a Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

28. A value chain framework ignores customers and suppliers as it requires the organisation to focus on its internal processes. a. True *b. False Correct answer: b Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

29. Value chain analysis can be used in conjunction with other management accounting developments such as activity-based costing and strategic cost management. *a. True b. False Correct answer: a Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

30. Value chain analysis can be used to inform decision such as outsourcing and strategic alliances. *a. True b. False Correct answer: a Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

32. Supply chain analysis is incompatible with value chain analysis as supply chain is only concerned with external suppliers. a. True *b. False Correct answer: b Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

33. Research and development would be considered a downstream activity in value chain analysis. a. True *b. False Correct answer: b Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

34. Non-value added activities are unnecessary and wasteful activities that can never be eliminated. a. True *b. False Correct answer: b Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

35. Value chain analysis involves studying each step in the business process and eliminating activities that do not add value. *a. True b. False Correct answer: a Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

36. Cost object is anything that costs are measured for. *a. True b. False Correct answer: a Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

37. The manufacturing division of an oil refinery is an example of a cost object. *a. True b. False Correct answer: a Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

38. Cost objects are the same as cost drivers. a. True *b. False Correct answer: b Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

39. The inputs or activities that cause total costs to increase or decrease are cost drivers. *a. True b. False Correct answer: a Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

40. One way of classifying cost drivers is as structural or equivalent. a. True *b. False Correct answer: b Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

41. Structural costs drivers relate to the underlying economic structure of the organisational. *a. True b. False Correct answer: a Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

42. Total quality management is an example of a structural cost driver. a. True *b. False Correct answer: b 1.11

Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting 43. A company’s structure, product offerings and value chain design are unrelated. a. True *b. False Correct answer: b Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

Multiple-choice questions

44. Which of the following influences organisational strategies? a. Tax rates b. Financial statement results *c. Organisational vision d. Number of employees Correct answer: c Learning objective 1.1 ~ Recognise the types of decisions managers make for an organisation

45. Which of the following statements regarding organisational vision is false? *a. Organisational vision is the same as operating plans. b. Organisational vision is one tool for expressing an organisation’s main purpose. c. Organisational vision should be communicated to all employees. d. Managers sometimes divide the organisational vision into one or more written statements.

Correct answer: a Learning objective 1.1 ~ Recognise the types of decisions managers make for an organisation

46. An organisational vision is sometimes broken down into: I Mission statement II Core values statement III Code of conduct IV Statement of stakeholders a. I only b. I and II only *c. I, II and III d. I, II and IV only Correct answer: c Learning objective 1.1 ~ Recognise the types of decisions managers make for an organisation

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

47. Organisational core competencies can include: a. a mission statement. b. favourable economic conditions in the external environment. c. a code of conduct. *d. an innovative product design.

Correct answer: d Learning objective 1.1 ~ Recognise the types of decisions managers make for an organisation

48. How are organisational strategies related to core competencies? a. Competencies are the tactics managers use to take advantage of strategies. b. Broad based organisational strategies are the same as the core competencies. *c. Strategies help managers exploit competencies. d. Strategies and competencies are actually two ways of expressing the same idea.

Correct answer: c Learning objective 1.1 ~ Recognise the types of decisions managers make for an organisation

49. Broad based organisational strategies are commonly classified as: *a. low cost or product differentiation. b. core competencies. c. an organisation’s vision. d. an operating plan.

Correct answer: a Learning objective 1.1 ~ Recognise the types of decisions managers make for an organisation

50. Which of the following is an element of an operating plan? a. Developing an organisational mission b. Preparing financial statements c. Defining core values *d. Outlining specific performance objectives Correct answer: d Learning objective 1.1 ~ Recognise the types of decisions managers make for an organisation

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

51. Types of decisions that managers make include all of the following except: a. Choosing which products to sell b. Designing performance evaluation systems *c. Setting tax rates d. Hiring employees Correct answer: c Learning objective 1.1 ~ Recognise the types of decisions managers make for an organisation

52. The term cost accounting is: *a. the precursor to management accounting. b. commonly used to refer to financial accounting. c. encompasses both financial and management reporting. d. the same as budgeting.

Correct answer: a Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

53. An example of cost accounting information that is used in financial accounting is: a. staff absentee rates. b. quality assurance processes. *c. valuation of ending inventory. d. machine breakdown hours.

Correct answer: c Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

54. Which of the following is a type of internal report produced by an organisation’s information system? a. News release *b. Analysis of potential acquisition c. Credit report d. Tax return Correct answer: b Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

55. Which of the following statements is true? *a. Internal reports present information for use within an organisation. b. Internal reports present information predominantly for use outside an organisation. c. Internal reports are always for one-time use only. d. Internal reports are also used for reporting to government.

Correct answer: a Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

56. Which of the following is the best example of an internal report that might come from an organisation’s information system? a. Environmental Protection Agency regulatory report *b. Cash flow plan c. Income tax returns d. Credit rating agency report Correct answer: b Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

57. Financial statements are: a. Internal reports produced from an organisation’s information system. b. never used for internal decision making. c. only true when they are audited. *d. necessary to meet external reporting requirements.

Correct answer: d Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

58. Information gathered outside the organisation includes: *a. customer preferences. b. product design specifications. c. product mix plans. d. number of employees hired.

Correct answer: a Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

59. The following are all stages found in a management accounting system except for: a. processing. b. output. *c. outcome. d. input.

Correct answer: c Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

60. Influences on the nature of the management accounting system include all of the following except: a. organisational structure. *b. geographical location. c. organisational culture and vision. d. types of decisions managers are confronted with.

Correct answer: b Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making 1.17

Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

61. The routine measuring, monitoring and feedback processes to managers relating to operations is: *a. part of the management accounting system’s role. b. not required in organisations with only one product. c. required for long-term strategic decision making. d. an organisational core competency.

Correct answer: a Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making 62. Cost accounting information often serves as an input for: a. listed companies. b. a company’s suppliers. c. a company’s bankers. *d. Management accounting and financial accounting.

Correct answer: d Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

63. Start-up internet companies have no need for a management accounting function because: *a. even start-up internet companies need management accounting. b. they have innovative profit offerings. c. their financial structure is uniform. d. they have no physical product.

Correct answer: a Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

64. Relevant information: a. does not vary with the decision taken. b. is only useful if there are only two alternative courses of action c. considers past costs. *d. is always dependent on the decision and other factors.

Correct answer: d Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

65. Identify the irrelevant information in the following scenario.

Eve is choosing between two part-time jobs. Job A offers a high hourly wage but is located out of town and she will have to pay for public transport to get there. Job B is based locally and Eve can walk from home. The second job pays a lower hourly rate but there is more opportunity to pick up extra hours. The first job has a set number of hours. Last month Eve purchased a monthly gym pass for $80 for a gym located near Job B. a. Hourly pay rates b. Number or working hours *c. Cost of the gym pass d. Public transport cost Correct answer: c Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

66. Higher quality decisions result from: a. higher quality information b. higher quality reports c. higher quality decision-making processes *d. all of the options listed Correct answer: d Learning objective 1.3 ~ Communicate how managers can make higher-quality decisions using accounting information

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

67. Which of the following is/are not associated with higher quality decisions? a. Timely information b. Unbiased decision making processes *c. Ignoring uncertainties d. Available and understandable reports Correct answer: c Learning objective 1.3 ~ Communicate how managers can make higher-quality decisions using accounting information

68. Opportunity costs can be defined as: *a. the benefit foregone by choosing one alternative over another. b. the cost of collecting information for decision making purposes. c. the costs incurred when the wrong decision is made. d. all of the options listed.

Correct answer: a Learning objective 1.3 ~ Communicate how managers can make higher-quality decisions using accounting information

69. Cost–benefit analysis is only necessary when: a. there are opportunity costs to consider. b. there are more than two courses of action. c. when the decision concerns the reliability of product cost data. *d. none of the options listed is correct.

Correct answer: d Learning objective 1.3 ~ Communicate how managers can make higher-quality decisions using accounting information

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

70. Uncertainty may hinder a manager’s ability to: I adequately define a problem.

II identify all potential solution options.

III predict the outcome of various solution options. a. I and III only b. II and III only c. II only *d. I, II and III Correct answer: d Learning objective 1.3 ~ Communicate how managers can make higher-quality decisions using accounting information

71. Managers can make higher quality decisions by relying on all of the following except: a. more complete information. *b. irrelevant information. c. better decision-making processes. d. information having less uncertainty.

Correct answer: b Learning objective 1.3 ~ Communicate how managers can make higher-quality decisions using accounting information

72. Which of the following adjectives describes higher quality information?

I Complete II Costly to develop III Relevant a. I and II only b. II and III only c. I, II and III *d. I and III only Correct answer: d Learning objective 1.3 ~ Communicate how managers can make higher-quality decisions using accounting information

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

73. Higher quality reports are more: I relevant.

II understandable.

III available. a. I and II only b. I and III only c. II and III only *d. I, II and III Correct answer: d Learning objective 1.3 ~ Communicate how managers can make higher-quality decisions using accounting information

74. A higher quality decision is more: I focused.

II thorough.

III biased. a. I and III only b. I, II and III c. III only *d. I and II only Correct answer: d Learning objective 1.3 ~ Communicate how managers can make higher-quality decisions using accounting information

75. Irrelevant information may be: I useful in decision making.

II internally generated.

III accurate. a. I only b. I and II only *c. II and III only d. None of the above Correct answer: c Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

76. Whether a given type of information is relevant or irrelevant depends on: a. whether it is expressed in financial terms. b. its objectivity. *c. its relation to the decision to be made. d. its accuracy.

Correct answer: c Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

77. In a decision to lease premises or to build office space in Brisbane, which of the following is relevant? a. The cost of office space for sale in Melbourne *b. The costs associated with construction of the new office space c. The age of the employees currently working for the company d. The personal preferences of the decision maker Correct answer: c Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making 78. Frank is considering transportation modes to a client’s office. He can drive his own car at an incremental cost of $0.75 per kilometre or take a company car. If he takes his own car, he can be reimbursed $0.55 per kilometre. If Frank makes his decision strictly from his personal economic point of view, what is the relevant net cost associated with driving his own car? a. $0.75 *b. $0.20 c. $0.55 d. $0.00 Correct answer: b Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

79. A value chain is the sequence of business processes in which: a. costs are determined with activity-based principles. b. all non-value-added activities are eliminated. *c. value is added to a product or service. d. managers determine prices.

Correct answer: c Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

80. Value chains are most commonly viewed at the: *a. organisational level. b. industry level. c. product level. d. management level.

Correct answer: a Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting 81. An organisation’s value chain provides a framework for considering a range of management accounting issues such as: I reinforcing initiatives such as activity-based costing.

II breaking down traditional representations of organisational activity.

III reflecting value chain relationships in terms of cost.

IV encourages a broader organisational view. a. I and II b. I and III c. II and IV *d. I, II, III and IV Correct answer: d Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

82. Managers often break activities into four groups for value chain analysis. Which of the following is not an activity category among those four groups? a. Unnecessary activities that can be eliminated eventually b. Necessary activities that could be changed to improve the process c. Necessary activities that cannot be improved upon at this time *d. Unnecessary activities that cannot be eliminated Correct answer: d Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

83. The supply chain: a. does not include inside suppliers. b. does not include outside suppliers. *c. is the flow of resources from initial supplier through to delivery to end customers. d. is the flow of resources from initial supplier through to the final product.

Correct answer: c Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

84. Which of these statements concerning the value chain is correct? a. The value chain and the supply chain are different names for the same thing. b. The value chain essentially internalises an organisations’ thinking. *c. Enables the financial measurement of downstream and upstream activities. d. All of the options listed are correct.

Correct answer: c Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

85. Which of the following are examples of a cost object?

I Product II Accounting department III A haircut a. I and II only b. I, II and III c. I only *d. I, II and III Correct answer: d Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

86. Inputs or activities that cause changes in the total cost of a cost object are: a. value added activities. *b. cost drivers. c. quality costs. d. unimportant in activity-based costing.

Correct answer: b Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

87. The following are examples of executional cost drivers except for: a. capacity utilisation. b. product configuration. c. workforce involvement. *d. experience.

Correct answer: d Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

88. In decentralised structures it is common for there to be: *a. separate business units or divisions. b. little organisational complexity. c. direct reporting lines to the CEO. d. all of the options listed.

Correct answer: a Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

Essay/matching questions 89. Consider the following activities, which could be undertaken by managers at Air New Zealand. Indicate whether each item is most likely part of: S — organisational strategies P — operating plans A — actual operations or M — measuring, monitoring and motivating.

Each item has only one correct response.

1. Comparing actual revenues with budgeted revenues 2. Developing processes for handling customer complaints 3. Handling customer complaints 4. Hosting an annual employee picnic 5. Maintaining high quality customer service 6. Negotiating contracts with the flight attendant union over the next six months 7. Opening a new route to Perth 8. Implementing a new luggage tracking system 9. Valuing training for employees to increase organisational competence 10. Reporting periodic financial results Learning objective 1.1 ~ Recognise the types of decisions managers make for an organisation Answer: 1. Comparing actual revenues with budgeted revenues = M 2. Developing processes for handling customer complaints = P 3. Handling customer complaints = A 4. Hosting an annual employee picnic = M 5. Maintaining high quality customer service = S 6. Negotiating contracts with the flight attendant union over the next six months = A 7. Opening a new route to Perth = A 8. Implementing a new luggage tracking system = A 9. Valuing training for employees to increase organisational competence = S 10. Reporting periodic financial results = M

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

90. The owner of a local delicatessen is deciding whether to lease a company van. If the van is leased, the company would avoid paying its vendors to deliver the supplies and food purchases. The owner has negotiated a potential lease contract that would require a down payment plus a flat monthly rental payment. At the end of each year, an additional ‘contingency’ rental payment would be required if the total number of kilometres driven exceeds 12 000. The owner has estimated that the van will be driven 900 kilometres per month for picking up supplies and food purchases, so she does not expect to incur a contingency annual payment. Based on these kilometres, the owner has calculated the expected amount of cost for fuel, repairs and maintenance. She has received a quote from her insurance company for the next six months’ insurance. She plans to hire a part-time employee at $15 per hour to drive the van. The employee will work a flexible schedule based on the deliveries required. Items 1 through 7 are relevant costs for this decision.

Indicate whether the dollar amount of each relevant cost is most likely C certain or U uncertain.

Each item has only one correct response.

1. Lease down payment 2. Monthly lease rental payments 3. Contingency annual payment 4. Fuel, repairs and maintenance 5. Van insurance for the next six months 6. Part-time employee wages 7. Reduction in vendor delivery charges Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making Answer: 1. Lease down payment = C 2. Monthly lease rental payments = C 3. Contingency annual payment = U 4. Fuel, repairs and maintenance = U 5. Van insurance for the next six months = C 6. Part-time employee wages = U 7. Reduction in vendor delivery charges = U

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

91. Indicate whether each of the following items is primarily: I — an internal report or E — an external report.

Each item has only one correct response.

1. Evaluating a potentially new business 2. Modifying the mixtures in the production process 3. New product design 4. Operational budgets 5. Cash flow statement 6. Income statement 7. Inventory reports for managers 8. Acquisition of a new business 9. Analysis of supplier quality 10. ASIC reports Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making Answer: 1. Evaluating a potentially new business = I 2. MODIFYING the mixtures in the production process = I 3. New product design = I 4. Operational budgets = I 5. Cash flow statement = E 6. Income statement = E 7. Inventory reports for managers = I 8. Acquisition of a new business = E 9. Analysis of supplier quality = I 10. ASIC reports = E

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

92. Rick is an accountant. His boss has asked him to make a recommendation about buying or leasing new computer equipment for the accounting department. A decision has already been made to acquire a particular type of equipment. The only remaining decision is whether the equipment will be purchased or leased. Several pieces of information Rick might consider in his decision are listed below. Indicate whether each of the following items is: R relevant or I irrelevant to the decision.

1. Cost of current computer equipment 2. Interest rate for lease 3. Training costs for operating new computer 4. Cost of purchasing new equipment 5. Depreciation on old equipment 6. Future reliability of new equipment 7. Independent quality ratings on new equipment 8. Trade-in value of old equipment 9. Tax incentives to lease 10. Future depreciation rates Learning objective 1.2 ~ Discuss the role of cost and management accounting information in management decision making Answer: 1. Cost of current computer equipment = I 2. Interest rate for lease = R 3. Training costs for operating new computer = R 4. Cost of purchasing new equipment = R 5. Depreciation on old equipment = I 6. Future reliability of new equipment = I 7. Independent quality ratings on new equipment = I 8. Trade-in value of old equipment = I 9. Tax incentives to lease = R 10. Future depreciation rates = R

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93. A value chain is the sequence of business processes in which value is added to a product or service. Consider a manufacturing company that produces and sells dog food.

Match each business activity listed on the left with the element of the value chain that best describes it. Each item has only one correct answer.

Advertising products to consumers Combining material, labour and overhead to produce dog food Responding to internet enquiries for new flavours.

Enforcing time and quality standards for raw material suppliers Investigating ways to develop a range of cat food Implementing a new quality assurance process.

Selecting retailers to sell dog food to end consumers

Supplier and raw material management Research and development Customer service Product manufacture Product and process design Marketing and sales Distribution management

Learning objective 1.4 ~ Describe the value chain framework and its applications in management accounting Answer: 1. Advertising products to consumers = Marketing and sales 2. Combining material, labour and overhead to produce dog food = Product manufacture 3. Responding to internet enquiries for new flavours = Customer Service 4. Enforcing time and quality standards for raw material suppliers = Supplier and raw material management 5. Investigating ways to develop a range of cat food = Research and development 6. Implementing a new quality assurance process = Product and process design 7. Selecting retailers to sell dog food to end consumers = Distribution management

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

Testbank to accompany

Management accounting 5th edition by Eldenburg et al.

Not for distribution. Instructors may assign selected questions in their LMS.

© John Wiley & Sons Australia, Ltd 2024

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Chapter 2: Cost concepts, behaviour and estimation True/false questions

1. Cost behaviour refers to the way that costs vary in relation to changes in an organisation’s activities. *a. True b. False Correct answer: a Learning objective 2.1 ~ Demonstrate an understanding of the concept of cost behaviour

2. The traditional basis for understanding cost behaviour uses an activity analysis cost framework. a. True *b. False Correct answer: b Learning objective 2.1 ~ Demonstrate an understanding of the concept of cost behaviour

3. Organisations need to understand how costs behave so they can predict the changes in costs that occur as a result of decisions made about production, sales and services. *a. True b. False Correct answer: a Learning objective 2.1 ~ Demonstrate an understanding of the concept of cost behaviour

4. To understand cost behaviour accountants need to consider the drivers of the organisation’s costs. *a. True b. False Correct answer: a Learning objective 2.1 ~ Demonstrate an understanding of the concept of cost behaviour

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5. Distinguishing between fixed and variable costs is an important element of understanding cost behaviour. *a. True b. False Correct answer: a Learning objective 2.1 ~ Demonstrate an understanding of the concept of cost behaviour

6. The cost of beverages on an airplane vary with the number of passengers on the flight. *a. True b. False Correct answer: a Learning objective 2.2 ~ Explain the different types of cost behaviour

7. The line rental paid on a telephone account is an example of a variable cost. a. True *b. False Correct answer: b Learning objective 2.2 ~ Explain the different types of cost behaviour

8. Total fixed costs vary with small changes in activity levels. a. True *b. False Correct answer: b Learning objective 2.2 ~ Explain the different types of cost behaviour

9. An example of a fixed cost is the cost of petrol in a transport company. a. True *b. False Correct answer: b Learning objective 2.2 ~ Explain the different types of cost behaviour

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10. Rent on a building is usually a fixed cost. *a. True b. False Correct answer: a Learning objective 2.2 ~ Explain the different types of cost behaviour

11. When a company expands its operations and rents new premises, the rental cost can be classified as a step-wise linear fixed cost. *a. True b. False Correct answer: a Learning objective 2.2 ~ Explain the different types of cost behaviour

12. It is always easy to determine whether a cost is a variable or a fixed cost. a. True *b. False Correct answer: b Learning objective 2.2 ~ Explain the different types of cost behaviour

13. Total costs that have both fixed and variable elements are call mixed costs. *a. True b. False Correct answer: a Learning objective 2.2 ~ Explain the different types of cost behaviour

14. A hospital would have mainly fixed costs because its costs do not vary based on the number of patients it treats. a. True *b. False Correct answer: b Learning objective 2.2 ~ Explain the different types of cost behaviour

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15. Most organisations ignore mixed costs because it is too difficult to predict their behaviour. a. True *b. False Correct answer: b Learning objective 2.2 ~ Explain the different types of cost behaviour

16. A relevant range is a span of activity for a given cost object where both total fixed costs and total variable costs per unit of activity remain constant. *a. True b. False Correct answer: a Learning objective 2.2 ~ Explain the different types of cost behaviour

17. The relevant range for an organisation never changes. a. True *b. False Correct answer: b Learning objective 2.2 ~ Explain the different types of cost behaviour

18. When an organisation changes their capacity or operations significantly it is likely that the relevant range will also change. *a. True b. False Correct answer: a Learning objective 2.2 ~ Explain the different types of cost behaviour

19. The incremental cost of an activity is known as the marginal cost. *a. True b. False Correct answer: a Learning objective 2.2 ~ Explain the different types of cost behaviour

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20. The marginal cost of an activity is not useful for decision making because managers only need to know the total cost. a. True *b. False Correct answer: b Learning objective 2.2 ~ Explain the different types of cost behaviour

21. Within the relevant range the variable cost approximates the marginal cost. *a. True b. False Correct answer: a Learning objective 2.2 ~ Explain the different types of cost behaviour

22. Cost functions are a mathematical representation of the total cost of a cost object over a relevant range. *a. True b. False Correct answer: a Learning objective 2.2 ~ Explain the different types of cost behaviour

23. Within the relevant range of activity the change in total cost is linear, or close to linear. *a. True b. False Correct answer: a Learning objective 2.2 ~ Explain the different types of cost behaviour

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24. When graphing a cost function, the y-intercept represents the variable cost per unit. a. True *b. False Correct answer: b Learning objective 2.2 ~ Explain the different types of cost behaviour

25. When volume is very low or very high, the total cost function is non-linear. *a. True b. False Correct answer: a Learning objective 2.2 ~ Explain the different types of cost behaviour

26. A cost driver is also known as the variable cost per unit. a. True *b. False Correct answer: b Learning objective 2.2 ~ Explain the different types of cost behaviour

27. An input or activity that causes changes in total cost is a cost driver. *a. True b. False Correct answer: a Learning objective 2.2 ~ Explain the different types of cost behaviour 28. The number of patients treated is an example of a cost driver for a hospital’s cardiac ward. *a. True b. False Correct answer: a Learning objective 2.2 ~ Explain the different types of cost behaviour

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29. Cost drivers are always considered based on a specific cost object. *a. True b. False Correct answer: a Learning objective 2.2 ~ Explain the different types of cost behaviour

30. Cost objects only ever have one cost driver. a. True *b. False Correct answer: b Learning objective 2.2 ~ Explain the different types of cost behaviour

31. Past costs can be used for estimating future cost behaviour. *a. True b. False Correct answer: a Learning objective 2.3 ~ Describe different cost estimation techniques

32. When estimating future costs, it is necessary to classify costs into fixed and variable components. *a. True b. False Correct answer: a Learning objective 2.3 ~ Describe different cost estimation techniques

33. One method for determining cost functions that relies on past costs is regression analysis. *a. True b. False Correct answer: a Learning objective 2.3 ~ Describe different cost estimation techniques

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34. Engineered estimates of costs can only be used by manufacturing firms to estimate future costs. a. True *b. False Correct answer: b Learning objective 2.3 ~ Describe different cost estimation techniques

35. If the organisation has only operated for a short time several methods of determining the cost function cannot be used. *a. True b. False Correct answer: a Learning objective 2.3 ~ Describe different cost estimation techniques

36. The method of cost estimation that analyses accounting records to determine future cost patterns is called engineered cost analysis. a. True *b. False Correct answer: b Learning objective 2.3 ~ Describe different cost estimation techniques

37. Cost functions are most useful for estimating long-term cost patterns. a. True *b. False Correct answer: b Learning objective 2.3 ~ Describe different cost estimation techniques

38. Scatter plots provide a visual technique for exploring cost behaviour. *a. True b. False Correct answer: a Learning objective 2.3 ~ Describe different cost estimation techniques

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39. Computer programs such as Excel can be used to improve the analysis when using scatter plots. *a. True b. False Correct answer: a Learning objective 2.3 ~ Describe different cost estimation techniques

40. Reviewing the pattern of a cost over time is a critical step in determining an engineered cost estimate. a. True *b. False Correct answer: b Learning objective 2.3 ~ Describe different cost estimation techniques

41. The two-point method uses the highest and lowest data points to estimate a mixed cost function. a. True *b. False Correct answer: b Learning objective 2.3 ~ Describe different cost estimation techniques

42. Preparing a scatter plot is a requirement before applying the two-point method of cost estimation. *a. True b. False Correct answer: a Learning objective 2.3 ~ Describe different cost estimation techniques

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43. The high-low method is a specific application of the two-point method of cost estimation. *a. True b. False Correct answer: a Learning objective 2.3 ~ Describe different cost estimation techniques 44. When using the two-point method of cost estimation or the high low method, the calculation to derive the variable cost component of a mixed cost is: change in cost ÷ change in cost driver. *a. True b. False Correct answer: a Learning objective 2.3 ~ Describe different cost estimation techniques

45. One of the problems of the high-low method is that the highest and lowest observation is usually outliers. *a. True b. False Correct answer: a Learning objective 2.3 ~ Describe different cost estimation techniques

46. The first step in estimating a cost function is to identify relevant costs for the cost object. *a. True b. False Correct answer: a Learning objective 2.4 ~ Apply estimation techniques to determine the cost function

47. When estimating cost functions, it is important to continuously evaluate uncertainties and quality of information. *a. True b. False

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Correct answer: a Learning objective 2.4 ~ Apply estimation techniques to determine the cost function

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48. Multiple methods of cost estimation techniques may be required to estimate total cost functions for a cost object.

*a. True b. False Correct answer: a Learning objective 2.4 ~ Apply estimation techniques to determine the cost function

49. The statistical technique that measure the average change in a dependent variable for every unit change in one or more independent variables is called regression analysis. *a. True b. False Correct answer: a Learning objective 2.5 ~ Apply regression analysis in cost estimation

50. Regression analysis uses all the available data points and often improve the accuracy of the cost function. *a. True b. False Correct answer: a Learning objective 2.5 ~ Apply regression analysis in cost estimation

51. The dependent variable in regression analysis is the cost driver. a. True *b. False Correct answer: b Learning objective 2.5 ~ Apply regression analysis in cost estimation

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52. Multiple regression analysis develops a cost function for the statistical relationship between total cost and two or more cost drivers. *a. True b. False Correct answer: a Learning objective 2.5 ~ Apply regression analysis in cost estimation 53. In the simple regression analysis equation below, α represents the fixed costs.

Y= α + βX + ε *a. True b. False Correct answer: a Learning objective 2.5 ~ Apply regression analysis in cost estimation

54. The cost and time associated with using regression analysis means that it is likely that the costs of using outweigh the benefits of doing so. a. True *b. False Correct answer: b Learning objective 2.5 ~ Apply regression analysis in cost estimation 55. Regression analysis produces the most accurate results when there is a strong linear relationship between the cost and cost driver. *a. True b. False Correct answer: a Learning objective 2.5 ~ Apply regression analysis in cost estimation

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56. Regression analysis removes errors in cost estimation associated with changing cost patterns over time, unusual events and random fluctuations. a. True *b. False Correct answer: b Learning objective 2.5 ~ Apply regression analysis in cost estimation

57. In regression analysis, the adjusted R-square statistic is used to evaluate how well the cost driver explains the behaviour in the cost. *a. True b. False Correct answer: a Learning objective 2.5 ~ Apply regression analysis in cost estimation

58. When comparing the adjusted R-squares from multiple regressions, the best equation is represented by the regression with the lowest adjusted R-square. a. True *b. False Correct answer: b Learning objective 2.5 ~ Apply regression analysis in cost estimation

59. When only one coefficient is statistically greater than zero this means it is likely that the cost being estimated is not a mixed cost. *a. True b. False Correct answer: a Learning objective 2.5 ~ Apply regression analysis in cost estimation

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60. When generating a list of possible cost-drivers it is important that the change in cost driver could potentially affect the cost. *a. True b. False Correct answer: a Learning objective 2.5 ~ Apply regression analysis in cost estimation

61. In regression analysis, the estimated fixed cost is represented by the intercept coefficient. *a. True b. False Correct answer: a Learning objective 2.5 ~ Apply regression analysis in cost estimation

62. When an organisation operates in an environment where technologies and costs change rapidly, the information quality of past cost data is reduced. *a. True b. False Correct answer: a Learning objective 2.6 ~ Reflect on the uses and limitations of cost estimates

63. Overhead cost pools are used to allocate indirect fixed costs only. a. True *b. False Correct answer: b Learning objective 2.6 ~ Reflect on the uses and limitations of cost estimates

64. The calculation of average cost is total costs ÷ activity. *a. True b. False Correct answer: a Learning objective 2.6 ~ Reflect on the uses and limitations of cost estimates

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65. Management accounting commonly uses average costs in reports because they are more useful for decision-making purposes. a. True *b. False Correct answer: b Learning objective 2.6 ~ Reflect on the uses and limitations of cost estimates

66. Average costs incorrectly treat fixed costs as variable. *a. True b. False Correct answer: a Learning objective 2.6 ~ Reflect on the uses and limitations of cost estimates

67. Regression analysis usually provides a higher quality cost function than the high-low method. *a. True b. False Correct answer: a Learning objective 2.6 ~ Reflect on the uses and limitations of cost estimates

68. Changes in cost behaviour due to inflation or deflation is one source of uncertainty in estimating future costs. *a. True b. False Correct answer: a Learning objective 2.6 ~ Reflect on the uses and limitations of cost estimates

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69. The analysis at the account level method can be used when there is no past cost information available. a. True *b. False Correct answer: b Learning objective 2.6 ~ Reflect on the uses and limitations of cost estimates

70. Cost estimates that are based on resources used is a characteristic of the engineered estimate of cost method. *a. True b. False Correct answer: a Learning objective 2.6 ~ Reflect on the uses and limitations of cost estimates 71. Scatter plots facilitates whether a potential cost driver is viable. *a. True b. False Correct answer: a Learning objective 2.6 ~ Reflect on the uses and limitations of cost estimates

72. In regression analysis it is not necessary to eliminate data from unusual periods because the statistical analysis is able to factor this in to the regression outputs. a. True *b. False Correct answer: b Learning objective 2.6 ~ Reflect on the uses and limitations of cost estimates

73. Regression analysis mismeasures the cost function if data points come from more than one relevant range. *a. True b. False Correct answer: a Learning objective 2.6 ~ Reflect on the uses and limitations of cost estimates 1.50

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Multiple-choice questions

74. Cost behaviour is: a. another word for cost object. b. irrelevant for service organisations. *c. the variation in costs relative to the variation in activities. d. an old-fashioned term for activity cost analysis.

Correct answer: c Learning objective 2.1 ~ Demonstrate an understanding of the concept of cost behaviour

75. Cost behaviour can be classified in a more contemporary way using: a. a fixed and variable framework. *b. an activity analysis cost framework. c. a direct and indirect cost framework. d. all of the options are correct.

Correct answer: b Learning objective 2.1 ~ Demonstrate an understanding of the concept of cost behaviour

76. Fixed costs per unit: a. will not change over the relevant range. b. are constant regardless of changes in activity. *c. vary inversely with changes in activity. d. increase with an increase in activity.

Correct answer: c Learning objective 2.2 ~ Explain the different types of cost behaviour

77. Total fixed costs: a. vary inversely with changes in activity. b. increase with an increase in activity. c. decrease with a decrease in activity. *d. are constant regardless of changes in activity.

Correct answer: d Learning objective 2.2 ~ Explain the different types of cost behaviour

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78. Total variable costs: *a. change proportionately with changes in activity levels. b. increase with a decrease in activity. c. have no relevant range. d. are constant regardless of changes in activity.

Correct answer: a Learning objective 2.2 ~ Explain the different types of cost behaviour

79. Mixed costs: a. have a constant per-unit value. b. are constant in total. c. consist of the variable portion of all costs. *d. consist of fixed and variable costs.

Correct answer: d Learning objective 2.2 ~ Explain the different types of cost behaviour

80. The total cost function can be represented by the equation TC = F + V x Q. V x Q in the equation represents the: *a. total value of variable costs. b. total value of fixed costs. c. total value of mixed costs. d. total value of both fixed and variable costs.

Correct answer: a Learning objective 2.2 ~ Explain the different types of cost behaviour

81. The relevant range is defined as: a. a period of time over which total costs do not change. *b. a span of activity where both total fixed costs and variable cost per unit of activity remain constant. c. the volume of production over which step-wise fixed costs increase. d. the time period in which the level of production does not change.

Correct answer: b Learning objective 2.2 ~ Explain the different types of cost behaviour

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82. Which of the follow is not an assumption when estimating a cost function over the relevant range of activity? a. Mixed costs will change in total b. Variable cost per unit will be constant *c. Variable costs will be constant in total d. Fixed costs will be constant in total Correct answer: c Learning objective 2.2 ~ Explain the different types of cost behaviour

83. Keep Smiling Dental Surgery is located in Christchurch. The company employs three dentists, four dental assistants and two receptionists who book appointments and keep records. The surgery provides a range of services including general dental care, paediatric dental care and teeth whitening. The clinic includes a small retail section that carries specialised products for home treatment.

The surgery has recently updated its communications plan and negotiated a plan with a new provider which includes a monthly line charge and a usage charge for internet activity. The cost structure for communications is best described as a: a. fixed cost. b. marginal cost. c. sunk cost. *d. mixed cost.

Correct answer: d Learning objective 2.2 ~ Explain the different types of cost behaviour

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84. Keep Smiling Dental Surgery is located in Christchurch. The company employs three dentists, four dental assistants and two receptionists who book appointments and keep records. The surgery provides a range of services including general dental care, paediatric dental care and teeth whitening. The clinic includes a small retail section that carries specialised products for home treatment.

The surgery has recently updated its communications plan and negotiated a plan with a new provider which includes a monthly line charge and a usage charge for internet activity. The internet usage change is best described as a: a. fixed cost. *b. variable cost. c. sunk cost. d. mixed cost.

Correct answer: b Learning objective 2.2 ~ Explain the different types of cost behaviour

85. Keep Smiling Dental Surgery is located in Christchurch. The company employs three dentists, four dental assistants and two receptionists who book appointments and keep records. The surgery provides a range of services including general dental care, paediatric dental care and teeth whitening. The clinic includes a small retail section that carries specialised products for home treatment.

The clinic’s relevant range of activity would best be measured in terms of: a. the number of staff employed. *b. the number of patients treated. c. the current budget for staff wages. d. the number of parking spaces available in the parking lot.

Correct answer: b Learning objective 2.2 ~ Explain the different types of cost behaviour

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86. Keep Smiling Dental Surgery is located in Christchurch. The company employs three dentists, four dental assistants and two receptionists who book appointments and keep records. The surgery provides a range of services including general dental care, paediatric dental care and teeth whitening. The clinic includes a small retail section that carries specialised products for home treatment.

Keep Smiling has recently secured a contract with the Christchurch branch of a major bank to treat their staff. Currently each dentist can treat 35 patients per week. However, the new contract means that they will have a total of 100 patients per week. This means that they will need to employ an additional dentist to cope with the increased demand. No other changes are required to the surgery. The cost attached to employing a new dentist is an example of a: *a. stepwise linear cost function. b. marginal cost. c. mixed cost. d. variable cost.

Correct answer: a Learning objective 2.2 ~ Explain the different types of cost behaviour

87. A fixed cost function which changes at some point but remains constant after the change is called a: a. piecewise linear cost function. *b. stepwise linear cost function. c. mixed cost. d. none of the options listed.

Correct answer: b Learning objective 2.2 ~ Explain the different types of cost behaviour 88. Which of the following statements is true? a. Past costs are always relevant for decisions and are often useful in estimating future cost behaviour. b. Past costs are always relevant for decisions, but are rarely useful in estimating future cost behaviour. *c. Past costs are never relevant for decisions, but are often useful in estimating future cost behaviour. d. Past costs are never relevant for decisions, nor are they useful in estimating future cost behaviour.

Correct answer: c Learning objective 2.3 ~ Describe different cost estimation techniques

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89. In most accounting information systems, costs are often recorded and coded so they can be summarised based on different: a. cost drivers. b. activity levels. *c. cost objects. d. independent variables.

Correct answer: c Learning objective 2.3 ~ Describe different cost estimation techniques

90. The multiple regression method of developing a cost function: a. calculates values for the statistical relationship between total cost and a single cost driver. b. calculates values for the statistical relationship between two dependent cost objects and a single cost driver. *c. calculates values for the statistical relationship between total cost and two or more cost drivers. d. does not use all available data points.

Correct answer: c Learning objective 2.3 ~ Describe different cost estimation techniques

91. Which of the following statements is NOT true when using analysis at the account level to estimate a cost function? a. Salaries are usually fixed. b. Manufacturing overhead is usually treated as a mixed cost. c. Materials used in production are usually variable. *d. Maintenance on the buildings and facilities is usually treated as variable.

Correct answer: d Learning objective 2.3 ~ Describe different cost estimation techniques

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92. Hifi Company wants to develop a cost function for its maintenance costs to estimate such costs for the coming year. The following data are available: Month

Machine hours

January February March April

8000 13000 14000 11000

Maintenance costs incurred $3600 $5300 $6000 $4600

Using the high-low method, what is the variable maintenance cost per machine hour? a. $0.30 *b. $0.40 c. $0.20 d. $2.50 Correct answer: b Learning objective 2.4 ~ Apply estimation techniques to determine the cost function

93. Hifi Company wants to develop a cost function for its maintenance costs to estimate such costs for the coming year. The following data are available: Month

Machine hours

January February March April

8000 13000 14000 11000

Maintenance costs incurred $3600 $5300 $6000 $4600

Using the high-low method, what is the fixed maintenance cost? *a. $400 b. $3200 c. $200 d. $1800 Correct answer: a Learning objective 2.4 ~ Apply estimation techniques to determine the cost function

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94. Hifi Company wants to develop a cost function for its maintenance costs to estimate such costs for the coming year. The following data are available: Month

Machine hours

January February March April

8000 13000 14000 11000

Maintenance costs incurred $3600 $5300 $6000 $4600

Using the high-low method, what is the cost function for maintenance costs? a. $1800 + $0.40 per machine hour b. $300 + $0.40 per machine hour *c. $400 + $0.40 per machine hour d. $200 + $0.40 per machine hour Correct answer: c Learning objective 2.4 ~ Apply estimation techniques to determine the cost function

95. The major disadvantage of the high-low method is that it: *a. uses the two most extreme data points in determining a cost function. b. is difficult to calculate. c. is difficult to understand. d. involves more judgmental factors than do other methods.

Correct answer: a Learning objective 2.4 ~ Apply estimation techniques to determine the cost function

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96. Highland Rose Ltd is attempting to develop the cost function for repair costs. The following past data are available.

Machine hours 4800 3400 4000 5900

Repair costs $6385 4585 5285 7085

Using the high-low method, what is the variable repair cost per machine hour? *a. $1.00 b. $0.15 c. $4.00 d. $5.00 Correct answer: a Learning objective 2.4 ~ Apply estimation techniques to determine the cost function

97. Highland Rose Ltd is attempting to develop the cost function for repair costs. The following past data are available.

Machine hours 4800 3400 4000 5900

Repair costs $6385 4585 5285 7085

Using the high-low method, what is the fixed repair cost? a. $475 b. $850 *c. $1185 d. $565 Correct answer: c Learning objective 2.4 ~ Apply estimation techniques to determine the cost function

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98. Highland Rose Ltd is attempting to develop the cost function for repair costs. The following past data are available.

Machine hours 4800 3400 4000 5900

Repair costs $6385 4585 5285 7085

Using the high-low method, what is the estimated repair cost for 4500 machine hours? a. $5785 b. $5585 c. $5985 *d. $5685 Correct answer: d Learning objective 2.4 ~ Apply estimation techniques to determine the cost function

99. Design Fashion has an average overhead cost per hour of $21.00 at 3500 machine hours and at 3000 hours it is $22.50. The company managers wish to estimate the overhead cost function.

What is the variable overhead cost per machine hour? a. $1.50 *b. $12.00 c. $6.00 d. $1.75 Correct answer: b Learning objective 2.4 ~ Apply estimation techniques to determine the cost function

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100. Design fashion has an average overhead cost per hour of $21.00 at 3500 machine hours and at 3000 hours it is $22.50. The company managers wish to estimate the overhead cost function.

What is the fixed overhead cost? a. $15 750 b. $36 750 *c. $31 500 d. $6000 Correct answer: c Learning objective 2.4 ~ Apply estimation techniques to determine the cost function

101. Assuming that a cost is mixed and linear, and that past cost behaviour is expected to continue into the future, which of the following is mostly likely the best technique for estimating future costs? *a. Regression analysis b. Two-point method c. Scatter plot d. Engineered estimate of cost Correct answer: a Learning objective 2.5 ~ Apply regression analysis in cost estimation

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102. An organisation’s accountant is estimating next period’s total overhead costs. She performed two regression analyses, one based on direct labour hours and the other based upon machine hours. The results were as follows.

Total overhead = $150 000 + $4 x direct labour hours Adjusted R-square = 0.83 Total overhead = $130 000 + $5 x machine hours Adjusted R-square = 0.77 For the next period the accountant anticipates using 28 000 direct labour hours and 26 000 machine hours. Based upon this information, what is the best estimate for overhead for the next period? *a. $262 000 b. $260 000 c. $254 000 d. $270 000 Correct answer: a Learning objective 2.5 ~ Apply regression analysis in cost estimation

103. Which of the following is not an assumption of linear regression analysis? a. The error terms have a constant variance b. The error terms are independent *c. There is a cause and effect relationship between the dependent and independent variables d. A linear relationship exists between the dependent and independent variables Correct answer: c Learning objective 2.5 ~ Apply regression analysis in cost estimation

104. Which of the following are forms of regression analysis? *a. Simple and multiple b. Fixed and variable c. Quantitative and qualitative d. Financial and managerial Correct answer: a Learning objective 2.5 ~ Apply regression analysis in cost estimation

105. Simple regression analysis differs from multiple regression analysis based on the number of: 1.62

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a. the interpretation of the adjusted R-square statistic. b. costs predicted. c. data points incorporated. *d. cost drivers used.

Correct answer: d Learning objective 2.5 ~ Apply regression analysis in cost estimation

106. Simple regression estimates an equation that minimises the distance from each data point to: a. the error term. b. the y-intercept. *c. a trend line. d. the x-axis.

Correct answer: c Learning objective 2.5 ~ Apply regression analysis in cost estimation

107. In a multiple regression, more than one cost driver is used to determine which is more appropriate to explain a cost behaviour. The cost being measured is considered a(n): *a. dependent variable. b. independent variable. c. residual. d. error term.

Correct answer: a Learning objective 2.5 ~ Apply regression analysis in cost estimation

108. Which of the following is an alternative name for the cost being predicted in a regression analysis? a. Independent variable *b. Dependent variable c. Beta d. Slope Correct answer: b Learning objective 2.5 ~ Apply regression analysis in cost estimation

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109. Regression analysis works best when the relationship between costs and cost drivers is: *a. positive and linear. b. negative and linear. c. positive and indirect. d. positive, linear and indirect.

Correct answer: a Learning objective 2.5 ~ Apply regression analysis in cost estimation

110. In a regression equation, variable costs per unit are represented by the: *a. slope. b. intercept. c. error term. d. adjusted R-square coefficient.

Correct answer: a Learning objective 2.5 ~ Apply regression analysis in cost estimation

111. In a regression equation, fixed costs per unit are represented by the: a. slope. b. intercept. c. adjusted R-square coefficient. *d. none of the options listed.

Correct answer: d Learning objective 2.5 ~ Apply regression analysis in cost estimation

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112. Which graph shows data that are more suitable for regression analysis?

*a. Graph A b. Graph B c. Neither Graph A nor Graph B d. Cannot be determined Correct answer: a Learning objective 2.5 ~ Apply regression analysis in cost estimation

113. Simple regression analysis output produces a variety of information and statistics.

Which of the following statistics provides information for fixed costs? *a. T-statistic and p-value for the alpha coefficient b. T-statistics for alpha and beta coefficients c. Adjusted R-square d. P-values for alpha and beta coefficients Correct answer: a Learning objective 2.5 ~ Apply regression analysis in cost estimation

114. Simple regression analysis output produces a variety of statistics. Which of the following statistics best summarises how well the cost driver explains the behaviour of the cost? a. T-statistics for alpha and beta coefficients b. T-statistic and p-value for the alpha coefficient *c. Adjusted R-square d. P-values for alpha and beta coefficients Correct answer: c Learning objective 2.5 ~ Apply regression analysis in cost estimation

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115. When determining whether a coefficient should be used in a cost function the relevant statistic in the regression output is: a. the coefficient value. *b. p-value for the coefficient. c. t-statistic for the coefficient. d. number of observations.

Correct answer: b Learning objective 2.5 ~ Apply regression analysis in cost estimation

116. When estimating future costs, information quality is higher when: a. costs must be allocated. b. the regression adjusted R-square is near zero. *c. the accounting system can trace relevant costs to a cost object. d. most costs are fixed, rather than variable.

Correct answer: c Learning objective 2.6 ~ Reflect on the uses and limitations of cost estimates

117. Past cost information might be too unreliable for future cost estimation because: a. the organisation’s operations have changed considerably. b. the organisation’s accounting system does not currently capture the necessary information. *c. all of the options listed. d. none of the options listed.

Correct answer: c Learning objective 2.6 ~ Reflect on the uses and limitations of cost estimates

118. A disadvantage of regression analysis as a method of determining a cost function is: a. it is time consuming. b. uses only two data points. *c. mismeasures the cost function if data points come from more than one relevant range. d. all of the options listed are disadvantages.

Correct answer: c Learning objective 2.6 ~ Reflect on the uses and limitations of cost estimates

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119. Consider the following cost data for the cost object, number of machine setups. Each set of costs (A, B and C) is from a different type of manufacturing operation and represents the cost behaviour for the cost of that company’s machine setups.

Number of machine setups 0 10 20 30 40 50

Cost A $ 0 20 40 60 80 100

Cost B $80 79 82 78 81 79

Cost C $ 5 37 66 91 123 154

Cost A is best described as: *a. variable. b. fixed. c. mixed. d. direct.

Correct answer: a Learning objective 2.2 ~ Explain the different types of cost behaviour

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120. Consider the following cost data for the cost object, number of machine setups. Each set of costs (A, B and C) is from a different type of manufacturing operation and represents the cost behaviour for the cost of that company’s machine setups.

Cost B is best described as: Number of machine setups 0 10 20 30 40 50

Cost A $ 0 20 40 60 80 100

Cost B $80 79 82 78 81 79

Cost C $ 5 37 66 91 123 154

a. mixed. b. variable. *c. fixed. d. discretionary.

Correct answer: c Learning objective 2.2 ~ Explain the different types of cost behaviour

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121. Consider the following cost data for the cost object, number of machine setups. Each set of costs (A, B and C) is from a different type of manufacturing operation and represents the cost behaviour for the cost of that company’s machine setups.

Cost C is best described as: Number of machine setups 0 10 20 30 40 50

Cost A $ 0 20 40 60 80 100

Cost B $80 79 82 78 81 79

Cost C $ 5 37 66 91 123 154

*a. mixed. b. variable. c. fixed. d. indirect.

Correct answer: a Learning objective 2.2 ~ Explain the different types of cost behaviour

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122. Three different divisions of a university are estimating costs for their human resources departments. Each division has a cost structure that is different from the other divisions and those structures are represented by the following cost behaviour patterns.

Number of employees 0 25 50 75 100

Cost A $ 0 50 100 125 200

Cost B $120 118 123 124 119

Cost C $118 180 245 296 360

Which cost is best described as fixed? a. Cost A *b. Cost B c. Cost C d. Cost B and Cost C Correct answer: b Learning objective 2.2 ~ Explain the different types of cost behaviour

123. Three different divisions of a university are estimating costs for their human resources departments. Each division has a cost structure that is different from the other divisions and those structures are represented by the following cost behaviour patterns.

Number of employees 0 25 50 75 100

Cost A $ 0 50 100 125 200

Cost B $120 118 123 124 119

Cost C $118 180 245 296 360

Which cost is best described as variable? *a. Cost A b. Cost B c. Cost C d. Cost A and Cost C Correct answer: a Learning objective 2.2 ~ Explain the different types of cost behaviour

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124. Three different divisions of a university are estimating costs for their human resources departments. Each division has a cost structure that is different from the other divisions and those structures are represented by the following cost behaviour patterns.

Number of employees 0 25 50 75 100

Cost A $ 0 50 100 125 200

Cost B $120 118 123 124 119

Cost C $118 180 245 296 360

Which cost is best described as mixed? a. Cost A b. Cost B *c. Cost C d. Cost B and Cost C Correct answer: c Learning objective 2.2 ~ Explain the different types of cost behaviour

125. A firm has the capacity to produce 3100 units per week. At 80% capacity, the average total cost per unit is $12.50 and the average variable cost per unit is $7.50. What is the total fixed cost per week, assuming the firm is still operating within its relevant range? *a. $12 400 b. $19 375 c. $23 200 d. $15 500 Correct answer: a Learning objective 2.4 ~ Apply estimation techniques to determine the cost function

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126. A scatter plot is especially useful when managers wish to: a. compute a cost function. b. update a past cost function for future changes. *c. study the relationship between a cost and a potential cost driver. d. analyse cost behaviour when only one period of data is available.

Correct answer: c Learning objective 2.3 ~ Describe different cost estimation techniques

127. Which of the following are disadvantages of the high low method? a. Ignores all but two data points b. Relies on past costs c. Highest and lowest data points are often atypical *d. All of the options listed Correct answer: d Learning objective 2.6 ~ Reflect on the uses and limitations of cost estimates

128. Which of the following cost estimation techniques makes assumptions about the data being analysed?

I Analysis at the account level II High low method III Regression analysis a. I only b. I and II only c. II and III only *d. I, II and III Correct answer: d Learning objective 2.6 ~ Reflect on the uses and limitations of cost estimates

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129. The most reliable cost estimation technique is: a. the high-low method. b. a scatter plot. c. the two-point method. *d. regression analysis.

Correct answer: d Learning objective 2.6 ~ Reflect on the uses and limitations of cost estimates

Testbank to accompany

Management accounting 5th edition by Eldenburg et al.

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Not for distribution. Instructors may assign selected questions in their LMS.

© John Wiley & Sons Australia, Ltd 2024

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Chapter 3: A costing framework and cost allocation True/false questions

1. A cost object is anything for which a separate measurement of cost is required. *a. True b. False Correct answer: a Learning objective 3.1 ~ Describe the role of cost objects and how they support decision making

2. Understanding how costs are incurred help organisations to remain competitive and generate a profit. *a. True b. False Correct answer: a Learning objective 3.1 ~ Describe the role of cost objects and how they support decision making

3. Traditionally costing systems focussed on production costs only and were structured on a departmental basis. *a. True b. False Correct answer: a Learning objective 3.1 ~ Describe the role of cost objects and how they support decision making

4. A geographic region could be a cost object for a service organisation. *a. True b. False Correct answer: a Learning objective 3.1 ~ Describe the role of cost objects and how they support decision making

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5. Total costs for a firm vary depending on how many cost objects they have. a. True *b. False Correct answer: b Learning objective 3.1 ~ Describe the role of cost objects and how they support decision making 6. When calculating the total cost for a cost object it is necessary to include both direct and indirect costs. *a. True b. False Correct answer: a Learning objective 3.2 ~ Explain and compare direct and indirect costs

7. Before determining whether a cost is direct or indirect it is necessary to know what the cost object is. *a. True b. False Correct answer: a Learning objective 3.2 ~ Explain and compare direct and indirect costs

8. Direct costs do not have a cause and effect relationship with the cost object. a. True *b. False Correct answer: b Learning objective 3.2 ~ Explain and compare direct and indirect costs

9. Costs that are common to many cost objects and cannot easily be traced to a specific cost object are known as indirect costs. *a. True b. False Correct answer: a Learning objective 3.2 ~ Explain and compare direct and indirect costs

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10. The cost object determines whether costs are classified as direct or indirect. *a. True b. False Correct answer: a Learning objective 3.2 ~ Explain and compare direct and indirect costs

11. Direct costs can also be referred to as overhead costs. a. True *b. False Correct answer: b Learning objective 3.2 ~ Explain and compare direct and indirect costs

12. The accuracy of costing a cost object is increased when more costs can be identified as direct costs. *a. True b. False Correct answer: a Learning objective 3.2 ~ Explain and compare direct and indirect costs

13. The screws used in mass produced furniture is an example of direct costs. a. True *b. False Correct answer: b Learning objective 3.2 ~ Explain and compare direct and indirect costs

14. Entities use either manual or computerised tracking systems to trace direct costs. *a. True b. False Correct answer: a Learning objective 3.2 ~ Explain and compare direct and indirect costs

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15. Cost–benefit analysis is used to determine whether a cost object has made use of a particular resource. a. True *b. False Correct answer: b Learning objective 3.2 ~ Explain and compare direct and indirect costs

16. An example of a cost tracing system is the time card which indicates how much time an employee has spent working on a particular job. *a. True b. False Correct answer: a Learning objective 3.2 ~ Explain and compare direct and indirect costs

17. Some costs are treated as indirect because it is too difficult or costly to trace them directly to the cost object. *a. True b. False Correct answer: a Learning objective 3.2 ~ Explain and compare direct and indirect costs

18. Cost allocation is the process of assigning indirect costs to cost objects. *a. True b. False Correct answer: a Learning objective 3.3 ~ Discuss the process of indirect cost allocation

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19. One reason that entities allocate indirect costs to cost objects is to encourage the use of central resources. *a. True b. False Correct answer: a Learning objective 3.3 ~ Discuss the process of indirect cost allocation

20. Only entities that are subject to accounting standards allocate indirect costs to cost objects. a. True *b. False Correct answer: b Learning objective 3.3 ~ Discuss the process of indirect cost allocation

21. A cost driver or allocation base provides a measure of activity that explains the cost object’s use of the indirect cost. *a. True b. False Correct answer: a Learning objective 3.3 ~ Discuss the process of indirect cost allocation

22. Cost drivers are used to allocate indirect costs to direct cost pools. a. True *b. False Correct answer: b Learning objective 3.3 ~ Discuss the process of indirect cost allocation

23. The prime consideration when selecting a cost driver is the accuracy of the full cost measurement. *a. True b. False Correct answer: a Learning objective 3.3 ~ Discuss the process of indirect cost allocation 1.80

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24. Volume drivers use a measure of output to assign indirect costs. *a. True b. False Correct answer: a Learning objective 3.3 ~ Discuss the process of indirect cost allocation

25. Allocating indirect costs based on machine hours is an example of using an activity driver. a. True *b. False Correct answer: b Learning objective 3.3 ~ Discuss the process of indirect cost allocation

26. The first step in allocating indirect costs is to calculate the indirect cost rate. a. True *b. False Correct answer: b Learning objective 3.3 ~ Discuss the process of indirect cost allocation

27. To develop a cost allocation formula, entities need to decide on the number of indirect cost pools. *a. True b. False Correct answer: a Learning objective 3.3 ~ Discuss the process of indirect cost allocation

28. As the number of cost pools decreases the accuracy of the cost information decreases. *a. True b. False Correct answer: a Learning objective 3.3 ~ Discuss the process of indirect cost allocation 1.81

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29. To be consistent in the cost assignment process the same cost driver must be chosen for each indirect cost pool. a. True *b. False Correct answer: b Learning objective 3.3 ~ Discuss the process of indirect cost allocation

30. The indirect cost rate is determined by dividing the budgeted indirect cost by the budgeted cost driver usage in each indirect cost pool. *a. True b. False Correct answer: a Learning objective 3.3 ~ Discuss the process of indirect cost allocation

31. Organisations use budgeted costs so they can calculate a predetermined indirect cost rate prior to actual costs becoming available. *a. True b. False Correct answer: a Learning objective 3.3 ~ Discuss the process of indirect cost allocation

32. Identifying the cost pools and related cost drivers enables the full cost of the cost object to be determined. *a. True b. False Correct answer: a Learning objective 3.4 ~ Identify the steps within a costing framework

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33. While the basic costing structure for entities is similar, the number of cost pools and types of cost driver used are dependent upon the entity’s specific cost information needs. *a. True b. False Correct answer: a Learning objective 3.4 ~ Identify the steps within a costing framework

34. The budgeted cost of maintenance for a production department is $250 000. The organisation has decided to use machine hours as the cost driver for allocating indirect costs. The budgeted amount of machine hours for the production department is 125 000 machine hours. Therefore, the indirect cost rate is calculated as $250 000 / 125 000 = $2 per machine hour. *a. True b. False Correct answer: a Learning objective 3.5 ~ Apply and evaluate the costing framework in a service entity setting

35. The costs of the human resources department of an organisation are allocated to other departments at the rate of $150 per employee in the department. If Department A has 38 employees and Department B has 90 the human resource costs allocated to Department B will be $13 500. *a. True b. False Correct answer: a Learning objective 3.5 ~ Apply and evaluate the costing framework in a service entity setting

36. The costs of the human resources department of an organisation are allocated to other departments at the rate of $150 per employee in the department. If Department A has 38 employees and Department B has 90 the human resource costs allocated to Department A will be $5700. *a. True b. False Correct answer: a 1.83

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Learning objective 3.5 ~ Apply and evaluate the costing framework in a service entity setting

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37. The costing framework cannot be used in a service business. a. True *b. False Correct answer: b Learning objective 3.5 ~ Apply and evaluate the costing framework in a service entity setting

38. Operating departments are the departments within an organisation responsible for providing goods or services to external customers. *a. True b. False Correct answer: a Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

39. Support departments provide internal services to each other and the operating departments. *a. True b. False Correct answer: a Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

40. Organisations typically allocate costs from operating departments to support departments.

a. True *b. False Correct answer: b Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

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41. The three methods of allocating support department costs to operating departments are called the direct method, the step-down method and the proportional method. a. True *b. False Correct answer: b Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

42. Regardless of method adopted the first step in allocating support department costs to operating departments is to choose the allocation basis. a. True *b. False Correct answer: b Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

43. The direct method of allocating support department costs ignores the fact that support departments provide services to other support departments. *a. True b. False Correct answer: a Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

44. Once the total cost pool for each support department has been determined the next step is to choose the allocation basis. *a. True b. False Correct answer: a Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

45. The step-down method allocates support department costs, one department at a time, to remaining support departments and operating departments in a cascading manner until all support department costs have been allocated.

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*a. True b. False Correct answer: a Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

46. The step-down method requires a ranking of support departments based on the amount of service provided to other support departments. *a. True b. False Correct answer: a Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

47. The department which provides the least amount of services to other support departments should be allocated first in the step-down method. a. True *b. False Correct answer: b Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

48. The allocation order of support department costs does not matter if the step-down method of allocation is used a. True *b. False Correct answer: b Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

49. There are two support departments, Accounting and Catering. Accounting provides 5% of its services to Catering. Catering provides 10% of its services to Accounting. Catering should be allocated first in the step-down method. *a. True 1.87

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b. False Correct answer: a Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

50. The step-down method recognises some interaction between support departments but not all because it only allocates support department costs in one direction. *a. True b. False Correct answer: a Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

51. The direct method of allocating support costs to operating departments accounts for allocation between support departments. a. True *b. False Correct answer: b Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

52. The reciprocal method is the simplest method of allocating support department costs when there are more than two support departments. a. True *b. False Correct answer: b Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

53. The reciprocal method of allocating support departments uses simultaneous equations to mathematically allocate costs between support departments. *a. True b. False Correct answer: a 1.88

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Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

54. The total cost allocated is the same under the direct method, step-down method and the reciprocal method. *a. True b. False Correct answer: a Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

55. Dual rate allocation methods separate support costs into direct and indirect cost pools. a. True *b. False Correct answer: b Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

56. It is not important to use the dual rate method for support department allocations because most support department costs are variable. a. True *b. False Correct answer: b Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

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57. One limitation of support department cost allocations is that it is subject to judgement when making decisions about allocation bases and the allocation method. *a. True b. False Correct answer: a Learning objective 3.7 ~ Critically analyse the limitations of cost allocation data

58. One of the limitations of allocating costs to a cost object is the uncertainty of identifying the most appropriate allocation base. *a. True b. False Correct answer: a Learning objective 3.7 ~ Critically analyse the limitations of cost allocation data

59. The allocation of indirect costs to cost objects is likely to be inaccurate if the allocation base used is not a cost driver. *a. True b. False Correct answer: a Learning objective 3.7 ~ Critically analyse the limitations of cost allocation data

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Multiple-choice questions

60. A cost object cannot be: a. a geographic region. b. a customer. c. a department. *d. none of the options listed (i.e. all can be cost objects).

Correct answer: d Learning objective 3.1 ~ Describe the role of cost objects and how they support decision making

61. Which of the following is least likely to be a cost object for a car manufacturer? a. Human resources department b. Assembly division *c. Gordon Lee — a part time employee in the cafeteria d. Charlie’s Car Company — a long-term customer Correct answer: c Learning objective 3.1 ~ Describe the role of cost objects and how they support decision making

62. The distinction between direct costs and indirect costs depends on their traceability to a(n): a. activity. b. manufacturing operation. *c. cost object. d. product.

Correct answer: c Learning objective 3.2 ~ Explain and compare direct and indirect costs

63. Indirect costs are: a. costs that cannot be traced to a cost object in an economic manner. b. also known as overhead costs. *c. all of the options listed. d. none of the options listed.

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Learning objective 3.2 ~ Explain and compare direct and indirect costs

64. Which of the following would be an indirect cost in a business that manufactures cars? *a. The accountant’s salary b. The car engines used in the manufacturing process c. The factory supervisor’s salary d. Wages paid to full-time employees in the factory Correct answer: a Learning objective 3.2 ~ Explain and compare direct and indirect costs

65. Which of these is an example of an indirect cost if Department M is the cost object? a. Insurance on the organisation’s building, part of which is occupied by Department M b. Rent on the organisation’s building, part of which is occupied by Department M *c. All of the options listed d. None of the options listed Correct answer: c Learning objective 3.2 ~ Explain and compare direct and indirect costs

66. If the cost object is the cosmetics department of a large department store which of the following is a direct cost? a. Advertising costs for the store’s annual stock take sale. *b. Brand specific cosmetic product training c. The payroll department manager’s yearly bonus payment d. Security staff wages for the store Correct answer: b Learning objective 3.2 ~ Explain and compare direct and indirect costs

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67. Paws Pet Resort and Spa is located in Christchurch. The company employs three pet attendants, four pet groomers and two front office staff who book appointments and keep records. The spa provides a range of services for dogs and cats including boarding, grooming and obedience training. The grooming area includes a small retail section that carries dog and cat food, pet supplies and toys.

If the cost object is cost per day of boarding, which of the following is an indirect cost? a. Pet food *b. Front office staff salaries c. Cleaning costs for the kennels d. Maintenance on the kennels Correct answer: b Learning objective 3.2 ~ Explain and compare direct and indirect costs

68. Paws Pet Resort and Spa is located in Christchurch. The company employs three pet attendants, four pet groomers and two front office staff who book appointments and keep records. The spa provides a range of services for dogs and cats including boarding, grooming and obedience training. The grooming area includes a small retail section that carries dog and cat food, pet supplies and toys.

If the cost object is the total cost of the grooming product line, which of the following is a direct cost? a. Front office staff salaries *b. Labour cost of employees who groom pets c. Public liability insurance d. Rent on the premises Correct answer: b Learning objective 3.2 ~ Explain and compare direct and indirect costs

69. The reason for allocating indirect costs is: a. to set product prices. b. to comply with external reporting requirements. c. to help with making decisions about which products to produce. *d. all of the options listed.

Correct answer: d Learning objective 3.3 ~ Discuss the process of indirect cost allocation

70. Which of these cost drivers is not one of the criteria for allocating costs?

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a. Benefits received b. Fairness *c. Standardisation d. Behavioural Correct answer: c Learning objective 3.3 ~ Discuss the process of indirect cost allocation

71. The cost driver that is a volume-based cost driver is: *a. number of units. b. number of set-ups. c. number of employees. d. all are volume based cost drivers.

Correct answer: a Learning objective 3.3 ~ Discuss the process of indirect cost allocation

72. In determining the amount of indirect costs to be allocated to the cost object the first step is: a. to develop a cost allocation formula. b. to develop a predetermined cost rate. c. to select a cost driver. *d. to decide on the number of cost pools.

Correct answer: d Learning objective 3.3 ~ Discuss the process of indirect cost allocation

73. The formula for calculating a predetermined indirect cost rate is: a. actual indirect costs/actual usage of the cost driver. b. budgeted indirect costs/actual usage of the cost driver. *c. budgeted indirect costs/budgeted usage of the cost driver. d. actual indirect costs/budgeted usage of the cost driver.

Correct answer: c Learning objective 3.3 ~ Discuss the process of indirect cost allocation

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74. Mollie’s Lollie Manufacturer has budged total overhead to be $269 500 and the expected cost driver is 55 000 machine hours. Last year actual machine hours were 50 000.

What is the predetermined indirect cost rate? a. $5.39 b. $1.10 c. $0.20 *d. $4.90 Correct answer: d Learning objective 3.3 ~ Discuss the process of indirect cost allocation

75. In relation to product costing, the indirect cost rate is: *a. the rate used to assign indirect costs to the cost object. b. added to direct costs to calculate the full product cost. c. the input or activity that causes changes in total costs for a cost object. d. the method used to allocate the costs of each support department to the operating departments.

Correct answer: a Learning objective 3.3 ~ Discuss the process of indirect cost allocation

76. Which of these statements concerning the determination of the full cost of a cost object is not true? a. Direct costs are traced via source documentation b. Overheads are included c. Indirect costs are allocated via the use of a cost driver *d. Full cost includes only manufacturing costs Correct answer: d Learning objective 3.4 ~ Identify the steps within a costing framework

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77. Smart Choices allocates advertising expenses to its two departments, Lifestyle and Storage Solutions, using sales as the cost driver. For the current year the sales for Lifestyle are estimated to be $450 000 and for department Storage Solutions $900 000 and total advertising expenses are budgeted at $110 000. What is the indirect cost rate? a. Lifestyle: $0.24 per sales dollar; Storage Solutions: $0.12 per sales dollar b. $.036 per sales dollar *c. $.081 per sales dollar d. $12.27 per sales dollar Correct answer: c Learning objective 3.5 ~ Apply and evaluate the costing framework in a service entity setting

78. Smart Choices allocates indirect labour costs to its two departments, Lifestyle and Storage Solutions, using number of employees per department as the cost driver. For the current year the number of employees in department Lifestyle are estimated to be 50 and for Storage Solutions department 30 and total indirect labour costs for the departments are budgeted at $1 400 000. What are the amounts allocated to the departments? a. Lifestyle $48 000; Storage Solutions $80 000 *b. Lifestyle $875 000; Storage Solutions $525 000 c. Lifestyle $525 000; Storage Solutions $875 000 b. Lifestyle $875 000; Storage Solutions $80 000 Correct answer: b Learning objective 3.5 ~ Apply and evaluate the costing framework in a service entity setting

79. Jones Plumbing estimates that its overhead costs for the year will be $800 000 and it has decided to use direct labour hours as the cost driver. Its mark-up is 20% on cost. If a job for Martin Z used $800 of direct materials and 5 labour hours at $50 per hour, how much will Jones Plumbing charge Martin Z? a. $960 b. $800 c. $2460 *d. Cannot be calculated from the information given Correct answer: d Learning objective 3.5 ~ Apply and evaluate the costing framework in a service entity setting

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80. Which of these departments would not be considered a support department for a manufacturer of bathroom fittings? a. Accounts b. Security c. Computing departments *d. Laminating department Correct answer: d Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

81. Which of these is not an allocation method commonly used to allocate support department costs to operating departments? *a. Indirect method b. Direct method c. Step-down method d. Reciprocal method Correct answer: a Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

82. The cost allocation method that recognise the services to support department is: a. the single rate method. b. the direct method. *c. the reciprocal method. d. the dual rate method.

Correct answer: c Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

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83. The allocation method for support department costs that allocates fixed and variable costs separately is: a. the reciprocal method. b. the step-down method. *c. the dual rate method. d. the direct method.

Correct answer: c Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

84. The allocation method for support department costs that can manipulate the costs allocated by changing the order of the support department cost allocation is the: a. direct method. b. dual-rate method. c. reciprocal method. *d step-down method.

Correct answer: d Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

85. Molten Works Ltd provides the following information about departmental consumption of allocation bases for its 3 support and 2 operating departments.

Support departments Operating departments Personnel Cafeteria Maintenance Machining Assembly Personnel 10% 10% 50% 30% Cafeteria 10% 10% 40% 40% Maintenance 10% 20% 50% 20% For the direct method, what proportion of the personnel costs will be allocated to the machining department? *a. 62.5% b. 10% c. 42.9% d. 37.5% Correct answer: a Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

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86. Molten Works Ltd provides the following information about departmental consumption of allocation bases for its 3 support and 2 operating departments.

Support departments Operating departments Personnel Cafeteria Maintenance Machining Assembly Maintenance 10% 20% 30% 40% Cafeteria 10% 20% 40% 30% Personnel 10% 20% 50% 20% For the step-down method, what proportion of the maintenance department’s costs will be allocated to the assembly department if the allocation order is personnel, cafeteria and maintenance? a. 60% b. 40% *c. 57.1% d. 42.9% Correct answer: c Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

87. Molten Works Ltd provides the following information about departmental consumption of allocation bases for its 3 support and 2 operating departments.

Support departments Operating departments Cafeteria Maintenance Machining Assembly 10% 20% 30% 40% 10% 20% 40% 30% 10% 20% 50% 20%

Personnel Personnel Cafeteria Maintenance

For the step-down method, what proportion of the Cafeteria’s costs will be allocated to the maintenance department if the allocation order is personnel, cafeteria and maintenance? a. 20% b. 14.3% *c. 22.2% d. 30% Correct answer: c Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

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88. Molten Works Ltd provides the following information about departmental consumption of allocation bases for its 3 support and 2 operating departments.

Support departments Operating departments Personnel Cafeteria Maintenance Machining Assembly Personnel 10% 20% 30% 40% Cafeteria 5% 5% 40% 50% Maintenance 10% 20% 50% 20% For the reciprocal method, what proportion of the cafeteria department’s costs will be allocated to the machining department? a. 44.4% b. 5% c. 20% *d. 40% Correct answer: d Learning objective 3.6 ~ Apply and evaluate the costing framework in a support department setting

89. To avoid passing on inefficiencies of the support departments, support department costs should be allocated using: a. an actual cost allocation rate. *b. a budgeted cost allocation rate. c. only fixed costs per unit of service. d. only variable costs per unit of service.

Correct answer: b Learning objective 3.7 ~ Critically analyse the limitations of cost allocation data

90. Which of these is not an uncertainty when allocating support department costs? a. Deciding whether to use dual or single rate allocations b. Identifying the appropriate cost driver *c. Knowing which departments are support departments and which are operating departments d. Selecting the most appropriate allocation method Correct answer: c Learning objective 3.7 ~ Critically analyse the limitations of cost allocation data

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91. Allocated indirect cost information can sometimes be low quality. Allocating indirect costs can be improved by: *a. cross divisional co-operation. b. using the same cost driver for every cost pool. c. all of the options listed. d. none of the options listed.

Correct answer: a Learning objective 3.7 ~ Critically analyse the limitations of cost allocation data

Testbank to accompany

Management accounting 5th edition by Eldenburg et al.

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Not for distribution. Instructors may assign selected questions in their LMS.

© John Wiley & Sons Australia, Ltd 2024

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Chapter 4: Cost–volume–profit (CVP) analysis True/false questions

1. CVP analysis is a management tool that examines changes in profits in response to changes in sales, costs and prices. *a. True b. False Correct answer: a Learning objective 4.1 ~ Demonstrate an understanding of cost–volume–profit (CVP) analysis and its use in decision making

2. Accountants typically perform CVP analysis every day to keep track of what is happening in the market place. a. True *b. False Correct answer: b Learning objective 4.1 ~ Demonstrate an understanding of cost–volume–profit (CVP) analysis and its use in decision making

3. CVP analysis can assist in helping managers understand the required of levels of sales to avoid making a loss. *a. True b. False Correct answer: a Learning objective 4.1 ~ Demonstrate an understanding of cost–volume–profit (CVP) analysis and its use in decision making

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4. CVP analysis begins with the basic formula Profit = Total Revenue – Total Costs *a. True b. False Correct answer: a Learning objective 4.1 ~ Demonstrate an understanding of cost–volume–profit (CVP) analysis and its use in decision making

5. It is not necessary to separate fixed costs and variable costs for CVP analysis. a. True *b. False Correct answer: b Learning objective 4.1 ~ Demonstrate an understanding of cost–volume–profit (CVP) analysis and its use in decision making

6. One of the assumptions of CVP analysis is that selling price and variable cost per unit stays constant. *a. True b. False Correct answer: a Learning objective 4.1 ~ Demonstrate an understanding of cost–volume–profit (CVP) analysis and its use in decision making

7. Contribution margin provides an indication of how much revenue from each unit sold can be applied towards fixed costs. *a. True b. False Correct answer: a Learning objective 4.1 ~ Demonstrate an understanding of cost–volume–profit (CVP) analysis and its use in decision making

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8. A company can produce and sell 500 units at $10 each; its variable costs are $6 per unit; fixed costs total $1000. Its expected profit using the profit equation will be $1 000. *a. True b. False Correct answer: a Learning objective 4.1 ~ Demonstrate an understanding of cost–volume–profit (CVP) analysis and its use in decision making

9. Breakeven point is the point at which revenue covers all fixed costs. a. True *b. False Correct answer: b Learning objective 4.2 ~ Define and describe the breakeven point

10. The breakeven point can be calculated by dividing the total fixed costs by the difference between selling price per unit and variable cost per unit. *a. True b. False Correct answer: a Learning objective 4.2 ~ Define and describe the breakeven point

11. Contribution margin ratio can be described as the percentage by which the selling price exceeds the variable cost per unit. *a. True b. False Correct answer: a Learning objective 4.2 ~ Define and describe the breakeven point

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12. Contribution margin ratio divided by fixed costs equals breakeven revenue. a. True *b. False Correct answer: b Learning objective 4.2 ~ Define and describe the breakeven point

13. The breakeven point can be expressed in number of units or revenue dollars. *a. True b. False Correct answer: a Learning objective 4.2 ~ Define and describe the breakeven point

14. CVP analysis can be used to help managers assess the risk associated with a business venture by comparing breakeven point to sales forecasted. *a. True b. False Correct answer: a Learning objective 4.3 ~ Apply CVP calculations for a single product

15. If fixed costs are $75 000 and the CM per unit is $20 then breakeven point is 3750 units. *a. True b. False Correct answer: a Learning objective 4.3 ~ Apply CVP calculations for a single product

16. If fixed costs are $75 000 and the CM ratio is 50% then breakeven point is $37 500. a. True *b. False ($150 000).

Correct answer: b Learning objective 4.3 ~ Apply CVP calculations for a single product

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17. Breakeven point is the point at which the entity achieves zero profit. *a. True b. False Correct answer: a Learning objective 4.3 ~ Apply CVP calculations for a single product

18. The formula for determining the required number of units to achieve a targeted pre-tax profit is (Fixed costs + Target profit) / Contribution margin per unit. *a. True b. False Correct answer: a Learning objective 4.3 ~ Apply CVP calculations for a single product

19. If fixed costs are $20 000, contribution margin per unit is $3 and target pre-tax profit is $40 000, sales are required to be 20 000 units. *a. True b. False Correct answer: a Learning objective 4.3 ~ Apply CVP calculations for a single product

20. It is not possible to use post tax profits in CVP analysis. a. True *b. False Correct answer: b Learning objective 4.3 ~ Apply CVP calculations for a single product

21. On a cost–volume–profit graph, the breakeven point is located where the total cost line intersects the x-axis. a. True *b. False Correct answer: b Learning objective 4.3 ~ Apply CVP calculations for a single product

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22. After doing a CVP analysis XY Limited determined that its contribution margin was $5 per unit. It determined that the breakeven units were 10 000 units. The fixed costs were therefore $50 000. *a. True b. False Correct answer: a Learning objective 4.3 ~ Apply CVP calculations for a single product

23. CVP analysis cannot be used in companies that sell multiple products. a. True *b. False Correct answer: b Learning objective 4.4 ~ Apply CVP calculations for multiple products

24. Sales mix is the proportion of different products or services that an entity sells. *a. True b. False Correct answer: a Learning objective 4.4 ~ Apply CVP calculations for multiple products

25. If a company sell multiple products or services, an assumption needed for CVP analysis is that the sales mix remains constant. *a. True b. False Correct answer: a Learning objective 4.4 ~ Apply CVP calculations for multiple products

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26. Reliable Solutions provides three services to its customers. It currently offers Basic, Deluxe and Complete Solutions. The company estimates customers will purchase the following solutions; Basic — 20, Deluxe — 5 and Complete — 15. The estimated sales mix is therefore Basic 50%, Deluxe 12.5% and Complete 37.5%. *a. True b. False Correct answer: a Learning objective 4.4 ~ Apply CVP calculations for multiple products

27. When an organisation produces and sells a number of different products or services, the contribution margin per unit for each product is added together to get total contribution margin per unit and this is used to determine the breakeven point or target profit in units. a. True *b. False Correct answer: b Learning objective 4.4 ~ Apply CVP calculations for multiple products 28. A product’s weighted average contribution margin per unit is calculated by multiplying the contribution margin per unit by the % sales mix for that product. *a. True b. False Correct answer: a Learning objective 4.4 ~ Apply CVP calculations for multiple products

29. G. Jones has three products: Product A, Product B, Product C. Their respective weighted average contribution margins per unit are; Product A $6.00 per unit, Product B $8.00 per unit, Product C $3 per unit. Fixed costs are $2500 and target profit is $6000. The number of units required to be sold is 500. *a. True b. False Correct answer: a Learning objective 4.4 ~ Apply CVP calculations for multiple products

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30. When an organisation produces and sells a number of different products or services, we use the weighted average contribution margin per unit. *a. True b. False Correct answer: a Learning objective 4.4 ~ Apply CVP calculations for multiple products

31. Due to the number of assumptions and limitations that CVP analysis is subject to, care should be taken when interpreting the results. *a. True b. False Correct answer: a Learning objective 4.5 ~ List the assumptions and limitations that managers should consider when using CVP analysis

32. If the relevant range changes due to expanding operations the CVP analysis should be restated. *a. True b. False Correct answer: a Learning objective 4.5 ~ List the assumptions and limitations that managers should consider when using CVP analysis

33. Learning curves are one explanation for why costs fluctuate over time. *a. True b. False Correct answer: a Learning objective 4.5 ~ List the assumptions and limitations that managers should consider when using CVP analysis

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34. The margin of safety is the excess of a firm’s profits above current sales. a. True *b. False Correct answer: b Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

35. The margin of safety indicates the amount by which sales volume could fall before the entity starts making a loss. *a. True b. False Correct answer: a Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

36. A small margin of safety gives managers greater confidence in making plans such as incurring additional fixed costs. a. True *b. False Correct answer: b Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

37. The margin of safety can be calculated using actual or estimated sales. *a. True b. False Correct answer: a Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

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38. The margin of safety percentage is calculated by the margin of safety divided by the actual or estimated sales. *a. True b. False Correct answer: a Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

39. Managers should always minimise the fixed costs in their organisation as fixed costs are incurred regardless of sales volume. a. True *b. False Correct answer: b Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk 40. Operating leverage is the degree to which an organisation’s cost function is made up of fixed costs. *a. True b. False Correct answer: a Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

41. The formula for calculating operating leverage is contribution margin divided by profit. *a. True b. False Correct answer: a Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

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42. Managers can use the degree of operating leverage to explicitly calculate the sensitivity of profits to changes in sales. *a. True b. False Correct answer: a Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

43. The % change in profits can be calculated by % change in margin of safety multiplied by degree of operating leverage. a. True *b. False Correct answer: b Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

44. The degree of operating leverage and margin of safety are reciprocals. *a. True b. False Correct answer: a Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

45. Penco Industries has a small margin of safety % and a high degree of operating leverage; this means it is likely that Penco has a high reliance on fixed costs. *a. True b. False Correct answer: a Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

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46. If managers perceive that the organisation’s operating leverage is too high they should choose to use fixed costs to meet their operating costs. a. True *b. False Correct answer: b Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

47. The point of indifference is the level of activity at which equal cost or profit occurs across multiple alternatives. *a. True b. False Correct answer: a Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

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Multiple-choice questions

48. Managers can use cost–volume–profit analysis to: I II III

select which products to offer. reward managers for high performance. make decisions about how to finance expanding operations.

a. I only b. II and III only *c. I and III only d. I, II and III Correct answer: c Learning objective 4.1 ~ Demonstrate an understanding of cost–volume–profit (CVP) analysis and its use in decision making

49. CVP analysis is least likely to be used for which of the following decisions? a. The amount of discretionary expenditures for the next period. *b. The organisational vision. c. The exact level of operations at which the organisation will operate. d. Whether to buy a business segment operating in Germany.

Correct answer: b Learning objective 4.1 ~ Demonstrate an understanding of cost–volume–profit (CVP) analysis and its use in decision making

50. CVP analysis can be helpful in which of the following types of decisions? a. Employee work schedules b. Production levels *c. All of the options listed d. None of the options listed Correct answer: c Learning objective 4.1 ~ Demonstrate an understanding of cost–volume–profit (CVP) analysis and its use in decision making

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51. Tommy Ltd. Sells t-shirts. The total sales for the week was $6000 and the contribution margin was $2. The company sold 1000 t-shirts for the week. The variable cost per t-shirt is: a. $8. *b. $4. c. $4000. d. unable to be determined from the information provided.

Correct answer: b Learning objective 4.1 ~ Demonstrate an understanding of cost–volume–profit (CVP) analysis and its use in decision making

52. The profit equation can be expressed as: a. Profit = [Selling price – Fixed costs) * Q] – Variable costs * Q b. Profit = [Selling price + Fixed costs) * Q] – Variable costs *c. Profit = [Selling price – Variable costs) * Q] – Fixed costs d. Profit = [Selling price – Variable costs *Q] – Fixed costs Correct answer: c Learning objective 4.1 ~ Demonstrate an understanding of cost–volume–profit (CVP) analysis and its use in decision making

53. If sales are $160 000, variable costs are $100 000 and fixed costs are $40 000, the contribution margin ratio is: a. 62.5%. b. 12.5%. *c. 37.5%. d. 25.0%.

Correct answer: c Learning objective 4.2 ~ Define and describe the breakeven point

54. The breakeven point can be defined as: a. the point at which revenue equal variable costs. b. the point at which revenue equal fixed costs. c. the level of operations at which the firm earns a profit. *d. the point at which revenue equals total fixed and variable costs.

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55. The breakeven equation can be expressed as: a. Fixed costs / Contribution margin per unit. b. Fixed costs / (Sales price per unit – Variable costs per unit). *c. all of the options listed. d. none of the options listed.

Correct answer: c Learning objective 4.2 ~ Define and describe the breakeven point

56. To express breakeven point in revenue the formula is: a. Fixed costs per unit / Profit per unit. b. Fixed costs / Contribution margin per unit. *c. Fixed costs / Contribution margin ratio. d. Fixed costs per unit / Contribution margin ratio.

Correct answer: c Learning objective 4.2 ~ Define and describe the breakeven point

57. Bijoux Ltd manufactures and sells a single product. This product has the following operational data.

Unit sales price Variable manufacturing cost per unit Fixed manufacturing costs Variable selling cost per unit Fixed selling costs Marginal tax rate

$50 $25 $72 000 $2 $57 000 20 %

Calculate the number of units required to break even. *a. 5609 units b. 5160 units c. 2880 units d. 2280 units Correct answer: a Learning objective 4.3 ~ Apply CVP calculations for a single product

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58. Bijoux Ltd manufactures and sells a single product. This product has the following operational data.

Unit sales price Variable manufacturing cost per unit Fixed manufacturing costs Variable selling cost per unit Fixed selling costs Marginal tax rate

$50 $25 $72 000 $2 $57 000 20 %

Calculate the sales revenue required to break even. a. $129 000 *b. $280 450 c. $258 000 d. $259 400 Correct answer: b Learning objective 4.3 ~ Apply CVP calculations for a single product

59. Bijoux Ltd manufactures and sells a single product. This product has the following operational data.

Unit sales price Variable manufacturing cost per unit Fixed manufacturing costs Variable selling cost per unit Fixed selling costs Marginal tax rate

$50 $25 $72 000 $2 $57 000 20 %

Calculate the number of units required to achieve a pre-tax profit of $125 000. a. 7 479 units b. 10 160 units c. 5 435 units *d. 11 044 units Correct answer: d Learning objective 4.3 ~ Apply CVP calculations for a single product

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60. Bijoux Ltd manufactures and sells a single product. This product has the following operational data.

Unit sales price Variable manufacturing cost per unit Fixed manufacturing costs Variable selling cost per unit Fixed selling costs Marginal tax rate

$50 $25 $72 000 $2 $57 000 20 %

Calculate the sales revenue required to achieve a post-tax profit of $125 000. a. 11 410 b. 9 924 c. 5 705 *d. 12 402 Correct answer: d Learning objective 4.3 ~ Apply CVP calculations for a single product

61. Kingsbrae Company produces a single product. Following is cost information.

Manufacturing costs Non-manufacturing costs

Fixed costs $35 000 $60 000

Variable cost per unit $15 $10

If the product sells for $100, how many units must be sold to break even? a. 412 b. 1118 *c. 1267 d. 3800 Correct answer: c Learning objective 4.3 ~ Apply CVP calculations for a single product

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62. Spare Cash Ltd manufactures a single product. The product sells for $20. The variable manufacturing cost per unit is $4 and the variable selling cost is $4 per unit. Spare Cash incurs monthly fixed costs of $200 000 for manufacturing and $140 000 for administration and selling.

Spare Cash is considering changes to its production and distribution procedures. If the changes are made, total variable costs (manufacturing and selling) will be $7 and total fixed costs (manufacturing, administration and selling) will be $350 000 per month. The selling price will remain at $20. If the changes are made, the number of units required to break even will be: a. unable to be determined. b. the same as before. *c. less than before. d. greater than before.

Correct answer: c Learning objective 4.3 ~ Apply CVP calculations for a single product

63. IMA Shop Ltd produces three products. Cost, price and volume data is shown below.

• •

Total fixed costs: $2400 Tax rate: 30%

Normal volume Price per unit Variable cost per unit

Chocolate ice cream 300 $5 $2

Milkshake 150 $7 $3

Burger 200 $10 $4

When using units as the measure, what proportion of the sales mix do milkshakes represent? Round to the nearest whole percent. *a. 23% b. 46% c. 31% d. Cannot be determined Correct answer: a Learning objective 4.4 ~ Apply CVP calculations for multiple products

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64. IMA Shop Ltd produces three products. Cost, price and volume data is shown below.

• •

total fixed costs: $2400. tax rate: 30%.

Normal volume Price per unit Variable cost per unit

Chocolate ice cream 300 $5 $2

Milkshake

Burger

150 $7 $3

200 $10 $4

The weighted average contribution margin per unit for chocolate ice cream, rounded to the nearest cent, is: a. $3.00. b. $0.92. c. $4.15. *d. $1.39.

Correct answer: d Learning objective 4.4 ~ Apply CVP calculations for multiple products

65. IMA Shop Ltd produces three products. Cost, price and volume data is shown below.

• •

Total fixed costs: $2400 Tax Rate: 30%

Normal volume Price per unit Variable cost per unit

Chocolate ice cream 300 $5 $2

Milkshake 150 $7 $3

Burger 200 $10 $4

What is the weighted average contribution margin, rounded to the nearest whole dollar? a. $13 *b. $4.16 c. $1.85 d. $4.33 Correct answer: b Learning objective 4.4 ~ Apply CVP calculations for multiple products

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66. IMA Shop Ltd produces three products. Cost, price and volume data is shown below.

• •

Total fixed costs: $2400 Tax rate: 30%

Normal volume Price per unit Variable cost per unit

Chocolate ice cream 300 $5 $2

Milkshake 150 $7 $3

Burger 200 $10 $4

When using revenues as the measure, what proportion of the sales mix do chocolate ice creams represent? Round to the nearest whole percent. *a. 33% b. 44% c. 67% d. 23% Correct answer: a Learning objective 4.4 ~ Apply CVP calculations for multiple products

67. IMA Shop Ltd produces three products. Cost, price and volume data is shown below.

• •

Total fixed costs: $2400 Tax rate: 30%

Normal volume Price per unit Variable cost per unit

Chocolate ice cream 300 $5 $2

Milkshake 150 $7 $3

Burger 200 $10 $4

Using revenue as the measure for sales mix, calculate IMA Shop’s breakeven point in units for each product. *a. Chocolate ice creams 190; Milkshakes 133; Burgers 254. b. Chocolate ice creams 300; Milkshakes 150; Burgers 200. c. Chocolate ice creams 150; Milkshakes 133; Burgers 254. d. Cannot be determined Correct answer: a Learning objective 4.4 ~ Apply CVP calculations for multiple products

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68. A firm with fixed costs of $161 500 per month sells three products with the following characteristics: Product P Q R

Sales mix Contribution percentage margin 25% $48 50% 50 25% 52

How many total units must be sold to break even? *a. 3230 b. 1230 c. 2153 d. 1077 Correct answer: a Learning objective 4.4 ~ Apply CVP calculations for multiple products

69. Cad Ltd has the following information relating to chocolates produced.

Unit sales price Variable cost per unit Sales mix $ Fixed costs

Choc $5 $3

Wicked $4 $1

Vanilla $3 $1.50

70%

20%

10%

Total

$21 500

How many units of Vanilla must be sold to break even? a. 10 000 *b. 1000 c. 2150 d. 21 500 Correct answer: b Learning objective 4.4 ~ Apply CVP calculations for multiple products

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70. Cad Ltd has the following information relating to chocolates produced.

Unit sales price Variable cost per unit Sales mix $ Fixed costs Target profit

Choc $5 $3

Wicked $4 $1

Vanilla $3 $1.50

70%

20%

10%

Total

$21 500 $32 250

How many units in total must be sold to earn the target profit? (Ignore taxes.) a. 21 500 b. 27 750 c. 30 000 *d. 25 000 Correct answer: d Learning objective 4.4 ~ Apply CVP calculations for multiple products

71. Managers should consider which of the following in CVP analysis?

I II III

Relevant range Cost behaviour Sales mix

a. I and III only b. I and III only c. I and II only *d. I, II and III Correct answer: d Learning objective 4.5 ~ List the assumptions and limitations that managers should consider when using CVP analysis

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72. In CVP analysis, managers usually assume that the cost function is linear. Which of the following equations best represents a linear function for total cost if the cost is a mixed cost? *a. y = $500 + $80x b. y = $80x2 c. y = $80x d. y = $500x + $80x Correct answer: a Learning objective 4.5 ~ List the assumptions and limitations that managers should consider when using CVP analysis

73. The assumption of cost function linearity means: I II III

fixed costs remain fixed. sales mix remains constant. the fixed cost per unit remains constant.

a. I only *b. I and II only c. I, II and III d. III only Correct answer: b Learning objective 4.5 ~ List the assumptions and limitations that managers should consider when using CVP analysis

74. When the assumption of linearity is applied to revenue in CVP analyses: a. fixed cost per unit increases as revenue decreases. b. variable cost per unit is linear with respect to total revenue. c. the sales mix remains constant, but prices decrease as volumes increase. *d. the sales mix and all of the prices remain constant.

Correct answer: d Learning objective 4.5 ~ List the assumptions and limitations that managers should consider when using CVP analysis

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75. The cost function for Kat’s Cosmetics is: TC = $800 + 0.375 × Revenue. If Kat expects after-tax income of $600 and the tax rate is 40%, what is the firm’s margin of safety? *a. $3200 b. $2000 c. $2880 d. $5760 Correct answer: a Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk 76. Kaitlyn’s Cakes had the following activity for December.

Total cakes sold 23 000 Total revenues $500 000 Total fixed costs $99 000 Total variable costs $350 000 What was Kaitlyn’s margin of safety in dollars? a. $330 000 b. $247 500 c. $347 500 *d. $170 000 Correct answer: d Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

77. The margin of safety is: a. the difference between sales and contribution margin. b. the same as breakeven point. *c. the amount sales can drop before reaching breakeven point. d. how far sales must increase to earn a profit.

Correct answer: c Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

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78. Which of the measures the extent to which the entity’s cost function is made up of fixed costs? *a. Operating leverage. b. Total contribution margin. c. Margin of safety. d. Fixed cost leverage.

Correct answer: a Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

79. Echo Ltd sells its single product for $14 per unit and its variable cost per unit is $4.

Total fixed costs are $800. Its CVP graph is as follows.

Point B is best described as: *a. fixed cost. b. margin of safety. c. estimated profit at actual volume. d. breakeven point.

Correct answer: a Learning objective 4.3 ~ Apply CVP calculations for a single product

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80. Echo Ltd sells its single product for $14 per unit and its variable cost per unit is $4.

Total fixed costs are $800. Its CVP graph is as follows.

Area C is best described as: a. fixed cost. b. margin of safety. *c. estimated profit at actual volume. d. breakeven point.

Correct answer: c Learning objective 4.3 ~ Apply CVP calculations for a single product

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81. Echo Ltd sells its single product for $14 per unit and its variable cost per unit is $4.

Total fixed costs are $800. Its CVP graph is as follows.

Point A is best described as: a. fixed cost. b. margin of safety. c. estimated profit at actual volume. *d. breakeven point.

Correct answer: d Learning objective 4.3 ~ Apply CVP calculations for a single product

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82. Echo Ltd sells its single product for $14 per unit and its variable cost per unit is $4.

Total fixed costs are $800. Its CVP graph is as follows.

Area D is best described as: a. fixed cost. b. margin of safety. *c. estimated profit at actual volume. d. breakeven point.

Correct answer: c Learning objective 4.3 ~ Apply CVP calculations for a single product

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83. The Madison Co produces a single product. Its cost structure is as follows.

Manufacturing costs Non-manufacturing costs

Fixed cost $60 000 $35 000

Variable cost per unit $35 $10

If the firm sells 15 000 units per period, what price should be charged to earn $65 000? *a. $56 b. $25 c. $50 d. $45 Correct answer: a Learning objective 4.3 ~ Apply CVP calculations for a single product 84. The weighted average contribution margin for a company’s 3 products was $3.50 per unit. If the breakeven units for the 3 products was 31 500 units, then the fixed costs are a. $110 000. *b. $110 250. c. $110 750. d. unable to be determined.

Correct answer: b Learning objective 4.3 ~ Apply CVP calculations for a single product

85. Alpha New Ltd. has a contribution margin ratio of 30% and a breakeven point of $200 000 in sales. If the firm reports net profit of $50 000 after taxes of 50%, what were total sales for the year? a. $450 000 b. $466 667 *c. $533 333 d. $700 000 Correct answer: c Learning objective 4.3 ~ Apply CVP calculations for a single product

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86. If the total contribution margin increases and fixed costs do not change, pre-tax profit: a. decreases by an equal amount. *b. increases by an equal amount. c. does not change. d. increases by some other amount.

Correct answer: b Learning objective 4.3 ~ Apply CVP calculations for a single product

87. Data extracted from the accounting information system of NYX Corporation produced the following graph. The equation of the dashed line is y = $25x; the equation of the solid line is y = $200 + $5x.

Which of the following terms best describes the graph? *a. Cost–volume–profit graph b. Operating leverage graph c. Margin of safety graph d. Revenue graph Correct answer: a Learning objective 4.3 ~ Apply CVP calculations for a single product

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88. Data extracted from the accounting information system of NYX Corporation produced the following graph. The equation of the dashed line is y = $25x; the equation of the solid line is y = $200 + $5x.

The dotted line represents: a. total variable costs. b. total fixed costs. c. total costs. *d. total revenues.

Correct answer: d Learning objective 4.3 ~ Apply CVP calculations for a single product

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89. Data extracted from the accounting information system of NYX Corporation produced the following graph. The equation of the dashed line is y = $25x; the equation of the solid line is y = $200 + $5x.

The point where the dashed line intersects the solid line is the: a. variable cost per unit. b. fixed cost per unit. c. unit contribution margin. *d. breakeven point.

Correct answer: d Learning objective 4.3 ~ Apply CVP calculations for a single product

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90. Eve’s Emporium sells three products which have the following characteristics.

Product P Q R

Sales mix

Unit price

60 000 40 000 20 000

$40 60 30

Unit variable cost $20 30 15

If Eve can change the sales mix from 60 000 P; 40 000 Q; and 20 000 R; to 70 000 P; 45 000 Q; and 20 000 R, pre-tax profit will be: a. lower. *b. higher. c. unchanged. d. cannot be determined.

Correct answer: b Learning objective 4.4 ~ Apply CVP calculations for multiple products

91. Ichi Corp. produces a single product and projects the following costs for a normal month in which 50 units are produced and sold.

Fixed costs Total variable costs

Manufacturing $8000 7700

Non-manufacturing $5000 6050

The selling price per unit is $400. What volume, in units, must Ichi sell to break even? a. 40 *b. 104 c. 53 d. 90 Correct answer: b Learning objective 4.3 ~ Apply CVP calculations for a single product

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92. When sales are $2000, the contribution margin is $1200 and a pre-tax loss of $120 occurs. What is the breakeven point in dollars? *a. $2200 b. $1100 c. $1320 d. $1750 Correct answer: a Learning objective 4.3 ~ Apply CVP calculations for a single product

93. Endeavour Ltd. is a management consulting firm specialising in pension plans. Its billing rate to clients is $120 per hour and variable costs average $80 per hour. Fixed costs are $38 000 per month. The income tax rate is 20%. If variable costs increase by 20% and management increases its billing rate by 5%, what is the effect on the breakeven point, in billable hours? *a. It increases the breakeven point. b. It decreases the breakeven point. c. The breakeven point will not change. d. Cannot be determined.

Correct answer: a Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

94. Endeavour Ltd. is a management consulting firm specialising in pension plans. Its billing rate to clients is $120 per hour and variable costs average $80 per hour. Fixed costs are $38 000 per month. The income tax rate is 20%. If fixed costs increase by 5% and management increases its billing rate by 20%, what is the effect on the breakeven point, in billable hours? a. It increases the breakeven point. b. The breakeven point will not change. *c. It decreases the breakeven point. d. Cannot be determined.

Correct answer: c Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

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95. Pura Vida manufactures a single product. The product sells for $20. The variable manufacturing cost per unit is $4 and the variable selling cost is $4 per unit. Ryan incurs monthly fixed costs of $100 000 for manufacturing and $140 000 for administration and selling.

If Ryan raises its selling price by 5% in response to a 5% increase in variable costs, and income taxes are 40%, its new breakeven point in sales dollars (relative to that of the original data above) will be: *a. unchanged. b. higher. c. lower. d. cannot be determined.

Correct answer: a Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

96. The breakeven units for a company is 10 000 units. If there is an increase in the company tax rate from 30% to 32% then: a. the contribution margin decreases. b. the variable costs will increase. c. the weighted average contribution margin will increase. *d. the breakeven units remain the same, that is 10 000 units.

Correct answer: d Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

97. If there is a decrease in the total fixed costs and the selling price and variable costs remains constant then: *a. the number of units to break even will decrease. b. the number of units to break even will increase. c. the number of units to break even will stay the same prior to the decrease in fixed costs. d. none of the above.

Correct answer: a Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

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98. If all other factors remain unchanged, a 20% decrease in both the selling price and variable costs for a product will: a. lower the breakeven point in dollars. *b. have no effect on the breakeven point in dollars. c. increase the breakeven point in dollars. d. cannot be determined.

Correct answer: b Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

99. Nickleby Ltd sells its single product for $14 per unit and its variable cost per unit is $4.

Total fixed costs are $800. Its CVP graph is as follows.

If Nickleby decreases its volume of sales by 10%, what will happen to its degree of operating leverage? a. It will decrease b. It will increase *c. It will stay the same d. Cannot be determined Correct answer: c Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

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100. Nickleby sells its single product for $14 per unit and its variable cost per unit is $4.

Total fixed costs are $800. Its CVP graph is as follows.

If Nickleby decreases its sales volume by 10%, what will happen to its margin of safety? *a. It will decrease b. It will increase c. It will stay the same d. Cannot be determined Correct answer: a Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

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101. Nickleby sells its single product for $14 per unit and its variable cost per unit is $4.

Total fixed costs are $800. Its CVP graph is as follows.

If Nickleby increases its sales volume by 20%, what will happen to its breakeven point? a. It will decrease b. It will increase *c. It will stay the same d. Cannot be determined Correct answer: c Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

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102. Nickleby sells its single product for $14 per unit and its variable cost per unit is $4.

Total fixed costs are $800. Its CVP graph is as follows.

Which of the following actions will move Point B lower on the y axis? a. An increase in the price of materials b. A decrease in the number of units sold *c. Paying sales staff a commission instead of salary d. An increase in variable overhead cost Correct answer: c Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

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103. Nickleby sells its single product for $14 per unit and its variable cost per unit is $4.

Total fixed costs are $800. Its CVP graph is as follows.

Which of the following actions will move Point A to the left on the x axis? a. An increase in the number of units sold b. A decrease in the number of units sold *c. An increase in the product’s selling price d. An increase in the variable cost per unit Correct answer: c Learning objective 4.6 ~ Demonstrate an understanding of the use of margin of safety and operating leverage to assess operational risk

104. Toucan Ltd sells three products and incurs $36 000 per period in fixed costs. The three products have the following characteristics.

Product P Q R

Price $40 20 49

Variable cost $20 10 24

Sales mix 3 units 9 units 12 units

How many units of Product P will be sold at the breakeven point? *a. 240 b. 960 c. 120 d. 96 Correct answer: a Learning objective 4.4 ~ Apply CVP calculations for multiple products 1.142

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105. Kelly Co. incurs $465 000 in fixed costs while producing three products with the following characteristics.

Product

Sales mix (units)

Small Medium Large

5 3 2

Contribution margin per unit $300 $200 $500

Contribution margin ratio 25% 30% 40%

What is the selling price of Small? *a. $1200 b. $400 c. $800 d. $1250 Correct answer: a Learning objective 4.4 ~ Apply CVP calculations for multiple products

106. Mikela Ltd produces the following three products and has determined that they break even if they sell 2000 units.

Product

Sales mix (units)

Small Medium Large

5 3 2

Contribution margin per unit $300 $200 $500

Contribution margin ratio 25% 30% 40%

What is the total fixed costs incurred? *a. $620 000 b. $465 000 c. $310 000 d. $200 000 Correct answer: a Learning objective 4.4 ~ Apply CVP calculations for multiple products

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107. Kelly Co. incurs $465 000 in fixed costs while producing three products with the following characteristics.

Product

Sales mix (units)

Small Medium Large

5 3 2

Contribution margin per unit $300 $200 $500

Contribution margin ratio 25% 30% 40%

At the breakeven point, what is the dollar sales volume for Product Q? a. $800 000 b. $360 000 *c. $300 000 d. $120 000 Correct answer: c Learning objective 4.4 ~ Apply CVP calculations for multiple products

Testbank to accompany

Management accounting 5th edition by Eldenburg et al.

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Not for distribution. Instructors may assign selected questions in their LMS.

© John Wiley & Sons Australia, Ltd 2024

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Chapter 5: Planning – budgeting and behaviour True/false questions

1. Budgeting helps organisations make strategic decisions about resource allocations. *a. True b. False Correct answer: a Learning objective 5.1 ~ Communicate the role of planning and budgeting for improved profit performance and value creation

2. Organisations are continually confronted with resource allocation decisions when preparing budgets. *a. True b. False Correct answer: a Learning objective 5.1 ~ Communicate the role of planning and budgeting for improved profit performance and value creation

3. Decisions that have long-term consequences should be excluded from the budgeting process because there are too many uncertainties that cannot be anticipated. a. True *b. False Correct answer: b Learning objective 5.1 ~ Communicate the role of planning and budgeting for improved profit performance and value creation

4. Strategic budgeting is best considered in the context of organisational strategy. *a. True b. False Correct answer: a Learning objective 5.2 ~ Apply the planning and budgeting process to consider the impact of alternative courses of action on profit, assets and cash flow

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5. A key assumption of strategic budgeting is that there are no interrelationships between the cash cycle and the asset cycle. a. True *b. False Correct answer: b Learning objective 5.2 ~ Apply the planning and budgeting process to consider the impact of alternative courses of action on profit, assets and cash flow

6. The asset cycle relates to the extent to which company assets generate returns for shareholders and company growth. *a. True b. False Correct answer: a Learning objective 5.2 ~ Apply the planning and budgeting process to consider the impact of alternative courses of action on profit, assets and cash flow

7. A key element of the cash cycle is the cash flow statement. *a. True b. False Correct answer: a Learning objective 5.2 ~ Apply the planning and budgeting process to consider the impact of alternative courses of action on profit, assets and cash flow

8. A key metric for the income cycle is the working capital ratio. a. True *b. False Correct answer: b Learning objective 5.2 ~ Apply the planning and budgeting process to consider the impact of alternative courses of action on profit, assets and cash flow

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9. One method for estimating sales revenue is external market research. *a. True b. False Correct answer: a Learning objective 5.2 ~ Apply the planning and budgeting process to consider the impact of alternative courses of action on profit, assets and cash flow

10. The starting point for budgeting should be estimating overheads because companies need to know much cash to borrow to cover their expenses. a. True *b. False Correct answer: b Learning objective 5.2 ~ Apply the planning and budgeting process to consider the impact of alternative courses of action on profit, assets and cash flow

11. In considering the outcomes for alternative decisions it is not necessary to include changes in discretionary costs. a. True *b. False Correct answer: b Learning objective 5.2 ~ Apply the planning and budgeting process to consider the impact of alternative courses of action on profit, assets and cash flow

12. Capital budgeting has no effect on the income cycle because it only affects items in the statement of financial position. a. True *b. False Correct answer: b Learning objective 5.2 ~ Apply the planning and budgeting process to consider the impact of alternative courses of action on profit, assets and cash flow

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13. The operating cycle relates to relationships between inventory, sales, accounts receivable and the collection of cash. *a. True b. False Correct answer: a Learning objective 5.2 ~ Apply the planning and budgeting process to consider the impact of alternative courses of action on profit, assets and cash flow

14. The more rapidly a company can convert its inventory into cash from accounts collected, the more liquid the company will remain within its normal operating cycle. *a. True b. False Correct answer: a Learning objective 5.2 ~ Apply the planning and budgeting process to consider the impact of alternative courses of action on profit, assets and cash flow

15. A key metric to evaluate the elements in the statement of financial position is return on equity. *a. True b. False Correct answer: a Learning objective 5.2 ~ Apply the planning and budgeting process to consider the impact of alternative courses of action on profit, assets and cash flow

16. Determining what level of profits should be distributed to equity holders is an example of a strategic budgeting question relating to the income cycle. a. True *b. False Correct answer: b Learning objective 5.2 ~ Apply the planning and budgeting process to consider the impact of alternative courses of action on profit, assets and cash flow

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17. Cost centres are organisational units where the manager is deemed responsible for the costs of the unit. *a. True b. False Correct answer: a Learning objective 5.3 ~ Identify the various planning and budgeting approaches used in cost centres

18. Typically, support departments such as accounting, human resources and maintenance are classified as cost centres. *a. True b. False Correct answer: a Learning objective 5.3 ~ Identify the various planning and budgeting approaches used in cost centres

19. A cost centre where the relationship between inputs and outputs is not readily measurable is known as an engineered cost centre. a. True *b. False Correct answer: b Learning objective 5.3 ~ Identify the various planning and budgeting approaches used in cost centres

20. In engineered cost centres there is a standard against which actual performance can be measured and variances can be identified and managed accordingly. *a. True b. False Correct answer: a Learning objective 5.3 ~ Identify the various planning and budgeting approaches used in cost centres

21. It is difficult to measure the relationship between inputs and outputs in discretionary cost centres because the organisational output is not directed related to the activities in the individual cost centre.

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*a. True b. False Correct answer: a Learning objective 5.3 ~ Identify the various planning and budgeting approaches used in cost centres 22. Planning this year’s expenditure based solely on last year’s expenditure provides managers with incentives to be efficient with their use of organisational resources. a. True *b. False Correct answer: b Learning objective 5.3 ~ Identify the various planning and budgeting approaches used in cost centres 23. Managers which know that next year’s budget is likely to be based on their use of this year’s allocated funds have incentives to ensure that all of their budgeted funds are used in full each year. *a. True b. False Correct answer: a Learning objective 5.3 ~ Identify the various planning and budgeting approaches used in cost centres

24. Incremental budgets involves making some alteration to the expenditure in a cost centre from the previous year, which will enhance accountability. a. True *b. False Correct answer: b Learning objective 5.3 ~ Identify the various planning and budgeting approaches used in cost centres

25. Program budgeting requires manager to justify expenditure based on the programs or projects to be conducted. *a. True 1.151

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b. False Correct answer: a Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

26. Program budgets originate from private sector organisations which used job costing. a. True *b. False Correct answer: b Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting 27. The starting point for program budgeting is last year’s expenditure. a. True *b. False Correct answer: b Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

28. Zero-based budgeting requires managers to justify budgeted expenditure as if no information about budgets or costs from prior budget cycles was available. *a. True b. False Correct answer: a Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

29. A major advantage of zero-based budgeting is that is quick and efficient to prepare. a. True *b. False Correct answer: b Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

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30. Zero-based budgeted can encourage managers to cut costs and focus on desired outcomes. *a. True b. False Correct answer: a Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

31. One means of responding to a fast paced business environment is to adopt rolling budgets. *a. True b. False Correct answer: a Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

32. Rolling budgets reflect planning changes and can be prepared monthly or quarterly. *a. True b. False Correct answer: a Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

33. Updating rolling budgets with recent results means that changes can be incorporated into budget targets for future periods. *a. True b. False Correct answer: a Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

34. Rolling budgets can only be used in conjunction with zero-based budgeting. a. True *b. False Correct answer: b Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

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35. Activity-based budgeting is a system used for products that tend to have decreasing prices or increasing quality across time. a. True *b. False Correct answer: b Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

36. In activity-based budgeting a budget is developed for each activity. *a. True b. False Correct answer: a Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

37. A manufacturer using an activity-based budgeting system would budget for costs attached to activities such as assembly, machine set-up or painting. *a. True b. False Correct answer: a Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

38. Kaizen costing is a system used for products that tend to have decreasing prices or increasing quality across time, such as mobile phones and computers. *a. True b. False Correct answer: a Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

39. Continuous quality improvements are a characteristic of activity-based budgeting. a. True *b. False Correct answer: b Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

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40. To achieve the best results for the organisation, budgets should be designed to promote cooperation amongst employees. *a. True b. False Correct answer: a Learning objective 5.5 ~ Reflect on the behavioural implications of budgeting

41. Power struggles, blame shifting and game playing often accompany the budgeting process. *a. True b. False Correct answer: a Learning objective 5.5 ~ Reflect on the behavioural implications of budgeting

42. Building slack into budgetary targets is one way to prevent dysfunctional behaviour. a. True *b. False Correct answer: b Learning objective 5.5 ~ Reflect on the behavioural implications of budgeting

43. To motivate managers and employees, budgets should be attainable but challenging. *a. True b. False Correct answer: a Learning objective 5.5 ~ Reflect on the behavioural implications of budgeting

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44. Excessive reliance on achieving budget targets does not usually result in the best outcome for the organisation. *a. True b. False Correct answer: a Learning objective 5.5 ~ Reflect on the behavioural implications of budgeting

45. A focus on outcomes is intended to encourage a more participatory approach to budgeting. *a. True b. False Correct answer: a Learning objective 5.5 ~ Reflect on the behavioural implications of budgeting

46. Multiple budgets can be used to indicate best case and worst case outcomes. *a. True b. False Correct answer: a Learning objective 5.5 ~ Reflect on the behavioural implications of budgeting

47. Linking rewards to budget achievement should always be avoided. a. True *b. False Correct answer: b Learning objective 5.5 ~ Reflect on the behavioural implications of budgeting

48. One of the most important principles of the Beyond Budgeting is that every day is different. *a. True b. False Correct answer: a Learning objective 5.6 ~ Critique the Beyond Budgeting approach to management control

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49. Beyond Budgeting is characterised by extreme centralisation of decision making. a. True *b. False Correct answer: b Learning objective 5.6 ~ Critique the Beyond Budgeting approach to management control

50. Beyond Budgeting advocates setting aspirational goals for continuous relative improvement and rewarding success based on relative performance. *a. True b. False Correct answer: a Learning objective 5.6 ~ Critique the Beyond Budgeting approach to management control

51. The Beyond Budgeting approach believes that employees are primarily motivated by financial rewards. a. True *b. False Correct answer: b Learning objective 5.6 ~ Critique the Beyond Budgeting approach to management control 52. Beyond Budgeting advocates consider traditional ‘fixed’ contract budgets to be dysfunctional and argue that they should be eliminated. *a. True b. False Correct answer: a Learning objective 5.6 ~ Critique the Beyond Budgeting approach to management control

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53. Employees are recruited for organisations adopting a Beyond Budgeting approach based on their fit with a customer intimacy philosophy. *a. True b. False Correct answer: a Learning objective 5.6 ~ Critique the Beyond Budgeting approach to management control

54. Relative performance evaluation relies on direct comparison with budgetary targets. a. True *b. False Correct answer: b Learning objective 5.6 ~ Critique the Beyond Budgeting approach to management control

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Multiple-choice questions

55. Strategic budgeting assists in which of the following? a. Determining the best choice between alternative decisions. b. Making resource allocation decisions. c. Obtaining understanding of financial and non-financial business factors. *d. All of the above.

Correct answer: d Learning objective 5.1 ~ Communicate the role of planning and budgeting for improved profit performance and value creation 56. A company’s decision on which product or service to emphasise should consider:

and

*a. the financial and non-financial impact of their decision; competitor responses; market-based responses. b. whether the product or service appeals to employees. c. whether the CEO and competitors wish to collaborate on the product or service. d. all of the options listed.

Correct answer: a Learning objective 5.1 ~ Communicate the role of planning and budgeting for improved profit performance and value creation

57. The process of strategic budgeting may include: a. benchmarking against competitors’ business practices. b. market research to determine product demand. *c. all of the options listed. d. none of the options listed.

Correct answer: c Learning objective 5.1 ~ Communicate the role of planning and budgeting for improved profit performance and value creation

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58. The process of considering the effect of alternative courses of action on profits, assets and cash flow management is known as: a. operational budgeting. *b. strategic budgeting. c. zero-based budgeting. d. activity-based budgeting.

Correct answer: b Learning objective 5.2 ~ Apply the planning and budgeting process to consider the impact of alternative courses of action on profit, assets and cash flow

59. In strategic budgeting the income cycle corresponds to the: *a. statement of profit or loss. b. cash flow statement. c. statement of changes in owners’ equity. d. statement of financial position.

Correct answer: a Learning objective 5.2 ~ Apply the planning and budgeting process to consider the impact of alternative courses of action on profit, assets and cash flow

60. The cash cycle is concerned with: a. returns on operations. b. debt leveraging. *c. cash collections and payments. d. profitability.

Correct answer: c Learning objective 5.2 ~ Apply the planning and budgeting process to consider the impact of alternative courses of action on profit, assets and cash flow

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61. The key independent variable for strategic budgeting is: a. profit. b. expenses. *c. sales. d. cash flow.

Correct answer: c Learning objective 5.2 ~ Apply the planning and budgeting process to consider the impact of alternative courses of action on profit, assets and cash flow

62. Sales/revenue estimation may consider: a. a competitor’s sales mix. b. variable costs. c. competitors level of activity. *d. the macroeconomic conditions.

Correct answer: d Learning objective 5.2 ~ Apply the planning and budgeting process to consider the impact of alternative courses of action on profit, assets and cash flow

63. Changes in operating expenses are influenced primarily by: a. changes in revenue estimation. b. economic conditions. c. changes to product specifications. *d. all of the options listed.

Correct answer: d Learning objective 5.2 ~ Apply the planning and budgeting process to consider the impact of alternative courses of action on profit, assets and cash flow

64. The most likely example of a discretionary cost item is: a. taxation. b. council rates. *c. research and development costs. d. management salaries.

Correct answer: c Learning objective 5.2 ~ Apply the planning and budgeting process to consider the impact of alternative courses of action on profit, assets and cash flow

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65. The most likely example of a committed cost item is: a. employee training b. rent for plant premises *c. all of the options listed. d. none of the options listed.

Correct answer: c Learning objective 5.2 ~ Apply the planning and budgeting process to consider the impact of alternative courses of action on profit, assets and cash flow

66. Depending on the organisation direct labour can be categorised as: a. committed cost. b. discretionary cost. *c. all of the options listed. d. none of the options listed.

Correct answer: c Learning objective 5.2 ~ Apply the planning and budgeting process to consider the impact of alternative courses of action on profit, assets and cash flow

67. Which of the following is a key question that relates to the asset cycle? a. Will an increase in cost impact competitive advantage? *b. What are the returns generated by investment in the business? c. What is the borrowing capacity of the organisation? d. What is the cost of holding inventory?

Correct answer: b Learning objective 5.2 ~ Apply the planning and budgeting process to consider the impact of alternative courses of action on profit, assets and cash flow

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68. Which of the following is a common type of cost centre? a. Committed b. Standard c. Overhead *d. Engineered Correct answer: d Learning objective 5.3 ~ Identify the various planning and budgeting approaches used in cost centres

69. A cost centre in which it is difficult to identify the relationship between inputs and outputs is known as a(n): a. engineered cost centre. b. committed cost centre. *c. discretionary cost centre. d. individual cost centre.

Correct answer: c Learning objective 5.3 ~ Identify the various planning and budgeting approaches used in cost centres

70. Which statement is true in relation to engineered cost centres? a. Planning is more difficult in engineered cost centres than in discretionary cost centres. b. The research and development department of an organisation is likely to be an engineered cost centre. *c. Service departments where there are repetitive activities are performed are more likely to be engineered cost centres. d. It is difficult to link the service or product to the cost centre.

Correct answer: c Learning objective 5.3 ~ Identify the various planning and budgeting approaches used in cost centres

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71. Budgeting which makes an adjustment to last year’s cost centre expenditure is known as: *a. incremental budgeting. b. rolling budgeting. c. engineered budgeting. d. program budgeting.

Correct answer: a Learning objective 5.3 ~ Identify the various planning and budgeting approaches used in cost centres

72. Incremental budgeting has been criticised because it: a. encourages managers to continually reduce costs at the expense of quality. *b. does not encourage managers to seek ways to use the organisation’s resources more efficiently. c. encourages managers to used fixed costs instead of variable costs. d. all of the options listed.

Correct answer: b Learning objective 5.3 ~ Identify the various planning and budgeting approaches used in cost centres

73. A budgeting approach that requires a cost centre to plan its expenditure specifically around the programs or projects conducted by the cost centre is known as: a. discrete budgeting. b. kaizen budgeting. c. flexible budgeting. *d. program budgeting.

Correct answer: d Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

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74. Identifying and justifying linkages between the objectives of the organisation and the cost centre expenditure is a key element of: *a. program budgeting. b. kaizen budgeting. c. rolling budgeting. d. activity-based budgeting.

Correct answer: a Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

75. Which of these is a contemporary approach to budgeting? a. Flexible budgeting b. Incremental budgeting c. All of the options listed *d. None of the options listed Correct answer: d Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

76. Zero-based budgeting can be used in: a. manufacturing environments. b. service industries. c. public sector contexts. *d. all of the above.

Correct answer: d Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

77. Under which of the following types of budgeting must managers justify their budget requests each year as if prior information did not exist? a. Activity-based budgeting *b. Zero-based budgeting c. Kaizen budgeting d. Flexible budgeting Correct answer: b Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

78. Zero-based budgeting is particularly useful when: 1.166

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a. economic conditions are difficult. b. there is significant and rapid technological change. *c. all of the options listed. d. none of the options listed.

Correct answer: c Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

79. A budget that continually reflects the most recent results and is updated to incorporate changes in strategy and the economy is called a: a. flexible budget. b. static budget. *c. rolling budget. d. zero-based budget.

Correct answer: c Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

80. Activity-based budgeting primarily uses: a. cost drivers that are based on output. *b. cost drivers that are based on individual activities. c. cost drivers that are based on volume. d. all of the options listed.

Correct answer: b Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

81. When an organisation implements activity-based budgeting, managers must identify activities for: a. production activities. b. support activities. *c. both production activities and support activities. d. neither production activities nor support activities, as long as cost drivers are clearly specified.

Correct answer: c Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

82. What feature differentiates kaizen budgeting from other forms of budgeting?

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*a. Cost reduction and quality improvement goals are embedded in the budgets b. It is used only in Japan c. It is used for products with increasing prices d. It is normally found in companies also using zero-based budgeting Correct answer: a Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

83. The main advantage of using zero-based budgeting is that it: a. is easy to implement. *b. forces managers to focus on desired outcomes. c. reduces the need for managers to estimate costs. d. simplifies calculating variances compared to a static or a flexible budget.

Correct answer: b Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

84. When managers use kaizen budgeting, which of the following is (are) explicitly embedded in the budget?

I II III

Cost reduction goals Quality improvement goals Anticipated price reductions

a. I and II only b. I and III only c. II and III only *d. I, II and III Correct answer: d Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

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85. The kaizen approach to budgeting was developed in: a. Australia. b. Germany. *c. Japan. d. China.

Correct answer: c Learning objective 5.4 ~ Compare traditional and contemporary approaches to budgeting

86. Kaizen budgeting is used for products that: a. decrease in quality across time. b. are made by Japanese companies only. c. increase in price across time. *d. decrease in price across time.

Correct answer: d Learning objective 5.5 ~ Reflect on the behavioural implications of budgeting

87. Employee morale is most likely to be negatively influenced by: a. setting budgets that are unreasonable or attainable. b. changing budgetary targets suddenly. *c. all of the options listed. d. none of the options listed.

Correct answer: c Learning objective 5.5 ~ Reflect on the behavioural implications of budgeting

88. Building slack into budgets is likely to occur when: *a. rewards are linked to meeting budget targets. b. budget targets are easily achievable c. participatory budgeting is not used. d. all of the options listed.

Correct answer: a Learning objective 5.5 ~ Reflect on the behavioural implications of budgeting

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89. Budgetary mismanagement can be described as: a. when underlying assumptions vary from actual events. b. minimal consideration for impacts on other parts of the organisation. *c. not trying to achieve above budget when only meeting budget is rewarded. d. all of the above.

Correct answer: c Learning objective 5.5 ~ Reflect on the behavioural implications of budgeting

90. The relative performance evaluation approach advocated by the Beyond Budgeting philosophy means employees’ performance is evaluated against: a. their own past performance. *b. peer performance. c. benchmarks established by top management. d. customised budgetary targets.

Correct answer: b Learning objective 5.6 ~ Critique the Beyond Budgeting approach to management control

91. A key principle for the Beyond Budgeting approach is: a. a command and control approach to planning. *b. replacing annual planning with rolling forecasts. c. restrict access to ‘need to know’. d. rewards-based on meeting targets.

Correct answer: b Learning objective 5.6 ~ Critique the Beyond Budgeting approach to management control

92. Radical decentralisation requires: a. a contractual approach. b. reward systems based on relative performance evaluation. *c. authority to be devolved through the hierarchical layers to lower level employees. d. all of the options listed.

Correct answer: c Learning objective 5.6 ~ Critique the Beyond Budgeting approach to management control

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93. The accounting systems in a Beyond Budgeting approach must: a. not use arbitrary allocations. b. focus on performance variables linked to strategy. *c. all of the options listed. d. none of the options listed.

Correct answer: c Learning objective 5.6 ~ Critique the Beyond Budgeting approach to management control

94. The philosophy of encouraging employees to continuously focus on building strong customer relationships is known as: a. employee dedication. *b. customer intimacy. c. autonomous employees. d. employee evaluation.

Correct answer: b Learning objective 5.6 ~ Critique the Beyond Budgeting approach to management control

Testbank to accompany

Management accounting 5th edition by 1.171

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Eldenburg et al.

Not for distribution. Instructors may assign selected questions in their LMS.

© John Wiley & Sons Australia, Ltd 2024

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Chapter 6: Operational budgets True/false questions

1. A budget is a formalised financial plan for organisational operations for a specific future period. *a. True b. False Correct answer: a Learning objective 6.1 ~ Demonstrate an understanding of the role of budgets in developing both short- and long-term plans 2. Budgets help competitors understand an entity’s activities for the next period. a. True *b. False Correct answer: b Learning objective 6.1 ~ Demonstrate an understanding of the role of budgets in developing both short- and long-term plans

3. Budgets are used to monitor performance and compare expected to actual results. *a. True b. False Correct answer: a Learning objective 6.1 ~ Demonstrate an understanding of the role of budgets in developing both short- and long-term plans

4. Budgets provide a mechanism for defining the responsibilities and financial decisionmaking authority or decision rights of individual managers. *a. True b. False Correct answer: a Learning objective 6.1 ~ Demonstrate an understanding of the role of budgets in developing both short- and long-term plans

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5. Budgets are generally developed for the organisation as a whole as department managers do not have budget authority. a. True *b. False Correct answer: b Learning objective 6.1 ~ Demonstrate an understanding of the role of budgets in developing both short- and long-term plans

6. A budget cycle refers to the length of time that the budget period covers. a. True *b. False Correct answer: b Learning objective 6.1 ~ Demonstrate an understanding of the role of budgets in developing both short- and long-term plans

7. The first stage in the budget cycle is to reassess organisational vision and core competencies. *a. True b. False Correct answer: a Learning objective 6.1 ~ Demonstrate an understanding of the role of budgets in developing both short- and long-term plans

8. The operating budget is another name for master budget. a. True *b. False Correct answer: b Learning objective 6.1 ~ Demonstrate an understanding of the role of budgets in developing both short- and long-term plans

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9. The operating budget is a comprehensive plan of the entity’s entire financial and operational activities for an upcoming financial period. a. True *b. False Correct answer: b Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget 10. The master budget reflects the entity’s future operating and financing decisions and is often summarised in a set of budgeted financial statements. *a. True b. False Correct answer: a Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

11. The master budget includes two components: an operating budget and a flexible budget. a. True *b. False Correct answer: b Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget 12. The component of a master budget that contains management’s plans for revenues, production and operating costs is the operating budget. *a. True b. False Correct answer: a Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

13. The master budget starts with a series of assumptions about future events and activities. *a. True b. False 1.175

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Correct answer: a Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget 14. Given the organisation’s strategy, the first step is to forecast the production budget. a. True *b. False Correct answer: b Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

15. The production budget requires a forecasted level of sales volume. *a. True b. False Correct answer: a Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

16. Managers need information from about current beginning inventories and required ending inventories to prepare the capital budget. a. True *b. False Correct answer: b Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

17. Beginning inventory plus budgeted production equals sales plus targeted ending inventory in a production budget. *a. True b. False Correct answer: a Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

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18. The ending inventories budget is typically expressed in terms of units, while the production budget is typically expressed in costs. a. True *b. False Correct answer: b Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

19. Together the direct materials budget, direct labour budget and manufacturing budget provide the information to calculate cost of goods sold. *a. True b. False Correct answer: a Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

20. The cash budget is part of the operating budgets. a. True *b. False Correct answer: b Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

21. Support department costs are included in the budgeted income statement. *a. True b. False Correct answer: a Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

22. The budgeted statement of financial position is prepared before budgeted income statement. a. True *b. False 1.178

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Correct answer: b Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

23. The sales volume and revenue budget is linked to the organisational strategy. *a. True b. False Correct answer: a Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

24. Budgeting is complex for multinational companies due to cultural and legal influences. *a. True b. False Correct answer: a Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

25. Retail entities do not require budgets for inventory. a. True *b. False Correct answer: b Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

26. In government organisations budgets can be used to place restrictions on spending authority. *a. True b. False Correct answer: a Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

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27. Dividends paid to shareholders are shown in the budgeted statement of financial position and does not appear in the cash budget. a. True *b. False Correct answer: b Learning objective 6.3 ~ Develop a cash budget

28. Budgeted operating cash receipts are calculated using budgeted sales revenue. *a. True b. False Correct answer: a Learning objective 6.3 ~ Develop a cash budget

29. Cash payments are always budgeted to take place in the month in which the transaction is budgeted to occur. a. True *b. False Correct answer: b Learning objective 6.3 ~ Develop a cash budget

30. Depreciation is a cash outflow in the cash budget. a. True *b. False Correct answer: b Learning objective 6.3 ~ Develop a cash budget

31. Managers typically use excess cash to repay short-term debt. *a. True b. False Correct answer: a Learning objective 6.3 ~ Develop a cash budget

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32. Cash receipts, cash disbursements and short-term borrowing or investments all appear in the cash budget. *a. True b. False Correct answer: a Learning objective 6.3 ~ Develop a cash budget

33. In addition to operating cash flows, an organisation have many other types of cash flows such as paying for depreciation on equipment. a. True *b. False Correct answer: b Learning objective 6.3 ~ Develop a cash budget

34. Differences between budgeted amounts and actual amounts are called budget benchmarks. a. True *b. False Correct answer: b Learning objective 6.4 ~ Explain the use of budget targets as performance benchmarks

35. An unfavourable variance occurs when actual costs are lower than budgeted costs. a. True *b. False Correct answer: b Learning objective 6.4 ~ Explain the use of budget targets as performance benchmarks

36. Favourable variances are always positive amounts; unfavourable variances are always negative amounts. a. True *b. False Correct answer: b Learning objective 6.4 ~ Explain the use of budget targets as performance benchmarks 1.181

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37. A favourable variance may be caused by efficient use of resources or less activity than expected. *a. True b. False Correct answer: a Learning objective 6.4 ~ Explain the use of budget targets as performance benchmarks

38. An organisation operating in a highly competitive and volatile environment is likely to have more significant budget variances than an established business with low uncertainty about business operations. *a. True b. False Correct answer: a Learning objective 6.4 ~ Explain the use of budget targets as performance benchmarks

39. One reason that variances can occur is when there is deviation from budgeted volume levels. *a. True b. False Correct answer: a Learning objective 6.4 ~ Explain the use of budget targets as performance benchmarks

40. Differences in actual and budgeted sales volume will often lead to budget variances as variable costs vary according to volume. *a. True b. False Correct answer: a Learning objective 6.4 ~ Explain the use of budget targets as performance benchmarks

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41. Budgeted variable costs are likely to be understated if production volume is less than forecasted. a. True *b. False Correct answer: b Learning objective 6.4 ~ Explain the use of budget targets as performance benchmarks

42. A flexible budget separates fixed and variable costs to accurately reflect the effects of activity on cost. *a. True b. False Correct answer: a Learning objective 6.4 ~ Explain the use of budget targets as performance benchmarks

43. A static budget is based on forecasts of sales volumes. a. True *b. False Correct answer: b Learning objective 6.4 ~ Explain the use of budget targets as performance benchmarks

44. When evaluating actual results at the end of an accounting period, the flexible budget provides the appropriate benchmark for actual operations. *a. True b. False Correct answer: a Learning objective 6.4 ~ Explain the use of budget targets as performance benchmarks

45. The flexible budget uses actual volume to calculate variable costs. *a. True b. False Correct answer: a Learning objective 6.4 ~ Explain the use of budget targets as performance benchmarks

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46. Participative budgeting involves customers and managers at all levels in the organisation. a. True *b. False Correct answer: b Learning objective 6.5 ~ Illustrate how budgets are used to monitor and motivate performance

47. Some entities monitor individual manager performance by comparing actual results to budgeted results. *a. True b. False Correct answer: a Learning objective 6.5 ~ Illustrate how budgets are used to monitor and motivate performance

48. Profit sharing, cash bonus schemes and awards dinners are all ways of rewarding employees who achieve budget targets. *a. True b. False Correct answer: a Learning objective 6.5 ~ Illustrate how budgets are used to monitor and motivate performance

49. Participative budgets are used by managers to manipulate the budget to meet targets easily. a. True *b. False Correct answer: b Learning objective 6.5 ~ Illustrate how budgets are used to monitor and motivate performance

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50. Targets developed via a participative budgeting are non-negotiable. a. True *b. False Correct answer: b Learning objective 6.5 ~ Illustrate how budgets are used to monitor and motivate performance

51. Budgetary slack occurs when a divisional manager under-utilises support department resources. a. True *b. False Correct answer: b Learning objective 6.5 ~ Illustrate how budgets are used to monitor and motivate performance

52. A danger of under estimating sales forecasts is that the entity may lose the capacity to increase sales in the short term. *a. True b. False Correct answer: a Learning objective 6.5 ~ Illustrate how budgets are used to monitor and motivate performance

53. One way to decrease budgetary slack is to offer bonuses for accurate forecasts. *a. True b. False Correct answer: a Learning objective 6.5 ~ Illustrate how budgets are used to monitor and motivate performance

54. Budget variances can sometimes occur due to unanticipated changes in the price of direct materials, direct labour or overhead costs. *a. True b. False 1.186

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Correct answer: a Learning objective 6.5 ~ Illustrate how budgets are used to monitor and motivate performance

55. The production department manager should not be held responsible for variances due to changes in forecasted sales volume. *a. True b. False Correct answer: a Learning objective 6.5 ~ Illustrate how budgets are used to monitor and motivate performance

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Multiple-choice questions

56. Which of the following is not an objective of budgeting? a. Assigning decision rights b. Establishing prices for the internal transfer of goods and services c. Motivating managers to use resources efficiently *d. Improving customer relations Correct answer: d Learning objective 6.1 ~ Demonstrate an understanding of the role of budgets in developing both short- and long-term plans

57. The starting point of the budget cycle is: *a. reassess organisational vision and core competencies. b. reconsider long-term strategy. c. translate strategies and operating plans into financial data. d. none of the options listed.

Correct answer: a Learning objective 6.1 ~ Demonstrate an understanding of the role of budgets in developing both short- and long-term plans

58. The final stage in the budget cycle is: a. reconsider long-term strategies. b. investigate the differences between actual and budgeted items. *c. evaluate and reward performance. d. none of the options listed.

Correct answer: c Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

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59. The correct sequence for the following components in the operating budget is: I. II. III. IV.

sales forecast production budget revenue budget budgeted cost of sales a. I, II, III, IV. b. III, I, IV, II. *c. I, III, II, IV. d. IV, I, III, II.

Correct answer: c Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

60. The budgeted statement of financial position does not use information from which of the following? *a. Budgeted statement of cash flows b. Cash budget c. Capital budget d. Budgeted income statement Correct answer: a Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

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61. Mr Lewis’s Co has projected sales for the next four months as follows.

January February March April

Units 70 000 90 000 55 000 65 000

Beginning inventory for the year is 47 000 units. Ending inventory for each month should be 30% of the next month’s sales.

How many units should the company produce in January? *a. 50 000 b. 97 000 c. 70 000 d. 90 000 Correct answer: a Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget 62. Mr Lewis’s Co has projected sales for the next four months as follows.

January February March April

Units 70 000 90 000 55 000 65 000

Beginning inventory for the year is 47 000 units. Ending inventory for each month should be 30% of the next month’s sales.

How many units should the company produce in February? a. 59 500 b. 97 000 *c. 79 500 d. 90 000 Correct answer: c Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

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63. Mr Lewis’s Co has projected sales for the next four months as follows.

January February March April

Units 70 000 90 000 55 000 65 000

Beginning inventory for the year is 47 000 units. Ending inventory for each month should be 30% of the next month’s sales.

How many units need to be available for sale in February? a. 117 000 b. 90 000 c. 47 000 *d. 106 500 Correct answer: d Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

64. Vaviano Ltd expects to sell 34 000 units of finished goods over the next 6-month period. The company has 10 000 units on hand and its managers want to have 14 000 units on hand at the end of the period. To produce one unit of finished product, two units of direct materials are needed. Vaviano has 100 000 units of direct material on hand and has budgeted for an ending inventory of 110 000 units.

What is the number of finished units to be produced? *a. 38 000 b. 28 000 c. 34 000 d. 24 000 Correct answer: a Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

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65. Vaviano Ltd expects to sell 34 000 units of finished goods over the next 6-month period. The company has 10 000 units on hand and its managers want to have 14 000 units on hand at the end of the period. To produce one unit of finished product, two units of direct materials are needed. Vaviano has 100 000 units of direct material on hand and has budgeted for an ending inventory of 110 000 units.

What is the amount of direct material to be purchased (in units)? a. 38 000 b. 66 000 *c. 86 000 d. 76 000 Correct answer: c Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

66. Super Solar Systems has forecast the following unit sales and production for the next year, by quarter.

Production Sales

1st 75 60

2nd 80 70

3rd 70 75

4th 50 60

Super Solar has the following beginning inventories.

Finished goods Direct material A Direct material B

50 50 50

A finished unit requires one unit of material A and two units of material B. There should be enough material on hand at the end of each quarter to meet 20% of the next quarter’s production needs. There are no work-in-process inventories.

What is ending finished goods inventory for quarter 2? a. 145 *b. 75 c. 65 d. 70 Correct answer: b Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

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67. Super Solar Systems has forecast the following unit sales and production for the next year, by quarter.

Production Sales

1st 75 60

2nd 80 70

3rd 70 75

4th 50 60

Super Solar has the following beginning inventories.

Finished goods Direct material A Direct material B

50 50 50

A finished unit requires one unit of material A and two units of material B. There should be enough material on hand at the end of each quarter to meet 20% of the next quarter’s production needs. There are no work-in-process inventories.

What is the ending inventory for material A for quarter 2? a. 70 *b. 14 c. 82 d. 60 Correct answer: b Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

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68. Super Solar Systems has forecast the following unit sales and production for the next year, by quarter.

Production Sales

1st 75 60

2nd 80 70

3rd 70 75

4th 50 60

Super Solar has the following beginning inventories.

Finished goods Direct material A Direct material B

50 50 50

A finished unit requires one unit of material A and two units of material B. There should be enough material on hand at the end of each quarter to meet 20% of the next quarter’s production needs. There are no work-in-process inventories.

How much material A must be purchased in quarter 2? *a. 78 b. 80 c. 156 d. 16 Correct answer: a Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

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69. Super Solar Systems has forecast the following unit sales and production for the next year, by quarter.

Production Sales

1st 75 60

2nd 80 70

3rd 70 75

4th 50 60

Super Solar has the following beginning inventories.

Finished goods Direct material A Direct material B

50 50 50

A finished unit requires one unit of material A and two units of material B. There should be enough material on hand at the end of each quarter to meet 20% of the next quarter’s production needs. There are no work-in-process inventories.

What is the ending inventory for material B in quarter 1? a. 150 *b. 32 c. 16 d. 132 Correct answer: b Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

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70. Super Solar Systems has forecast the following unit sales and production for the next year, by quarter.

Production Sales

1st 75 60

2nd 80 70

3rd 70 75

4th 50 60

Super Solar has the following beginning inventories.

Finished goods Direct material A Direct material B

50 50 50

A finished unit requires one unit of material A and two units of material B. There should be enough material on hand at the end of each quarter to meet 20% of the next quarter’s production needs. There are no work-in-process inventories.

How much material B must be purchased in quarter 1? a. 264 *b. 132 c. 150 d. 160 Correct answer: b Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

71. Sales for March are budgeted at $600 000. Gross profit is 60% of sales. If ending inventory is budgeted at $125 000 and there is no inventory on hand, then the budgeted purchases is: a. $240 000. b. $360 000. c. $125 000. *d. $365 000.

Correct answer: d Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

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72. Limelite Ltd, projects sales for its first three months of operation as follows.

Credit sales Cash sales

January $150 000 $60 000 $210 000

February $188 000 $50 000 $238 000

March $176 000 $55 000 $231 000

Inventory on 1st January is $40 000. Subsequent beginning inventories should be 40% of that month’s cost of goods sold. Goods are priced at 140% of their cost. 50% of purchases are paid for in the month of purchase; the balance is paid in the following month. It is expected that 50% of credit sales will be collected in the month following sale, 30% in the second month following the sale and the balance the third month. A 5% discount is given if payment is received in the month following sale.

What is the projected cost of goods sold for January? *a. $150 000 b. $84 000 c. $188 000 d. $140 000 Correct answer: a Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

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73. Limelite Ltd, projects sales for its first three months of operation as follows.

Credit sales Cash sales

January $150 000 $60 000 $210 000

February $188 000 $50 000 $238 000

March $176 000 $55 000 $231 000

Inventory on 1st January is $40 000. Subsequent beginning inventories should be 40% of that month’s cost of goods sold. Goods are priced at 140% of their cost. 50% of purchases are paid for in the month of purchase; the balance is paid in the following month. It is expected that 50% of credit sales will be collected in the month following sale, 30% in the second month following the sale and the balance the third month. A 5% discount is given if payment is received in the month following sale.

What is the projected cost of purchases for January? a. $80 000 b. $68 000 c. $120 000 *d. $178 000 Correct answer: d Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

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74. Limelite Ltd, projects sales for its first three months of operation as follows.

Credit sales Cash sales

January $150 000 $60 000 $210 000

February $188 000 $50 000 $238 000

March $176 000 $55 000 $231 000

Inventory on 1st January is $40 000. Subsequent beginning inventories should be 40% of that month’s cost of goods sold. Goods are priced at 140% of their cost. 50% of purchases are paid for in the month of purchase; the balance is paid in the following month. It is expected that 50% of credit sales will be collected in the month following sale, 30% in the second month following the sale and the balance the third month. A 5% discount is given if payment is received in the month following sale.

What are the anticipated cash receipts for January? a. $150 000 *b. $60 000 c. $210 000 d. $135 000 Correct answer: b Learning objective 6.3 ~ Develop a cash budget

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75. Limelite Ltd, projects sales for its first three months of operation as follows.

Credit sales Cash sales

January $150 000 $60 000 $210 000

February $188 000 $50 000 $238 000

March $176 000 $55 000 $231 000

Inventory on 1st January is $40 000. Subsequent beginning inventories should be 40% of that month’s cost of goods sold. Goods are priced at 140% of their cost. 50% of purchases are paid for in the month of purchase; the balance is paid in the following month. It is expected that 50% of credit sales will be collected in the month following sale, 30% in the second month following the sale and the balance the third month. A 5% discount is given if payment is received in the month following sale.

What are the anticipated cash receipts for February? a. $107 500 *b. $121 250 c. $71 250 d. $238 000 Correct answer: b Learning objective 6.3 ~ Develop a cash budget

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76. Limelite Ltd, projects sales for its first three months of operation as follows.

Credit sales Cash sales

January $150 000 $60 000 $210 000

February $188 000 $50 000 $238 000

March $176 000 $55 000 $231 000

Inventory on 1st January is $40 000. Subsequent beginning inventories should be 40% of that month’s cost of goods sold. Goods are priced at 140% of their cost. 50% of purchases are paid for in the month of purchase; the balance is paid in the following month. It is expected that 50% of credit sales will be collected in the month following sale, 30% in the second month following the sale and the balance the third month. A 5% discount is given if payment is received in the month following sale.

What are the anticipated cash disbursements for January? *a. $89 000 b. $150 000 c. $178 000 d. $68 000 Correct answer: a Learning objective 6.3 ~ Develop a cash budget

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77. Rainbow Legacy Ltd has the following balances at 31st December 2019: Cash $46 000; accounts receivable $34 000 ($10 000 from November and $24 000 from December); merchandise inventory $40 000; and accounts payable $20 000 (for merchandise purchases only).

Budgeted sales are as follows.

January February March April

$100 000 $180 000 $120 000 $200 000

Other data: i. Sales are 40% cash, 50% collected during the following month and 10% collected during the second month after sale. A 3% cash discount is given on cash sales ii. Cost of goods sold is 40% of sales iii. Ending inventory must be 150% of the next month’s cost of sales iv. Purchases are paid 70% in month of purchase and 30% in the following month v. The selling and administrative cost function is: $6000 + $0.2 × sales. This includes $1000 for depreciation vi. All costs are paid in the month incurred vii. Minimum cash balance requirement is $6000 What is the budgeted cost of purchases for February? a. $108 000 *b. $36 000 c. $72 000 d. $120 000 Correct answer: b Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

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78. Rainbow Legacy Ltd has the following balances at 31st December 2019: Cash $46 000; accounts receivable $34 000 ($10 000 from November and $24 000 from December); merchandise inventory $40 000; and accounts payable $20 000 (for merchandise purchases only).

Budgeted sales follow: January February March April

$100 000 $180 000 $120 000 $200 000

Other data: i. Sales are 40% cash, 50% collected during the following month and 10% collected during the second month after sale. A 3% cash discount is given on cash sales ii. Cost of goods sold is 40% of sales iii. Ending inventory must be 150% of the next month’s cost of sales iv. Purchases are paid 70% in month of purchase and 30% in the following month v. The selling and administrative cost function is: $6000 + $0.2 × sales. This includes $1000 for depreciation vi. All costs are paid in the month incurred vii. Minimum cash balance requirement is $6000 What are the cash disbursements for purchases in March? *a. $78 000 b. $32 480 c. $81 200 d. $48 000 Correct answer: a Learning objective 6.3 ~ Develop a cash budget

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79. Rainbow Legacy Ltd has the following balances at 31st December 2019: Cash $46 000; accounts receivable $34 000 ($10 000 from November and $24 000 from December); merchandise inventory $40 000; and accounts payable $20 000 (for merchandise purchases only).

Budgeted sales follow: January February March April

$100 000 $180 000 $120 000 $200 000

Other data: i. Sales are 40% cash, 50% collected during the following month and 10% collected during the second month after sale. A 3% cash discount is given on cash sales ii. Cost of goods sold is 40% of sales iii. Ending inventory must be 150% of the next month’s cost of sales iv. Purchases are paid 70% in month of purchase and 30% in the following month v. The selling and administrative cost function is: $6000 + $0.2 × sales. This includes $1000 for depreciation vi. All costs are paid in the month incurred vii. Minimum cash balance requirement is $6000 What will cash receipts for April be? a. $77 600 b. $77 800 *c. $155 600 d. $78 000 Correct answer: c Learning objective 6.3 ~ Develop a cash budget

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80. Rainbow Legacy Ltd has the following balances at 31st December 2019: Cash $46 000; accounts receivable $34 000 ($10 000 from November and $24 000 from December); merchandise inventory $40 000; and accounts payable $20 000 (for merchandise purchases only).

Budgeted sales follow: January February March April

$100 000 $180 000 $120 000 $200 000

Other data: i. Sales are 40% cash, 50% collected during the following month and 10% collected during the second month after sale. A 3% cash discount is given on cash sales ii. Cost of goods sold is 40% of sales iii. Ending inventory must be 150% of the next month’s cost of sales iv. Purchases are paid 70% in month of purchase and 30% in the following month v. The selling and administrative cost function is: $6000 + $0.2 × sales. This includes $1000 for depreciation vi. All costs are paid in the month incurred vii. Minimum cash balance requirement is $6000 What will be the ending cash balance for January before lending (if required)? a. $3240 b. $78 800 c. $19 720 *d. $6000 Correct answer: d Learning objective 6.3 ~ Develop a cash budget

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81. Keysie projected sales for the last three months of the year is as follows.

Credit sales Cash sales

October $100 000 $ 40 000 $140 000

November $280 000 $ 80 000 $360 000

December $550 000 $125 000 $675 000

Inventory on 1st October is $40 000. Subsequent beginning inventories should be 30% of that month’s cost of goods sold. Goods are priced at 160% of their cost. 60% of purchases are paid for in the month of purchase; the balance is paid in the following month. It is expected that 60% of credit sales will be collected in the month following sale, 20% in the second month following the sale and the balance the third month. A 5% discount is given if payment is received in the month following sale.

What are the anticipated cash receipts for November? a. $80 000 b. $40 000 c. $313 000 *d. $140 000 Correct answer: d Learning objective 6.3 ~ Develop a cash budget

82. Gulland Rock Ltd uses the following flexible budget formula for monthly repair cost: total cost = $1500 + $0.40 per machine hour. The annual operating budget calls for 25 000 hours of planned machine time. What is the budgeted repair cost? *a. $11 500 b. $14 700 c. $22 400 d. $22 000 Correct answer: a Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

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83. An advantage of a flexible budget is that it: a. considers only variable costs. *b. incorporates adjustments caused by volume changes. c. allows management freedom in meeting goals. d. allows comparison of actual costs to master budget costs.

Correct answer: b Learning objective 6.4 ~ Explain the use of budget targets as performance benchmarks

84. To overcome possible problems with budgets that are developed only by top level managers, an alternative is to use which of the following? a. Activity-based budgets b. Authoritative budgets c. Flexible budgets *d. Participative budgets Correct answer: d Learning objective 6.5 ~ Illustrate how budgets are used to monitor and motivate performance

85. When allocated support department costs are higher than expected due to poor management in the support department, a challenge that may result is: a. employee turnover. *b. resentment. c. delays in the hiring process. d. all of the options listed.

Correct answer: b Learning objective 6.5 ~ Illustrate how budgets are used to monitor and motivate performance

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86. One objective of budgeting is to motivate managers to: a. eliminate all variances. *b. use resources efficiently. c. lessen the need for communication. d. establish prices for external sales of goods and services.

Correct answer: b Learning objective 6.5 ~ Illustrate how budgets are used to monitor and motivate performance

87. Which of the following must managers develop prior to preparing a budgeted income statement? a. Capital budget b. Budgeted statement financial position *c. Support department budgets d. Support department cost allocations Correct answer: c Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

88. Poster Artist Ltd, a retail store selling classic and rare marketing materials, has just completed its master budget for the next fiscal year. Ending inventory is budgeted at 20% of cost of goods available for sale. Selected data from that process appear in the table below.

Beginning inventory Budgeted purchases Expected revenue Inflows of cash Support departments costs Total cash outflows

$ 20 000 50 000 150 000 120 000 30 000 80 000

Poster Artist Ltd’s budgeted cost of goods sold for the next fiscal year will be: *a. $56 000. b. $64 000. c. $70 000. d. $28 000.

Correct answer: a

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Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

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89. Poster Artist Ltd, a retail store selling classic and rare marketing materials, has just completed its master budget for the next fiscal year. Ending inventory is budgeted at 20% of cost of goods available for sale. Selected data from that process appear in the table below.

Beginning inventory Budgeted purchases Expected revenue Inflows of cash Support departments costs Total cash outflows

$ 20 000 50 000 150 000 120 000 30 000 80 000

Poster Artist Ltd’s budgeted gross profit for the next fiscal year will be: a. $136 000. b. $106 000. c. $64 000. *d. $94 000.

Correct answer: d Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

90. Poster Artist Ltd, a retail store selling classic and rare marketing materials, has just completed its master budget for the next fiscal year. Ending inventory is budgeted at 20% of cost of goods available for sale. Selected data from that process appear in the table below.

Beginning inventory Budgeted purchases Expected revenue Inflows of cash Support departments costs Total cash outflows

$ 20 000 50 000 150 000 120 000 30 000 80 000

Which of the following amounts is irrelevant in the preparation of Poster Artist Ltd’s budgeted income statement? a. Beginning inventory of $20 000 *b. Expected inflows of cash of $120 000 c. Expected revenue of $150 000 d. Budgeted support department costs of $30 000 Correct answer: b

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Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

91. Poster Artist Ltd, a retail store selling classic and rare marketing materials, has just completed its master budget for the next fiscal year. Ending inventory is budgeted at 20% of cost of goods available for sale. Selected data from that process appear in the table below.

Beginning inventory Budgeted purchases Expected revenue Inflows of cash Support departments costs Total cash outflows

$ 20 000 50 000 150 000 120 000 30 000 80 000

Which of the following amounts will be subtracted from gross profit on Poster Artist Ltd’s budgeted income statement? *a. $30 000 b. $80 000 c. $14 000 d. $110 000 Correct answer: a Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

92. On a budgeted statement of profit or loss, the gross profit is determined by: a. Revenue + Cost of goods sold b. Revenue – (Cost of goods sold + Operating costs) c. Revenue – Operating costs *d. Revenue – Cost of goods sold Correct answer: d Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

93. Carpe Diem Ltd expects to operate at a loss in its next fiscal year. Which statement about its budgeted income statement is true? *a. Operating expenses are expected to be greater than gross profit. b. Operating income is expected to be greater than net profit. c. Net profit is expected to be greater than operating income.

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d. Actual gross profit less operating expenses will equal expected net profit.

Correct answer: a Learning objective 6.2 ~ Describe the role of the master budget and develop a master budget

94. At the end of 2019, Dubai Mission prepared its master budget for 2024. Selected amounts from that budget, along with actual results for 2024, are presented below.

Sales Research and development cost Interest revenue Cost of goods sold Marketing costs

Budgeted $180 000 25 000 7 600 60 000 45 000

Actual $210 000 20 000 7 000 65 000 45 000

Dubai Mission’s total budget variance for the data provided is: a. $40 600 favourable. b. $40 600 unfavourable. *c. $29 400 favourable. d. $29 400 unfavourable.

Correct answer: c Learning objective 6.4 ~ Explain the use of budget targets as performance benchmarks

95. At the end of 2019, Dubai Mission prepared its master budget for 2024. Selected amounts from that budget, along with actual results for 2024, are presented below.

Sales Research and development cost Interest revenue Cost of goods sold Marketing costs

Budgeted $180 000 25 000 7 600 60 000 45 000

Actual $210 000 20 000 7 000 65 000 45 000

Which items in the table have favourable variances? a. Sales and marketing expense b. Cost of goods sold and sales *c. Sales and research and development expense d. Sales and interest revenue 1.212

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Correct answer: c Learning objective 6.4 ~ Explain the use of budget targets as performance benchmarks

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96. At the end of 2019, Dubai Mission prepared its master budget for 2024. Selected amounts from that budget, along with actual results for 2024, are presented below.

Sales Research and development cost Interest revenue Cost of goods sold Marketing costs

Budgeted $180 000 25 000 7 600 60 000 45 000

Actual $210 000 20 000 7 000 65 000 45 000

Which items in the table have unfavourable variances? a. Marketing expense and cost of goods sold b. Cost of goods sold and sales c. Sales and research and development expense *d. Interest revenue and cost of goods sold Correct answer: d Learning objective 6.4 ~ Explain the use of budget targets as performance benchmarks

97. At the end of 2019, Dubai Mission prepared its master budget for 2024. Selected amounts from that budget, along with actual results for 2024, are presented below.

Sales Research and development cost Interest revenue Cost of goods sold Marketing costs

Budgeted $180 000 25 000 7 600 60 000 45 000

Actual $210 000 20 000 7 000 65 000 45 000

The research and development cost variance could be explained by: a. starting too many projects. b. cost increases due to new information technologies. *c. efficient cost management. d. higher salaries.

Correct answer: c Learning objective 6.4 ~ Explain the use of budget targets as performance benchmarks

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98. At the end of 2019, Dubai Mission prepared its master budget for 2024. Selected amounts from that budget, along with actual results for 2024, are presented below.

Sales Research and development cost Interest revenue Cost of goods sold Marketing costs

Budgeted $180 000 25 000 7 600 60 000 45 000

Actual $210 000 20 000 7 000 65 000 45 000

The variance for cost of goods sold could be explained by: a. increased rent on their building. b. actual sales being less than the budget. *c. price increases in raw materials. d. decreased labour costs.

Correct answer: c Learning objective 6.4 ~ Explain the use of budget targets as performance benchmarks

99. In 2018, Flowers Ltd budgeted its sales volume at 10 000 units. Actual volume was 9800 units. If Flowers Ltd uses the static budget to calculate variances and assuming that inventory levels are insignificant, which of the following statements is true? *a. Budgeted variable costs will be overstated compared to actual variable costs. b. Profits will be less than expected. c. Profits will be more than expected due to favourable cost variances. d. Sales managers will not receive a bonus.

Correct answer: a Learning objective 6.4 ~ Explain the use of budget targets as performance benchmarks

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100. A manufacturing business operating at 70% capacity incurs variable costs of $218 750. What is the variable costs at an 80% capacity for the business? a. $191 406 *b. $250 000 c. $239 750 d. None of the options listed Correct answer: b Learning objective 6.4 ~ Explain the use of budget targets as performance benchmarks

101. Zariz Ltd budgeted product costs for the third quarter of 2019 were based on an expected volume of 2000 units. The budgeted unit costs appear below.

Direct material Direct labour Variable overhead Fixed overhead Total

$1.50 2.25 4.25 3.00 $11.00

What was Zariz Ltd’s total budgeted product cost for the third quarter of 2019? a. $16 500 *b. $22 000 c. $4500 d. $16 000 Correct answer: b Learning objective 6.4 ~ Explain the use of budget targets as performance benchmarks

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102. Zariz Ltd budgeted product costs for the third quarter of 2019 were based on an expected volume of 2000 units. The budgeted unit costs appear below.

Direct material Direct labour Variable overhead Fixed overhead Total

$1.50 2.25 4.25 3.00 $11.00

If Zariz Ltd had a budgeted volume of 2500 units, the total budgeted product cost for the third quarter of 2019 would have been: *a. $26 000. b. $16 000. c. $20 500. d. none of the options listed.

Correct answer: a Learning objective 6.4 ~ Explain the use of budget targets as performance benchmarks

103. When budgets are used in performance evaluation, a challenge that arise for managers being evaluated is: *a. resentment from managers for costs they have no control over. b. controllable external factors. c. low employee turnover rate. d. none of the options listed.

Correct answer: a Learning objective 6.5 ~ Illustrate how budgets are used to monitor and motivate performance

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104. In a cash budget, operating cash disbursements include: a. repayments of long-term debt. b. purchases of plant assets. c. payments of dividends. *d. payments to suppliers.

Correct answer: d Learning objective 6.3 ~ Develop a cash budget

Testbank to accompany

Management accounting 5th edition by Eldenburg et al.

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Not for distribution. Instructors may assign selected questions in their LMS.

© John Wiley & Sons Australia, Ltd 2024

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Chapter 7: Job costing systems True/false questions

1. Inventoriable product costs consist of the direct and indirect costs of producing goods. *a. True b. False Correct answer: a Learning objective 7.1 ~ Explain the flow of costs through the manufacturing process

2. Selling and administrative costs are indirect costs that are included in the inventoriable product cost. a. True *b. False Correct answer: b Learning objective 7.1 ~ Explain the flow of costs through the manufacturing process

3. A period cost is expensed directly to the statement of profit or loss in the period in which they occur. *a. True b. False Correct answer: a Learning objective 7.1 ~ Explain the flow of costs through the manufacturing process

4. Job costing is the process of assigning costs to custom products where the cost object is the individual job. *a. True b. False Correct answer: a Learning objective 7.1 ~ Explain the flow of costs through the manufacturing process

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5. In job costing, direct materials are traced to the job while direct labour and manufacturing overhead are allocated to the job. a. True *b. False Correct answer: b Learning objective 7.1 ~ Explain the flow of costs through the manufacturing process

6. An architect is a business which is likely to use job costing. *a. True b. False Correct answer: a Learning objective 7.1 ~ Explain the flow of costs through the manufacturing process

7. Prime costs are direct labour and direct material. *a. True b. False Correct answer: a Learning objective 7.1 ~ Explain the flow of costs through the manufacturing process

8. GAAP requires a product cost for finished goods inventory only. a. True *b. False Correct answer: b Learning objective 7.1 ~ Explain the flow of costs through the manufacturing process

9. Goods that are in production but not yet complete are classified as work in process. *a. True b. False Correct answer: a Learning objective 7.1 ~ Explain the flow of costs through the manufacturing process

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10. Inventory is reported at cost in the statement of financial position. *a. True b. False Correct answer: a Learning objective 7.1 ~ Explain the flow of costs through the manufacturing process

11. Cost of sales is shown in the statement of financial position. a. True *b. False Correct answer: b Learning objective 7.1 ~ Explain the flow of costs through the manufacturing process

12. Non-manufacturing costs are treated as period costs. *a. True b. False Correct answer: a Learning objective 7.1 ~ Explain the flow of costs through the manufacturing process

13. Job costing uses subsidiary ledgers to track the costs of individual jobs. *a. True b. False Correct answer: a Learning objective 7.2 ~ Calculate the inventoriable product cost for customised products

14. An example of a source document in a job costing system is a materials requisition form. *a. True b. False Correct answer: a Learning objective 7.2 ~ Calculate the inventoriable product cost for customised products

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15. A computerised job costing system enter direct material and direct labour costs into electronic source documents. *a. True b. False Correct answer: a Learning objective 7.2 ~ Calculate the inventoriable product cost for customised products

16. Manufacturing overhead includes all production costs except direct materials and direct labour. *a. True b. False Correct answer: a Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

17. A job can be an individual product or a batch of products. *a. True b. False Correct answer: a Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

18. Variable overhead includes costs such as management salaries and insurance. a. True *b. False Correct answer: b Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

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19. Organisations can use single or multiple overhead cost pools. *a. True b. False Correct answer: a Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

20. When the nature or level of overhead differs across activities or departments the organisation should use a single overhead cost pool. a. True *b. False Correct answer: b Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

21. An allocation base is chosen for each department in job costing. a. True *b. False Correct answer: b Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

22. The allocation base is a measure of activity that is used to allocate costs to a cost object. *a. True b. False Correct answer: a Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

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23. The allocation rate in job costing is the dollar amount per unit of allocation base used to allocate overhead to each cost object. *a. True b. False Correct answer: a Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

24. The estimated allocation rate equals actual overhead cost divided by estimated quantity of allocation base. a. True *b. False Correct answer: b Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

25. In actual costing overhead is allocated using the actual quantity of the allocation base multiplied by the actual allocation rate. *a. True b. False Correct answer: a Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

26. In both actual and normal costing the actual cost of direct materials and direct labour is recorded. *a. True b. False Correct answer: a Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

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27. In normal costing overhead is allocated using the estimated allocation rate multiplied by the actual quantity of allocation base. *a. True b. False Correct answer: a Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

28. The assignment of overhead to individual jobs requires information about each job’s use of the allocation base. *a. True b. False Correct answer: a Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

29. Underapplied overhead occurs when actual costs are less than the amount of overhead allocated. a. True *b. False Correct answer: b Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

30. To calculate under or overapplied overhead compare the amount of overhead allocated to the actual overhead cost. *a. True b. False Correct answer: a Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

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31. The overhead control account records the actual overhead costs incurred and the overhead costs allocated. *a. True b. False Correct answer: a Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

32. There are normally three inventory accounts in a manufacturer’s general ledger: raw materials, cost of sales and finished goods. a. True *b. False Correct answer: b Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

33. When raw materials are purchased, the raw materials inventory account is credited. a. True *b. False Correct answer: b Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

34. Actual overhead is debited to the overhead control account. *a. True b. False Correct answer: a Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

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35. The journal entry to record overhead allocated is debit work in process and credit overhead control. *a. True b. False Correct answer: a Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

36. The amount of under or overapplied overhead must be removed with an adjusting entry at the end of the accounting period. *a. True b. False Correct answer: a Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

37. If the amount of over or underapplied overhead is material it should be allocated on a pro rata basis to work in process, finished goods and raw materials. a. True *b. False Correct answer: b Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

38. Overapplied overhead is always material and should be treated accordingly. a. True *b. False Correct answer: b Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

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39. In job costing if scrap can be sold it can reduce the cost of the job it was associated with or be credited to overhead. *a. True b. False Correct answer: a Learning objective 7.4 ~ Discuss the issues associated with spoilage, rework and scrap handled in job costing

40. When certain chemicals used in the production process evaporate beyond your control, this is referred to as normal spoilage. *a. True b. False Correct answer: a Learning objective 7.4 ~ Discuss the issues associated with spoilage, rework and scrap handled in job costing

41. Abnormal spoilage is part of everyday operations. a. True *b. False Correct answer: b Learning objective 7.4 ~ Discuss the issues associated with spoilage, rework and scrap handled in job costing

42. Job costing systems provide information for understanding the work profiles of individuals. a. True *b. False Correct answer: b Learning objective 7.5 ~ Critically analyse the uses and limitations of job costing for financial reporting

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43. Job costing information cannot be used for financial reporting purposes. a. True *b. False Correct answer: b Learning objective 7.5 ~ Critically analyse the uses and limitations of job costing for financial reporting

44. Job costing information requires accountants to make decisions about the type and number of cost pools to use for overhead. *a. True b. False Correct answer: a Learning objective 7.5 ~ Critically analyse the uses and limitations of job costing for financial reporting

45. When overhead costs from many departments are pooled managers have incentives to control costs. a. True *b. False Correct answer: b Learning objective 7.5 ~ Critically analyse the uses and limitations of job costing for financial reporting

46. Job cost estimates may be used by managers in quoting for future jobs. *a. True b. False Correct answer: a Learning objective 7.5 ~ Critically analyse the uses and limitations of job costing for financial reporting

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47. One reason why actual volume might be different than planned is unexpected demand for the company’s product. *a. True b. False Correct answer: a Learning objective 7.5 ~ Critically analyse the uses and limitations of job costing for financial reporting

48. When there are differences between estimates and actual amounts, one outcome is underapplied or overapplied overhead. *a. True b. False Correct answer: a Learning objective 7.5 ~ Critically analyse the uses and limitations of job costing for financial reporting

49. Job costing provides a cost estimate for individual jobs while process costing provides an average cost estimate for an individual unit of product. *a. True b. False Correct answer: a Learning objective 7.5 ~ Critically analyse the uses and limitations of job costing for financial reporting

50. Mismeasurement of inputs into the costing system is likely to be lower in companies that have just commenced operations. a. True *b. False Correct answer: b Learning objective 7.5 ~ Critically analyse the uses and limitations of job costing for financial reporting

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Multiple-choice questions

51. Which cost would not be included as an inventoriable product cost? a. Factory manager’s salary b. Depreciation of factory equipment *c. Sales commissions d. None (i.e. all would be included as inventoriable product costs) Correct answer: c Learning objective 7.1 ~ Explain the flow of costs through the manufacturing process

52. All of the following are likely to use job costing except: a. chartered accountant. b. house builder. c. printing shop. *d. oil refinery.

Correct answer: d Learning objective 7.1 ~ Explain the flow of costs through the manufacturing process

53. Under a job costing system the raw materials ledger account is what type of account? *a. Asset b. Liability c. Revenue d. Expense Correct answer: a Learning objective 7.1 ~ Explain the flow of costs through the manufacturing process

54. Under a job costing system the total cost of all the incomplete jobs recorded in the subsidiary ledger is reconciled to the: a. cost of goods sold account. b. finished goods inventory account. *c. work-in-process account. d. overhead control account.

Correct answer: c Learning objective 7.1 ~ Explain the flow of costs through the manufacturing process

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55. Which statement is true? a. Period costs are expensed in the period the product is sold. b. Period costs are initially inventoried, then expensed. *c. Product costs are expensed in the period the product is sold. d. Product costs are expensed as the product is produced.

Correct answer: c Learning objective 7.1 ~ Explain the flow of costs through the manufacturing process

56. When products are sold the cost is: *a. debited to cost of sales. b. credited to cost of sales. c. debited to finished goods. d. none of the above.

Correct answer: a Learning objective 7.1 ~ Explain the flow of costs through the manufacturing process

57. Which of the following is not a source document used in job costing? a. Materials requisition forms b. Time sheet c. Job sheet *d. Employment contract Correct answer: d Learning objective 7.2 ~ Calculate the inventoriable product cost for customised products

58. Manufacturing overhead costs can be traced to a job: a. using the number of kilograms of materials consumed by the job. b. using the number of labour hours consumed by the job. c. using the number of litres of water consumed by the job. *d. none of the above since there too many manufacturing overheads.

Correct answer: d Learning objective 7.2 ~ Calculate the inventoriable product cost for customised products

59. A time sheet is used in job costing to record:

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a. direct material costs. b. manufacturing overheads. c. an employees’ super contributions. *d. direct labour hours.

Correct answer: d Learning objective 7.2 ~ Calculate the inventoriable product cost for customised products

60. In which order do the following activities take place for job costing?

I For each overhead cost pool, calculate an overhead allocation rate.

II Identify the relevant cost object.

III Identify one or more overhead cost pools and allocation bases.

IV For each overhead cost pool, allocate costs to the cost object. a. I, II, III, IV *b. II, III, I, IV c, III, IV, I, II d. IV, I, II, III Correct answer: b Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

61. Which of the following is a fixed cost? a. Indirect materials b. Direct labour *c. Production manager salary d. Direct material Correct answer: c Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

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62. In a takeaway coffee bar which of the following are variable costs? a. Takeaway coffee cups b. Coffee granules *c. All of the options listed d. None of the options listed Correct answer: c Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

63. Manufacturing job costing systems are least likely to use which of the following bases to allocate overhead? a. Direct labour hours *b. Number of departments c. Direct labour costs d. Machine hours Correct answer: b Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

64. Which statement concerning actual and normal costing is true? *a. Information from normal costing is used for pricing purposes. b. Actual costing is carried out at the beginning of the accounting period. c. Under actual costing direct labour is traced to a job and under normal costing it is allocated. d. Over or underapplied overhead does not exist in normal costing.

Correct answer: a Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

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65. Use the following estimates to calculate the overhead allocation rate for the production department. Use direct labour hour as the allocation base.

Overhead Direct labour cost Direct labour hours

Production department $500 000 $250 000 12 500

a. $2 per direct labour dollar b. $0.50 per direct labour dollar *c. $40 per direct labour hour d. $0.025 per direct labour hour Correct answer: c Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

66. In job costing recording actual overhead results in a debit to: *a. the overhead control account. b. the work in process inventory account. c. the finished goods inventory account. d. the cost of goods sold account.

Correct answer: a Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

67. If estimated production overhead in the assembly department is $240 000; actual overhead is $216 000; estimated machine hours in the assembly department are 60 000 hours; and actual machine hours are 62 000 hours, what is the overhead allocation rate? Use normal costing. a. $3.60 per machine hour *b. $4 per machine hour c. $3.87 per machine hour d. $3.49 per machine hour Correct answer: b Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

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68. Estimated production overhead in the machining department is $200 000; actual overhead is $204 000; estimated machine hours in the machining department are 4000 hours; and actual machine hours are 3700 hours. Job 12B used 20 machine hours. Using normal costing, what is the machining department overhead charged to job 12B? a. $1081 b. $50 c. $54 *d. $1000 Correct answer: d Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

69. If estimated production overhead in the painting department is $120 000; actual overhead is $116 000; estimated machine hours in the painting department are 30 000 hours; and actual machine hours are 28 000 hours, the underapplied/overapplied overhead is: a. $12 000 overapplied. *b. $4000 underapplied. c. $4000 overapplied. d. $8000 underapplied.

Correct answer: b Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

70. Brianna’s Dancewear Ltd manufactures a specialty line of leotards using a job costing system. During June, the following costs were incurred in completing job BB201: direct materials $14 700; direct labour $6300; non-factory administrative costs $1200; and selling costs $5600. Factory overhead was applied at the rate of $20.00 per machine hour and Job BB201 required 100 machine hours. If Job BB201 resulted in 2300 good leotards, what would the cost of goods sold per unit be? a. $12.43 b. $12.96 *c. $10.00 d. $10.52 Correct answer: c Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

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71. In a job costing system, what would the accounting entry to record the payment of factory wages for the month be? a. Debit cost of goods sold; credit bank b. Debit work in process; credit overhead control account c. Debit factory wages; credit work in process *d. Debit work in process; credit wages payable Correct answer: d Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

72. In a job costing system the accounting entry to record the delivery of job XZY is: *a. debit cost of sales; credit finished goods. b. debit work in process; credit profit and loss summary account. c. debit finished goods inventory; credit work in process. d. debit cost of sales, credit profit and loss summary.

Correct answer: a Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

73. In a job costing system the accounting entry to record the use of raw materials is: a. debit to raw materials inventory; credit to work in process. b. debit to accounts payable, credit to raw materials inventory. *c. debit to work in process; credit to raw materials inventory. d. debit to work in process; credit to accounts payable.

Correct answer: c Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

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74. The journal entry ‘debit work in process and credit overhead control account’ records: a. actual overhead cost. b. use of indirect labour. *c. allocated overhead. d. none of the options listed.

Correct answer: c Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

75. If the balance of over or underapplied for the period is immaterial, it should be: a. pro-rated over cost of sales and finished goods. *b. assigned to cost of sales. c. carried forward to become the opening balance in the next accounting period. d. pro-rated over cost of sales, work in process and finished goods.

Correct answer: b Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

76. A rule of thumb for deciding if overhead over or underapplied is a material amount is: a. if it is more than 5% of total actual overhead costs. *b. if it is more than 10% of total actual overhead costs. c. if it is more than 5% of cost of sales. d. if it is more than 10% of cost of sales.

Correct answer: b Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

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77. The following information is available for product JH 947.

Direct material costs Direct labour costs Overhead allocation rate

$1.50 per unit of product $500.00 per batch of 1500 units $28 per machine hour

The cost of a job for 1500 units of product JH 947, which uses 35 machine hours, is: a. $1481.50. b. $2.49. c. $3158. *d. $3730.

Correct answer: d Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

78. Master House Ltd uses a job costing system that allocates overhead as a percentage of direct labour costs. The budget for this year was: direct materials $60 000, direct labour $30 000, overhead $60 000. The actual costs for this year were: direct materials $50 000, direct labour $35 000, overhead $55 000. How much overhead was over/under allocated? a. $0 *b. $15 000 over allocated c. $5000 over allocated d. cannot be determined Correct answer: b Learning objective 7.3 ~ Discuss the issues related to the allocation of overhead to individual jobs

79. Which statement concerning job costing is untrue? a. Actual job costs will almost certainly be different from estimated job costs. b. Under normal costing overhead is allocated to jobs using the estimated overhead allocation rate. *c. Under normal costing overhead is allocated to jobs using the estimated volume of usage of the allocation base. d. Managers monitor operations by comparing actual job costs to the original estimate.

Correct answer: c Learning objective 7.4 ~ Discuss the issues associated with spoilage, rework and scrap handled in job costing

80. The opportunity costs of spoilage and rework on a job is:

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a. selling spoiled products at cost. b. scrapping the job before incurring additional costs. *c. forgone profit, loss of reputation and market share. d. Rework the spoilt product with inferior and cheap materials.

Correct answer: c Learning objective 7.4 ~ Discuss the issues associated with spoilage, rework and scrap handled in job costing

81. Which of these is not an uncertainty in measuring job costs? a. Whether and how to trace direct costs b. The choice of overhead cost pools c. The choice of allocation bases *d. None of the above (i.e. all are uncertainties in measuring job costs) Correct answer: d Learning objective 7.5 ~ Critically analyse the uses and limitations of job costing for financial reporting

82. One of the reasons for a difference in estimating the cost of a job and the actual cost of a job is: a. allocating overheads using actual costing. b. allocating overheads using several-allocation basis. c. the choice of allocation bases. *d. allocating manufacturing overheads using normal costing.

Correct answer: d Learning objective 7.5 ~ Critically analyse the uses and limitations of job costing for financial reporting

Testbank to accompany

Management accounting 1.241

Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

5th edition by Eldenburg et al.

Not for distribution. Instructors may assign selected questions in their LMS.

© John Wiley & Sons Australia, Ltd 2024

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Chapter 8: Process costing systems True/false questions

1. The accounting method for assigning production costs to mass produced products is process costing. *a. True b. False Correct answer: a Learning objective 8.1 ~ Assign costs to mass-produced products

2. Process costing assigns costs to cost pools and allocates the costs to individual units in a two-stage process. *a. True b. False Correct answer: a Learning objective 8.1 ~ Assign costs to mass-produced products

3. The cost pools used in process costing are typically overhead cost pools. a. True *b. False Correct answer: b Learning objective 8.1 ~ Assign costs to mass-produced products

4. Transferred in costs refer to the costs that flow between departments in mass production facilities. *a. True b. False Correct answer: a Learning objective 8.1 ~ Assign costs to mass-produced products

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5. There are two categories of costs in process costing: direct materials and direct overhead. a. True *b. False Correct answer: b Learning objective 8.1 ~ Assign costs to mass-produced products

6. Conversion costs are the combined costs of direct labour and manufacturing overhead. *a. True b. False Correct answer: a Learning objective 8.1 ~ Assign costs to mass-produced products

7. Direct labour is grouped with overhead in process costing because all units consume labour resources in the same pattern. *a. True b. False Correct answer: a Learning objective 8.1 ~ Assign costs to mass-produced products

8. In process costing direct materials are traced to products while direct labour and overhead are allocated.

a. True *b. False Correct answer: b Learning objective 8.1 ~ Assign costs to mass-produced products

9. Process costing environments are unlikely to have work in process inventories.

a. True *b. False Correct answer: b Learning objective 8.2 ~ Understand the concept of equivalent units and how they relate to the production process

10. Equivalent units measure the resources consumed by partially completed units relative to the resources needed to complete the units.

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*a. True b. False Correct answer: a Learning objective 8.2 ~ Understand the concept of equivalent units and how they relate to the production process

11. Equivalent units are calculated by multiplying the percentage of completion by the number of incomplete units. *a. True b. False Correct answer: a Learning objective 8.2 ~ Understand the concept of equivalent units and how they relate to the production process

12. The equivalent unit calculation is not required for finished goods.

*a. True b. False Correct answer: a Learning objective 8.2 ~ Understand the concept of equivalent units and how they relate to the production process

13. When using the weighted average method to calculate cost per equivalent unit, the cost is calculated as Total costs / Equivalent units for total work. *a. True b. False Correct answer: a Learning objective 8.3 ~ Calculate product costs using the weighted average and first-in, first-out (FIFO) methods

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14. The weighted average costing method calculates an average unit cost which is applied to finished goods and work in process inventory.

*a. True b. False Correct answer: a Learning objective 8.3 ~ Calculate product costs using the weighted average and first-in, first-out (FIFO) methods

15. In the weighted average method, costs from beginning work in process are averaged with costs incurred during the current period and then allocated to units completed and ending work in process. *a. True b. False Correct answer: a Learning objective 8.3 ~ Calculate product costs using the weighted average and first-in, first-out (FIFO) methods

16. The weighted average method isolates efficiencies or inefficiencies in each period by using an average cost.

a. True *b. False Correct answer: b Learning objective 8.3 ~ Calculate product costs using the weighted average and first-in, first-out (FIFO) methods

17. In the weighted average method, cost per equivalent unit is often calculated separately for materials costs and conversion costs. *a. True b. False Correct answer: a Learning objective 8.3 ~ Calculate product costs using the weighted average and first-in, first-out (FIFO) methods

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18. When using the FIFO method of process costing, the cost per equivalent unit is calculated by Current period costs / Equivalent units for work performed this period. *a. True b. False Correct answer: a Learning objective 8.3 ~ Calculate product costs using the weighted average and first-in, first-out (FIFO) methods

19. FIFO assumes that the units in beginning work in process will be completed and transferred out first.

*a. True b. False Correct answer: a Learning objective 8.3 ~ Calculate product costs using the weighted average and first-in, first-out (FIFO) methods 20. Under the FIFO method of process costing, the total manufacturing costs of beginning work in process units will include the prior period costs plus the costs incurred in the current period to complete them.

*a. True b. False Correct answer: a Learning objective 8.3 ~ Calculate product costs using the weighted average and first-in, first-out (FIFO) methods

21. Under the FIFO method of process costing, the total manufacturing costs of units started and completed within a period will be the costs incurred in the current period to complete them less the prior period costs attached to beginning inventory.

a. True *b. False Correct answer: b Learning objective 8.3 ~ Calculate product costs using the weighted average and first-in, first-out (FIFO) methods

22. If manufacturing costs change significantly from period to period weighted average costing will produce the more accurate product cost.

a. True *b. False Correct answer: b

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Learning objective 8.3 ~ Calculate product costs using the weighted average and first-in, first-out (FIFO) methods 23. The weighted average cost per unit and the FIFO cost per unit will be identical if there is no beginning work in process inventory.

*a. True b. False Correct answer: a Learning objective 8.3 ~ Calculate product costs using the weighted average and first-in, first-out (FIFO) methods

24. Journal entries for job and process costing is the same except that materials, labour and overhead costs are assigned to departments.

*a. True b. False Correct answer: a Learning objective 8.4 ~ Create journal entries for process costing 25. As units are completed in a department, their costs are transferred to WIP of the next department.

*a. True b. False Correct answer: a Learning objective 8.4 ~ Create journal entries for process costing

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26. When manufacturing a product in multiple departments, costs are transferred from one department to the next until the last department when completed units are transferred WIP inventory.

a. True * b. False Correct answer: b Learning objective 8.5 ~ Calculate product costs in a process where there are multiple production departments

27. When the costs from one department to next occurs, the costs are called transfer-out costs.

a. True *b. False Correct answer: b Learning objective 8.5 ~ Calculate product costs in a process where there are multiple production departments

28. Spoilage refers to product that is unacceptable and is discarded, reworked or sold at a reduced price. *a. True b. False Correct answer: a Learning objective 8.6 ~ Understand the issues associated with spoilage costs in process costing

29. Inspection for spoilage is carried out once the product is ready for sale. a. True *b. False Correct answer: b Learning objective 8.6 ~ Understand the issues associated with spoilage costs in process costing

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30. The way the spoilage cost is treated in the accounting records depends on whether the spoilage is considered normal or abnormal. *a. True b. False Correct answer: a Learning objective 8.6 ~ Understand the issues associated with spoilage costs in process costing

31. The cost of a partially complete spoiled unit is treated as though the unit had been completed. *a. True b. False Correct answer: a Learning objective 8.6 ~ Understand the issues associated with spoilage costs in process costing

32. Normal spoilage consists of defective units that arise as part of regular operations. *a. True b. False Correct answer: a Learning objective 8.6 ~ Understand the issues associated with spoilage costs in process costing

33. In a process costing system, the cost of normal spoilage is allocated to all units produced as part of overhead. *a. True b. False Correct answer: a Learning objective 8.6 ~ Understand the issues associated with spoilage costs in process costing

34. A type of abnormal spoilage is spoilage that occurs because of external environmental events. *a. True b. False Correct answer: a Learning objective 8.6 ~ Understand the issues associated with spoilage costs in process costing

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35. All spoilage in a process costing system is considered normal spoilage. a. True *b. False Correct answer: b Learning objective 8.6 ~ Understand the issues associated with spoilage costs in process costing

36. The costs associated with abnormal spoilage is excluded from product costs and treated as a separate loss. *a. True b. False Correct answer: a Learning objective 8.6 ~ Understand the issues associated with spoilage costs in process costing

37. Signs that an organisation might have a high spoilage rate include higher than average warranty liabilities or a poor reputation for product quality. *a. True b. False Correct answer: a Learning objective 8.6 ~ Understand the issues associated with spoilage costs in process costing 38. Spoiled units should not typically be reworked because it is not possible to hide the original defect.

a. True *b. False Correct answer: b Learning objective 8.6 ~ Understand the issues associated with spoilage costs in process costing

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39. Cost–benefit analysis is used to determine whether to rework a spoiled item.

*a. True b. False Correct answer: a Learning objective 8.6 ~ Understand the issues associated with spoilage costs in process costing

40. The opportunity costs of spoilage are generally not measured. *a. True b. False Correct answer: a Learning objective 8.6 ~ Understand the issues associated with spoilage costs in process costing

41. Scrap is the incidental materials left over from normal manufacturing processes. *a. True b. False Correct answer: a Learning objective 8.6 ~ Understand the issues associated with spoilage costs in process costing

42. Scrap should always be immediately disposed of using environmentally friendly procedures. a. True *b. False Correct answer: b Learning objective 8.6 ~ Understand the issues associated with spoilage costs in process costing

43. If scrap has value then it should be recorded as part of inventory. *a. True b. False Correct answer: a Learning objective 8.6 ~ Understand the issues associated with spoilage costs in process costing

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44. A type of opportunity cost associated with spoilage and rework is loss of reputation. *a. True b. False Correct answer: a Learning objective 8.6 ~ Understand the issues associated with spoilage costs in process costing

45. Process costing makes assumptions about exactly when and how costs are incurred during the production process. *a. True b. False Correct answer: a Learning objective 8.7 ~ Identify the uses and limitations of process cost information

46. Percentage of completion for work in process units is subject to judgement. *a. True b. False Correct answer: a Learning objective 8.7 ~ Identify the uses and limitations of process cost information

47. If the percentage of completion is over estimated in ending work in process this will affect the cost per equivalent unit for this period and next period. *a. True b. False Correct answer: a Learning objective 8.7 ~ Identify the uses and limitations of process cost information

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Multiple-choice questions

48. The correct order for the steps in preparing a process costing report is: I Summarise total costs to account for II Calculate the cost per equivalent unit III Account for cost of units completed and cost of ending WIP IV Summarise total physical and equivalent units a. I, II, III IV. b. IV, III, II, I. c. IV, I, II, III. *d. I, IV, II, III. Correct answer: d Learning objective 8.1 ~ Assign costs to mass-produced products

49. A costing system that determines an average cost for all units of product in a particular time period is a(n): a. job costing system. *b. process costing system. c. batch costing system. d. activity-costing system.

Correct answer: b Learning objective 8.1 ~ Assign costs to mass-produced products

50. Which type of company would be most likely use a process costing system? *a. Milk factory b. Custom furniture maker c. Accounting firm d. Aircraft manufacturer Correct answer: a Learning objective 8.1 ~ Assign costs to mass-produced products

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51. Equivalent units of production: a. are the number of whole units produced in a batch. *b. are calculated by converting all units to a common denominator. c. compares the number of units that should have been completed with that actually produced d. are equal to the number of physical units.

Correct answer: b Learning objective 8.2 ~ Understand the concept of equivalent units and how they relate to the production process

52. Production costs during the current period are kept separate from that of the previous period in the: a. job costing method. *b. FIFO method. c. just-in-time method. d. weighted average method.

Correct answer: b Learning objective 8.3 ~ Calculate product costs using the weighted average and first-in, first-out (FIFO) methods

53. When using weighted average process costing: a. the costs attached to beginning work in process are kept separate from all other costs. *b. the beginning work in process costs are added to current period costs. c. units in ending inventory are not included when calculating equivalent units. d. the weighted average cost is used for the current period and future periods.

Correct answer: b Learning objective 8.3 ~ Calculate product costs using the weighted average and first-in, first-out (FIFO) methods

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54. Because the weighted average and FIFO methods treat beginning inventory differently, if a firm has beginning inventory in a process costing system and the FIFO method is used, it will: a. always have a higher cost per equivalent unit than the weighted average method for materials. b. always have a lower cost per equivalent unit than the weighted average method for conversion costs. c. always have a higher number of equivalent units of production for conversion costs than the weighted the average method. *d. always have a lower number of equivalent units of production for conversion costs than the weighted average method.

Correct answer: d Learning objective 8.3 ~ Calculate product costs using the weighted average and first-in, first-out (FIFO) methods

55. Arohata Ltd started 12 000 units during the month of March. 1200 units were in the beginning work in process inventory and 800 units in the ending work in process inventory.

Units completed and transferred out during March will be: a. 12 000. *b. 12 400. c. 6200. d. 10 000.

Correct answer: b Learning objective 8.2 ~ Understand the concept of equivalent units and how they relate to the production process

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56. Forthefunofit Ltd uses a process costing system. Direct materials are added at the beginning of the process. During January, Department A had a beginning inventory of 2000 units, 50% complete for conversion costs. During the month 14 000 units were started and there were 1000 units in ending inventory, 40% complete for conversion costs.

Using weighted average process costing, the equivalent units for direct material for the month were: a. 13 600. *b. 16 000. c. 15 000. d. 15 600.

Correct answer: b Learning objective 8.2 ~ Understand the concept of equivalent units and how they relate to the production process

57. Forthefunofit Ltd uses a process costing system. Direct materials are added at the beginning of the process. During January, Department A had a beginning inventory of 2000 units, 50% complete for conversion costs. During the month 14 000 units were started and there were 1000 units in ending inventory, 40% complete for conversion costs.

Using FIFO process costing, the equivalent units for direct materials for the month were: a. 13 600. b. 16 600. c. 16 000. *d. 14 000.

Correct answer: d Learning objective 8.2 ~ Understand the concept of equivalent units and how they relate to the production process

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58. Forthefunofit Ltd uses a process costing system. Direct materials are added at the beginning of the process. During January, Department A had a beginning inventory of 2000 units, 50% complete for conversion costs. During the month 14 000 units were started and there were 1000 units in ending inventory, 40% complete for conversion costs.

Using weighted average process costing, the equivalent units for conversion costs for the month were: a. 14 100. b. 15 000. c. 16 000. *d. 15 400.

Correct answer: d Learning objective 8.2 ~ Understand the concept of equivalent units and how they relate to the production process

59. Forthefunofit Ltd uses a process costing system. Direct materials are added at the beginning of the process. During January, Department A had a beginning inventory of 2000 units, 50% complete for conversion costs. During the month 14 000 units were started and there were 1000 units in ending inventory, 40% complete for conversion costs.

Using FIFO process costing, the equivalent units for conversion costs for the month were: *a. 14 400. b. 15 400. c. 16 000. d. 14 100.

Correct answer: a Learning objective 8.2 ~ Understand the concept of equivalent units and how they relate to the production process

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60. Tres Dieci Ltd employs a process costing system in which direct materials are added at the beginning of the process. Direct material costs from the prior period for beginning work in process are $6000. The current period’s direct material costs total $60 000. The company began the period with 500 units, 60% complete; started 10 500 units; and finished the period with 1000 units, 50% complete.

Using the weighted average method, the direct material cost per equivalent unit for the period is: *a. $6.00. b. $5.71. c. $6.60. d. $5.46.

Correct answer: a Learning objective 8.3 ~ Calculate product costs using the weighted average and first-in, first-out (FIFO) methods

61. Tres Dieci Ltd employs a process costing system in which direct materials are added at the beginning of the process. Direct material costs from the prior period for beginning work in process are $6000. The current period’s direct material costs total $60 000. The company began the period with 500 units, 60% complete; started 10 500 units; and finished the period with 1000 units, 50% complete.

Using a FIFO system, the direct material cost per equivalent unit is: a. $6.00. b. $5.46. c. $6.60. *d. $5.71.

Correct answer: d Learning objective 8.3 ~ Calculate product costs using the weighted average and first-in, first-out (FIFO) methods

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62. Bright n Breezy Ltd employs a process costing system. Direct materials are added at the beginning of the process. Relevant information about July’s activities follows.

1 July

During July 31 July

Beginning Inventory 1500 units (60% complete) DM Cost $5925 CC Cost $4095 15 000 units started DM added $150 000 CC added $83 520 Ending Inventory 3000 units (40%)

Using the FIFO method, the number of units started and completed in July was: a. 15 000. *b. 12 000. c. 13 500. d. 16 500.

Correct answer: b Learning objective 8.2 ~ Understand the concept of equivalent units and how they relate to the production process

63. Bright n Breezy Ltd employs a process costing system. Direct materials are added at the beginning of the process. Relevant information about July’s activities follows.

1 July

During July 31 July

Beginning Inventory 1500 units (60% complete) DM Cost $5925 CC Cost $4095 15 000 units started DM added $150 000 CC added $83 520 Ending Inventory 3000 units (40%)

Using the FIFO method, the number of equivalent units of conversion costs was: *a. 13 800. b. 15 300. c. 12 000. d. 14 700.

Correct answer: a Learning objective 8.2 ~ Understand the concept of equivalent units and how they relate to the production process

64. Bright n Breezy Ltd employs a process costing system. Direct materials are added at the beginning of the process. Relevant information about July’s activities follows.

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1 July

During July 31 July

Beginning Inventory 1500 units (60% complete) DM Cost $5925 CC Cost $4095 15 000 units started DM added $150 000 CC added $83 520 Ending Inventory 3000 units (40%)

Using the FIFO method, the cost per equivalent unit for direct material during July was: a. $9.09. b. $9.80. *c. $10.00. d. $11.11.

Correct answer: c Learning objective 8.3 ~ Calculate product costs using the weighted average and first-in, first-out (FIFO) methods

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65. Bright n Breezy Ltd employs a process costing system. Direct materials are added at the beginning of the process. Relevant information about July’s activities follows.

1 July

During July 31 July

Beginning Inventory 1500 units (60% complete) DM Cost $5925 CC Cost $4095 15 000 units started DM added $150 000 CC added $83 520 Ending Inventory 3000 units (40%)

Using the FIFO method, the cost of goods completed and transferred out during July was (choose the closest answer as answers will vary according to rounding): a. $196 257. *b. $206 277. c. $213 277. d. $213 257.

Correct answer: b Learning objective 8.3 ~ Calculate product costs using the weighted average and first-in, first-out (FIFO) methods

66. Bright n Breezy Ltd employs a process costing system. Direct materials are added at the beginning of the process. Relevant information about July’s activities follows.

1 July

During July 31 July

Beginning Inventory 1500 units (60% complete) DM Cost $5925 CC Cost $4095 15 000 units started DM added $150 000 CC added $83 520 Ending Inventory 3000 units (40%)

Using the weighted average method, the number of equivalent units for direct material was: a. 13 500. b. 14 250. *c. 16 500. d. 13 500.

Correct answer: c Learning objective 8.2 ~ Understand the concept of equivalent units and how they relate to the production process

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67. Bright n Breezy Ltd employs a process costing system. Direct materials are added at the beginning of the process. Relevant information about July’s activities follows.

1 July

During July 31 July

Beginning Inventory 1500 units (60% complete) DM Cost $5925 CC Cost $4095 15 000 units started DM added $150 000 CC added $83 520 Ending Inventory 3000 units (40%)

Using the weighted average method, the cost per equivalent unit for conversion costs was: a. $5.68. *b. $5.96. c. $6.49. d. $6.10.

Correct answer: b Learning objective 8.3 ~ Calculate product costs using the weighted average and first-in, first-out (FIFO) methods

68. Bright n Breezy Ltd employs a process costing system. Direct materials are added at the beginning of the process. Relevant information about July’s activities follows.

1 July

During July 31 July

Beginning Inventory 1500 units (60% complete) DM Cost $5925 CC Cost $4095 15 000 units started DM added $150 000 CC added $83 520 Ending Inventory 3000 units (40%)

Using the weighted average method, the cost of the goods completed and transferred out was: a. $127 575. b. $155 925. c. $213 300. *d. $208 035.

Correct answer: d Learning objective 8.3 ~ Calculate product costs using the weighted average and first-in, first-out (FIFO) methods

69. Bright n Breezy Ltd employs a process costing system. Direct materials are added at the beginning of the process. Relevant information about July’s activities follows.

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1 July

During July 31 July

Beginning Inventory 1500 units (60% complete) DM Cost $5925 CC Cost $4095 15 000 units started DM added $150 000 CC added $83 520 Ending Inventory 3000 units (40%)

Using the weighted average method, the cost of the ending work in process inventory for July was: a. $46 230. b. $18 540. *c. $35 502. d. $28 350.

Correct answer: c Learning objective 8.3 ~ Calculate product costs using the weighted average and first-in, first-out (FIFO) methods

70. On 1st June, Drabadore Ltd had 40 000 units in process, which were 30% completed. Materials are added at the beginning of the process. During the month 320 000 units were started and 340 000 completed. Ending work in process was 50% complete. By what amount would the equivalent units of materials differ if weighted average were used instead of FIFO? *a. 40 000 more. b. 0. c. 12 000 more. d. 28 000 less.

Correct answer: a Learning objective 8.3 ~ Calculate product costs using the weighted average and first-in, first-out (FIFO) methods

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71. Assume there were 10 000 units in beginning work in process, 60% complete. 30 000 units were completed during the month. Ending work in process is 50% complete, which is equivalent to 4000 units for conversion costs. Materials are added at the beginning of the process. The FIFO method is used.

The number of units started this month is: a. 20 000 units. b. 32 000 units. *c. 28 000 units. d. 15 280 units.

Correct answer: c Learning objective 8.3 ~ Calculate product costs using the weighted average and first-in, first-out (FIFO) methods

72. Martin’s Masterpieces Ltd makes mass produced acrylic paints. The dye mixing machines leave behind residue that can be recycled and used again in the next batch of production. The entry to record this in the ledger is: *a. debit raw materials inventory; credit work in process inventory. b. debit raw materials inventory; credit overhead control. c. debit work in process inventory; credit raw materials inventory. d. debit work in process inventory; credit overhead control.

Correct answer: a Learning objective 8.4 ~ Create journal entries for process costing

73. Which of the following is a use of job and processing cost information? a. Assign manufacturing costs to inventory b. Assign manufacturing costs to cost of sales *c. All of the options listed d. None of the options listed Correct answer: c Learning objective 8.4 ~ Create journal entries for process costing

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74. The information below relates to Tish Manufacturers: A 1000 units (20% complete) were transferred from Department A to Department B at a total cost of $20 000. Additional conversion costs incurred to complete the 1000 units in Department B was $20 000. Direct materials are added at the beginning of the process in Department B. In February, 10 000 units were started in Department B at of which $44 000 were direct materials costs and conversion costs were $200 000. The closing WIP (60% complete) for June was 2000 units. The transfer-in unit were: a. 22 000. b. 18 000. c. 36 000. *d. 20 000.

Correct answer: d Learning objective 8.5 ~ Calculate product costs in a process where there are multiple production departments

75. The information below relates to Tish Manufacturers.

A 1000 units (20% complete) were transferred from Department A to Department B at a total cost of $20 000. Additional conversion costs incurred to complete the 1000 units in Department B was $20 000. Direct materials are added at the beginning of the process in Department B. In February, 10 000 units were started in Department B at of which $44 000 were direct materials costs and conversion costs were $200 000. The closing WIP (60% complete) for June was 2000 units. What is the cost per equivalent unit for conversion costs? a. $10 b. $2 c. $12 *d. $11 Correct answer: d Learning objective 8.5 ~ Calculate product costs in a process where there are multiple production departments

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76. Normal spoilage refers to: *a. defective units that arise as part of regular operations. b. warranty costs. c. claims on insurance. d. obsolete products.

Correct answer: a Learning objective 8.6 ~ Understand the issues associated with spoilage costs in process costing

77. The cost of abnormal spoilage: a. is charged to general overhead. b. is charged to the job. *c. is recorded as a separate loss. d. is included in work in process.

Correct answer: c Learning objective 8.6 ~ Understand the issues associated with spoilage costs in process costing

78. Abnormal spoilage costs generally appear in the external financial accounts: a. on the statement of financial position as part of work in process. *b. on the statement of profit or loss as part of some other item. c. on the statement of financial position as part of finished goods. d. on the statement of profit or loss as a line item ‘loss on abnormal spoilage’.

Correct answer: b Learning objective 8.6 ~ Understand the issues associated with spoilage costs in process costing

79. Katrina’s Cosmetics makes a generic brand of mineral powder it sells to a multinational chain or retail stores. Discoloured powders have their labels removed and are sold as ‘seconds’. This is an example of: a. scrap. *b. normal spoilage. c rework. d. poor quality control.

Correct answer: b Learning objective 8.6 ~ Understand the issues associated with spoilage costs in process costing

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80. Upon inspection Charlie’s Chocolate Milk Company found that all the bottles of iced mochaccino in batch YC 128 had been mixed with the incorrect syrup. A batch of syrup had been incorrectly labelled by the supplier, which is highly unusual. The bottles had to be thrown away. This is an example of: a. scrap. b. rework. *c. all of the options listed. d. none of the options listed.

Correct answer: c Learning objective 8.6 ~ Understand the issues associated with spoilage costs in process costing

81. Martin’s Masterpieces Ltd makes mass produced acrylic paints. The dye mixing machines leave behind residue that can be recycled and used again in the next batch of production. The entry to record this in the ledger is: *a. debit raw materials inventory; credit work in process inventory. b. debit raw materials inventory; credit overhead control. c. debit work in process inventory; credit raw materials inventory. d. debit work in process inventory; credit overhead control.

Correct answer: a Learning objective 8.4 ~ Create journal entries for process costing

82. Which of the following is a use of job and processing cost information? a. Assign manufacturing costs to inventory b. Assign manufacturing costs to cost of sales *c. All of the options listed d. None of the options listed

Correct answer: c Learning objective 8.4 ~ Create journal entries for process costing

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83. In process costing it is possible to split conversion costs into: a. direct and indirect cost pools. *b. fixed and variable cost pools. c. departmental cost pools. d. direct material cost pools.

Correct answer: b Learning objective 8.7 ~ Identify the uses and limitations of process cost information

84. Mismeasurement in calculating normal spoilage automatically causes errors in calculating: a. rework. b. scrap. *c. abnormal spoilage. d. all of the options listed.

Correct answer: c Learning objective 8.6 ~ Understand the issues associated with spoilage costs in process costing

85. When ending inventories are high, inaccurate measurement of percentage of completion: a. does not affect cost reports. b. distorts cost reports in this period. *c. distorts cost reports in this period and next period. d. causes higher spoilage costs this period and next period.

Correct answer: c Learning objective 8.7 ~ Identify the uses and limitations of process cost information

86. If percentage of completion in ending inventory is overestimated: *a. the cost per equivalent is understated in this period. b. the cost per equivalent unit is overstated in this period. c. the cost per equivalent unit is not affected in this period. d. understates the cost per equivalent unit in this period only if FIFO method is used.

Correct answer: a Learning objective 8.7 ~ Identify the uses and limitations of process cost information

Testbank 1.269

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to accompany

Management accounting 5th edition by Eldenburg et al.

Not for distribution. Instructors may assign selected questions in their LMS.

© John Wiley & Sons Australia, Ltd 2024

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Chapter 9: Absorption and variable costing True/false 1. Absorption costing statements conform to generally accepted accounting principles. *a. True b. False Correct answer: a Learning objective 9.1 ~ Understand the difference between absorption costing and variable costing, and prepare income statements under each method 2. Absorption costing income statements typically include ‘gross margin’ as a line item. *a. True b. False Correct answer: a Learning objective 9.1 ~ Understand the difference between absorption costing and variable costing, and prepare income statements under each method 3. In absorption costing systems, costs on the income statement are classified by their behaviour. a. True *b. False Correct answer: b Learning objective 9.1 ~ Understand the difference between absorption costing and variable costing, and prepare income statements under each method 4. Absorption costing systems subtract inventoried costs from revenues at the time of production. a. True *b. False Correct answer: b Learning objective 9.1 ~ Understand the difference between absorption costing and variable costing, and prepare income statements under each method

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5. ‘Cost’ and ‘expense’ are two terms for describing the same concept. a. True *b. False Correct answer: b Learning objective 9.1 ~ Understand the difference between absorption costing and variable costing, and prepare income statements under each method 6. Theoretical capacity is a supply-based capacity measurement. *a. True b. False Correct answer: a Learning objective 9.1 ~ Understand the difference between absorption costing and variable costing, and prepare income statements under each method 7. Theoretical capacity and practical capacity are demand-based capacity measurements. a. True *b. False Correct answer: b Learning objective 9.1 ~ Understand the difference between absorption costing and variable costing, and prepare income statements under each method 8. Practical capacity is always less than theoretical capacity. *a. True b. False Correct answer: a Learning objective 9.1 ~ Understand the difference between absorption costing and variable costing, and prepare income statements under each method

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9. The Australian Tax Office requires managers to use practical capacity for tax reporting because it is more stable over time and therefore less easy to manipulate. *a. True b. False Correct answer: a Learning objective 9.1 ~ Understand the difference between absorption costing and variable costing, and prepare income statements under each method 10. Normal capacity and budgeted capacity are demand-based capacity measurements. *a. True b. False Correct answer: a Learning objective 9.1 ~ Understand the difference between absorption costing and variable costing, and prepare income statements under each method 11. Budgeted capacity is always greater than normal capacity. a. True *b. False Correct answer: b Learning objective 9.1 ~ Understand the difference between absorption costing and variable costing, and prepare income statements under each method 12. On a variable costing income statement, costs are grouped according to their behaviour. *a. True b. False Correct answer: a Learning objective 9.1 ~ Understand the difference between absorption costing and variable costing, and prepare income statements under each method

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13. Variable costing income statements include fixed manufacturing overhead as part of the costs of ending inventory. a. True *b. False Correct answer: b Learning objective 9.1 ~ Understand the difference between absorption costing and variable costing, and prepare income statements under each method 14. When units produced are equal to units sold, operating profit under absorption costing will equal operating profit under variable costing. *a. True b. False Correct answer: a Learning objective 9.1 ~ Understand the difference between absorption costing and variable costing, and prepare income statements under each method 15. Variable costing does not conform to GAAP because it does not match manufacturing costs with revenues. *a. True b. False Correct answer: a Learning objective 9.1 ~ Understand the difference between absorption costing and variable costing, and prepare income statements under each method 16. Synonyms for variable costing include direct costing and marginal costing. *a. True b. False Correct answer: a Learning objective 9.1 ~ Understand the difference between absorption costing and variable costing, and prepare income statements under each method

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17. Variable costing data can often be used for making non-routine operating decisions. *a. True b. False Correct answer: a Learning objective 9.1 ~ Understand the difference between absorption costing and variable costing, and prepare income statements under each method 18. Because absorption costing capitalises fixed manufacturing overhead costs to inventory, managers using it may build up inventories unnecessarily. *a. True b. False Correct answer: a Learning objective 9.1 ~ Understand the difference between absorption costing and variable costing, and prepare income statements under each method 19. JIT systems are incompatible with absorption costing systems. a. True *b. False Correct answer: b Learning objective 9.1 ~ Understand the difference between absorption costing and variable costing, and prepare income statements under each method 20. Normal costing uses budgeted direct costs and actual volumes with an actual fixed overhead allocation rate. a. True *b. False Correct answer: b Learning objective 9.2 ~ Calculate absorption costs using normal costing

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21. Using an estimated fixed overhead allocation rate is preferred for three reasons, denominator, numerator and information timeliness. *a. True b. False Correct answer: a Learning objective 9.2 ~ Calculate absorption costs using normal costing 22. Under absorption costing all variable manufacturing costs are product costs and under variable costing all manufacturing costs are product costs. a. True *b. False Correct answer: b Learning objective 9.3 ~ Identify the uses and limitations of absorption and variable costing income statements 23. Under variable costing fixed and variable manufacturing overhead are allocated to inventory. a. True *b. False Correct answer: b Learning objective 9.3 ~ Identify the uses and limitations of absorption and variable costing income statements

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Multiple-choice questions

24. Shipp Ltd budgets the following costs for a normal monthly volume of 500 units selling for $4000 each.

Variable Fixed

Manufacturing $800 000 600 000

Non-manufacturing $1 000 000 400 000

The product cost per unit using absorption costing is: a. $1600. *b. $2800. c. $2000. d. $2400.

Correct answer: b Learning objective 9.2 ~ Calculate absorption costs using normal costing 25. Shipp Ltd budgets the following costs for a normal monthly volume of 500 units selling for $4000 each.

Variable Fixed

Manufacturing $800 000 600 000

Non-manufacturing $1 000 000 400 000

The product cost per unit using variable costing is: *a. $1600. b. $2800. c. $2000. d. $2400.

Correct answer: a Learning objective 9.2 ~ Calculate absorption costs using normal costing

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26. Shipp Ltd budgets the following costs for a normal monthly volume of 500 units selling for $4000 each.

Variable Fixed

Manufacturing $800 000 600 000

Non-manufacturing $1 000 000 400 000

The profit (loss) using absorption costing when 500 units are produced and 400 units are sold is: a. $840 000 loss. b. $160 000 profit. c. $480 000 profit. *d. $720 000 loss.

Correct answer: d Learning objective 9.2 ~ Calculate absorption costs using normal costing 27. Shipp Ltd budgets the following costs for a normal monthly volume of 500 units selling for $4000 each.

Variable Fixed

Manufacturing $800 000 600 000

Non-manufacturing $1 000 000 400 000

The profit (loss) using variable costing when 500 units are produced and 400 units are sold is: *a. $840 000 loss. b. $160 000 profit. c. $480 000 profit. d. $720 000 loss.

Correct answer: a Learning objective 9.2 ~ Calculate absorption costs using normal costing

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28. Exeter Ltd introduced a new mass-produced specialty product early in the year.

Production and sales of this product for the first four months are as follows.

Month 1 2 3 4

Units produced Units sold 800 600 1100 800 1200 1100 1000 1400

The firm’s budgeted fixed overhead is $200 000 and budgeted output is 1000 units per month. The volume variance, if any, is carried forward month-by-month and closed at the end of the year. When 1000 units are produced and sold, expected monthly operating profit is $40 000.

In which month(s) was variable costing profit higher than absorption costing profit? *a. 4 b. l, 2 and 3 c. 2 and 3 d. 3 and 4 Correct answer: a Learning objective 9.2 ~ Calculate absorption costs using normal costing

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29. Exeter Ltd introduced a new mass-produced specialty product early in the year.

Production and sales of this product for the first four months are as follows.

Month 1 2 3 4

Units produced Units sold 800 600 1100 800 1200 1100 1000 1400

The firm’s budgeted fixed overhead is $200 000 and budgeted output is 1000 units per month. The volume variance, if any, is carried forward month-by-month and closed at the end of the year. When 1000 units are produced and sold, expected monthly operating profit is $40 000.

In which month(s) was variable costing profit lower than absorption costing profit? a. 4 *b. 1, 2 and 3 c. 2 and 3 d. 3 and 4 Correct answer: b Learning objective 9.2 ~ Calculate absorption costs using normal costing 30. Exeter Ltd introduced a new mass-produced specialty product early in the year.

Production and sales of this product for the first four months are as follows.

Month 1 2 3 4

Units produced Units sold 800 600 1100 800 1200 1100 1000 1400

The firm’s budgeted fixed overhead is $200 000 and budgeted output is 1000 units per month. The volume variance, if any, is carried forward month-by-month and closed at the end of the year. When 1000 units are produced and sold, expected monthly operating profit is $40 000.

Compared to using absorption costing, using variable costing will result in operating profit for the 4-month period to be: a. higher. *b. lower. c. same. d. cannot be determined.

Correct answer: b

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Learning objective 9.2 ~ Calculate absorption costs using normal costing 31. Bella Ltd has operated for 2 years. During that time, it produced 1000 units in year 1 and 800 in year 2, while sales were 800 units in year 1 and 900 in year 2. Variable production costs were $8 per unit during both years. The company uses last-in, first-out (LIFO) for inventory costing. The absorption costing income statements for these 2 years were as follows.

Sales Less: Cost of goods sold Beginning inventory Product costs Ending inventory Gross profit Less: Operating expenses Variable Fixed Operating income

Year 1 $16 000 $ 0 11 000 (2 200)

1 200 5 000

8 800 7 200

6 200 $1 000

Year 2 $18 000 $ 2 200 9 400 (1 175)

1 350 5 000

10 425 7 575

6 350 1 225

Using variable costing, what would be the cost of goods sold for year 1? *a. $6400 b. $8800 c. $8000 d. $7600 Correct answer: a Learning objective 9.2 ~ Calculate absorption costs using normal costing

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32. Bella Ltd has operated for 2 years. During that time, it produced 1000 units in year 1 and 800 in year 2, while sales were 800 units in year 1 and 900 in year 2. Variable production costs were $8 per unit during both years. The company uses last-in, first-out (LIFO) for inventory costing. The absorption costing income statements for these 2 years were as follows.

Sales Less: Cost of goods sold Beginning inventory Product costs Ending inventory Gross profit Less: Operating expenses Variable Fixed Operating income

Year 1 $16 000 $ 0 11 000 (2 200)

1 200 5 000

8 800 7 200 6 200 $1 000

Year 2 $18 000 $ 2 200 9 400 (1 175)

1 350 5 000

10 425 7 575 6 350 1 225

Using variable costing, what would be the operating profit for year 1? a. $1600 b. $(2800) c. $2200 *d. $400 Correct answer: d Learning objective 9.2 ~ Calculate absorption costs using normal costing

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33. Bella Ltd has operated for 2 years. During that time, it produced 1000 units in year 1 and 800 in year 2, while sales were 800 units in year 1 and 900 in year 2. Variable production costs were $8 per unit during both years. The company uses last-in, first-out (LIFO) for inventory costing. The absorption costing income statements for these 2 years were as follows.

Sales Less: Cost of goods sold Beginning inventory Product costs Ending inventory Gross profit Less: Operating expenses Variable Fixed Operating income

Year 1 $16 000 $ 0 11 000 (2 200)

1 200 5 000

8 800 7 200 6 200 $1 000

Year 2 $18 000 $ 2 200 9 400 (1 175)

1 350 5 000

10 425 7 575 6 350 1 225

Using variable costing, what would be the ending inventory for year 2? a. $2200 b. $1100 c. $1175 *d. $800 Correct answer: d Learning objective 9.2 ~ Calculate absorption costs using normal costing

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34. Bella Ltd has operated for 2 years. During that time, it produced 1000 units in year 1 and 800 in year 2, while sales were 800 units in year 1 and 900 in year 2. Variable production costs were $8 per unit during both years. The company uses last-in, first-out (LIFO) for inventory costing. The absorption costing income statements for these 2 years were as follows.

Sales Less: Cost of goods sold Beginning inventory Product costs Ending inventory Gross profit Less: Operating expenses Variable Fixed Operating income

Year 1 $16 000 $ 0 11 000 (2 200)

1 200 5 000

8 800 7 200 6 200 $1 000

Year 2 $18 000 $ 2 200 9 400 (1 175)

1 350 5 000

10 425 7 575 6 350 1 225

Using variable costing, what would be the operating profit for year 2? a. $1000 b. $1600 c. $4000 *d. $1450 Correct answer: d Learning objective 9.2 ~ Calculate absorption costs using normal costing

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35. Taylor Ltd just finished its second year of operations. In the first year it produced 1000 units and sold 400. The second year resulted in the same production level, but sales were 1200 units. The variable costing income statements for both years are shown below.

Sales Variable cost of goods sold Variable selling & administration Contribution margin Fixed overhead Fixed selling & administration Operating income

Year 1 Year 2 $40 000 $120 000 $22 000 $66 000 800 22 800 2 400 68 400 17 200 51 600 30 000 30 000 15 000 45 000 15 000 45 000 $(27 800) $6 600

The product cost per unit during year 1 using absorption would be: a. $67 000. b. $73 000. c. $82 000. *d. $85 000.

Correct answer: d Learning objective 9.2 ~ Calculate absorption costs using normal costing 36. Taylor Ltd just finished its second year of operations. In the first year it produced 1000 units and sold 400. The second year resulted in the same production level, but sales were 1200 units. The variable costing income statements for both years are shown below.

Sales Variable cost of goods sold Variable selling & administration Contribution margin Fixed overhead Fixed selling & administration Operating income

Year 1 Year 2 $40 000 $120 000 $22 000 $66 000 800 22 800 2 400 68 400 17 200 51 600 30 000 30 000 15 000 45 000 15 000 45 000 $(27 800) $6 600

The operating profit for year 1 using absorption costing would be: a. $6000. b. $(9000). *c. $(9800). d. $600.

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37. Taylor Ltd just finished its second year of operations. In the first year it produced 1000 units and sold 400. The second year resulted in the same production level, but sales were 1200 units. The variable costing income statements for both years are shown below.

Sales Variable cost of goods sold Variable selling & administration Contribution margin Fixed overhead Fixed selling & administration Operating income

Year 1 $40 000 $22 000 800 22 800 17 200 30 000 15 000 45 000 $(27 800)

Year 2 $120 000 $66 000 2 400 68 400 51 600 30 000 15 000 45 000 $6 600

The ending inventory for year 2 using absorption costing would be: a. $51 000. *b. $34 000. c. $22 000. d. $17 000.

Correct answer: b Learning objective 9.2 ~ Calculate absorption costs using normal costing

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38. Taylor Ltd just finished its second year of operations. In the first year it produced 1000 units and sold 400. The second year resulted in the same production level, but sales were 1200 units. The variable costing income statements for both years are shown below.

Sales Variable cost of goods sold Variable selling & administration Contribution margin Fixed overhead Fixed selling & administration Operating income

Year 1 $40 000 $22 000 800 22 800 17 200 30 000 15 000 45 000 $(27 800)

Year 2 $120 000 $66 000 2 400 68 400 51 600 30 000 15 000 45 000 $6 600

The operating profit for year 2 using absorption costing would be: a. $(9800). *b. $600. c. $(9000). d. $6000.

Correct answer: b Learning objective 9.2 ~ Calculate absorption costs using normal costing

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39. Rubble Ltd develops an annual overhead budget at the start of each year (which has remained unchanged for the last 2 years) and closes any over- or underapplied overhead at year-end. For the firm’s single product, the following ending inventory levels have been experienced during the last 7 months.

Month 31 December 31 January 28 February 31 March 30 April 31 May 30 June

Units 300 300 200 400 300 400 500

For how many months would variable costing profit be higher than absorption? a. 1 *b. 2 c. 3 d. 4 Correct answer: b Learning objective 9.2 ~ Calculate absorption costs using normal costing

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40. Rubble Ltd develops an annual overhead budget at the start of each year (which has remained unchanged for the last 2 years) and closes any over- or underapplied overhead at year-end. For the firm’s single product, the following ending inventory levels have been experienced during the last 7 months.

Month 31 December 31 January 28 February 31 March 30 April 31 May 30 June

Units 300 300 200 400 300 400 500

In how many months would variable costing profit be lower than absorption costing profit? a. 1 b. 2 *c. 3 d. 4 Correct answer: c Learning objective 9.2 ~ Calculate absorption costs using normal costing

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41. Rubble Ltd develops an annual overhead budget at the start of each year (which has remained unchanged for the last 2 years) and closes any over- or underapplied overhead at year-end. For the firm’s single product, the following ending inventory levels have been experienced during the last 7 months.

Month 31 December 31 January 28 February 31 March 30 April 31 May 30 June

Units 300 300 200 400 300 400 500

In how many months would variable costing profit be equal to absorption costing profit? a. 0 *b. 1 c. 2 d. 3 Correct answer: b Learning objective 9.2 ~ Calculate absorption costs using normal costing 42. Total production overhead is treated as a product cost when using: *a. absorption costing. b. throughput costing. c. variable costing. d. throughput costing and absorption costing.

Correct answer: a Learning objective 9.2 ~ Calculate absorption costs using normal costing 43. Variable production overhead is allocated to inventory when using: *a. absorption costing and variable costing. b. absorption costing and throughput costing. c. variable costing and throughput costing. d. absorption costing, variable costing and throughput costing.

Correct answer: a Learning objective 9.2 ~ Calculate absorption costs using normal costing

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44. Under which costing method(s) are administrative and selling costs considered period expenses?

I Absorption costing II Variable costing a. I only b. II only c. Neither I or II *d. I and II Correct answer: d Learning objective 9.2 ~ Calculate absorption costs using normal costing 45. Any costs traced or allocated to inventory are expensed when units are sold in which of the following costing method(s)?

I Absorption costing II Variable costing a. I only b. II only c. Neither I or II *d. I and II Correct answer: d Learning objective 9.2 ~ Calculate absorption costs using normal costing 46. Direct materials costs are deducted from revenues when units are sold under which of the following costing method(s)?

I Absorption costing II Variable costing a. I only b. II only c. Neither I or II *d. I and II Correct answer: d Learning objective 9.2 ~ Calculate absorption costs using normal costing

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47. The chief executive officer told Nick, the production manager at BRS Ltd, to reduce costs and increase profits. In response, Nick decided to produce more units for inventory.

BRS is most likely using: a. variable costing. b. throughput costing. *c. absorption costing. d. capacity-based costing.

Correct answer: c Learning objective 9.2 ~ Calculate absorption costs using normal costing 48. Which costing method matches costs and revenues most appropriately for generally accepted accounting principles? a. Throughput costing *b. Absorption costing c. Variable costing d. Activity-based costing Correct answer: b Learning objective 9.2 ~ Calculate absorption costs using normal costing 49. During its first year of operations, Kima Ltd experienced the following.

Units manufactured Units sold Product costs: Variable Fixed Selling and administrative: Variable Fixed

70 000 60 000 $10.50/unit $315 000 $1.60/unit $140 000

The amount of variable costs deducted from revenues under the variable costing approach would be: a. $847 000. b. $831 000. *c. $726 000. d. $742 000.

Correct answer: c Learning objective 9.2 ~ Calculate absorption costs using normal costing

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50. During its first year of operations, Kima Ltd experienced the following.

Units manufactured Units sold Product costs: Variable Fixed Selling and administrative: Variable Fixed

70 000 60 000 $10.50/unit $315 000 $1.60/unit $140 000

The amount of fixed costs deducted from revenues under the absorption costing approach would be: *a. $410 000. b. $455 000. c. $390 000. d. $435 000.

Correct answer: a Learning objective 9.2 ~ Calculate absorption costs using normal costing 51. During its first year of operations, Kima Ltd experienced the following.

Units manufactured Units sold Product costs: Variable Fixed Selling and administrative: Variable Fixed

70 000 60 000 $10.50/unit $315 000 $1.60/unit $140 000

If Kima calculates operating profit under the variable costing method as opposed to the absorption costing method, operating profit will be: *a. $45 000 lower. b. $270 000 lower. c. $315 000 higher. d. $270 000 higher.

Correct answer: a Learning objective 9.2 ~ Calculate absorption costs using normal costing

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52. During its first year of operations, Kima Ltd experienced the following.

Units manufactured Units sold Product costs: Variable Fixed Selling and administrative: Variable Fixed

70 000 60 000 $10.50/unit $315 000 $1.60/unit $140 000

The cost of goods sold under absorption costing would be: a. $585 000. b. $735 000. c. $945 000. *d. $900 000.

Correct answer: d Learning objective 9.2 ~ Calculate absorption costs using normal costing 53. Philpott’s operating profit using absorption costing is $100. Its inventories using both absorption and variable costing are as follows.

Absorption costing Variable costing

Beginning of year End of year $98 $76

$86 $60

Under variable costing, operating profit would be: a. $102. b. $94. c. $100. *d. $96.

Correct answer: d Learning objective 9.2 ~ Calculate absorption costs using normal costing

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54. Variable costing profit for the period 1 July through 30 September was $400. Inventory data are as follows.

1 July 30 September

Absorption costing $1600 $1900

Variable costing $1200 $1400

What is the profit if absorption costing is used? a. $300 *b. $500 c. $400 d. $600 Correct answer: b Learning objective 9.2 ~ Calculate absorption costs using normal costing 55. General Ltd budgeted fixed overhead costs of $25 000 per quarter and 1000 units per quarter in its normal absorption costing system. Any volume variance is carried forward and closed at year end. The company experienced the following activity.

Quarter 1 2 3 4

Units produced Units sold 900 600 1200 1000 1400 1200 1000 1500

The volume variance was favourable in quarter(s)? a. 2, 3 and 4 *b. 2 and 3 c. 3 and 4 d. 3 Correct answer: b Learning objective 9.2 ~ Calculate absorption costs using normal costing

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56. General Ltd budgeted fixed overhead costs of $25 000 per quarter and 1000 units per quarter in its normal absorption costing system. Any volume variance is carried forward and closed at year-end. The company experienced the following activity.

Quarter 1 2 3 4

Units produced Units sold 900 600 1200 1000 1400 1200 1000 1500

The volume variance in quarter 1 was: *a. $2500 unfavourable.

B. $10 000 unfavourable.

C. $7500 favourable.

D. $5000 favourable.

Correct answer: a Learning objective 9.2 ~ Calculate absorption costs using normal costing 57. General Ltd budgeted fixed overhead costs of $25 000 per quarter and 1000 units per quarter in its normal absorption costing system. Any volume variance is carried forward and closed at year end. The company experienced the following activity.

Quarter 1 2 3 4

Units produced Units sold 900 600 1200 1000 1400 1200 1000 1500

The volume variance for the year was: a. 0. *b. favourable. c. unfavourable. d. unable to be determined.

Correct answer: b Learning objective 9.2 ~ Calculate absorption costs using normal costing

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58. Exter Manufacturing experienced the following activity over the last four years.

Year 1 2 3 4

Units produced 800 1100 1200 1000

Units sold 600 800 1100 1400

The firm’s estimated fixed overhead allocation rate was unchanged over the 4 years at $200 per unit, based on budgeted fixed overhead of $200 000 and 1000 units of output. The volume variance is closed to the cost of goods sold each year. Exter maintains an absorption costing system.

The volume variance for Year 2 is: a. $40 000 unfavourable. b. $60 000 favourable. c. $100 000 unfavourable. *d. $20 000 favourable.

Correct answer: d Learning objective 9.2 ~ Calculate absorption costs using normal costing 59. Under generally accepted accounting principles, absorption costing is used for: *a. job costing and process costing. b. neither job costing nor process costing. c. process costing only. d. job costing only.

Correct answer: a Learning objective 9.2 ~ Calculate absorption costs using normal costing 60. In variable costing: *a. only variable production costs are considered product costs. b. all non-variable production costs are treated as product costs. c. direct costs are considered to be period costs. d. all variable costs are considered product costs.

Correct answer: a Learning objective 9.2 ~ Calculate absorption costs using normal costing

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61. Absorption costing: *a. is used for external reporting purposes. b. includes variable and fixed period costs in inventory. c. is the method in which the fixed overhead cost is not included in inventory. d. treats production costs as expenses in the period in which they are incurred.

Correct answer: a Learning objective 9.2 ~ Calculate absorption costs using normal costing 62. Under the variable costing method, fixed production overhead is: a. included in inventory. *b. expensed in the period incurred. c. expensed as a product cost. d. expensed when the inventory is sold.

Correct answer: b Learning objective 9.2 ~ Calculate absorption costs using normal costing 63. Absorption costing will produce a larger operating profit than variable costing if: a. fixed production overhead increases. b. fixed production overhead decreases. *c. units produced exceed units sold. d. units sold exceed units produced.

Correct answer: c Learning objective 9.2 ~ Calculate absorption costs using normal costing 64. When calculating an estimated fixed production cost overhead allocation rate, accountants choose the: *a. allocation base to use as the denominator. b. allocation base to use as the numerator. c. allocation base to use as the rate. d. allocation base that minimises total fixed production overhead.

Correct answer: a Learning objective 9.2 ~ Calculate absorption costs using normal costing

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65. Supply-based capacity levels include: I Normal capacity II Practical capacity III Theoretical capacity a. I and II only. b. I and III only. *c. II and III only. d. I, II and III. Correct answer: c Learning objective 9.2 ~ Calculate absorption costs using normal costing 66. The capacity level which assumes continuous, uninterrupted production 365 days per year is called: a. budgeted capacity. b. normal capacity. c. practical capacity. *d. theoretical capacity.

Correct answer: d Learning objective 9.2 ~ Calculate absorption costs using normal costing 67. What type of capacity is the upper capacity limit that takes into account the organisation’s regularly scheduled times for production? *a. Tax capacity b. Practical capacity c. Scheduled capacity d. Normal capacity Correct answer: a Learning objective 9.2 ~ Calculate absorption costs using normal costing

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68. Practical capacity is estimated based on: a. engineering studies and labour use patterns. *b. the behaviour of fixed costs. c. the behaviour of variable costs. d. demand patterns.

Correct answer: b Learning objective 9.2 ~ Calculate absorption costs using normal costing 69. The difference between practical capacity and theoretical capacity is: a. budgeted fixed costs. *b. expected downtimes. c. excess capacity. d. nothing, because the two terms have the same meaning.

Correct answer: b Learning objective 9.2 ~ Calculate absorption costs using normal costing 70. Which of the following are demand-based capacity levels?

I Normal capacity II Budgeted capacity III Practical capacity *a. I and II only b. II and III only c. I and III only d. I, II and III Correct answer: a Learning objective 9.2 ~ Calculate absorption costs using normal costing 71. The volume variance is calculated as the: *a. difference between estimated fixed overhead costs and allocated fixed overhead costs. b. sum of estimated fixed overhead costs and allocated fixed overhead costs. c. difference between estimated fixed overhead costs and actual fixed overhead costs. d. difference between actual fixed overhead costs and allocated fixed overhead costs.

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Correct answer: a Learning objective 9.2 ~ Calculate absorption costs using normal costing 72. An estimated fixed overhead allocation rate: a. is unrealistically large if determined using theoretical capacity. *b. can be considered an estimated cost of capacity per unit. c. is usually based on theoretical capacity. d. does not provide information about opportunity costs of unused capacity.

Correct answer: b Learning objective 9.2 ~ Calculate absorption costs using normal costing 73. Which of the following types of capacity can result in an unrealistically small fixed overhead allocation rate if used as an allocation base? a. Normal capacity *b. Theoretical capacity c. Budgeted capacity d. Practical capacity Correct answer: b Learning objective 9.2 ~ Calculate absorption costs using normal costing 74. Direct material and direct labour costs are assigned to inventory when using: I Absorption costing II Variable costing *a. I only. b. II only. c. neither I or II. d. I and II. Correct answer: a Learning objective 9.2 ~ Calculate absorption costs using normal costing

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75. Brady Ltd uses a normal absorption costing system in which the overhead rate and variable manufacturing costs have remained unchanged for the last 2 years. During the current year the following activity occurred.

Denominator volume Unit sales Cost of goods sold Volume variance Operating income after adjusting for the volume variance Budgeted fixed overhead

25 000 units 20 000 units $170 000 $5 040 unfavourable $40 000 $90 000

The firm had no beginning or ending work in process inventories. However, there were 1000 units in beginning finished goods. The fixed overhead in cost of goods sold amounted to: a. $90 000. b. $66 960. *c. $72 000. d. $84 960.

Correct answer: c Learning objective 9.2 ~ Calculate absorption costs using normal costing 76. Brady Ltd uses a normal absorption costing system in which the overhead rate and variable manufacturing costs have remained unchanged for the last 2 years. During the current year the following activity occurred.

Denominator volume Unit sales Cost of goods sold Volume variance Operating income after adjusting for the volume variance Budgeted fixed overhead

25 000 units 20 000 units $170 000 $5 040 unfavourable $40 000 $90 000

The firm had no beginning or ending work in process inventories. However, there were 1000 units in beginning finished goods.

The variable product cost per unit was: *a. $4.90. b. $5.15. c. $4.00. d. $4.25.

Correct answer: a

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Learning objective 9.2 ~ Calculate absorption costs using normal costing

77. Brady Ltd uses a normal absorption costing system in which the overhead rate and variable manufacturing costs have remained unchanged for the last 2 years. During the current year the following activity occurred.

Denominator volume Unit sales Cost of goods sold Volume variance Operating income after adjusting for the volume variance Budgeted fixed overhead

25 000 units 20 000 units $170 000 $5 040 unfavourable $40 000 $90 000

The firm had no beginning or ending work in process inventories. However, there were 1000 units in beginning finished goods. The number of units produced was: a. 26 400. b. 25 000. c. 20 000. *d. 23 600.

Correct answer: d Learning objective 9.2 ~ Calculate absorption costs using normal costing

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78. Brady Ltd uses a normal absorption costing system in which the overhead rate and variable manufacturing costs have remained unchanged for the last 2 years. During the current year the following activity occurred.

Denominator volume Unit sales Cost of goods sold Volume variance Operating income after adjusting for the volume variance Budgeted fixed overhead

25 000 units 20 000 units $170 000 $5 040 unfavourable $40 000 $90 000

The firm had no beginning or ending work in process inventories. However, there were 1000 units in beginning finished goods. The number of units in ending finished goods inventory was: a. 7400. b. 6000. c. 1000. *d. 4600.

Correct answer: d Learning objective 9.2 ~ Calculate absorption costs using normal costing 79. Brady Ltd uses a normal absorption costing system in which the overhead rate and variable manufacturing costs have remained unchanged for the last 2 years. During the current year the following activity occurred.

Denominator volume Unit sales Cost of goods sold Volume variance Operating income after adjusting for the volume variance Budgeted fixed overhead

25 000 units 20 000 units $170 000 $5 040 unfavourable $40 000 $90 000

The firm had no beginning or ending work in process inventories. However, there were 1000 units in beginning finished goods. The sales revenue for the year was: a. $210 000. *b. $215 040. c. $260 000. d. $204 960.

Correct answer: b Learning objective 9.2 ~ Calculate absorption costs using normal costing

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80. Brady Ltd uses a normal absorption costing system in which the overhead rate and variable manufacturing costs have remained unchanged for the last 2 years. During the current year the following activity occurred.

Denominator volume Unit sales Cost of goods sold Volume variance Operating income after adjusting for the volume variance Budgeted fixed overhead

25 000 units 20 000 units $170 000 $5 040 unfavourable $40 000 $90 000

The firm had no beginning or ending work in process inventories. However, there were 1000 units in beginning finished goods.

If variable costing had been used, operating profit would be: *a. $27 040. b. $56 560. c. $52 960. d. $45 040.

Correct answer: a Learning objective 9.2 ~ Calculate absorption costs using normal costing

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81. Brady Ltd uses a normal absorption costing system in which the overhead rate and variable manufacturing costs have remained unchanged for the last 2 years. During the current year the following activity occurred.

Denominator volume Unit sales Cost of goods sold Volume variance Operating income after adjusting for the volume variance Budgeted fixed overhead

25 000 units 20 000 units $170 000 $5 040 unfavourable $40 000 $90 000

The firm had no beginning or ending work in process inventories. However, there were 1000 units in beginning finished goods.

If variable costing had been used, the cost of goods sold would be: a. $133 280. b. $93 100. c. $98 000. *d. $111 720.

Correct answer: d Learning objective 9.2 ~ Calculate absorption costs using normal costing

82. Absorption costing: a. is not in line with accounting standards. *b. is useful for external reporting. c. separate administration and selling costs into fixed and variable costs. d. does not expense inventory until sold.

Correct answer: b Learning objective 9.3 ~ Identify the uses and limitations of absorption and variable costing income statements

Testbank to accompany 1.306

Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

Management accounting 5th edition by Eldenburg et al.

Not for distribution. Instructors may assign selected questions in their LMS.

© John Wiley & Sons Australia, Ltd 2024

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Chapter 10: Flexible budgets, standard costs and variance analysis True/false questions

1. A flexible budget is a set of cost relationships that can be used to estimate costs and cash flows for any level of operations within the relevant range. *a. True b. False Correct answer: a Learning objective 10.1 ~ Understand flexible budgets and the use of sensitivity analysis

2. Another name for master budget is static budget. *a. True b. False Correct answer: a Learning objective 10.1 ~ Understand flexible budgets and the use of sensitivity analysis

3. A flexible budget uses the variable cost information from the static budget but changes the fixed costs to reflect actual volume. a. True *b. False Correct answer: b Learning objective 10.1 ~ Understand flexible budgets and the use of sensitivity analysis

4. Sensitivity analysis can be used to estimate the effects of deviations from budget assumptions. *a. True b. False Correct answer: a Learning objective 10.1 ~ Understand flexible budgets and the use of sensitivity analysis

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5. Flexible budget techniques are useful in the original planning phase to examine different iterations of the budget before the static budget is locked in. *a. True b. False Correct answer: a Learning objective 10.1 ~ Understand flexible budgets and the use of sensitivity analysis

6. Standard costs are the amount that managers expect to incur to produce a good or service under standard operating conditions. *a. True b. False Correct answer: a Learning objective 10.2 ~ Explain how standard costs are established

7. The use of standard costs is best suited to a business that has repetitive activities. *a. True b. False Correct answer: a Learning objective 10.2 ~ Explain how standard costs are established

8. To establish standard costs organisations need to identify the standard usage of resources and the standard costs of resources. *a. True b. False Correct answer: a Learning objective 10.2 ~ Explain how standard costs are established

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9. The standard cost of direct labour is computed as the standard price per labour hour multiplied by the standard labour hours per unit of output. *a. True b. False Correct answer: a Learning objective 10.2 ~ Explain how standard costs are established

10. It is not possible to calculate a standard cost of fixed overhead as fixed overhead is not determined by units of output. a. True *b. False Correct answer: b Learning objective 10.2 ~ Explain how standard costs are established

11. There are two types of standards: ideal standard and efficient standard. a. True *b. False Correct answer: b Learning objective 10.2 ~ Explain how standard costs are established

12. Ideal standards assume perfect operating conditions that achieve maximum efficiency. *a. True b. False Correct answer: a Learning objective 10.2 ~ Explain how standard costs are established

13. Ideal standards make allowances for unexpected events. a. True *b. False Correct answer: b Learning objective 10.2 ~ Explain how standard costs are established

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14. Currently attainable standards assume normal operating conditions which make allowances for inefficiencies in the production process. *a. True b. False Correct answer: a Learning objective 10.2 ~ Explain how standard costs are established

15. Organisations should always use ideal standards to motivate employees. a. True *b. False Correct answer: b Learning objective 10.2 ~ Explain how standard costs are established

16. Standards costs cannot be used for new products as no information about resource use is available. a. True *b. False Correct answer: b Learning objective 10.2 ~ Explain how standard costs are established

17. Standards should be reviewed periodically. *a. True b. False Correct answer: a Learning objective 10.2 ~ Explain how standard costs are established

18. Variances are differences between budgeted and actual results. *a. True b. False Correct answer: a Learning objective 10.3 ~ Communicate how variance information is analysed and used

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19. There are two reasons for calculating variances: bookkeeping and monitoring. *a. True b. False Correct answer: a Learning objective 10.3 ~ Communicate how variance information is analysed and used

20. Variances are calculated for two purposes, namely for recording purposes and monitoring purposes. *a. True b. False Correct answer: a Learning objective 10.3 ~ Communicate how variance information is analysed and used

21. One element of variance analysis is identifying reasons for variances. *a. True b. False Correct answer: a Learning objective 10.3 ~ Communicate how variance information is analysed and used

22. When actual costs exceed budgeted costs the variance will be favourable. a. True *b. False Correct answer: b Learning objective 10.3 ~ Communicate how variance information is analysed and used

23. A standard cost variance is the difference between a standard cost and an actual cost. *a. True b. False Correct answer: a Learning objective 10.3 ~ Communicate how variance information is analysed and used

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24. A standard cost variance can be broken down into a price variance and a direct variance. a. True *b. False Correct answer: b Learning objective 10.3 ~ Communicate how variance information is analysed and used

25. The static budget compared to flexible budget will compute a volume variance. *a. True b. False Correct answer: a Learning objective 10.3 ~ Communicate how variance information is analysed and used

26. A price variance is the difference between standard and actual prices paid for resources purchased and used. *a. True b. False Correct answer: a Learning objective 10.3 ~ Communicate how variance information is analysed and used

27. Efficiency variances provide information about how economically resources have been used. *a. True b. False Correct answer: a Learning objective 10.3 ~ Communicate how variance information is analysed and used

28. Calculating the dollar amount of a variance is all that is required for decision making. a. True *b. False Correct answer: b Learning objective 10.3 ~ Communicate how variance information is analysed and used

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29. Management by exception refers to investigating all variances. a. True *b. False Correct answer: b Learning objective 10.3 ~ Communicate how variance information is analysed and used

30. Managers choose which variance to investigate by considering the amount of the variance and any other relevant factors such as changes in trends. *a. True b. False Correct answer: a Learning objective 10.3 ~ Communicate how variance information is analysed and used

31. Interactions between employee incentives and variances may result in incentives creating unanticipated problems. *a. True b. False Correct answer: a Learning objective 10.3 ~ Communicate how variance information is analysed and used

32. If a variance is considered to be random or not expected to recur the appropriate management action is to delete the variance from the accounting records. a. True *b. False Correct answer: b Learning objective 10.3 ~ Communicate how variance information is analysed and used

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33. If variances show that the operations are better than expected the appropriate management action is to continue monitoring to ensure it is maintained and modify future operating plans accordingly. *a. True b. False Correct answer: a Learning objective 10.3 ~ Communicate how variance information is analysed and used

34. The preparation of the flexible budget eliminates the variance caused by volume differences in overall activity. *a. True b. False Correct answer: a Learning objective 10.4 ~ Apply the principles of flexible budgeting

35. If managers could accurately predict actual volume when preparing the master budget there would be no need for flexible budgets. *a. True b. False Correct answer: a Learning objective 10.4 ~ Apply the principles of flexible budgeting

36. Variances in standard costing can be separated in the following categories: direct materials, direct labour, fixed overhead and variable overhead. *a. True b. False Correct answer: a Learning objective 10.4 ~ Apply the principles of flexible budgeting

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37. The starting point for variance analysis is to compare the static budget to actual costs to determine volume variance. a. True *b. False Correct answer: b Learning objective 10.4 ~ Apply the principles of flexible budgeting

38. By using categories in an accounting system to separate variances into component parts can save time when looking for reasons for certain variances. *a. True b. False Correct answer: a Learning objective 10.4 ~ Apply the principles of flexible budgeting

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Multiple-choice questions 39. The master budget is also called a: *a. static budget. b. flexible budget. c. direct budget. d. cost budget.

Correct answer: a Learning objective 10.1 ~ Understand flexible budgets and the use of sensitivity analysis

40. The information in a static budget is biased when compared to actual results for: a. the same volume of operations. b. the minimum level of capacity of operations. *c. a different volume of operations. d. for the maximum capacity of operations.

Correct answer: c Learning objective 10.1 ~ Understand flexible budgets and the use of sensitivity analysis

41. A is a set of cost relationships that can be used to estimate costs for any level of operations within the relevant range. a. static budget b. standard cost *c. flexible budget d. master budget Correct answer: c Learning objective 10.1 ~ Understand flexible budgets and the use of sensitivity analysis

42. A tool that managers use to estimate the effects of deviations from budget assumptions is known as: *a. sensitivity analysis. b. variance analysis. c. standard costing. d. benchmarking.

Correct answer: a Learning objective 10.1 ~ Understand flexible budgets and the use of sensitivity analysis

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43. Expected costs per unit of input are called: a. standard prices. b. standard revenues. c. standard quantities. *d. standard costs.

Correct answer: d Learning objective 10.2 ~ Explain how standard costs are established

44. Standard costing allows management to: I II III

Plan operations Monitor Performance Control costs

a. I and II only. b. I and III only. c. II and III only. *d. I, II and III. Correct answer: d Learning objective 10.2 ~ Explain how standard costs are established

45. In a production setting, the standard cost of a unit of output is the sum of the standard costs of: a. direct material, direct labour and variable overhead. b. direct material, direct labour and fixed overhead. *c. direct material, direct labour, variable overhead and fixed overhead. d. direct material, direct labour and period costs.

Correct answer: c Learning objective 10.2 ~ Explain how standard costs are established

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46. Standard costs are established under operating plan assumptions which include: I II III

Volume of production activity Just in time inventory management Prices and quality of inputs

a. I and II only. *b. I and III only. c. II and III only. d. I, II and III. Correct answer: b Learning objective 10.2 ~ Explain how standard costs are established

47. The standard cost of fixed overhead is calculated by: a. standard fixed overhead allocation rate multiplied by standard quantity of direct labour per unit of output. b. standard fixed overhead allocation rate multiplied by standard quantity of allocation base per unit of input. *c. standard fixed overhead allocation rate multiplied by standard quantity of allocation base per unit of output. d. total fixed overhead multiplied by standard quantity of allocation base per unit of output.

Correct answer: c Learning objective 10.2 ~ Explain how standard costs are established

48. Ideal standards assume: *a. perfect operating conditions. b. normal operating conditions. c. substandard operating conditions. d. less than 100% efficiency.

Correct answer: a Learning objective 10.2 ~ Explain how standard costs are established

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49. Standards which assume normal operating conditions are called: a. ideal standards. b. efficiency standards. c. historical standards. *d. currently attainable standards.

Correct answer: d Learning objective 10.2 ~ Explain how standard costs are established

50. Sometimes a standard needs to be changed: a. as a result of insignificant favourable variances only. b. as a result of insignificant unfavourable variances only. c. as a result of insignificant favourable and unfavourable variances. *d. as a result of quality improvements.

Correct answer: d Learning objective 10.2 ~ Explain how standard costs are established

51. Variances are calculated for which of the following reasons: a. budgeting. b. bookkeeping. *c. all of the options listed. d. none of the options listed.

Correct answer: c Learning objective 10.3 ~ Communicate how variance information is analysed and used

52. The process of calculating variances and analysing the reasons they occurred is called: a. benchmarking. b. budget analysis. c. trend analysis. *d. variance analysis.

Correct answer: d Learning objective 10.3 ~ Communicate how variance information is analysed and used

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53. Variance analysis includes which of the following processes?

I II III

Calculating variances Choosing variances for further investigation Predicting variances in future periods

*a. I and II only b. I and III only c. II and III only d. I, II and III Correct answer: a Learning objective 10.3 ~ Communicate how variance information is analysed and used

54. If actual costs are less than budgeted costs then the variance will be: *a. favourable. b. unfavourable. c. immaterial. d. none of the options listed.

Correct answer: a Learning objective 10.3 ~ Communicate how variance information is analysed and used

54. If actual revenue is less than budgeted revenue then the variance will be: a. favourable. *b. unfavourable. c. immaterial. d. none of the options listed.

Correct answer: b Learning objective 10.3 ~ Communicate how variance information is analysed and used

55. Standard cost variances can be broken down into: a. price variances. b. efficiency variances. *c. all of the options listed. d. none of the options listed.

Correct answer: c Learning objective 10.3 ~ Communicate how variance information is analysed and used

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56. One of the limitations of price variance is: a. the variance ignores bulk discounts. b. the variance ignores interest rates. *c. the variance does not account for sufficient cash flows. d. none of the above Correct answer: c Learning objective 10.3 ~ Communicate how variance information is analysed and used

57. The difference between the standard and actual prices paid for resources purchased is a(n): *a. price variance. b. efficiency variance. c. volume variance. d. quantity variance.

Correct answer: a Learning objective 10.3 ~ Communicate how variance information is analysed and used

58. The difference between the standard quantity of an input and the actual quantity of an input is a(n): a. price variance. *b. efficiency variance. c. operating variance. d. none of the above.

Correct answer: b Learning objective 10.3 ~ Communicate how variance information is analysed and used

59. Management by exception means that managers investigate: a. all variances. b. all unfavourable variances. *c. variances they consider important. d. all exceptional variances.

Correct answer: c Learning objective 10.3 ~ Communicate how variance information is analysed and used

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60. How do managers decide which variances are important enough to investigate?

I When the variance is unfavourable II When the variance is larger than a specified amount or percentage III When the variance trends are increasing a. I only b. II only c. III only *d. II and III only Correct answer: d Learning objective 10.3 ~ Communicate how variance information is analysed and used

61. Variance analysis involves the steps listed below. In which order should the steps be performed?

1 Draw conclusions and take action 2 Calculate variances 3 Choose variances for further investigation 4 Identify reasons for variances a. 1, 2, 3, 4 *b. 2, 3, 4, 1 c. 2, 1, 4, 3 d. 2, 4, 3, 1 Correct answer: b Learning objective 10.3 ~ Communicate how variance information is analysed and used

62. Managers should consider possible interactions between incentives and variances because: a. research has shown that variance analysis reduces employee morale. *b. activities affect more than one department and incentives in one department may cause unfavourable variances in another department. c. rewards based on standard costs reduce organisational effectiveness. d. all of the options listed.

Correct answer: b Learning objective 10.3 ~ Communicate how variance information is analysed and used

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63. If the conclusion from a variance analysis is that the benchmark is inappropriate, the correct management action is to: a. write off the variance against cost of goods sold. b. do nothing. *c. revise benchmark. d. replace the manager who set the benchmark.

Correct answer: c Learning objective 10.3 ~ Communicate how variance information is analysed and used

64. If a variance analysis shows that operations are better than expected, managers should: a. do nothing. b. revise standard costs to make them harder to achieve. *c. monitor quality to ensure it was maintained. d. change the accounting records so that unrealistic expectations aren’t imposed in future.

Correct answer: c Learning objective 10.3 ~ Communicate how variance information is analysed and used

65. Standard cost for actual output is also called the: *a. flexible budget. b. static budget. c. master budget. d. quantity variance.

Correct answer: a Learning objective 10.4 ~ Apply the principles of flexible budgeting

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66. Thai Connection Ltd is a travel agency. They budget monthly costs of $50 000 plus $125 per customer served. They plan to serve 550 customers per month. During June they served 580 customers. Actual costs for June were $53 000 fixed costs and $65 000 variable costs.

The static budget for June is: *a. fixed costs $50 000; variable costs $68 750. b. fixed costs $50 000; variable costs $125. c. fixed costs $50 000; variable costs $65 000. c. fixed costs $53 000; variable costs $65 000.

Correct answer: a Learning objective 10.4 ~ Apply the principles of flexible budgeting

67. Thai Connection Ltd is a travel agency. They budget monthly costs of $50 000 plus $125 per customer served. They plan to serve 550 customers per month. During June they served 580 customers. Actual costs for June were $53 000 fixed costs and $65 000 variable costs.

The flexible budget for June is: a. fixed costs $50 000; variable costs $68 750. *b. fixed costs $50 000; variable costs $72 500. c. fixed costs $53 000; variable costs $65 000. c. fixed costs $53 000; variable costs $72 500.

Correct answer: b Learning objective 10.4 ~ Apply the principles of flexible budgeting

68. Thai Connection Ltd is a travel agency. They budget monthly costs of $50 000 plus $125 per customer served. They plan to serve 550 customers per month. During June they served 580 customers. Actual costs for June were $53 000 fixed costs and $65 000 variable costs.

The flexible budget variance for fixed costs in June is: a. $3750 unfavourable. b. $12 000 favourable. c. $0. *d. $3000 unfavourable.

Correct answer: d Learning objective 10.4 ~ Apply the principles of flexible budgeting

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69. Thai Connection Ltd is a travel agency. They budget monthly costs of $50 000 plus $125 per customer served. They plan to serve 550 customers per month. During June they served 580 customers. Actual costs for June were $53 000 fixed costs and $65 000 variable costs.

The flexible budget variance for variable costs in June is: a. $3750 favourable. b. $7500 unfavourable. c. $3750 unfavourable. *d. $7500 favourable.

Correct answer: d Learning objective 10.4 ~ Apply the principles of flexible budgeting

70. Leesh Manufacturing estimated that at a production level of 10 000 units their variable costs will be $160 000. If they increase their production level to 30 000 units, the variable costs will be: a. $160 000. *b. $480 000. c. $400 000. d. none of the options listed.

Correct answer: b Learning objective 10.4 ~ Apply the principles of flexible budgeting

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71. Fickle Factory Ltd produces unique large ceramic frogs. The accountant has collected the following information regarding standard costs.

Production input Direct materials Direct labour Variable overhead Fixed overhead

Standard cost 2 kilos of raw material Each kilo = $5 1 hour Direct labour is charged at $10 per hour $2 per direct labour hour $4 per frog

Total fixed overhead for the year is estimated to be $80 000. The selling price for each frog is $45.

Calculate the standard cost for one frog. a. $24 b. $22 *c. $26 d. $20 Correct answer: c Learning objective 10.4 ~ Apply the principles of flexible budgeting

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72. Fickle Factory Ltd produces unique large ceramic frogs. The accountant has collected the following information regarding standard costs.

Production input Direct materials Direct labour Variable overhead Fixed overhead

Standard cost 2 kilos of raw material Each kilo = $5 1 hour Direct labour is charged at $10 per hour $2 per direct labour hour $4 per frog

Total fixed overhead for the year is estimated to be $80 000. The selling price for each frog is $45.

The static budget for direct materials the year is: *a. $200 000. b. $100 000. c. $80 000. d. $10 000.

Correct answer: a Learning objective 10.4 ~ Apply the principles of flexible budgeting

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73. Fickle Factory Ltd produces unique large ceramic frogs. The accountant has collected the following information regarding standard costs.

Production input Direct materials Direct labour Variable overhead Fixed overhead

Standard cost 2 kilos of raw material Each kilo = $5 1 hour Direct labour is charged at $10 per hour $2 per direct labour hour $4 per frog

Total fixed overhead for the year is estimated to be $80 000. The selling price for each frog is $45. Actual sales and production was 22 000.

The flexible budget for direct materials the year is: a. $200 000. b. $100 000. *c. $220 000. d. $10 000.

Correct answer: c Learning objective 10.4 ~ Apply the principles of flexible budgeting

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74. Fickle Factory Ltd produces unique large ceramic frogs. The accountant has collected the following information regarding standard costs.

Production input Direct materials Direct labour Variable overhead Fixed overhead

Standard cost 2 kilos of raw material Each kilo = $5 1 hour Direct labour is charged at $10 per hour $2 per direct labour hour $4 per frog

Total fixed overhead for the year is estimated to be $80 000. The selling price for each frog is $45. Actual sales and production was 22 000. Actual direct material cost was $220 000.

The flexible budget variance for direct materials the year is: a. $20 000 unfavourable. *b. $0. c. $20 000 favourable. d. unable to be determined.

Correct answer: b Learning objective 10.4 ~ Apply the principles of flexible budgeting

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75. Fickle Factory Ltd produces unique large ceramic frogs. The accountant has collected the following information regarding standard costs.

Production input Direct materials Direct labour Variable overhead Fixed overhead

Standard cost 2 kilos of raw material Each kilo = $5 1 hour Direct labour is charged at $10 per hour $2 per direct labour hour $4 per frog

Total fixed overhead for the year is estimated to be $80 000. The selling price for each frog is $45. Actual sales and production was 22 000.

The flexible budget for fixed overhead for the year is: a. $88 000. b. $72 727. *c. $80 000. $ $10 000.

Correct answer: c Learning objective 10.4 ~ Apply the principles of flexible budgeting

Testbank to accompany

Management accounting 5th edition by 1.331

Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

Eldenburg et al.

Not for distribution. Instructors may assign selected questions in their LMS.

© John Wiley & Sons Australia, Ltd 2024

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Chapter 11: Variance analysis: revenue and cost True/false questions

1. The use of standards assists managers to identify the source of variances. *a. True b. False Correct answer: a Learning objective 11.1 ~ Identify variances for investigation

2. In order to resolve the problem of aggregation of variances, variances are broken down between components to identify significant variances. *a. True b. False Correct answer: a Learning objective 11.1 ~ Identify variances for investigation

3. The static budget is equal to budgeted revenue and costs multiplied by budgeted volume. *a. True b. False Correct answer: a Learning objective 11.1 ~ Identify variances for investigation

4. The flexible budget is equal to budgeted revenue and costs multiplied by actual volume. *a. True b. False Correct answer: a Learning objective 11.1 ~ Identify variances for investigation

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5. The sales volume variance can be broken down into market size variance, market share variance and product volume variance. a. True *b. False Correct answer: b Learning objective 11.1 ~ Identify variances for investigation

6. The sales price variance can be broken down into market size variance, market share variance and product mix variance. *a. True b. False Correct answer: a Learning objective 11.1 ~ Identify variances for investigation

7. The only variance for overhead is the production volume variance. a. True *b. False Correct answer: b Learning objective 11.1 ~ Identify variances for investigation

8. Variances for costs including material and labour can be broken down into price and efficiency variances. *a. True b. False Correct answer: a Learning objective 11.1 ~ Identify variances for investigation

9. Labour price variance is an example of a revenue variance. a. True *b. False Correct answer: b Learning objective 11.1 ~ Identify variances for investigation

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10. Revenue drivers include competition, market share and brand strength. *a. True b. False Correct answer: a Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

11. Revenue variances are excluded from variance analysis because they are outside the control of the business. a. True *b. False Correct answer: b Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances 12. Revenue variance analysis can also be called ‘competiveness effectiveness’. *a. True b. False Correct answer: a Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

13. The best way to develop standards for revenue is to use historical sales data. a. True *b. False Correct answer: b Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

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14. If the budgeted contribution margin is $100 500 for 50 000 units and the actual contribution margin is $86 400 for 48 000 actual units, the actual contribution margin from sales is $1.80. *a. True b. False Correct answer: a Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

15. If the budgeted contribution margin is $100 500 for 50 000 units and the actual contribution margin is $86 400 for 48 000 actual units, then the difference between the actual contribution margin from sales and the budgeted contribution margin from sales is $0.21 favourable. a. True *b. False Correct answer: b Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

16. The revenue budget variance cannot be caused by changes in sales mix as total sales is unaffected by sales mix. a. True *b. False Correct answer: b Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

17. The sales price variance reflects the difference between standard and actual selling prices. *a. True b. False Correct answer: a Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

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18. Employee satisfaction may be a revenue driver. *a. True b. False Correct answer: a Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

19. The sales price variance is calculated using the following formula: Sales price variance = (Actual price – Standard price) x Budgeted volume. a. True *b. False Correct answer: b Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

20. The sales price variance is favourable when the actual selling price exceeds the standard price. *a. True b. False Correct answer: a Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

21. The sales quantity variance is calculated using the following formula: Sales quantity variance = (Actual volume – Budgeted volume) x Standard price. *a. True b. False Correct answer: a Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

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22. When standard volume exceeds actual sales volume the sales quantity variance is favourable. a. True *b. False Correct answer: b Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

23. The static budget compared to the flexible budget provides the profit variance that is due to volume difference. *a. True b. False Correct answer: a Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

24. Variable costs per unit of volume increase when volume increases. a. True *b. False Correct answer: b Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

25. Fixed costs remain the same for both the budgeted level of volume and the static budget level of volume. *a. True b. False Correct answer: a Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

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26. The market size variance provides an indication of the proportion of sales volume variance that can be attributed to unexpected changes in market size. *a. True b. False Correct answer: a Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

27. Change in market size multiplied by budgeted market share multiplied by planned average contribution margin is the market size variance. *a. True b. False Correct answer: a Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

28. The information required for the market size variance is collected by the marketing department. *a. True b. False Correct answer: a Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

29. The market share variance is calculated using planned market size multiplied by change in market share multiplied by planned average contribution margin. a. True *b. False Correct answer: b Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

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30. Budgeted revenue is based on the projected sales mix of products, and changes in the mix changes cause changes in the revenue. *a. True b. False Correct answer: a Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

31. Product mix variance = Change in average standard contribution margin x Actual unit volume. *a. True b. False Correct answer: a Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

32. The product mix variance is only useful when the products involved are not substitutable. a. True *b. False Correct answer: b Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

33. The direct materials price variance is usually based on materials purchased, rather than on materials used. *a. True b. False Correct answer: a Learning objective 11.3 ~ Calculate direct cost variances

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34. Direct materials price variance = (Actual price – Standard price) x Quantity purchased. *a. True b. False Correct answer: a Learning objective 11.3 ~ Calculate direct cost variances

35. The direct materials price variance is based on the materials purchased since this price is the most current and relevant price. *a. True b. False Correct answer: a Learning objective 11.3 ~ Calculate direct cost variances

36. Using the standard cost for raw materials in the ledgers allows managers to identify the price variance during the period in which the variance occurred. *a. True b. False Correct answer: a Learning objective 11.3 ~ Calculate direct cost variances

37. A possible reason for an unfavourable direct materials efficiency variance is the excessive use of raw materials by a new employee in the production process. *a. True b. False Correct answer: a Learning objective 11.3 ~ Calculate direct cost variances

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38. The direct materials efficiency variance is measured at standard price because the price variance has already been isolated. *a. True b. False Correct answer: a Learning objective 11.3 ~ Calculate direct cost variances

39. If the direct material price variance is favourable and the direct material efficiency variance is unfavourable and greater than the direct material price variance then the total direct material variance will be favourable. a. True *b. False Correct answer: b Learning objective 11.3 ~ Calculate direct cost variances

40. The total direct labour variance can be broken down into two components: the efficiency variance and the hourly variance. a. True *b. False Correct answer: b Learning objective 11.3 ~ Calculate direct cost variances

41. Unreasonable standards may be the cause of direct materials efficiency variances, but not of direct labour efficiency variances. a. True *b. False Correct answer: b Learning objective 11.3 ~ Calculate direct cost variances

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42. Direct labour price variance = (Actual labour price per hour – Standard labour price per hour) x Actual hours used. *a. True b. False Correct answer: a Learning objective 11.3 ~ Calculate direct cost variances

43. Under standard costing direct labour is recorded in the work in process account at standard cost. *a. True b. False Correct answer: a Learning objective 11.3 ~ Calculate direct cost variances

44. In standard costing the price and efficiency variances account for the differences between actual and standard costs in the ledger accounts. *a. True b. False Correct answer: a Learning objective 11.3 ~ Calculate direct cost variances

45. A change in the price paid in materials will result in a direct materials efficiency variance. a. True *b. False Correct answer: b Learning objective 11.4 ~ Understand how direct cost variance information is analysed and used

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46. A contract with a new supplier may cause a favourable or unfavourable materials price variance. *a. True b. False Correct answer: a Learning objective 11.4 ~ Understand how direct cost variance information is analysed and used

47. Theft of raw materials may cause a favourable materials efficiency variance. a. True *b. False Correct answer: b Learning objective 11.4 ~ Understand how direct cost variance information is analysed and used

48. It is not necessary to investigate significant favourable variances since it indicates that the department has exceeded expectations. a. True *b. False Correct answer: b Learning objective 11.4 ~ Understand how direct cost variance information is analysed and used

49. Normal fluctuations in labour hours may cause a favourable direct price variance. a. True *b. False Correct answer: b Learning objective 11.4 ~ Understand how direct cost variance information is analysed and used

50. Unanticipated overtime hours may cause an unfavourable direct labour price variance. *a. True b. False

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Correct answer: a Learning objective 11.4 ~ Understand how direct cost variance information is analysed and used

51. Errors in the accounting records can only cause price variance not efficiency variances. a. True *b. False Correct answer: b Learning objective 11.4 ~ Understand how direct cost variance information is analysed and used

52. Trade-offs mean that an unfavourable variance could be offset by a favourable variance in another area. *a. True b. False Correct answer: a Learning objective 11.4 ~ Understand how direct cost variance information is analysed and used

53. Hiring highly skilled workers could result in a favourable direct labour price variance and a favourable direct materials efficiency variance. a. True *b. False Correct answer: b Learning objective 11.4 ~ Understand how direct cost variance information is analysed and used

54. The standard variable overhead allocation rate is calculated using estimated variable overhead cost divided by estimated volume of the allocation base. *a. True b. False Correct answer: a Learning objective 11.5 ~ Calculate variable and fixed overhead variances

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55. When analysing overhead variances it is unnecessary to separate fixed overheads and variable overheads. a. True *b. False Correct answer: b Learning objective 11.5 ~ Calculate variable and fixed overhead variances

56. When the proportion of labour related costs in the variable overhead cost pool is high, machine hours is an appropriate allocation base. a. True *b. False Correct answer: b Learning objective 11.5 ~ Calculate variable and fixed overhead variances

57. Fixed overhead costs do not vary with volume. *a. True b. False Correct answer: a Learning objective 11.5 ~ Calculate variable and fixed overhead variances

58. Fixed overhead costs per unit have an inverse relationship to volume. *a. True b. False Correct answer: a Learning objective 11.5 ~ Calculate variable and fixed overhead variances

59. The standard fixed overhead allocation rate is calculated by estimated fixed overhead cost divided by estimated volume of an allocation base. *a. True b. False Correct answer: a Learning objective 11.5 ~ Calculate variable and fixed overhead variances

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60. The variable overhead budget variance is the difference between allocated variable overhead cost and actual fixed overhead cost. a. True *b. False Correct answer: b Learning objective 11.5 ~ Calculate variable and fixed overhead variances

61. The fixed overhead spending variance is related to the variable overhead efficiency variance. a. True *b. False Correct answer: b Learning objective 11.5 ~ Calculate variable and fixed overhead variances

62. The fixed overhead budget variance can be broken down into two parts: the spending variance and the volume variance. *a. True b. False Correct answer: a Learning objective 11.5 ~ Calculate variable and fixed overhead variances

63. The fixed overhead spending variance is the difference between the static budget and the actual fixed overhead cost. *a. True b. False Correct answer: a Learning objective 11.5 ~ Calculate variable and fixed overhead variances

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64. The variable overhead spending variance is the difference between actual variable overhead costs and the expected variable overhead costs for the actual use of the allocation base. *a. True b. False Correct answer: a Learning objective 11.5 ~ Calculate variable and fixed overhead variances

65. A favourable variable overhead spending variance could be due to lower use of actual resources than expected or lower cost of actual resources compared to standard costs. *a. True b. False Correct answer: a Learning objective 11.5 ~ Calculate variable and fixed overhead variances

66. The variable overhead spending variance focuses on the volume difference in the allocation base used. a. True *b. False Correct answer: b Learning objective 11.5 ~ Calculate variable and fixed overhead variances

67. The variable overhead efficiency variance is favourable if the actual volume of the allocation base is less than expected given actual production levels. *a. True b. False Correct answer: a Learning objective 11.5 ~ Calculate variable and fixed overhead variances

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68. The fixed overhead spending variance is favourable when more is spent on fixed overhead than expected. a. True *b. False Correct answer: b Learning objective 11.5 ~ Calculate variable and fixed overhead variances

69. The difference between the standard amount of fixed overhead cost allocated to products and estimated fixed overhead costs is the production volume variance. *a. True b. False Correct answer: a Learning objective 11.5 ~ Calculate variable and fixed overhead variances

70. The production volume variance is equivalent to the amount of under or over applied overhead. *a. True b. False Correct answer: a Learning objective 11.5 ~ Calculate variable and fixed overhead variances

71. If actual volumes of the allocation base are less than estimated then the production volume variance will be unfavourable. a. True *b. False Correct answer: b Learning objective 11.5 ~ Calculate variable and fixed overhead variances

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72. Actual overhead costs are allocated to inventory each period. *a. True b. False Correct answer: a Learning objective 11.5 ~ Calculate variable and fixed overhead variances

73. The production volume variance is used for book keeping purposes only. *a. True b. False Correct answer: a Learning objective 11.5 ~ Calculate variable and fixed overhead variances

74. Variable overhead variances are closed to spending and efficiency variance accounts. *a. True b. False Correct answer: a Learning objective 11.5 ~ Calculate variable and fixed overhead variances

75. Fixed overheard variances are closed to spending and efficiency variance accounts. a. True *b. False Correct answer: b Learning objective 11.5 ~ Calculate variable and fixed overhead variances

76. The variable overhead efficiency variance will be present whenever the expected volume of the allocation base is different from the actual volume. *a. True b. False Correct answer: a Learning objective 11.6 ~ Understand how overhead variance information is analysed and used

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77. The production volume variance is adjusted out at the end of each accounting period. *a. True b. False Correct answer: a Learning objective 11.6 ~ Understand how overhead variance information is analysed and used

78. Usually companies produce more or less than expected and this causes a production volume variance. *a. True b. False Correct answer: a Learning objective 11.6 ~ Understand how overhead variance information is analysed and used

79. Actual production volume may be different than expected due to machine breakdowns, unreasonable estimates or normal fluctuations. *a. True b. False Correct answer: a Learning objective 11.6 ~ Understand how overhead variance information is analysed and used

80. The dollar amount of the production volume variance is the most informative element of this variance. a. True *b. False Correct answer: b Learning objective 11.6 ~ Understand how overhead variance information is analysed and used

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b. False Correct answer: a Learning objective 11.6 ~ Understand how overhead variance information is analysed and used

82. The variable overhead spending variance can be caused by higher or lower usage of the variable overhead allocation base. a. True *b. False Correct answer: b Learning objective 11.6 ~ Understand how overhead variance information is analysed and used

83. The fixed overhead spending variance can be caused by an increase in the activity level to a new relevant range. *a. True b. False Correct answer: a Learning objective 11.6 ~ Understand how overhead variance information is analysed and used

84. When all production entries and variances are recorded for an accounting period, an additional entry is made to eliminate the variance accounts. *a. True b. False Correct answer: a Learning objective 11.7 ~ Close off manufacturing cost variances at the end of the period

85. If manufacturing cost variances are considered to be material the preferred treatment is to pro rata the variance to work in process, finished goods inventory and cost of sales. *a. True b. False Correct answer: a Learning objective 11.7 ~ Close off manufacturing cost variances at the end of the period 1.352

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86. AASB 102 requires that variances relating to over and under applied overhead should be pro-rated between cost of sales and inventory. a. True *b. False Correct answer: b Learning objective 11.7 ~ Close off manufacturing cost variances at the end of the period

87. For external reporting purposes variances relating to over and under applied overhead should be treated as an expense. *a. True b. False Correct answer: a Learning objective 11.7 ~ Close off manufacturing cost variances at the end of the period

88. If the total variances in the accounting information system are favourable, the accounting treatment is to adjust accounts by decreasing costs during the closing process. *a. True b. False Correct answer: a Learning objective 11.7 ~ Close off manufacturing cost variances at the end of the period

89. If a variance is favourable, it should be closed directly to cost of sales. a. True *b. False Correct answer: b Learning objective 11.7 ~ Close off manufacturing cost variances at the end of the period

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Multiple-choice questions

90. The use of standards allows managers to: a. identify the sources of variances. b. determine whether the offsetting of variances is hiding operational problems. *c. all of the options listed. d. none of the options listed.

Correct answer: c Learning objective 11.1 ~ Identify variances for investigation

91. Revenue variances can be broken down into: a. sales price variance and sales efficiency variance. *b. sales price variance and sales volume variance. c. sales spending variance and sales volume variance. d. sales spending variance and sales efficiency variance.

Correct answer: b Learning objective 11.1 ~ Identify variances for investigation

92. The market size, market share and product mix variances are components of the: *a. sales volume variance. b. sales price variance. c. production volume variance. d. none of the options listed.

Correct answer: a Learning objective 11.1 ~ Identify variances for investigation

93. The production volume variance is calculated only for: a. direct labour. b. variable overhead. c. revenue. *d. fixed overhead.

Correct answer: d Learning objective 11.1 ~ Identify variances for investigation

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94. The amount of fixed overhead cost in the static budget compared to the flexible budget is: a. larger. b. larger when actual volume increases. *c. the same. d. smaller.

Correct answer: c Learning objective 11.1 ~ Identify variances for investigation

95. Consider the following data for Morethanmoney Ltd. Standard revenue per unit Budgeted sales volume Actual sales volume Total standard cost per unit

$10.00 5000 5500 $8.00

What is the budgeted revenue for Morethanmoney Ltd? a. $55 000 *b. $50 000 c. $10 000 d. $11 000 Correct answer: b Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

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96. Consider the following data for Morethanmoney Ltd. Standard revenue per unit Budgeted sales volume Actual sales volume Total standard cost per unit Actual total revenue

$10.00 5000 5500 $8.00 $53 900

What is the sales price variance for Morethanmoney Ltd? *a. $1100 b. $3900 c. $500 d. $5500 Correct answer: a Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

97. Consider the following data for Morethanmoney Ltd. Standard revenue per unit Budgeted sales volume Actual sales volume Total standard cost per unit Actual total revenue

$10.00 5000 5500 $8.00 $53 900

What is the sales quantity variance for Morethanmoney Ltd? a. $1500 b. $1000 c. $4000 *d. $5000 Correct answer: d Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

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98. Assume the additional information for Morethanmoney Ltd. Planned Market Size 20 000 Actual Market Size 19 800 Morethanmoney Ltd’s planned market share 25% The market size variance is: *a. $100 U. b. $100 F. c. $250 U. d. $250 F. Correct answer: a Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

99. Assume the additional information for Morethanmoney Ltd. Planned Market Size 20 000 Actual Market Size 19 800 Morethanmoney Ltd’s planned market share 25% What is the market share variance? a. $0 b. $400 F c. $1100 U *d. $1100 F Correct answer: d Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances 100. Which of the following may have affected Morethanmoney Ltd’s market share variance? *a. Seasonal factors b. Change in depreciation rates for taxation purposes c. Increase in the price of direct materials. d. Decrease in labour costs Correct answer: a Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances 1.358

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101. When is it appropriate to calculate a product mix variance? a. When the market is shrinking b. When the market is expanding *c. When the entity produces and sells multiple products d. None of the options listed Correct answer: c Learning objective 11.2 ~ Understand and calculate relevant profit- and revenue-related variances

102. Krivster manufacturing produces a premium health drink. The standard for one litre of the health drink for the month of May is as follows.

Direct materials: 200gram @ $0.25 per gram Direct labour: 0.25 hours @ $22 per hour The following information relate to actual results for May. i. 22 000 litres were produced for the month of May ii. 4 150 000 grams were purchased @ $0.27 per gram iii. There was no opening or closing inventory of raw materials iv. 5000 labour hours were worked at a cost of $21.50 per hour What was the material price variance for materials purchased? *a. $83 000 U b. $88 000 U c. $88 000 F d. $83 000 F Correct answer: a Learning objective 11.3 ~ Calculate direct cost variances

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103. Krivster manufacturing produces a premium health drink. The standard for one litre of the health drink for the month of May is as follows.

Direct materials: 200gram @ $0.25 per gram Direct labour: 0.25 hours @ $22 per hour The following information relate to actual results for May. i. 22 000 litres were produced for the month of May ii. 4 150 000 grams were purchased @ $0.27 per gram iii. There was no opening or closing inventory of raw materials iv. 5000 labour hours were worked at a cost of $21.50 per hour What was the material efficiency variance? a. $62 500U b. $62 000 U *c. $62 500 F d. $62 000 F Correct answer: c Learning objective 11.3 ~ Calculate direct cost variances

104. Krivster manufacturing produces a premium health drink. The standard for one litre of the health drink for the month of May is as follows.

Direct materials: 200gram @ $0.25 per gram Direct labour: 0.25 hours @ $22 per hour The following information relate to actual results for May. i. 22 000 litres were produced for the month of May ii. 4 150 000 grams were purchased @ $0.27 per gram iii. There was no opening or closing inventory of raw materials iv. 5000 labour hours were worked at a cost of $21.50 per hour What was the labour price variance? a. $2000 F b. $2000 U c. $2500 F *d. $2500 U Correct answer: d Learning objective 11.3 ~ Calculate direct cost variances

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104. Krivster manufacturing produces a premium health drink. The standard for one litre of the health drink for the month of May is as follows.

Direct materials: 200gram @ $0.25 per gram Direct labour: 0.25 hours @ $22 per hour The following information relate to actual results for May. i. 22 000 litres were produced for the month of May ii. 4 150 000 grams were purchased @ $0.27 per gram iii. There was no opening or closing inventory of raw materials iv. 5000 labour hours were worked at a cost of $21.50 per hour

What was the labour efficiency variance? a. $10 000 F b. $10 000 U *c. $11 000 F d. $11 000 U Correct answer: c Learning objective 11.3 ~ Calculate direct cost variances

105. The journal entry to record the purchase of direct materials for Aztec Bromac is: a. Dr Direct Materials inventory $30 000 Dr Direct materials price variance $1000 Cr Accounts payable *b. Dr Direct materials inventory $30 000 Cr Direct materials price variance Cr Accounts payable c. Dr Direct materials inventory $29 000 Cr Direct materials price variance $1000 Cr Accounts payable d. Dr Direct materials inventory $26 100 Cr Direct materials price variance $2900 Cr Accounts payable

$31 000 $1000 $29 000

$30 000

$29 000

Correct answer: b Learning objective 11.3 ~ Calculate direct cost variances

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106. The journal entry to record the use of direct materials for Aztec Bromac is: *a. Dr Work in process inventory $30 240 Cr DM Efficiency variance Cr Direct materials inventory b. Dr Work in process inventory $30 240 Dr DM efficiency variance $3240 Cr Direct materials inventory c. Dr Direct materials inventory $30 240 Cr DM efficiency variance Cr Work in process inventory d. Dr Work in process inventory $30 000 Cr DM efficiency variance Cr Direct materials inventory

$3 240 $27 000 $33 480 $3240 $27 000 $3240 $26 760

Correct answer: a Learning objective 11.3 ~ Calculate direct cost variances

108. The journal entry to record direct labour for Aztec Bromac is: a. Dr Work in process inventory $30 000 Dr Direct labour price variance $1000 Cr Wages payable $31 000 b. Dr Wages payable $30 000 Cr Direct labour price variance $1000 Cr Work in process inventory $29 000 *c. Dr Work in process inventory $32 400 Cr Direct labour price variance $1000 Cr Direct labour efficiency variance $8400 Cr Wages payable $26 000 d. Dr Work in process inventory $32 400 Cr Direct labour price variance $2000 Cr Direct labour efficiency variance $8400 Cr Accounts payable $26 000 Correct answer: c Learning objective 11.3 ~ Calculate direct cost variances

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109. Scenesay Ltd is a capital intensive firm. Indirect costs make up nearly 70% of the product costs. The company has no direct material costs because customers provide the direct materials used for each job. To plan and control such costs, the firm employs flexible budgets and standard costs. Overhead rates, based on direct labour hours, are derived from the master budget.

Master budget Units produced Direct labour hours Fixed overhead Variable overhead Direct labour

Actual results 4000 10 000 $200 000 $320 000 $200 000

3620 11 000 $205 000 $355 000 $180 000

What was the direct labour price variance? *a. $40 000 F b. $18 000 U c. $40 000 U d. $1000 F Correct answer: a Learning objective 11.3 ~ Calculate direct cost variances

110. Scenesay Ltd is a capital intensive firm. Indirect costs make up nearly 70% of the product costs. The company has no direct material costs because customers provide the direct materials used for each job. To plan and control such costs, the firm employs flexible budgets and standard costs. Overhead rates, based on direct labour hours, are derived from the master budget.

Units produced Direct labour hours Fixed overhead Variable overhead Direct labour

Master budget 4000 10 000 $200 000 $320 000 $200 000

Actual results 3620 11 000 $205 000 $355 000 $180 000

What was the direct labour efficiency variance? a. $39 000 F b. $7000 U *c. $39 000 U d. $7000 F Correct answer: c Learning objective 11.3 ~ Calculate direct cost variances

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111. Scenesay Ltd is a capital intensive firm. Indirect costs make up nearly 70% of the product costs. The company has no direct material costs because customers provide the direct materials used for each job. To plan and control such costs, the firm employs flexible budgets and standard costs. Overhead rates, based on direct labour hours, are derived from the master budget.

Units produced Direct labour hours Fixed overhead Variable overhead Direct labour

Master budget 4000 10 000 $200 000 $320 000 $200 000

Actual results 3620 11 000 $205 000 $355 000 $180 000

What was the fixed overhead spending variance? a. $5000 F *b. $5000 U c. $24 000 U d. $19 000 U Correct answer: b Learning objective 11.5 ~ Calculate variable and fixed overhead variances

112. Scenesay Ltd is a capital intensive firm. Indirect costs make up nearly 70% of the product costs. The company has no direct material costs because customers provide the direct materials used for each job. To plan and control such costs, the firm employs flexible budgets and standard costs. Overhead rates, based on direct labour hours, are derived from the master budget.

Units produced Direct labour hours Fixed overhead Variable overhead Direct labour

Master budget 4000 10 000 $200 000 $320 000 $200 000

Actual results 3620 11 000 $205 000 $355 000 $180 000

What was the fixed overhead production volume variance? *a. $19 000 U b. $19 000 F c. $5000 U d. $2800 U

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Correct answer: a Learning objective 11.5 ~ Calculate variable and fixed overhead variances

113. Scenesay Ltd is a capital intensive firm. Indirect costs make up nearly 70% of the product costs. The company has no direct material costs because customers provide the direct materials used for each job. To plan and control such costs, the firm employs flexible budgets and standard costs. Overhead rates, based on direct labour hours, are derived from the master budget.

Units produced Direct labour hours Fixed overhead Variable overhead Direct labour

Master budget 4000 10 000 $200 000 $320 000 $200 000

Actual results 3620 11 000 $205 000 $355 000 $180 000

What was the variable overhead spending variance? a. $65 400 F b. $3000 F *c. $3000 U d. $65 400 U Correct answer: c Learning objective 11.5 ~ Calculate variable and fixed overhead variances

114. Scenesay Ltd is a capital intensive firm. Indirect costs make up nearly 70% of the product costs. The company has no direct material costs because customers provide the direct materials used for each job. To plan and control such costs, the firm employs flexible budgets and standard costs. Overhead rates, based on direct labour hours, are derived from the master budget.

Units produced Direct labour hours Fixed overhead Variable overhead Direct labour

Master budget 4000 10 000 $200 000 $320 000 $200 000

Actual results 3620 11 000 $205 000 $355 000 $180 000

What was the budget variance for variable overhead? a. $62 400 U b. $62 400 F *c. $65 400 U

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d. $65 4000 F Correct answer: c Learning objective 11.5 ~ Calculate variable and fixed overhead variances

115. Adizero Ltd uses a standard cost system. Indirect costs were budgeted at $200 000 plus $15 per direct labour hour. The overhead rate is based on 10 000 hours. Actual results were: Standard direct labour hours Actual direct labour hours Fixed overhead Variable overhead

9 000 10 000 $190 000 $185 000

What was the fixed overhead budget variance? *a. $10 000 F b. $20 000 U c. $20 000 F d. $10 000 U Correct answer: a Learning objective 11.5 ~ Calculate variable and fixed overhead variances

116. Adizero Ltd uses a standard cost system. Indirect costs were budgeted at $200 000 plus $15 per direct labour hour. The overhead rate is based on 10 000 hours. Actual results were: Standard direct labour hours Actual direct labour hours Fixed overhead Variable overhead

9 000 10 000 $190 000 $185 000

What was the fixed overhead production volume variance? a. $20 000 F *b. $20 000 U c. $10 000 U d. $10 000 F Correct answer: b Learning objective 11.5 ~ Calculate variable and fixed overhead variances

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117. Adizero Ltd uses a standard cost system. Indirect costs were budgeted at $200 000 plus $15 per direct labour hour. The overhead rate is based on 10 000 hours. Actual results were: Standard direct labour hours Actual direct labour hours Fixed overhead Variable overhead

9 000 10 000 $190 000 $185 000

What was the variable overhead spending variance? a. $10 000 F b. $50 000 U *c. $35 000 U d. $15 000 U Correct answer: c Learning objective 11.5 ~ Calculate variable and fixed overhead variances

118. Adizero Ltd uses a standard cost system. Indirect costs were budgeted at $200 000 plus $15 per direct labour hour. The overhead rate is based on 10 000 hours. Actual results were: Standard direct labour hours Actual direct labour hours Fixed overhead Variable overhead

9 000 10 000 $190 000 $185 000

What was the variable overhead efficiency variance? a. $10 000 F b. $50 000 U c. $35 000 U *d. $15 000 U Correct answer: d Learning objective 11.5 ~ Calculate variable and fixed overhead variances

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119. Tycoon Manufacturing uses a standard costing system. The standard time to produce one unit is 4 hours and normal production is 5000 units monthly. Overhead costs were estimated to be $250 000. The standard variable overhead rate is $5 per machine hour.

During October the following results were recorded: Units produced Units sold Machine hours required Actual overhead cost

4 900 4 600 20 500 $248 000

What was the combined fixed and variable overhead spending variance? a. $1000 U b. $2000 F c. $4500 U *d. $4500 F Correct answer: d Learning objective 11.5 ~ Calculate variable and fixed overhead variances

120. Tycoon Manufacturing uses a standard costing system. The standard time to produce one unit is 4 hours and normal production is 5000 units monthly. Overhead costs were estimated to be $250 000. The standard variable overhead rate is $5 per machine hour.

During October the following results were recorded: Units produced Units sold Machine hours required Actual overhead cost

4 900 4 600 20 500 $248 000

What was the variable overhead efficiency variance? *a. $4500 U b. $3000 F c. $0 d. $3000 U Correct answer: a Learning objective 11.5 ~ Calculate variable and fixed overhead variances

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121. Tycoon Manufacturing uses a standard costing system. The standard time to produce one unit is 4 hours and normal production is 5000 units monthly. Overhead costs were estimated to be $250 000. The standard variable overhead rate is $5 per machine hour.

During October the following results were recorded: Units produced Units sold Machine hours required Actual overhead cost

4 900 4 600 20 500 $248 000

What was the fixed overhead production volume variance? a. $3000 F b. $4500 U c. $1500 F *d. $3000 U Correct answer: d Learning objective 11.5 ~ Calculate variable and fixed overhead variances

122. Tycoon Manufacturing uses a standard costing system. The standard time to produce one unit is 4 hours and normal production is 5000 units monthly. Overhead costs were estimated to be $250 000. The standard variable overhead rate is $5 per machine hour.

During October the following results were recorded: Units produced Units sold Machine hours required Actual overhead cost

4 900 4 600 20 500 $248 000

What was the total overhead allocated? a. $147 000 b. $98 000 *c. $245 000 d. $252 500 Correct answer: c Learning objective 11.5 ~ Calculate variable and fixed overhead variances

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123. Castinata Co. uses a standard job cost system and a denominator volume of 25 000 direct labour hours for allocating overhead.

The actual output was 12 000 units, which cost $185 700 for direct labour (23 000 hours), $28 000 for variable overhead and $150 000 for fixed overhead.

The standard variable overhead per unit is $2 (2 hours @ $1 per hour) and the standard fixed overhead per unit is $10 (2 hours @ $5 per hour).

All variances are immaterial and are closed to Cost of Sales at the end of the period.

The entry to close the variable overhead variances includes a: a. credit to the variable overhead efficiency variance for $1000. b. credit to work in process for $24 000. *c. credit to the variable overhead spending variance for $5000. d. debit to cost of sales for $4000.

Correct answer: c Learning objective 11.5 ~ Calculate variable and fixed overhead variances

124. Castinata Co. uses a standard job cost system and a denominator volume of 25 000 direct labour hours for allocating overhead.

The actual output was 12 000 units, which cost $185 700 for direct labour (23 000 hours), $28 000 for variable overhead and $150 000 for fixed overhead.

The standard variable overhead per unit is $2 (2 hours @ $1 per hour) and the standard fixed overhead per unit is $10 (2 hours @ $5 per hour).

All variances are immaterial and are closed to Cost of Sales at the end of the period.

The entry to close the fixed overhead variances includes a: a. credit to work in process for $120 000. *b. debit to cost of sales for $30 000. c. credit to cost of sales for $30 000. d. debit to the fixed overhead production volume variance for $5000.

Correct answer: b Learning objective 11.5 ~ Calculate variable and fixed overhead variances

125. Rilloto Ltd uses a standard costing system. Overhead costs are allocated based on direct labour hours. The standard variable overhead and fixed overhead rates are $3 and $10 per direct labour hour, respectively. Data relevant for the current period include: 1.370

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Direct materials purchased Direct materials used Standard quantity of direct materials for actual production Direct materials standard price Direct labour costs incurred Standard direct labour hours for actual production Standard direct labour cost per hour Variable overhead costs incurred Fixed overhead costs incurred

75 000kg @ $11 per kg 75 000kg 80 000kg $13 per kg 76 000 @ $14 per hour 78 000 hours $15 per hour $231 210 $763 000

The purchase of direct materials would be recorded in direct materials inventory at: a. $1 040 000. *b. $975 000. c. $825 000. d. $750 000.

Correct answer: b Learning objective 11.3 ~ Calculate direct cost variances

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126. Rilloto Ltd uses a standard costing system. Overhead costs are allocated based on direct labour hours. The standard variable overhead and fixed overhead rates are $3 and $10 per direct labour hour, respectively. Data relevant for the current period include: Direct materials purchased Direct materials used Standard quantity of direct materials for actual production Direct materials standard price Direct labour costs incurred Standard direct labour hours for actual production Standard direct labour cost per hour Variable overhead costs incurred Fixed overhead costs incurred

75 000kg @ $11 per kg 75 000kg 80 000kg $13 per kg 76 000 @ $14 per hour 78 000 hours $15 per hour $231 210 $763 000

What would the cost of direct materials added to work in process be? *a. $1 040 000 b. $1 050 000 c. $1 120 000 d. $880 000 Correct answer: a Learning objective 11.3 ~ Calculate direct cost variances

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127. Rilloto Ltd uses a standard costing system. Overhead costs are allocated based on direct labour hours. The standard variable overhead and fixed overhead rates are $3 and $10 per direct labour hour, respectively. Data relevant for the current period include: Direct materials purchased Direct materials used Standard quantity of direct materials for actual production Direct materials standard price Direct labour costs incurred Standard direct labour hours for actual production Standard direct labour cost per hour Variable overhead costs incurred Fixed overhead costs incurred

75 000kg @ $11 per kg 75 000kg 80 000kg $13 per kg 76 000 @ $14 per hour 78 000 hours $15 per hour $231 210 $763 000

What is the direct materials efficiency variance? a. $80 000 F b. $65 000 U c. $80 000 F *d. $65 000 F Correct answer: d Learning objective 11.3 ~ Calculate direct cost variances

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128. Rilloto Ltd uses a standard costing system. Overhead costs are allocated based on direct labour hours. The standard variable overhead and fixed overhead rates are $3 and $10 per direct labour hour, respectively. Data relevant for the current period include: Direct materials purchased Direct materials used Standard quantity of direct materials for actual production Direct materials standard price Direct labour costs incurred Standard direct labour hours for actual production Standard direct labour cost per hour Variable overhead costs incurred Fixed overhead costs incurred

75 000kg @ $11 per kg 75 000kg 80 000kg $13 per kg 76 000 @ $14 per hour 78 000 hours $15 per hour $231 210 $763 000

What is the direct labour price variance? a. $30 000 F b. $30 000 U *c. $76 000 F d. $76 000 U Correct answer: c Learning objective 11.3 ~ Calculate direct cost variances

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129. Rilloto Ltd uses a standard costing system. Overhead costs are allocated based on direct labour hours. The standard variable overhead and fixed overhead rates are $3 and $10 per direct labour hour, respectively. Data relevant for the current period include: Direct materials purchased Direct materials used Standard quantity of direct materials for actual production Direct materials standard price Direct labour costs incurred Standard direct labour hours for actual production Standard direct labour cost per hour Variable overhead costs incurred Fixed overhead costs incurred

75 000kg @ $11 per kg 75 000kg 80 000kg $13 per kg 76 000 @ $14 per hour 78 000 hours $15 per hour $231 210 $763 000

What is the variable overhead spending variance? a. $3210 F *b. $3210 U c. $33 000 F d. $33 000 U Correct answer: b Learning objective 11.3 ~ Calculate direct cost variances

130. Given the following account balances at the end of the first year of operations: Work in process inventory Finished goods inventory Cost of goods sold Direct labour price variance Direct labour efficiency variance

$ 100 000 200 000 500 000 40 000 F 20 000 F

Assuming that variances are considered material, the entry and amount of direct labour variances allocated to the finished goods inventory is: *a. credit $15 000. b. debit $15 000. c. credit $7500. d. debit $60 000.

Correct answer: a Learning objective 11.3 ~ Calculate direct cost variances

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131. Given the following account balances at the end of the first year of operations: Direct materials inventory Work in process inventory Finished goods inventory Cost of goods sold Direct material price variance Direct material efficiency

$ 60 000 200 000 200 000 600 000 65 000 F 195 000 U

Assuming that variances are considered material, the entry and amount of the direct material efficiency variance allocated to work in process inventory is: a. credit $39 000. b. credit $36 792. c. debit $36 792. *d. debit $39 000.

Correct answer: d Learning objective 11.7 ~ Close off manufacturing cost variances at the end of the period

132. Given the following account balances at the end of the first year of operations: Direct materials inventory Work in process inventory Finished goods inventory Cost of goods sold Direct material price variance Direct material efficiency

$ 60 000 200 000 200 000 600 000 65 000 F 195 000 U

Assuming that variances are considered material, the entry and amount of the direct material price variance allocated to work in process inventory is: a. credit $12 264. b. credit $3679. *c. credit $13 000. d. debit $13 000.

Correct answer: c Learning objective 11.7 ~ Close off manufacturing cost variances at the end of the period

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133. For overhead variances, the difference between the flexible budget amounts and actual costs incurred is called the: *a. budget variance. b. volume variance. c. favourable variance. d. quantity variance.

Correct answer: a Learning objective 11.7 ~ Close off manufacturing cost variances at the end of the period

134. Unfavourable price variances can occur because of: a. rising prices of finished goods. b. increases in raw materials efficiency. *c. price increases in raw materials. d. oversupply of raw materials.

Correct answer: c Learning objective 11.4 ~ Understand how direct cost variance information is analysed and used

135. Which of the following is a possible cause of a favourable materials efficiency variance? a. Using materials that do not meet specifications *b. Using highly skilled labour c. Using a lower quality of material d. Using cheaper materials Correct answer: b Learning objective 11.4 ~ Understand how direct cost variance information is analysed and used

136. Employee theft is most likely to result in which type of variance? a. Direct materials price variance *b. Direct materials efficiency variance c. Direct labour price variance d. Variable overhead spending variance Correct answer: b Learning objective 11.4 ~ Understand how direct cost variance information is analysed and used 1.377

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137. Viatix introduced a new automated production process that has reduced the amount of labour needed, but not affected the use of materials. The standard cost system has not been changed yet to reflect this new process. Assuming the machinery is functioning properly and that workers were properly trained in its use, which of the following variances is most likely to result? a. Favourable direct materials efficiency variance *b. Favourable direct labour efficiency variance c. Unfavourable direct labour efficiency variance d. Favourable direct materials price variance Correct answer: b Learning objective 11.4 ~ Understand how direct cost variance information is analysed and used

138. Misc Ltd entered into a new contract with one of its raw material suppliers. The new contract required the supplier to deliver raw materials with a 24-hour notice from Misc.

This reduces Misc’s material handling costs, but has increased the cost of the raw materials delivered. Which of the following variances is most likely to result? a. Unfavourable direct labour efficiency variance b. Favourable direct material price variance c. Unfavourable variable overhead spending variance *d. Unfavourable direct material price variance Correct answer: d Learning objective 11.4 ~ Understand how direct cost variance information is analysed and used

139. During the middle of the fiscal year, Fui Ltd unexpectedly revised its estimate of a plant asset’s life from 6 years to 8 years. That revision is most likely to lead to: a. variable overhead spending variance. *b. fixed overhead spending variance. c. fixed overhead production volume variance. d. variable overhead efficiency variance.

Correct answer: b Learning objective 11.6 ~ Understand how overhead variance information is analysed and used

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140. Fixed overhead costs are not expected to vary with production volumes. Therefore, production volume variances: a. are always zero. *b. result from using an allocation rate for fixed overhead. c. exist only if production volume is higher than anticipated. d. exist only if production volume is lower than expected.

Correct answer: b Learning objective 11.6 ~ Understand how overhead variance information is analysed and used

141. The production volume variance provides information about: a. sales levels. b. variable overhead costs which vary with volume. c. fixed overhead costs which vary with volume. *d. utilisation of capacity.

Correct answer: d Learning objective 11.6 ~ Understand how overhead variance information is analysed and used

142. Which of the following variances is least likely to provide useful information for making decisions, if calculated as part of a comprehensive set of variances? *a. Production volume variance b. Variable overhead spending c. Direct material price d. Direct labour efficiency Correct answer: a Learning objective 11.6 ~ Understand how overhead variance information is analysed and used

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143. In Command Ltd completed operations for the week and the accountant was preparing to make journal entries necessary to prepare a set of interim financial statements.

Unfortunately, he discovered some of the data concerning direct materials had been lost. He was able to find the following: Efficiency variance Standard price Actual units purchased Inventory decrease Budget variance

$9000 unfavourable $10 per unit 18 000 1000 units $1800 favourable

What was the actual direct materials price paid per unit? a. $9.60 *b. $9.40 c. $10.00 d. $10.60 Correct answer: b Learning objective 11.3 ~ Calculate direct cost variances

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144. In Command Ltd completed operations for the week and the accountant was preparing to make journal entries necessary to prepare a set of interim financial statements.

Unfortunately, he discovered some of the data concerning direct materials had been lost. He was able to find the following: Efficiency variance Standard price Actual units purchased Inventory decrease Budget variance

$9000 Unfavourable $10 per unit 18 000 1000 units $1800 Favourable

What was the standard cost of the direct materials used? a. $90 000 b. $191 000 *c. $180 000 d. $94 000 Correct answer: c Learning objective 11.3 ~ Calculate direct cost variances

145. In Command Ltd completed operations for the week and the accountant was preparing to make journal entries necessary to prepare a set of interim financial statements.

Unfortunately, he discovered some of the data concerning direct materials had been lost. He was able to find the following: Efficiency variance Standard price Actual units purchased Inventory decrease Budget variance

$9000 Unfavourable $10 per unit 18 000 1000 units $1800 Favourable

The standard quantity of direct materials allowed for the month was: *a. 17 100. b. 9000. c. 17 000. d. 9550.

Correct answer: a Learning objective 11.3 ~ Calculate direct cost variances

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146. Skillful Ltd budgeted $900 000 for total overhead. The standard variable overhead rate was $1 per direct labour hour, or $3 per unit, based on an anticipated activity level of 300 000 direct labour hours. During the year 110 000 units were produced. Fixed overhead costs incurred were $590 000. The variable overhead budget variance was $5500 unfavourable and the actual variable overhead rate was $1.10 per direct labour hour.

What were the actual variable overhead costs incurred? a. $121 000 b. $330 000 c. $324 500 *d. $335 500 Correct answer: d Learning objective 11.3 ~ Calculate direct cost variances

147. Skillful Ltd budgeted $900 000 for total overhead. The standard variable overhead rate was $1 per direct labour hour, or $3 per unit, based on an anticipated activity level of 300 000 direct labour hours. During the year 110 000 units were produced. Fixed overhead costs incurred were $90 000. The variable overhead budget variance was $5500 unfavourable and the actual variable overhead rate was $1.10 per direct labour hour.

What were the standard direct labour hours allowed? a. 300 000 b. 600 000 *c. 330 000 d. 36 667 Correct answer: c Learning objective 11.3 ~ Calculate direct cost variances

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148. Skillful Ltd budgeted $900 000 for total overhead. The standard variable overhead rate was $1 per direct labour hour, or $3 per unit, based on an anticipated activity level of 300 000 direct labour hours. During the year 110 000 units were produced. Fixed overhead costs incurred were $590 000. The variable overhead budget variance was $5500 unfavourable and the actual variable overhead rate was $1.10 per direct labour hour.

What was the variable overhead efficiency variance? *a. $25 000 F b. $25 000 U c. $30 500 F d. $5500 F Correct answer: a Learning objective 11.5 ~ Calculate variable and fixed overhead variances

149. Skillful Ltd budgeted $900 000 for total overhead. The standard variable overhead rate was $1 per direct labour hour, or $3 per unit, based on an anticipated activity level of 300 000 direct labour hours. During the year 110 000 units were produced. Fixed overhead costs incurred were $590 000. The variable overhead budget variance was $5500 unfavourable and the actual variable overhead rate was $1.10 per direct labour hour.

What was the standard fixed overhead rate per direct labour hour? a. $1.0 *b. $2.00 c. $0.50 d. $5.45 Correct answer: b Learning objective 11.5 ~ Calculate variable and fixed overhead variances

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150. Skillful Ltd budgeted $900 000 for total overhead. The standard variable overhead rate was $1 per direct labour hour, or $3 per unit, based on an anticipated activity level of 300 000 direct labour hours. During the year 110 000 units were produced. Fixed overhead costs incurred were $590 000. The variable overhead budget variance was $5500 unfavourable and the actual variable overhead rate was $1.10 per direct labour hour.

What was the fixed overhead budget variance? a. $-0b. $10 000 U *c. $10 000 F d. $60 000 F Correct answer: c Learning objective 11.5 ~ Calculate variable and fixed overhead variances

151. Skillful Ltd budgeted $900 000 for total overhead. The standard variable overhead rate was $1 per direct labour hour, or $3 per unit, based on an anticipated activity level of 300 000 direct labour hours. During the year 110 000 units were produced. Fixed overhead costs incurred were $590 000. The variable overhead budget variance was $5500 unfavourable and the actual variable overhead rate was $1.10 per direct labour hour.

What was the fixed overhead allocated? a. $330 000 b. $316 800 c. $600 000 *d. $660 000 Correct answer: d Learning objective 11.5 ~ Calculate variable and fixed overhead variances

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152. Valatia Ltd has gathered the following data in preparing to record their direct labour payroll costs for the week: Actual hours worked Standard hours allowed Total direct labour variance Direct labour price variance

9500 10 000 $1810 F $190 U

What was the standard direct labour price? *a. $4.00 b. $1.05 c. $5.52 d. $4.75 Correct answer: a Learning objective 11.5 ~ Calculate variable and fixed overhead variances

153. Valatia Ltd has gathered the following data in preparing to record their direct labour payroll costs for the week: Actual hours worked Standard hours allowed Total direct labour variance Direct labour price variance

9500 10 000 $1810 F $190 U

The actual direct labour costs were: a. $38 000. b. $40 000. c. $37 810. *d. $38 190.

Correct answer: d Learning objective 11.3 ~ Calculate direct cost variances

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154. Valatia Ltd has gathered the following data in preparing to record their direct labour payroll costs for the week: Actual hours worked Standard hours allowed Total direct labour variance Direct labour price variance

9500 10 000 $1810 F $190 U

What was the actual direct labour price? a. $8.00 b. $4.00 *c. $4.02 d. $50 Correct answer: c Learning objective 11.3 ~ Calculate direct cost variances

Testbank to accompany

Management accounting 5th edition by Eldenburg et al.

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Not for distribution. Instructors may assign selected questions in their LMS.

© John Wiley & Sons Australia, Ltd 2024

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Chapter 12: Activity analysis: costing and management True/false questions

1. Both activity-based costing and traditional costing allocate direct costs to cost objects. a. True *b. False Correct answer: b Learning objective 12.1 ~ Reflect on and communicate the differences and similarities between activity-based costing (ABC) and conventional costing

2. Activity-based costing, compared to traditional costing, increases the accuracy of cost measurement by using multiple cost allocation bases for overhead. *a. True b. False Correct answer: a Learning objective 12.1 ~ Reflect on and communicate the differences and similarities between activity-based costing (ABC) and conventional costing

3. Activity-based costing is a method that assign costs to the specific activities performed in a manufacturing or service delivery process. *a. True b. False Correct answer: a Learning objective 12.1 ~ Reflect on and communicate the differences and similarities between activity-based costing (ABC) and conventional costing

4. Activity-based costing extends the focus of costing to products and other types of cost objects. *a. True b. False Correct answer: a

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Learning objective 12.1 ~ Reflect on and communicate the differences and similarities between activity-based costing (ABC) and conventional costing

5. Direct labour was a common allocation base in traditional costing systems. *a. True b. False Correct answer: a Learning objective 12.1 ~ Reflect on and communicate the differences and similarities between activity-based costing (ABC) and conventional costing 6. Allocation bases should reflect the cost object’s use of resources. *a. True b. False Correct answer: a Learning objective 12.1 ~ Reflect on and communicate the differences and similarities between activity-based costing (ABC) and conventional costing

7. Modern manufacturing organisations tend to have less reliance on direct labour resources. *a. True b. False Correct answer: a Learning objective 12.1 ~ Reflect on and communicate the differences and similarities between activity-based costing (ABC) and conventional costing

8. Activity-based costing attempts to trace costs more accurately to products or other cost objects. *a. True b. False Correct answer: a Learning objective 12.1 ~ Reflect on and communicate the differences and similarities between activity-based costing (ABC) and conventional costing

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9. Conventional cost accounting systems have become obsolete as a result of product diversity and increased non-volume related costs. *a. True b. False Correct answer: a Learning objective 12.1 ~ Reflect on and communicate the differences and similarities between activity-based costing (ABC) and conventional costing

10. Since the cost of direct materials and direct labour has decreased and manufacturing overhead costs have increased, conventional costing systems has been replaced by activitybased costing systems. a. True *b. False Correct answer: b Learning objective 12.1 ~ Reflect on and communicate the differences and similarities between activity-based costing (ABC) and conventional costing

11. Materials handling is an example of an activity for a manufacturing organisation. *a. True b. False Correct answer: a Learning objective 12.1 ~ Reflect on and communicate the differences and similarities between activity-based costing (ABC) and conventional costing 12. Activity-based costing cannot be used in service organisations. a. True *b. False Correct answer: b Learning objective 12.1 ~ Reflect on and communicate the differences and similarities between activity-based costing (ABC) and conventional costing

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13. The cost hierarchy helps identify activities and assign costs to activities in an activitybased costing system. *a. True b. False Correct answer: a Learning objective 12.2 ~ Understand elements of the ABC cost hierarchy

14. In an activity-based costing system, both organisation-sustaining and facility-sustaining activities are assumed to be unaffected by the number of customers. a. True *b. False Correct answer: b Learning objective 12.2 ~ Understand elements of the ABC cost hierarchy

15. An example of batch-level of operations is the weight of the orders shipped. *a. True b. False Correct answer: a Learning objective 12.2 ~ Understand elements of the ABC cost hierarchy

16. Finance costs would most likely be an example of an organisation sustaining cost in an ABC system. *a. True b. False Correct answer: a Learning objective 12.2 ~ Understand elements of the ABC cost hierarchy

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17. A takeaway shop invests in a marketing campaign to advertise the launch of a new hamburger called the Monster Burger. This is an example of a product sustaining cost. *a. True b. False Correct answer: a Learning objective 12.2 ~ Understand elements of the ABC cost hierarchy

18. Batch-level costs are determined by the number of units in the batch. a. True *b. False Correct answer: b Learning objective 12.2 ~ Understand elements of the ABC cost hierarchy

19. Additional costs that result from customising products to meet individual customer specifications are most likely to be customer-sustaining costs. *a. True b. False Correct answer: a Learning objective 12.2 ~ Understand elements of the ABC cost hierarchy

20. Unit-level costs are performed for every unit of product and the cost is proportional to the number of units produced. *a. True b. False Correct answer: a Learning objective 12.2 ~ Understand elements of the ABC cost hierarchy

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21. It is unnecessary to consult relevant employees from the production team when identifying activities. a. True *b. False Correct answer: b Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

22. The first step in ABC is to identify the relevant cost object. *a. True b. False Correct answer: a Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

23. In ABC multiple cost pools are used and each has the same cost driver. a. True *b. False Correct answer: b Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

24. In an ABC system costs are first assigned to cost pools, then to cost objects. *a. True b. False Correct answer: a Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

25. Each cost pool in an ABC system has at least one allocation base. *a. True b. False Correct answer: a Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

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26. To identify activities in an organisation it may be necessary to use accounting records and employee estimates. *a. True b. False Correct answer: a Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

27. Each cost pool in an ABC system has the same cost allocation rate. a. True *b. False Correct answer: b Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

28. Activity-based costing relies on information from activity-based management. a. True *b. False Correct answer: b Learning objective 12.4 ~ Describe the characteristics and use of activity-based management (ABM)

29. Activity-based management used information from ABC to identify opportunities for improvements in profitability, efficiency and quality. *a. True b. False Correct answer: a Learning objective 12.4 ~ Describe the characteristics and use of activity-based management (ABM)

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30. Activity-based management and activity-based costing are the same thing. a. True *b. False Correct answer: b Learning objective 12.4 ~ Describe the characteristics and use of activity-based management (ABM)

31. Activity-based management can be used to manage constrained resources. *a. True b. False Correct answer: a Learning objective 12.4 ~ Describe the characteristics and use of activity-based management (ABM)

32. One of the major uses of activity-based management is to manage unlimited resources. a. True *b. False Correct answer: b Learning objective 12.4 ~ Describe the characteristics and use of activity-based management (ABM)

33. Characteristics of customers with high service costs include purchasing small quantities or requiring flexible delivery times. *a. True b. False Correct answer: a Learning objective 12.4 ~ Describe the characteristics and use of activity-based management (ABM)

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34. No product warranties are likely to be associated with high customer service costs. a. True *b. False Correct answer: b Learning objective 12.4 ~ Describe the characteristics and use of activity-based management (ABM)

35. From the perspective of the customer, value added activities increase the worth of an entity’s goods or service. *a. True b. False Correct answer: a Learning objective 12.4 ~ Describe the characteristics and use of activity-based management (ABM)

36. Rework and waste are considered to be non-valued added activities. *a. True b. False Correct answer: a Learning objective 12.4 ~ Describe the characteristics and use of activity-based management (ABM)

37. Activity-based management should not be used to change required activities. a. True *b. False Correct answer: b Learning objective 12.4 ~ Describe the characteristics and use of activity-based management (ABM)

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38. Environmental protection costs are usually outside the control of managers. a. True *b. False Correct answer: b Learning objective 12.4 ~ Describe the characteristics and use of activity-based management (ABM)

39. ABC can be used to separate committed costs from flexible costs. *a. True b. False Correct answer: a Learning objective 12.4 ~ Describe the characteristics and use of activity-based management (ABM)

40. Resources supplied and resources consumed are the same in organisations using activity-based management. a. True *b. False Correct answer: b Learning objective 12.4 ~ Describe the characteristics and use of activity-based management (ABM)

41. Accountants need to consider Cost–benefit trade-offs when choosing activities and cost drivers in an ABC system. *a. True b. False Correct answer: a Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

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42. ABC systems enable managers to focus on measurement at the activity level. *a. True b. False Correct answer: a Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

43. In ABC systems value added activities are more likely to be identified and eliminated from operations. a. True *b. False Correct answer: b Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

44. ABC systems measure the flow of resources in an entity. *a. True b. False Correct answer: a Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

45. The allocation bases used in conventional costing systems are more likely to be cost drivers than those used in ABC systems. a. True *b. False Correct answer: b Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

46. The benefits of ABC may be achieved through the process of collecting the required information, and embedding ABC into the costing system may be unnecessary. *a. True b. False Correct answer: a Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

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47. The costs of designing and implementing an ABC system include training and consulting fees. *a. True b. False Correct answer: a Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

48. Generally the costs of ABC are higher when there are fewer activities in the businesses processes. a. True *b. False Correct answer: b Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

49. There is little evidence to suggest that ABC systems improve return on assets in entities that use it. *a. True b. False Correct answer: a Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

50. For small manufacturing firms, ABC systems that combine complex technology with flexible manufacturing practices are most successful. a. True *b. False Correct answer: b Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

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51. Successful ABC implementations are typically accompanied by top management support, links to strategy and performance evaluation. *a. True b. False Correct answer: a Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

52. As the number of activities increase in an ABC system, measurement error also tends to increase. *a. True b. False Correct answer: a Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

53. The accuracy of estimates used in the denominator does not affect the cost accuracy in an ABC system. a. True *b. False Correct answer: b Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

54. The accuracy of ABC systems may be reduced if employees provide misleading or incorrect information. *a. True b. False Correct answer: a Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

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55. It is impossible to identify the exact amount of cost associated with each activity when using allocated costs. *a. True b. False Correct answer: a Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

56. The risk of mismeasurement decreases when costs are allocated instead of traced to an ABC cost pool. a. True *b. False Correct answer: b Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

57. When the number of ABC cost pools increase the risk of measurement error is higher. *a. True b. False Correct answer: a Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

58. Time-driven ABC is considered to be more accurate and less costly than ABC. *a. True b. False Correct answer: a Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

59. In time-driven ABC the cost driver rate is calculated as cost per time unit of capacity multiplied by unit times of activity. *a. True b. False Correct answer: a Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

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60. Time-driven ABC provides more informed decision making in regards to the best use of practical capacity. *a. True b. False Correct answer: a Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

61. Complex operating functions cannot be incorporated into a time driven ABC system. a. True *b. False Correct answer: b Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

62. Time driven ABC uses a standardised cost per time unit of capacity in its model. *a. True b. False Correct answer: a Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

63. ABC has been found to be helpful in increasing the accuracy of overhead cost allocation in manufacturing firms. *a. True b. False Correct answer: a Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

64. ABC systems seem to support product and customer-related decisions. *a. True b. False Correct answer: a Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

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65. Evidence suggests that when combined with other initiatives such as total quality management and just in time production methods, ABC can produce improved financial performance. *a. True b. False Correct answer: a Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

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Multiple-choice questions 66. Cost accounting systems have adapted over time to accommodate changes in: a. operational environments. b. technology. c. management reporting requirements. *d. all of the options listed.

Correct answer: d Learning objective 12.1 ~ Reflect on and communicate the differences and similarities between activity-based costing (ABC) and conventional costing

67. Which statement about costing systems is true? *a. Due to technology and mass production, labour related allocation bases are sometimes considered arbitrary. b. Traditional costing systems use a three stage cost allocation process. c. Labour related allocation bases should never be used in service organisations. d. Activity-based costing does not use machine hours or other volume-based allocation bases.

Correct answer: a Learning objective 12.1 ~ Reflect on and communicate the differences and similarities between activity-based costing (ABC) and conventional costing

68. Manufacturing overhead costs include: a. direct material costs. b. direct labour costs. c. sales commissions. *d. production facility costs.

Correct answer: d Learning objective 12.1 ~ Reflect on and communicate the differences and similarities between activity-based costing (ABC) and conventional costing

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69. How are direct and overhead costs assigned to cost objects under activity-based costing systems?

Direct costs a. Allocate b. Trace c. Allocate d. Trace

Overhead costs Trace Allocate Allocate Trace

a. A *b. B c. C d. D Correct answer: b Learning objective 12.1 ~ Reflect on and communicate the differences and similarities between activity-based costing (ABC) and conventional costing

70. An activity is a: a. direct cost. *b. type of task or function performed in an organisation. c. cost object in conventional costing systems. d. all of the options listed.

Correct answer: b Learning objective 12.1 ~ Reflect on and communicate the differences and similarities between activity-based costing (ABC) and conventional costing

71. Roberts Ltd allocates overhead to cost objects using a two-stage process. From this information, we can infer that Roberts Ltd: a. uses a traditional costing system. b. uses an activity-based costing system. c. has more than one product. *d. may be using either a traditional or an activity-based costing system.

Correct answer: d Learning objective 12.1 ~ Reflect on and communicate the differences and similarities between activity-based costing (ABC) and conventional costing

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72. Compared to an activity-based costing system, a traditional costing system usually involves: a. fewer cost pools. b. more cost pools. *c. all of the options listed. d. none of the options listed.

Correct answer: c Learning objective 12.1 ~ Reflect on and communicate the differences and similarities between activity-based costing (ABC) and conventional costing

73. What are multiple cost pools and cost objects a feature of? a. Traditional costing systems b. Direct allocation costing systems *c. Activity-based costing d. None of the options listed Correct answer: c Learning objective 12.1 ~ Reflect on and communicate the differences and similarities between activity-based costing (ABC) and conventional costing

74. Activity-based costing uses a cost assign costs to activities.

to help identify activities and

a. allocation b. sustaining c. control *d. hierarchy Correct answer: d Learning objective 12.2 ~ Understand elements of the ABC cost hierarchy

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75. Century Point is a modern business club in the inner city of Brisbane. It is owned by Silvera Property Holdings, which operates additional properties in Auckland, Christchurch and Singapore. Century Point has 6 separate areas each with corporate facilities for various membership groups. Also on premises is a gymnasium, restaurant and pool. The business club is organised in 5 departments: front desk, housekeeping, food and beverage, and customer relations. As part of its operation, Century Point regularly incurs the following costs.

General manager’s salary Cleaning and maintenance costs Utility costs Depreciation on gym equipment Advertising Food and beverage costs Depreciation on restaurant equipment If Century Point is the cost object, which of the following best describes the cleaning and maintenance costs. a. Batch-level cost b. Customer-sustaining cost *c. Facility-sustaining cost d. Organisation-sustaining cost Correct answer: c Learning objective 12.2 ~ Understand elements of the ABC cost hierarchy

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76. Century Point is a modern business club in the inner city of Brisbane. It is owned by Silvera Property Holdings, which operates additional properties in Auckland, Christchurch and Singapore. Century Point has 6 separate areas each with corporate facilities for various membership groups. Also on premises is a gymnasium, restaurant and pool. The business club is organised in 5 departments: front desk, housekeeping, food and beverage, and customer relations. As part of its operation, Century Point regularly incurs the following costs.

General manager’s salary Cleaning and maintenance costs Utility costs Depreciation on gym equipment Advertising Food and beverage costs Depreciation on restaurant equipment From the perspective of Silvera, advertising specifically for Century Point is best described as a(n): a. unit-level cost. b. customer-sustaining cost. *c. product-sustaining cost. d. batch-level cost.

Correct answer: c Learning objective 12.2 ~ Understand elements of the ABC cost hierarchy

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77. Century Point is a modern business club in the inner city of Brisbane. It is owned by Silvera Property Holdings, which operates additional properties in Auckland, Christchurch and Singapore. Century Point has 6 separate areas each with corporate facilities for various membership groups. Also on premises is a gymnasium, restaurant and pool. The business club is organised in 5 departments: front desk, housekeeping, food and beverage, and customer relations. As part of its operation, Century Point regularly incurs the following costs.

General manager’s salary Cleaning and maintenance costs Utility costs Depreciation on gym equipment Advertising Food and beverage costs Depreciation on restaurant equipment Administration salaries for the Silvera is best described as a(n): a. facility-sustaining cost. *b. organisation-sustaining cost. c. product-sustaining cost. d. batch-level cost.

Correct answer: b Learning objective 12.2 ~ Understand elements of the ABC cost hierarchy

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78. Century Point is a modern business club in the inner city of Brisbane. It is owned by Silvera Property Holdings, which operates additional properties in Auckland, Christchurch and Singapore. Century Point has 6 separate areas each with corporate facilities for various membership groups. Also on premises is a gymnasium, restaurant and pool. The business club is organised in 5 departments: front desk, housekeeping, food and beverage, and customer relations. As part of its operation, Century Point regularly incurs the following costs.

General manager’s salary Cleaning and maintenance costs Utility costs Depreciation on gym equipment Advertising Food and beverage costs Depreciation on restaurant equipment Which cost listed above is most likely to be a unit-level cost? *a. Food and beverage costs b. Utility costs c. Housekeeping supplies d. General manager’s salary Correct answer: a Learning objective 12.2 ~ Understand elements of the ABC cost hierarchy

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79. Century Point is a modern business club in the inner city of Brisbane. It is owned by Silvera Property Holdings, which operates additional properties in Auckland, Christchurch and Singapore. Century Point has 6 separate areas each with corporate facilities for various membership groups. Also on premises is a gymnasium, restaurant and pool. The business club is organised in 5 departments: front desk, housekeeping, food and beverage, and customer relations. As part of its operation, Century Point regularly incurs the following costs.

General manager’s salary Cleaning and maintenance costs Utility costs Depreciation on gym equipment Advertising Food and beverage costs Depreciation on restaurant equipment Century Point has been approached by a leading law firm to provide a specialised membership for their employees. Costs associated with this membership would best be described as: a. unit-level. b. product-sustaining. c. facility-sustaining. *d. customer-sustaining.

Correct answer: d Learning objective 12.2 ~ Understand elements of the ABC cost hierarchy

80. The salary of the manager of information technology services in a multinational organisation is: *a. an organisation-sustaining cost. b. a facility-sustaining cost. c. a customer-sustaining cost. d. a product-sustaining cost.

Correct answer: a Learning objective 12.2 ~ Understand elements of the ABC cost hierarchy

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81. Depreciation on production machinery in a food processing facility is best described as a(n): *a. facility-sustaining activity. b. unit-level activity. c. customer-sustaining activity. d. batch-level activity.

Correct answer: a Learning objective 12.2 ~ Understand elements of the ABC cost hierarchy

82. Which category of the ABC hierarchy has activities that need to be performed for every unit of good or service? *a. Unit-level b. Batch-level c. Organisation-sustaining d. Product-sustaining Correct answer: a Learning objective 12.2 ~ Understand elements of the ABC cost hierarchy

83. Managers are most likely to identify activities in an ABC system by: *a. interviewing employees. b. market research. c. developing standard costs. d. benchmarking.

Correct answer: a Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

84. Which of the steps listed below normally occurs last when assigning costs in an ABC system? a. Assign costs to activity-based pools *b. Allocate activity costs to each cost object c. Identify activities d. Identify the relevant cost object Correct answer: b Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

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85. Which of the following is not part of the process used to assign costs in an ABC system? a. Identify activities *b. Use the high-low method to identify fixed and variable costs c. Identify the relevant cost object d. Assign costs to activity-based pools Correct answer: b Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

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86. Swim4Life provides swimming classes and training in South East Queensland.

Swim4Life offers four training levels: Learn to Swim Baby, Learn to Swim Junior, Learn to Swim Senior, Swim Squad. In November 2019, the firm’s information system produced the following data.

Baby Junior Senior Squad

No. of swim teachers 4 3 5 3

No of students

Area occupied

20 24 15 9

10% 40% 20% 30%

Number of classes 108 94 84 48

Direct costs $1000 $1500 $3000 $1000

Regardless of level, students pay $15 per hour for lessons. Only 5 swimmers can be supervised by the teacher in each lesson. Swim4Life also provides lessons to school students who come with their school during school hours. These lessons are provided at a discounted rate of $12 per child. Costs associated with the Swim4Life operations for November 2019 included the following.

Facility rent Provision of life savers Utilities Computer equipment depreciation Advertising Training

$2500 $800 $1100 $800 $400 $1500

Which of the following could be a cost object for Swim4Life?

I A student II A swim level III A high school class a. I and II only b. II and III only c. I and III only *d. I, II and III Correct answer: d Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

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87. Swim4Life provides swimming classes and training in South East Queensland.

Swim4Life offers four training levels: Learn to Swim Baby, Learn to Swim Junior, Learn to Swim Senior, Swim Squad. In November 2019, the firm’s information system produced the following data.

Baby Junior Senior Squad

No. of swim teachers 4 3 5 3

No of students

Area occupied

20 24 15 9

10% 40% 20% 30%

Number of classes 108 94 84 48

Direct costs $1000 $1500 $3000 $1000

Regardless of level, students pay $15 per hour for lessons. Only 5 swimmers can be supervised by the teacher in each lesson. Swim4Life also provides lessons to school students who come with their school during school hours. These lessons are provided at a discounted rate of $12 per child.

Costs associated with the Swim4Life operations for November 2019 included the following.

Facility rent Provision of life savers Utilities Computer equipment depreciation Advertising Training

$2500 $800 $1100 $800 $400 $1500

The number of students in each level is most likely to be a cost driver for: *a. wages for swim teachers. b. advertising costs. c. utility costs. d. price charged for swim lessons.

Correct answer: a Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

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88. Swim4Life provides swimming classes and training in South East Queensland.

Swim4Life offers four training levels: Learn to Swim Baby, Learn to Swim Junior, Learn to Swim Senior, Swim Squad. In November 2019, the firm’s information system produced the following data.

Baby Junior Senior Squad

No. of swim teachers 4 3 5 3

No of students

Area occupied

20 24 15 9

10% 40% 20% 30%

Number of classes 108 94 84 48

Direct costs $1000 $1500 $3000 $1000

Regardless of level, students pay $15 per hour for lessons. Only 5 swimmers can be supervised by the teacher in each lesson. Swim4Life also provides lessons to school students who come with their school during school hours. These lessons are provided at a discounted rate of $12 per child.

Costs associated with the Swim4Life operations for November 2019 included the following.

Facility rent Provision of life savers Utilities Computer equipment depreciation Advertising Training

$2500 $800 $1100 $800 $400 $1500

Which of the following is the most logical allocation base for life saver costs if the relevant cost object is Swim Squad? a. Number of swim teachers b. Number of customer enquiries *c. Number of class hours d. Number of students in Learn to Swim Senior Correct answer: c Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

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89. Swim4Life provides swimming classes and training in South East Queensland.

Swim4Life offers four training levels: Learn to Swim Baby, Learn to Swim Junior, Learn to Swim Senior, Swim Squad. In November 2019, the firm’s information system produced the following data.

No. of swim teachers 4 3 5 3

Baby Junior Senior Squad

No of students

Area occupied

20 24 15 9

10% 40% 20% 30%

Number of classes 108 94 84 48

Direct costs $1000 $1500 $3000 $1000

Regardless of level, students pay $15 per hour for lessons. Only 5 swimmers can be supervised by the teacher in each lesson. Swim4Life also provides lessons to school students who come with their school during school hours. These lessons are provided at a discounted rate of $12 per child.

Costs associated with the Swim4Life operations for November 2019 included the following.

Facility rent Provision of life savers Utilities Computer equipment depreciation Advertising Training

$2500 $800 $1100 $800 $400 $1500

If the number of swim teachers is the cost driver for training costs, the total training cost allocated to Learn to Swim Baby would be: *a. $400. b. $6400. c. $375. d. $1500.

Correct answer: a Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

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90. Swim4Life provides swimming classes and training in South East Queensland.

Swim4Life offers four training levels: Learn to Swim Baby, Learn to Swim Junior, Learn to Swim Senior, Swim Squad. In November 2019, the firm’s information system produced the following data.

Baby Junior Senior Squad

No. of swim teachers 4 3 5 3

No of students

Area occupied

20 24 15 9

10% 40% 20% 30%

Number of classes 108 94 84 48

Direct costs $1000 $1500 $3000 $1000

Regardless of level, students pay $15 per hour for lessons. Only 5 swimmers can be supervised by the teacher in each lesson. Swim4Life also provides lessons to school students who come with their school during school hours. These lessons are provided at a discounted rate of $12 per child.

Costs associated with the Swim4Life operations for November 2019 included the following.

Facility rent Provision of life savers Utilities Computer equipment depreciation Advertising Training

$2500 $800 $1100 $800 $400 $1500

Which of these groups of costs are most likely to have a common cost driver? a. Advertising and computer equipment depreciation b. Computer equipment depreciation and utilities c. Utilities and lifesaving services *d. Utilities and facility rent Correct answer: d Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

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91. Swim4Life provides swimming classes and training in South East Queensland.

Swim4Life offers four training levels: Learn to Swim Baby, Learn to Swim Junior, Learn to Swim Senior, Swim Squad. In November 2019, the firm’s information system produced the following data.

No. of swim teachers 4 3 5 3

Baby Junior Senior Squad

No of students

Area occupied

20 24 15 9

10% 40% 20% 30%

Number of classes 108 94 84 48

Direct costs $1000 $1500 $3000 $1000

Regardless of level, students pay $15 per hour for lessons. Swim4Life also provides lessons to school students who come with their school during school hours. These lessons are provided at a discounted rate of $12 per child. However, during November no school’s required lessons.

Costs associated with the Swim4Life operations for November 2019 included the following.

Facility rent Provision of life savers Utilities Computer equipment depreciation Advertising Training

$2500 $800 $1100 $800 $400 $1500

Assume Swim4Life allocates facility rent and utilities on the basis of area occupied, computer equipment depreciation on the basis of number of students and training on the basis of number of swim teachers. Lifesaving is allocated based on the number of classes.

Advertising is not allocated. What is the total amount of indirect costs allocated to senior classes? a. $1396 b. $6300 *c. $1597 d. $3000 Correct answer: c Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

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92. Swim4Life provides swimming classes and training in South East Queensland.

Swim4Life offers four training levels: Learn to Swim Baby, Learn to Swim Junior, Learn to Swim Senior, Swim Squad. In November 2019, the firm’s information system produced the following data.

No. of swim teachers 4 3 5 3

Baby Junior Senior Squad

No of students

Area occupied

20 24 15 9

10% 40% 20% 30%

Number of classes 108 94 84 48

Direct costs $1000 $1500 $3000 $1000

Regardless of level, students pay $15 per hour for lessons. Swim4Life also provides lessons to school students who come with their school during school hours. These lessons are provided at a discounted rate of $12 per child. However, during November no school’s required lessons.

Costs associated with the Swim4Life operations for November 2019 included the following.

Facility rent Provision of life savers Utilities Computer equipment depreciation Advertising Training

$2500 $800 $1100 $800 $400 $1500

Assume Swim4Life allocates facility rent and utilities on the basis of area occupied, computer equipment depreciation on the basis of number of students and training on the basis of number of swim teachers. Lifesaving is allocated based on the number of classes.

Advertising is not allocated.

What is the total amount of profit generated by senior classes (assume all classes were fully booked) during November? a. $6300 b. $3300 *c. $1703 d. $4703 Correct answer: c Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

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93. The Supreme Juice Company undertakes the following activities in its production operation and incurred the following costs during the first half of 2019.

Harvest oranges Prepare oranges for processing Extract juice from oranges Process juice into orange juice concentrate, orange juice or orange smoothies Package completed products

$25 000 20 000 18 000 15 000 9 000

Processing the juice into 3 final products involves the use of 2 machines, each of which incurred depreciation costs of $15 000 for the first half of 2019. Each product requires a different set up on the processing machines, so Supreme Juice normally sets up the machines to produce concentrate for the first week of each month. The machine is then set up to produce orange juice for the next 2 weeks. Finally, workers set up the same machines to produce orange smoothies during the last week of each month.

During the first half of 2019, 30% of the oranges harvested were turned into orange juice concentrate, 45% were processed into orange juice and 25% became orange smoothies. The relative sales values of each product were: 5% for orange juice, 20% for orange juice concentrate and 10% for smoothies. The orange juice concentrate operation takes up 40% of Supreme Juice’s total factory space. Regular orange juice and orange smoothies occupy 35% and 25%, respectively.

Which of the costs above would most likely have ‘number of setups’ as its cost driver? *a. Process juice b. Package completed products c. Harvest oranges d. Extract juice Correct answer: a Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

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94. The Supreme Juice Company undertakes the following activities in its production operation and incurred the following costs during the first half of 2019.

Harvest oranges Prepare oranges for processing Extract juice from oranges Process juice into orange juice concentrate, orange juice, or orange smoothies Package completed products

$25 000 20 000 18 000 15 000 9 000

Processing the juice into 3 final products involves the use of 2 machines, each of which incurred depreciation costs of $15 000 for the first half of 2019. Each product requires a different set up on the processing machines, so Supreme Juice normally sets up the machines to produce concentrate for the first week of each month. The machine is then set up to produce orange juice for the next 2 weeks. Finally, workers set up the same machines to produce orange smoothies during the last week of each month.

During the first half of 2019, 30% of the oranges harvested were turned into orange juice concentrate, 45% were processed into orange juice and 25% became orange smoothies. The relative sales values of each product were: 5% for orange juice, 20% for orange juice concentrate and 10% for smoothies. The orange juice concentrate operation takes up 40% of Supreme Juice’s total factory space. Regular orange juice and orange smoothies occupy 35% and 25%, respectively.

Extracting juice from oranges is done by one machine. Which of the following would be a possible cost driver for extracting juice for processing? a. Square metres occupied by the equipment *b. Machine hours utilised c. Direct labour hours d. Total direct costs Correct answer: b Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

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95. The Supreme Juice Company undertakes the following activities in its production operation and incurred the following costs during the first half of 2019.

Harvest oranges Prepare oranges for processing Extract juice from oranges Process juice into orange juice concentrate, orange juice, or orange smoothies Package completed products

$25 000 20 000 18 000 15 000 9 000

Processing the juice into 3 final products involves the use of 2 machines, each of which incurred depreciation costs of $15 000 for the first half of 2019. Each product requires a different set up on the processing machines, so Supreme Juice normally sets up the machines to produce concentrate for the first week of each month. The machine is then set up to produce orange juice for the next 2 weeks. Finally, workers set up the same machines to produce orange smoothies during the last week of each month.

During the first half of 2019, 30% of the oranges harvested were turned into orange juice concentrate, 45% were processed into orange juice and 25% became orange smoothies. The relative sales values of each product were: 5% for orange juice, 20% for orange juice concentrate and 10% for smoothies. The orange juice concentrate operation takes up 40% of Supreme Juice’s total factory space. Regular orange juice and orange smoothies occupy 35% and 25%, respectively.

Which of the following activities is likely to be classified as product-level? *a. Packaging b. Harvesting c. Extracting d. Prepare oranges for processing Correct answer: a Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

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96. The Supreme Juice Company undertakes the following activities in its production operation and incurred the following costs during the first half of 2019.

Harvest oranges Prepare oranges for processing Extract juice from oranges Process juice into orange juice concentrate, orange juice, or orange smoothies Package completed products

$25 000 20 000 18 000 15 000 9 000

Processing the juice into 3 final products involves the use of 2 machines, each of which incurred depreciation costs of $15 000 for the first half of 2019. Each product requires a different set up on the processing machines, so Supreme Juice normally sets up the machines to produce concentrate for the first week of each month. The machine is then set up to produce orange juice for the next 2 weeks. Finally, workers set up the same machines to produce orange smoothies during the last week of each month.

During the first half of 2019, 30% of the oranges harvested were turned into orange juice concentrate, 45% were processed into orange juice and 25% became orange smoothies. The relative sales values of each product were: 5% for orange juice, 20% for orange juice concentrate and 10% for smoothies. The orange juice concentrate operation takes up 40% of Supreme Juice’s total factory space. Regular orange juice and orange smoothies occupy 35% and 25%, respectively.

Assume processing costs are allocated on the basis of number of machine setups. How much processing cost will be allocated to each product line? *a. $5000 to each product line b. $10 000 orange juice concentrate and $2500 each to orange juice and smoothie c. $10 000 to each product line d. $6667 to each product line Correct answer: a Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

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97. The Supreme Juice Company undertakes the following activities in its production operation and incurred the following costs during the first half of 2019.

Harvest oranges Prepare oranges for processing Extract juice from oranges Process juice into orange juice concentrate, orange juice, or orange smoothies Package completed products

$25 000 20 000 12 000 15 000 9 000

Processing the juice into 3 final products involves the use of 2 machines, each of which incurred depreciation costs of $15 000 for the first half of 2019. Each product requires a different set up on the processing machines, so Supreme Juice normally sets up the machines to produce concentrate for the first week of each month. The machine is then set up to produce orange juice for the next 2 weeks. Finally, workers set up the same machines to produce orange smoothies during the last week of each month.

During the first half of 2019, 30% of the oranges harvested were turned into orange juice concentrate, 45% were processed into orange juice and 25% became orange smoothies. The relative sales values of each product were: 5% for orange juice, 20% for orange juice concentrate and 10% for smoothies. The orange juice concentrate operation takes up 40% of Supreme Juice’s total factory space. Regular orange juice and orange smoothies occupy 35% and 25%, respectively.

If juice extraction costs are allocated to product lines based on usage of factory space, the amount allocated to smoothies will be: a. $3750. b. $4200. *c. $3000. d. $2250.

Correct answer: c Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

98. The best allocation base choice for an ABC cost pool is a(n): *a. cost driver. b. activity pool. c. allocation cost. d. pool driver.

Correct answer: a Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

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99. The managers of Financial Burden Ltd are analysing some of their corporate costs to determine the costs of each department’s use of administrative services. The accountant wants to allocate the costs of payroll processing using an activity-based costing system. The most appropriate cost driver for the payroll processing cost pool is the: a. current tax rate for employees. b. total number of deductions from an individual employee’s pay. c. number of pay periods each month. *d. number of employees.

Correct answer: d Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

100. Ovahead Ltd employs 4 sales clerks. Eve processes sales orders for customers starting with the letters A through H, while Kat does the same task for customers from I through N. Martin deals with customers in the O through R range and Desiree handles the rest of the alphabet. The most likely cost driver for the sales team wages is the: a. number of customers within each alphabetical segment. *b. number of sales orders processed each month. c. average dollar amount of each order. d. number of product lines Ovahead sells.

Correct answer: b Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

101. Aslowas Ltd is a large merchandiser that employs numerous accounts payable clerks.

Their jobs involve processing invoices and paying invoices at regular intervals. Which of the following is the most likely cost driver for the accounts payable activity cost pool? a. Number of journal entries b. Number of staff in the administration building *c. Number of invoices processed d. Average dollar amount for each purchase Correct answer: c Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

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102. Greyt Expectations is a greyhound sanctuary for retired dogs after their racing career finishes. Dogs are housed here until permanent homes can be found for them. The shelter relies on grants from the racing industry and private donations for funding. One of the shelter’s cost pools is animal recordkeeping, which involves maintaining a database with details about the race career of each greyhound in the shelter. Which of the following is the most appropriate cost driver for the recordkeeping cost pool? a. Total winnings from dogs over their careers b. Number of employees who work in the shelter *c. Number of greyhounds accepted into the shelter d. Square feet allocated to the recordkeeping operation Correct answer: c Learning objective 12.3 ~ Apply the principles of ABC and conventional costing

103. The process of using ABC information to evaluate the costs and benefits of production and to identify opportunities for improvements in profitability and efficiency is called: a. activity-based allocation. b. management by exception. *c. activity-based management. d. activity-based consulting.

Correct answer: c Learning objective 12.4 ~ Describe the characteristics and use of activity-based management (ABM)

104. Which of the following is not a use of activity-based management? a. Managing customer profitability b. Managing product and process design *c. Designing performance measurement schemes for management d. Managing environmental costs Correct answer: c Learning objective 12.4 ~ Describe the characteristics and use of activity-based management (ABM)

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105. Activity-based costing information can be used to identify the relative cost of maintaining different customers. Managers can use that information, coupled with activitybased management techniques, to manage: a. customer quality. *b. customer profitability. c. delivery times. d. supplier satisfaction.

Correct answer: b Learning objective 12.4 ~ Describe the characteristics and use of activity-based management (ABM)

106. Rhiannon is a customer of Inthenews Ltd She consistently orders low-margin services, but requires extensive technical support from Inthenews Ltd In employing ABM techniques to manage customer profitability, Inthenews’ staff should: a. reduce staff costs in their technical support area. b. increase prices charged to other customers. *c. consider new approaches to providing services to Rhiannon. d. increase the price charged for Rhiannon’s orders.

Correct answer: c Learning objective 12.4 ~ Describe the characteristics and use of activity-based management (ABM)

107. Characteristics typical of customers with low service costs do not include: a. purchasing standardised products. b. routine delivery schedules. *c. arrangements for instalment payment of bills. d. large volume.

Correct answer: c Learning objective 12.4 ~ Describe the characteristics and use of activity-based management (ABM)

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108. Non value-added activities: a. are unnecessary and should be eliminated where possible. b. waste resources. *c. all of the options listed. d. none of the options listed.

Correct answer: c Learning objective 12.4 ~ Describe the characteristics and use of activity-based management (ABM)

109. Fonesforall Ltd manufactures and sells mobile phones. Which of the following activities is least likely to be considered a value-added activity for BVH? *a. Creating a sound-proof area for customers to test different phones in b. Offering phones for sale in designer colours c. Making phones smaller d. Creating extra storage on the mobiles phones Correct answer: a Learning objective 12.4 ~ Describe the characteristics and use of activity-based management (ABM)

110. Reasons that managers may wish to reduce environmental costs include: a. appeal to shareholders concerned with the green reputation of companies in which they invest. b. reduce possible penalties for damage to environmental resources. *c. all of the options listed. d. none of the options listed.

Correct answer: c Learning objective 12.4 ~ Describe the characteristics and use of activity-based management (ABM)

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111. How can ABM be used to manage constrained resources? a. ABM cannot be used to manage constrained resources. *b. ABM can help managers identify the best way to relax constraints. c. ABM can help managers decrease the rate at which products get through the manufacturing process. d. ABM can help managers justify price increases due to constrained resources.

Correct answer: b Learning objective 12.4 ~ Describe the characteristics and use of activity-based management (ABM)

112. Which of the following is not a benefit of an ABC system? a. Reducing arbitrary cost measurement *b. Increased bonuses for managers c. Optimising use of constrained resources d. Motivating employees to find ways to improve performance Correct answer: b Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

113. Which of these is not a benefit of activity-based costing? a. Increased awareness of cause and effect relationships b. Identification of non-value-added activities *c. Cost–benefit trade-offs d. All of the options listed are benefits Correct answer: c Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

114. Costs associated with developing an ABC system most likely include: a. reduced profits. b. dissatisfied customers. *c. accounting and information system modifications. d. increased wages for production line employees.

Correct answer: c Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

115. When implementing an ABC system, the costs attached are generally higher when: 1.431

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a. employees are well trained and experienced. b. when there is managerial support for the process. *c. more activities are involved. d. all of the options listed.

Correct answer: c Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

116. The cost of implementing an ABC system is likely to be lower if the number of times an activity is performed: a. is low. b. is high. *c. can easily be tracked. d. decreases with volume.

Correct answer: c Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

117. ABC are costlier to develop when activities: a. use multiple types of resources. b. have costs that are difficult to trace. c. data for the cost driver is difficult to obtain. *d. all of the options listed.

Correct answer: d Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

118. ABC systems are typically associated with: *a. improved profitability for firms with advanced manufacturing techniques that combine information technology with flexible manufacturing practices. b. improved profitability for manufacturing firms, but not service firms. c. improved profitability for service firms, but not manufacturing firms. d. improved profitability for all firms that implement them.

Correct answer: a Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

119. As the number of activities in an ABC system increases, measurement error tends to:

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a. decrease. *b. increase. c. remain the same. d. make it difficult to identify the cost driver.

Correct answer: b Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

120. Measurement errors in an ABC system can be caused by: a. choosing an inappropriate denominator value. b. inaccurate estimates. c. compromises when selecting cost drivers. *d. all of the options listed.

Correct answer: d Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

121. Employees can restrict the success of an ABC implementation by: a. undermining training efforts. b. providing biased information. *c. all of the options listed. d. none of the options listed.

Correct answer: c Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

122. Which of these do managers use in choosing activities and cost drivers to include in an ABC system? a. Linear programming b. Simple regression *c. Cost–benefit analysis d. Activity-based management Correct answer: c Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

123. Uncertainties associated with ABC and ABM include:

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I Cost–benefit analysis II The appropriate choice of cost drivers III Employee response to the system a. I, II and III. b. I and III only. c. I and II only. *d. II and III only.

Correct answer: d Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

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124. Tizhman Ltd manufactures custom-made mobile phone casings. At the moment the company has two types of products on the market, the ‘Exquisite’ and the ‘Standard’. The company currently uses a traditional costing system and allocates overhead costs based on direct labour hours. The budgeted direct labour hours for the year totalled to 40 000 hours.

The following cost information has been used as a basis for pricing decisions over the past year.

Per-unit data Direct labour hours Direct labour cost per hour Direct materials Selling price Units produced

Exquisite 1.5 $15 $75 $180 20 000

Standard 1 $15 $40 $150 30 000

The new company controller Ms Leesha is considering the use of activity-based costing to apply overhead and has collected the following data.

Activity centre Set-ups Special design Packaging Machining

Cost driver Number of setups Design hours Packaging orders Machine hours

Traceable $100 000 $364 000 $900 000 $300 000

Number of events Exquisite Standard 100 100 900 100 15 000 35 000 9 000 1 000

Using the traditional costing method, what is the predetermined overhead rate? a. $50.00 *b. $41.60 c. $41.00 d. $41.80 Correct answer: b Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

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125. Tizhman Ltd manufactures custom-made mobile phone casings. At the moment the company has two types of products on the market, the ‘Exquisite’ and the ‘Standard’. The company currently uses a traditional costing system and allocates overhead costs based on direct labour hours. The budgeted direct labour hours for the year totalled to 40 000 hours.

The following cost information has been used as a basis for pricing decisions over the past year.

Per-unit data Direct labour hours Direct labour cost per hour Direct materials Selling price Units produced

Exquisite 1.5 $15 $75 $180 20 000

Standard 1 $15 $40 $150 30 000

The new company controller Ms Leesha is considering the use of activity-based costing to apply overhead and has collected the following data.

Activity centre Set-ups Special design Packaging Machining

Cost driver Number of setups Design hours Packaging orders Machine hours

Traceable $100 000 $364 000 $900 000 $300 000

Number of events Exquisite Standard 100 100 900 100 15 000 35 000 9 000 1 000

Using the traditional costing method, what is the product cost for Exquisite? a. $96.60 b. $275.60 c. $159.60 *d. $159.90 Correct answer: d Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

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126. Tizhman Ltd manufactures custom-made mobile phone casings. At the moment the company has two types of products on the market, the ‘Exquisite’ and the ‘Standard’. The company currently uses a traditional costing system and allocates overhead costs based on direct labour hours. The budgeted direct labour hours for the year totalled to 40 000 hours.

The following cost information has been used as a basis for pricing decisions over the past year.

Per-unit data Direct labour hours Direct labour cost per hour Direct materials Selling price Units produced

Exquisite 1.5 $15 $75 $180 20 000

Standard 1 $15 $40 $150 30 000

The new company controller Ms Leesha is considering the use of activity-based costing to apply overhead and has collected the following data.

Activity centre Set-ups Special design Packaging Machining

Cost driver Number of setups Design hours Packaging orders Machine hours

Traceable $100 000 $364 000 $900 000 $300 000

Number of events Exquisite Standard 100 100 900 100 15 000 35 000 9 000 1 000

What is the cost per activity for set-ups, special design, packaging and machining? a. $500, $364, $18 and $33.33 respectively b. $500, $364, $26 and $30 respectively *c. $500, $364, $18 and $30 respectively d. $404, $364, $18 and $30 Correct answer: c Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

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127. Tizhman Ltd manufactures custom-made mobile phone casings. At the moment the company has two types of products on the market, the ‘Exquisite’ and the ‘Standard’. The company currently uses a traditional costing system and allocates overhead costs based on direct labour hours. The budgeted direct labour hours for the year totalled to 40 000 hours.

The following cost information has been used as a basis for pricing decisions over the past year.

Per-unit data Direct labour hours Direct labour cost per hour Direct materials Selling price Units produced

Exquisite 1.5 $15 $75 $180 20 000

Standard 1 $15 $40 $150 30 000

The new company controller Ms Leesha is considering the use of activity-based costing to apply overhead and has collected the following data.

Activity centre Set-ups Special design Packaging Machining

Cost driver Number of setups Design hours Packaging orders Machine hours

Traceable $100 000 $364 000 $900 000 $300 000

Number of events Exquisite Standard 100 100 900 100 15 000 35 000 9 000 1 000

Using the ABC method, what is the total cost of special design? a. $36 400 *b. $327 600 c. $50 000 d. $270 000 Correct answer: b Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

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128. Symphonix Corporation is preparing its annual budget. As part of its analysis of the contribution of individual products to overall profitability, the controller estimates the amount of overhead that should be assigned to the individual product lines. Budgeted inspection costs are $12 000. Additional information is as follows.

Units inspected Hours spent inspecting Direct labour hours per unit

Small pumps 120 2.5 2

Large pumps 120 17.5 2

Under a traditional costing system that assigns overhead on the basis of units inspected, what would the inspection costs allocated to one small pump be? a. $875 *b. $50 c. $2.50 d. $300 Correct answer: b Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

129. Recent survey findings suggest that ABC: a. is better integrated into budget and planning systems. b. support product and customer related decisions. c. result in better identification of cause and effect relationships. *d. all of the options listed.

Correct answer: d Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

130. A recent development in ABC is: a. conventional ABC. b. resource driven ABC. *c. time-driven ABC. d. overhead driven ABC. Correct answer: c Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

131. The cost driver rate in time driven ABC is calculated using:

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a. total assigned activity cost divided by total activity quantity. b. cost per time unit of capacity divided by unit times of activity. *c. cost per time unit of capacity multiplied by unit times of activity. d. cost per time unit of capacity multiplied by total activity quantity.

Correct answer: c Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

132. Which of the following is not a feature of time driven ABC? a. Focus on capacity supplied and used b. Consideration of the time taken to perform each activity *c. Consideration of hourly wage rates d. Ability to adjust for flexibility of operations Correct answer: c Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

133. Advantages of time driven ABC include: a. idle time can be quantified as input costs minus costs assigned to activities. b. standard rates can be used in quotations. *c. all of the options listed. d. none of the options listed.

Correct answer: c Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

134. The standardised cost per time unit of capacity expertise of the employee performing the activity.

differentiate the

a. will always *b. may not c. should not d. cannot Correct answer: b Learning objective 12.5 ~ Communicate the benefits, costs and issues related to ABC

Testbank 1.440

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to accompany

Management accounting 5th edition by Eldenburg et al.

Not for distribution. Instructors may assign selected questions in their LMS.

© John Wiley & Sons Australia, Ltd 2024

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Chapter 13: Relevant costs for decision making True/false questions

1. Because non-routine operating decisions are common, managers use a standard decision process for addressing them. a. True *b. False Correct answer: b Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

2. Some examples of non-routine decisions include special order, outsourcing and keeping or dropping a product line. *a. True b. False Correct answer: a Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

3. Non-routine operating decisions are often tactical decisions. *a. True b. False Correct answer: a Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

4. Make or buy decisions refer to choosing between outsourcing or utilising internal resources. *a. True b. False Correct answer: a Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

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5. Strategic decisions do not include decisions that impact beyond the current accounting period. a. True *b. False Correct answer: b Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

6. The purpose of strategic decisions is to enhance the organisation’s competitive advantage. *a. True b. False Correct answer: a Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

7. Non-routine operating decisions focus on making use of existing capacity. *a. True b. False Correct answer: a Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

8. Most decisions require the use of relevant costs that may have arose in the past and changes with the action taken. a. True *b. False Correct answer: b Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

9. Qualitative analysis aims to identify how the organisation’s debt ratio will change as a consequence of the decision to be made. a. True *b. False Correct answer: b Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

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10. The effect of production practices on the customer quality is an example of a qualitative factor to be considered in a non-routine operating decision. a. True *b. False Correct answer: b Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

11. The process for making non-routine operating decisions starts with special orders. a. True *b. False Correct answer: b Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

12. Types of qualitative analysis include CVP and regression. a. True *b. False Correct answer: b Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

13. The first step in the relevant analysis technique is to identify input variables. *a. True b. False Correct answer: a Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

14. Analysing the impact of the decision on quality is an example of considering qualitative factors.

*a. True b. False Correct answer: a Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

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15. It is usually necessary to trade-off between qualitative and quantitative factors. *a. True b. False Correct answer: a Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

16. Positive financial outcomes should always override qualitative factors.

a. True *b. False Correct answer: b Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

17. Ethical standards are not a factor in non-routine operating decisions. a. True *b. False Correct answer: b Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

18. Existing variable costs are irrelevant in special order decisions. *a. True b. False Correct answer: a Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

19. Direct fixed costs are irrelevant in outsourcing decisions. a. True *b. False Correct answer: b Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

20. An opportunity cost is the benefit foregone when one alternative is chosen over the next best alternative.

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*a. True b. False Correct answer: a Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

21. Opportunity costs can be a factor in special order decisions if there is insufficient capacity to meet the special order.

*a. True b. False Correct answer: a Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

22. Cash flow analysis can be used in non-routine operating decision making. *a. True b. False Correct answer: a Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

23. Differential analysis focuses on the full effect of the decision on the statement of profit or loss. a. True *b. False Correct answer: b Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

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24. A special order occurs when an existing or new customer places a one-off request for a product or service. *a. True b. False Correct answer: a Learning objective 13.2 ~ Understand the decision-making process to accept, reject and price special orders

25. Special orders may stipulate requirements such as reduced price or additional customisation. *a. True b. False Correct answer: a Learning objective 13.2 ~ Understand the decision-making process to accept, reject and price special orders

26. Special orders require idle capacity.

a. True *b. False Correct answer: b Learning objective 13.2 ~ Understand the decision-making process to accept, reject and price special orders

27. If a service organisation is at capacity, it would not accept a special order for service. a. True *b. False Correct answer: b Learning objective 13.2 ~ Understand the decision-making process to accept, reject and price special orders

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28. The general rule for special order decisions is being at least as well off after the decision as before it. *a. True b. False Correct answer: a Learning objective 13.2 ~ Understand the decision-making process to accept, reject and price special orders

29. If idle capacity exists, special orders replace regular business. a. True *b. False Correct answer: b Learning objective 13.2 ~ Understand the decision-making process to accept, reject and price special orders

30. If there is no idle capacity then opportunity costs should be considered. *a. True b. False Correct answer: a Learning objective 13.2 ~ Understand the decision-making process to accept, reject and price special orders

31. The loss of the contribution margin supplied by regular customers is the opportunity cost of accepting a special order when there is no idle capacity.

*a. True b. False Correct answer: a Learning objective 13.2 ~ Understand the decision-making process to accept, reject and price special orders

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32. A business may be willing to accept a special order at a loss with the expectation that it will attract regular business in the future. *a. True b. False Correct answer: a Learning objective 13.2 ~ Understand the decision-making process to accept, reject and price special orders

33. The incremental cost of a special order does not include incremental fixed costs. a. True *b. False Correct answer: b Learning objective 13.2 ~ Understand the decision-making process to accept, reject and price special orders

34. Qualitative factors are not relevant for special orders. a. True *b. False Correct answer: b Learning objective 13.2 ~ Understand the decision-making process to accept, reject and price special orders

35. Average costs are used to make decisions about keeping or dropping product or segments. a. True *b. False Correct answer: b Learning objective 13.3 ~ Understand the decision-making process to keep or drop products, segments or whole businesses

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36. Products should be dropped when its total contribution margin does not cover avoidable fixed costs. *a. True b. False Correct answer: a Learning objective 13.3 ~ Understand the decision-making process to keep or drop products, segments or whole businesses

37. Avoidable fixed costs are those that can be eliminated if the product or segment is dropped. *a. True b. False Correct answer: a Learning objective 13.3 ~ Understand the decision-making process to keep or drop products, segments or whole businesses

38. A fixed cost that remains when a product or segment is dropped is called an unavoidable fixed cost. *a. True b. False Correct answer: a Learning objective 13.3 ~ Understand the decision-making process to keep or drop products, segments or whole businesses

39. The relevant fixed costs for a keep or drop decision are the unavoidable fixed costs. a. True *b. False Correct answer: b Learning objective 13.3 ~ Understand the decision-making process to keep or drop products, segments or whole businesses

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40. There are no opportunity costs in keep or drop decisions. a. True *b. False Correct answer: b Learning objective 13.3 ~ Understand the decision-making process to keep or drop products, segments or whole businesses

41. Managers should consider potential benefits from using released capacity for other purposes when making keep or drop decisions.

*a. True b. False Correct answer: a Learning objective 13.3 ~ Understand the decision-making process to keep or drop products, segments or whole businesses

42. In multi-product firms, managers need to consider the effect on demand for other products when they make a keep or drop decision about one product. *a. True b. False Correct answer: a Learning objective 13.3 ~ Understand the decision-making process to keep or drop products, segments or whole businesses

43. When a products contribution margin does not cover avoidable fixed costs then the product should be dropped. *a. True b. False Correct answer: a Learning objective 13.3 ~ Understand the decision-making process to keep or drop products, segments or whole businesses

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44. Outsourcing refers to the practice of finding outside vendors to supply products and services. *a. True b. False Correct answer: a Learning objective 13.4 ~ Understand the decision-making process to insource or outsource an activity (make or buy)

45. A business should outsource if the cost to buy is less than or equal to the sum of variable costs and relevant fixed costs minus any opportunity costs. *a. True b. False Correct answer: a Learning objective 13.4 ~ Understand the decision-making process to insource or outsource an activity (make or buy)

46. For manufacturers make or buy decisions are also known as activity sourcing.

a. True *b. False Correct answer: b Learning objective 13.4 ~ Understand the decision-making process to insource or outsource an activity (make or buy)

47. Potential cost savings are not relevant in make or buy decisions. a. True *b. False Correct answer: b Learning objective 13.4 ~ Understand the decision-making process to insource or outsource an activity (make or buy)

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48. Existing fixed costs that can be avoided through outsourcing are relevant to the decision making process. *a. True b. False Correct answer: a Learning objective 13.4 ~ Understand the decision-making process to insource or outsource an activity (make or buy)

49. Opportunity costs for insourcing include the contribution margin foregone from using the capacity for a new product. *a. True b. False Correct answer: a Learning objective 13.4 ~ Understand the decision-making process to insource or outsource an activity (make or buy)

50. Managers may choose to outsource activities or products unrelated to their core organisational competencies. *a. True b. False Correct answer: a Learning objective 13.4 ~ Understand the decision-making process to insource or outsource an activity (make or buy)

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51. Product quality should be considered in make or buy decisions. *a. True b. False Correct answer: a Learning objective 13.4 ~ Understand the decision-making process to insource or outsource an activity (make or buy)

52. Rapid growth may require a company to outsource certain products or services. *a. True b. False Correct answer: a Learning objective 13.4 ~ Understand the decision-making process to insource or outsource an activity (make or buy)

53. When there are no capacity constraints managers should always emphasise products with the highest contribution margin per unit. *a. True b. False Correct answer: a Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

54. Constraints are limits on capacity, materials or labour. *a. True b. False Correct answer: a Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

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55. A shortage of raw material to manufacture a product would be a capacity constraint. a. True *b. False Correct answer: b Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

56. When faced with constrained resources, managers can maximise the contribution margin within the constraint or incur additional costs to relax the constraint.

*a. True b. False Correct answer: a Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

57. The general rule for choosing the product mix under constraints is to emphasise products with the highest contribution margin per unit of the constrained resource. *a. True b. False Correct answer: a Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

58. Emphasising products with higher contribution margins assumes that fixed costs are unaffected by product mix. *a. True b. False Correct answer: a Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

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59. The number of babysitters available could be a constraint for a nanny service. *a. True b. False Correct answer: a Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

60. The number of customers willing to purchase the product is an example of a capacity constraint. a. True *b. False Correct answer: b Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

61. The general rule for relaxing a short-term constraint for direct materials is that managers would be willing to pay what they are already paying as well as some or all of the contribution margin per unit of the constrained resource.

*a. True b. False Correct answer: a Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

62. The general rule for relaxing capacity constraints assumes that sales of one product do not affect sales of another product. *a. True b. False Correct answer: a Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

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63. A process that restricts overall capacity is known as a bottle limit. a. True *b. False Correct answer: b Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

64. New fixed costs incurred to relax a constraint are irrelevant. a. True *b. False Correct answer: b Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

65. Relationships with resource suppliers should be analysed in constrained resource decisions. *a. True b. False Correct answer: a Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

66. Uncertainties about future revenues and costs affect non-routine operating decisions.

*a. True b. False Correct answer: a Learning objective 13.6 ~ Describe the qualitative factors important to non-routine operating decisions

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67. Decisions which have a short time horizon typically have less uncertainties than decision that have a longer impact. *a. True b. False Correct answer: a Learning objective 13.6 ~ Describe the qualitative factors important to non-routine operating decisions

68. Three major factors affect the quality of information for non-routine operating decisions: certainty, information timeliness and analysis technique assumptions. a. True *b. False Correct answer: b Learning objective 13.6 ~ Describe the qualitative factors important to non-routine operating decisions

69. An important uncertainty to be considered in regards to outsourcing decisions is whether the vendor or supplier is reliable. *a. True b. False Correct answer: a Learning objective 13.6 ~ Describe the qualitative factors important to non-routine operating decisions

70. The timeliness of information can affect decision quality in non-routine operating decisions. *a. True b. False Correct answer: a Learning objective 13.6 ~ Describe the qualitative factors important to non-routine operating decisions

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71. Access to timely information is not important in manufacturing firms because their infrastructure is fixed. a. True *b. False Correct answer: b Learning objective 13.6 ~ Describe the qualitative factors important to non-routine operating decisions

72. Sometimes qualitative factors are more important that maximising short-term profitability. *a. True b. False Correct answer: a Learning objective 13.6 ~ Describe the qualitative factors important to non-routine operating decisions

73. Decision-maker bias means that decision makers should rely solely on quantitative data as there is less uncertainty associated with it. a. True *b. False Correct answer: b Learning objective 13.6 ~ Describe the qualitative factors important to non-routine operating decisions

74. Sensitivity analysis can be used to determine how quantitative results would change due to changes in the inputs. *a. True b. False Correct answer: a Learning objective 13.6 ~ Describe the qualitative factors important to non-routine operating decisions

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75. Sensitivity analysis can be used to manipulate the degree of risk in various options. *a. True b. False Correct answer: a Learning objective 13.6 ~ Describe the qualitative factors important to non-routine operating decisions

76. Managers should prioritise qualitative factors over strategic goals.

a. True *b. False Correct answer: b Learning objective 13.6 ~ Describe the qualitative factors important to non-routine operating decisions

77. When a product emerges as a result of making another product these are called joint products. *a. True b. False Correct answer: a Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

78. Joint products fall into two categories: by-products and split products. a. True *b. False Correct answer: b Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

79. By-products have lower sales values compared to other joint products. *a. True b. False Correct answer: a Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

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80. Joint costs are common to all of the joint products. *a. True b. False Correct answer: a Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

81. Split-off point is the point at which joint products are sold. a. True *b. False Correct answer: b Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

82. Separable costs are the costs incurred after the split-off point. *a. True b. False Correct answer: a Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

83. Separable costs are incremental costs that can be traced to each specific product. *a. True b. False Correct answer: a Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

84. Joint costs allocation is occasionally governed by legal processes. *a. True b. False Correct answer: a Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

85. Joint costs are excluded from inventory and costs of sales in the financial statements.

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a. True *b. False Correct answer: b Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

86. Physical output method is a way to allocate joint costs to products. *a. True b. False Correct answer: a Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

87. Sales value at split-off point is a physical output method of allocating joint costs. a. True *b. False Correct answer: b Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

88. The physical output method for allocating joint costs is used when the output for all products can be expressed using the same physical measure. *a. True b. False Correct answer: a Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

89. Market-based methods for allocating joint costs use a proportion of the profit contribution for each main product to determine the joint cost allocation rate. *a. True b. False Correct answer: a Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

90. The sales value at split-off point method allocates joint costs based on the relative cost of sales at the point where joint production ends.

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a. True *b. False Correct answer: b Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

91. The net realisable value method allocates joint costs using the relative value of main products, taking into account the additional sales value and costs incurred after joint production ends. *a. True b. False Correct answer: a Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

92. The constant gross margin NRV method allocates joint costs so that the gross margin percentage for each main product is identical. *a. True b. False Correct answer: a Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

93. The gross margin is calculated by subtracting joint costs from sales. a. True *b. False Correct answer: b Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

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94. Allocating joints affects the relative gross margin for individual products but not the total gross margin. *a. True b. False Correct answer: a Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

95. Because the process of allocating joint costs is arbitrary the chosen method should avoid giving the incorrect impression that one or more products is unprofitable. *a. True b. False Correct answer: a Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

96. The sales value at split-off point is most appropriate when most products are sold at split-off point. *a. True b. False Correct answer: a Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

97. The constant gross margin NRV method best reflects the inseparability of the joint production process. *a. True b. False Correct answer: a Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

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98. Joint costs are relevant in decisions about whether to process a product beyond the split-off point

a. True *b. False Correct answer: b Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

99. Over time, by-products may become main products when new technologies or markets emerge. *a. True b. False Correct answer: a Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

100. By-products exist because the entity is producing the main products. *a. True b. False Correct answer: a Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

101. Typically by-products make a substantial contribution to profitability. a. True *b. False Correct answer: b Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

102. When by-product value is recognised at the time of production, the joint costs of the main product are reduced by the net realisable value of the by-product. *a. True b. False Correct answer: a Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

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103. When by-product value is recognised at the time of sale, the value may be recorded as sales revenue, other income or as a reduction in cost of sales.

*a. True b. False Correct answer: a Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

104. Joint costs are product costs. *a. True b. False Correct answer: a Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

105. Because estimates are used when allocating joint costs there is potential for inaccuracies. *a. True b. False Correct answer: a Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

106. Joint costs cannot be traced to individual products. *a. True b. False Correct answer: a Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

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107. Sales value is an example of a measurement base that could be used in the physical output method. a. True *b. False Correct answer: b Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

108. The general rule for deciding whether to process further is whether the incremental revenue is greater than the incremental cost.

*a. True b. False Correct answer: a Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

109. Qualitative factors should not be considered in decisions to process further. a. True *b. False Correct answer: b Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

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Multiple-choice questions

110. The process for making non-routine operating decisions: *a. requires the use of relevant costs/revenues. b. involves qualitative techniques only. c. incorporates the time value of money. d. disregards qualitative factors.

Correct answer: a Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

111. Quantitative analysis includes: a. CVP. b. regression. c. relevant cost analysis. *d. all of the options listed.

Correct answer: d Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

112. A special order has been received from the local high school to supply them with 1000 badges. Your business normally sells badges in batches of 10 000. The incremental variable costs in making this decision are: *a. relevant. b. irrelevant. c. an opportunity cost. d. a sunk cost.

Correct answer: a Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

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113. In non-routine situations, managers must identify the type of decision to be made.

Which of the following is not an example of a non-routine operating decision? a. Outsourcing b. Special order pricing *c. Employing production employees d. Discontinuing product lines or segments Correct answer: c Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

114. The following are steps in applying relevant analysis techniques to non-routine operating decisions.

I II III

Interpret results Identify input variables Apply the general rule

What is the correct sequence for these steps? a. I, II, III *b. II, III, I c. III, II, d. I, III, II Correct answer: b Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

115. Non-routine operating decisions differ from routine operating decisions in that nonroutine decisions: a. ignore cash flows. b. consider cash flows. c. involve major infrastructure spending. *d. do not happen on a regular basis.

Correct answer: d Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

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116. If relevant, opportunity costs should be considered in: *a. both routine and non-routine operating decisions. b. neither routine nor non-routine operating decisions. c. routine decisions only. d. non-routine operating decisions only.

Correct answer: a Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

117. Which of the following is the best definition of a qualitative factor? a. Factors related to product or service quality b. Opportunity costs *c. Factors that are not expressed in monetary terms d. Factors that are inferior to quantitative factors in decision making Correct answer: c Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

118. Trade-offs may be required between: a. sunk costs and opportunity costs. b. multiple products and opportunity costs. *c. quantitative and qualitative factors. d. sunk costs and qualitative factors.

Correct answer: c Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

119. If current production has been used to satisfy a special order, lost contribution from sales is: a. a sunk cost of the special order. b. an irrelevant cost of the special order. c. is a relevant cost of the special order. *d. an opportunity cost of the special order.

Correct answer: d Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

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120. Fixed costs should be considered in non-routine operating decisions when: a. they are material. b. they are incremental. *c. they are relevant. d. they are step costs.

Correct answer: c Learning objective 13.1 ~ Describe the process for making non-routine operating decisions

121. Jones Ltd received a special order from a supplier for 5000 units of a product that sells at $30 per unit. The incremental variable cost is $90 000. The company expects to save $5000 in ordering and other communication costs. What is the contribution from the special order? a. $60 000 b. $70 000 *c. $65 000 d. a loss of $60 000 Correct answer: c Learning objective 13.2 ~ Understand the decision-making process to accept, reject and price special orders

122. Jones Ltd received a special order from a supplier for 5000 units of a product that sells at $30 per unit. The incremental variable cost is $90 000. The company expects to save $5000 in ordering and other communication costs. If Jones Ltd agrees to the special order, it will forgo $55 400 in lost sales. What is the contribution from the special order? a. $55 400 b. $90 000 *c. $9600 d. a loss of $4600 Correct answer: c Learning objective 13.2 ~ Understand the decision-making process to accept, reject and price special orders

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123. Gordon is a manager at Wingle Low Restaurant. He is considering accepting a special order from a neighbourhood homeless shelter for 80 Christmas meals. Which of the following is a relevant qualitative factor he should consider? a. The number of homeless who will be served b. The restaurant’s production capacity *c. The potential goodwill for the restaurant d. Kitchen staff wages Correct answer: c Learning objective 13.2 ~ Understand the decision-making process to accept, reject and price special orders

124. In making a special order decision, which of the following is a relevant fixed cost? a. Incremental fixed costs associated with current business b. Unavoidable allocated fixed costs c. Depreciation on existing production equipment *d. Incremental fixed costs associated with the order Correct answer: d Learning objective 13.2 ~ Understand the decision-making process to accept, reject and price special orders

125. A company will only incur an opportunity cost for a special order when: *a. there is no idle capacity. b. the price of the order is less than its variable cost. c. the cost of the order is greater than the average cost for current business. d. there is no benefit from the special order.

Correct answer: a Learning objective 13.2 ~ Understand the decision-making process to accept, reject and price special orders

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126. Reality Planet Ltd sells product a model star at a price of $48 a unit. The per-unit cost data are: direct materials $15, direct labour $10 and overhead $12 (50% fixed and 50% variable). Reality Planet has sufficient capacity to accept a special order for 40 000 units just received. Selling costs associated with this order would be $3 per unit.

The minimum selling price per unit should be: *a. $34. b. $30. c. $40. d. $31.

Correct answer: a Learning objective 13.2 ~ Understand the decision-making process to accept, reject and price special orders

127. Reality Planet Ltd sells product a model star at a price of $48 a unit. The per-unit cost data are: direct materials $15, direct labour $10 and overhead $12 (50% fixed and 50% variable). Reality Planet has sufficient capacity to accept a special order for 40 000 units just received. Selling costs associated with this order would be $3 per unit.

At a selling price of $36 per unit, the operating profit will: a. increase by $144 000. *b. increase by $80 000. c. increase by $120 000. d. increase by $200 000.

Correct answer: b Learning objective 13.2 ~ Understand the decision-making process to accept, reject and price special orders

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128. Kintectics Ltd can manufacture 480 000 electrical pumps a year at a variable cost of $15 per pump and fixed costs of $500 000. Kintectics Ltd budgeted that it can sell 400 000 at $25 each. An additional order of 100 000 was received, but at a discount of 35% from the regular price.

What is the relevant cost to Kintectics Ltd of the special order? a. $1 500 000 b. $1 450 000 c. $1 300 000 *d. $1 700 000 Correct answer: d Learning objective 13.2 ~ Understand the decision-making process to accept, reject and price special orders

129. Kintectics Ltd can manufacture 480 000 electrical pumps a year at a variable cost of $15 per pump and fixed costs of $500 000. Kintectics Ltd budgeted that it can sell 400 000 at $25 each. An additional order of 100 000 was received, but at a discount of 35% from the regular price.

If Kintectics Ltd accepts the special order, profit before taxes will: *a. decrease by $75 000. b. increase by $75 000. c. increase by $25 000. d. none of the options listed.

Correct answer: a Learning objective 13.2 ~ Understand the decision-making process to accept, reject and price special orders

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130. Assume the following cost data.

Per-unit costs: Direct material Direct labour Variable overhead Variable selling Fixed overhead Fixed selling

$6 4 2 4 300 400

A special order for 100 units is received. The buyer wants his name stamped on each unit.

This will increase labour costs by $1.00 per unit and cost $500 for the stamping machine.

What price must be charged to earn $300 on the special order? a. $2700 b. $2100 c. $2225 *d. $2500 Correct answer: d Learning objective 13.2 ~ Understand the decision-making process to accept, reject and price special orders

131. Platinum Company has a capacity of 45 000 units and is currently producing and selling 40 000 at $25 a unit. The present cost structure, on a per unit basis, is as follows.

Direct material Direct labour Variable overhead Fixed overhead

$10 5 3 4

An order for 7000 units has been received from a New Zealand company at a price of $20 per unit. If the order is accepted, profit will: a. decrease by $2000. b. increase by $14 000. c. increase by $7000. *d. remain the same.

Correct answer: d Learning objective 13.2 ~ Understand the decision-making process to accept, reject and price special orders

132. A manufacturer operating with excess capacity has been asked to fill a special order at $9.25 per unit. The regular price is $10 per unit. No other use of the currently idle capacity 1.475

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can be found. The manufacturer’s usual variable costs per unit are $4.50 for direct materials, $3.00 for direct labour, $1.00 for variable overhead and $1.50 for sales commission. No sales commission would be paid on this special order. The average fixed overhead cost per unit is $0.25.

Under the general decision rule, what is the minimum price per unit for this special order? a. $8.75 *b. $8.50 c. $10.00 d. $7.50 Correct answer: b Learning objective 13.2 ~ Understand the decision-making process to accept, reject and price special orders

133. Collage Ltd is closing one of its divisions. Operating data on this division follows.

Sales Variable costs Overhead

$120 000 46 000 60 000

Overhead consists of $50 000 in salary and $10 000 for rent and insurance. The salary is for the production manager, who will continue to work for Collage Ltd even if the division is closed.

Rent and insurance that will cease if the division is closed is an: a. unavoidable and irrelevant cost. b. unavoidable and relevant cost. *c. avoidable and relevant cost. d. avoidable and irrelevant cost.

Correct answer: c Learning objective 13.3 ~ Understand the decision-making process to keep or drop products, segments or whole businesses

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134. Collage Ltd is closing one of its divisions. Operating data on this division follows.

Sales Variable costs Overhead

$120 000 46 000 60 000

Overhead consists of $50 000 in salary and $10 000 for rent and insurance. The salary is for the production manager, who will continue to work for Collage Ltd even if the division is closed. Assuming all overhead costs continue to be incurred even if the division closes, what will be the effect on overall company profits of closing the division? a. $60 000 decrease *b. $74 000 decrease c. $74 000 increase d. $46 000 increase Correct answer: b Learning objective 13.3 ~ Understand the decision-making process to keep or drop products, segments or whole businesses

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135. Jay Ltd wants to drop one of their service lines since it is showing a loss. The following details are provided for cleaning services.

Revenue Less: Cost of cleaning products used Gross profit

$80 000 30 000 $50 000

Less: Operating expenses

62 300

Wages of cleaning staff Other items used for cleaning Depreciation building used for storage(allocated) Manager’s salary (allocated) Depreciation of cleaning equipment Electricity(allocated) Loss on cleaning services

35 000 3 000 2 000 13 000 7 000 2 300 $(12 300)

The following operating expenses are irrelevant to the decision to drop the service. a. Wages of cleaning staff; manager’s salary and electricity *b. Depreciation of building used for storage; manager’s salary and electricity c. Depreciation of building used for storage; other items for cleaning and electricity d. Depreciation of cleaning equipment; manager’s salary and electricity Correct answer: b Learning objective 13.3 ~ Understand the decision-making process to keep or drop products, segments or whole businesses

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136. Jay Ltd wants to drop one of their service lines since it is showing a loss. The following details are provided for cleaning services.

Revenue Less: Cost of cleaning products used Gross profit

$80 000 30 000 $50 000

Less: Operating expenses

62 300

Wages of cleaning staff Other items used for cleaning Depreciation building used for storage(allocated) Manager’s salary (allocated) Depreciation of cleaning equipment Electricity(allocated) Loss on cleaning services

35 000 3 000 2 000 13 000 7 000 2 300 $(12 300)

After ignoring the irrelevant operating expenses, what is the profit on cleaning services? *a. $5000 b. $10 000 c. $12 300 d. $7000 Correct answer: a Learning objective 13.3 ~ Understand the decision-making process to keep or drop products, segments or whole businesses

137. Managers should discontinue a business if which of the following is less than the sum of relevant fixed costs and opportunity costs? a. Profit *b. Contribution margin c. Total cost d. Variable cost Correct answer: b Learning objective 13.3 ~ Understand the decision-making process to keep or drop products, segments or whole businesses

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138. In making a decision to drop a product line, variable costs are: *a. avoidable. b. never relevant. c. allocated. d. usually sunk.

Correct answer: a Learning objective 13.3 ~ Understand the decision-making process to keep or drop products, segments or whole businesses

139. Yvonne and Ken own and operate Deluxe Housecleaning Service. Which of the following is a qualitative factor associated with dropping carpet cleaning from their current line of services? a. The timeliness with which they can provide other cleaning services b. The quality of their current carpet cleaning equipment *c. The potential effect on demand for their other services d. The fixed costs associated with the carpet cleaning machinery Correct answer: c Learning objective 13.3 ~ Understand the decision-making process to keep or drop products, segments or whole businesses

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140. Duxeva produces two products named BigBlast and LittleBlast. Last month 2000 units of BigBlast and 4000 units of the LittleBlast were produced and sold. Following are average prices and costs for last month.

Selling price Direct materials Direct labour Variable overhead Product line fixed costs Corporate fixed costs Average margin per unit

BigBlast LittleBlast $100 $200 (25) (75) (15) (35) (5) (30) (10) (40) (25) (25) $20 $( 5)

The production lines for both products are highly automated, so large changes in production cause very little change in total direct labour costs. Workers who are classified as direct labour monitor the production line and are permanent employees who regularly work 40 hours per week. All costs other than ‘corporate fixed costs’ listed under each product line could be avoided if the product line were dropped.

Using only the information provided above, Duxeva could make several types of decisions.

Possible decisions include: I II III IV

Special order Product emphasis Keep or drop Constrained resources

a. I and II only. *b. I and III only. c. I, II and IV only. d. III and IV only.

Correct answer: b Learning objective 13.3 ~ Understand the decision-making process to keep or drop products, segments or whole businesses

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141. Duxeva produces two products named BigBlast and LittleBlast. Last month 2000 units of BigBlast and 4000 units of the LittleBlast were produced and sold. Following are average prices and costs for last month.

Selling price Direct materials Direct labour Variable overhead Product line fixed costs Corporate fixed costs Average margin per unit

BigBlast LittleBlast $100 $200 (25) (75) (15) (35) (5) (30) (10) (40) (25) (25) $20 $( 5)

The production lines for both products are highly automated, so large changes in production cause very little change in total direct labour costs. Workers who are classified as direct labour monitor the production line and are permanent employees who regularly work 40 hours per week. All costs other than ‘corporate fixed costs’ listed under each product line could be avoided if the product line were dropped. What is the breakeven sales volume (in units) for BigBlast? (In other words, what is the sales volume at which Duxeva should be financially indifferent between dropping and keeping BigBlast?) *a. 364 units b. 1273 units c. 909 units d. 790 units Correct answer: a Learning objective 13.3 ~ Understand the decision-making process to keep or drop products, segments or whole businesses

142. If financial statement data are used to evaluate a decision to discontinue a business: *a. managers need to identify relevant and irrelevant cash flows. b. average costs should be used. c. qualitative factors are irrelevant. d. only the statement of profit or loss should be considered.

Correct answer: a Learning objective 13.3 ~ Understand the decision-making process to keep or drop products, segments or whole businesses

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143. The rental of a factory is an unavoidable cost if: *a. the rental cost remains once the product is dropped. b. the rental cost is eliminated once the product is dropped. c. the rental contract ceases. d. rental contract is re-negotiated.

Correct answer: a Learning objective 13.3 ~ Understand the decision-making process to keep or drop products, segments or whole businesses

144. Order Point Ltd manufactures componentry used in the production of computers. The units can be purchased for $50 each from an outside vendor. It costs the manufacturer $60 per unit to produce them, of which 25% is fixed overhead cost. What are the relevant costs for this decision? Based on these costs, which option should the company choose?

i. ii. iii. iv.

Relevant costs (manufacture and purchase) $50 and $45 $50 and $45 $45 and $40 $45 and $40

Decision Manufacture Purchase Purchase Manufacture

*a. i b. ii c. iii d. iv Correct answer: a Learning objective 13.3 ~ Understand the decision-making process to keep or drop products, segments or whole businesses

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145. Allzine Ltd currently buys 19 000 subcomponents from an outside supplier at $15 each. The company has excess capacity, which it sublets to another company for $50 000 per year. If the company were to use the idle capacity to produce the subcomponent internally, it would incur variable production costs of $12 per unit and it would hire a new supervisor for $30 000 per year. Other fixed overhead costs would not change, but the average overhead cost per subcomponent unit would be $2. What is the advantage or disadvantage (in dollars) if Allzine makes the subcomponent instead of continuing to buy outside and subletting the excess capacity? a. $77 000 advantage b. $15 000 disadvantage *c. $23 000 advantage d. $61 000 disadvantage Correct answer: c Learning objective 13.4 ~ Understand the decision-making process to insource or outsource an activity (make or buy)

146. Familija Consulting has its own legal department with the following annual costs.

Labour $400 000 Administrative costs $200 000 Overhead $200 000

The managers would like to outsource the legal function because it is not considered a core competency. The overhead is 60% fixed. Of the fixed overhead, $60 000 is the salary of the legal department director. The remaining overhead is an allocation of overhead costs for the entire consulting firm. The department director would still oversee the legal activities and coordinate all of the activities for the organisation with the external lawyer. What is the maximum amount that Familija is willing to pay an outside firm to replace the legal services? *a. $740 000 b. $900 000 c. $700 000 d. $720 000 Correct answer: a Learning objective 13.4 ~ Understand the decision-making process to insource or outsource an activity (make or buy)

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147. The advantage of outsourcing is: a. specialised skills and expertise. b. cost savings. c. competitiveness. *d. all of the options listed.

Correct answer: d Learning objective 13.4 ~ Understand the decision-making process to insource or outsource an activity (make or buy)

148. Which of the following statements about outsourcing is true?

I II III

Outsourcing is the process of finding external suppliers Outsourcing is very common in today’s business world Outsourcing is used for manufactured goods and for services

a. I only b. I and III only c. II and III only *d. I, II and III Correct answer: d Learning objective 13.4 ~ Understand the decision-making process to insource or outsource an activity (make or buy)

149. For manufacturers, make or buy decisions are often known as: a. product segmentation. *b. outsourcing decisions. c. constrained resource decisions. d. special order decisions.

Correct answer: b Learning objective 13.4 ~ Understand the decision-making process to insource or outsource an activity (make or buy)

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150. In an outsourcing decision, the general rule managers should follow is to: a. choose the option with the lowest total cost. b. outsource if the price is greater than the sum of variable costs and fixed costs. c. do not outsource if the cost is less than the sum of relevant fixed costs and opportunity costs. *d. none of the options listed.

Correct answer: d Learning objective 13.4 ~ Understand the decision-making process to insource or outsource an activity (make or buy)

151. In an outsourcing decision, fixed costs are: a. not allocated. b. relevant if they are greater than associated opportunity costs. c. relevant if the company is operating outside the relevant range. *d. relevant if they can be avoided through outsourcing.

Correct answer: d Learning objective 13.4 ~ Understand the decision-making process to insource or outsource an activity (make or buy)

152. Bannatyne Ltd produces and sells sunglasses. Its managers are considering whether to outsource the task of moulding the lenses for the sunglasses to Katswiri Co. Which of the following is most likely to be a qualitative factor that managers will consider in making the decision? a. Cost of delivery *b. Quality of the moulding process at Katswiri c. Whether Katswiri will outsource the delivery process d. Depreciation on Bannatyne’s delivery vehicle Correct answer: b Learning objective 13.4 ~ Understand the decision-making process to insource or outsource an activity (make or buy)

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153. Financial institutions often consider outsourcing their data processing functions internationally. Which of the following are qualitative factors that should managers consider in the decision?

I II III

Potential communication barriers Wage costs in other country Reaction of existing customers

a. I only b. II and III only c. I, II and III *d. I and III only Correct answer: d Learning objective 13.4 ~ Understand the decision-making process to insource or outsource an activity (make or buy)

154. Which of the following is an opportunity cost that should be considered in an outsourcing decision? a. Staff morale *b. Benefits from alternate uses of released capacity c. Unavoidable fixed costs d. Taxation implications of the decision Correct answer: b Learning objective 13.4 ~ Understand the decision-making process to insource or outsource an activity (make or buy)

155. Managers should generally consider opportunity costs in both ‘keep or drop’ and ‘make or buy’ decisions. Which of the following is an opportunity cost they should consider in both situations? a. Avoidable fixed costs b. Product diversity c. Depreciation on new machinery *d. Benefits from alternate uses of released capacity Correct answer: d Learning objective 13.4 ~ Understand the decision-making process to insource or outsource an activity (make or buy)

156. Finders Company manufactures sewing machines and requires 60 000 units of a component that is used in the manufacturing process. If Flinders buys the part from Serrano

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Brothers, the plant will be idle. Of the fixed overhead, 45% will continue regardless of the decision. The cost to buy the part from Serrano Brothers is $46. The unit cost to make the part is as follows.

Direct materials Direct labour Variable overhead Average fixed overhead Total

$12 20 12 10 54

Relevant costs to make the part are: a. $1 320 000. b. $1 380 000. *c. $2 970 000. d. $2 910 000.

Correct answer: c Learning objective 13.4 ~ Understand the decision-making process to insource or outsource an activity (make or buy)

157. Finders Company manufactures sewing machines and requires 60 000 units of a component that is used in the manufacturing process. If Flinders buys the part from Serrano Brothers, the plant will be idle. Of the fixed overhead, 45% will continue regardless of the decision. The cost to buy the part from Serrano Brothers is $46. The unit cost to make the part is as follows.

Direct materials Direct labour Variable overhead Average fixed overhead Total

$12 20 12 10 54

Which alternative is more profitable and by what amount? a. Buy, $150 000 b. Make, $150 000 *c. Buy, $210 000 d. Make, $210 000 Correct answer: c Learning objective 13.4 ~ Understand the decision-making process to insource or outsource an activity (make or buy)

158. Which of the following are an option to relax a constraint?

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a. Reject customer orders b. Purchase goods or services from an outside supplier *c. All of the options listed d. None of the options listed

Correct answer: c Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

159. When faced with capacity constraints, managers should: a. maximise contribution margin per unit. b. maximise profit per unit. *c. maximise contribution margin per unit of constrained resource. d. reduce the number of products available.

Correct answer: c Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

160. A process, part or machine that limits overall capacity is called a: a. restrictive factor. *b. bottleneck. c. relevant constraint. d. none of the options listed.

Correct answer: b Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

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161. Reconnect Ltd has equipment that is in high demand, but has a limited amount of time available. The equipment can be used to produce a number of different products. The following data are available.

Product HX CL KB JP

Unit price $200 $300 $300 $100

Unit variable cost $100 $150 $125 $70

Units per hour 8 20 15 50

Which product should be emphasised first? a. HX *b. CL c. KB d. JP Correct answer: b Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

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162. Reconnect Ltd has equipment that is in high demand, but has a limited amount of time available. The equipment can be used to produce a number of different products. The following data are available.

Product HX CL KB JP

Unit price $200 $300 $300 $100

Unit variable cost $100 $150 $125 $70

Units per hour 8 20 15 50

Which product should be emphasised last? *a. HX b. CL c. KB d. JP Correct answer: a Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

163. The net realisable value (NRV) method allocates joint costs to products: a. on the net realisable value of the products. *b. on some physical characteristic of the product. c. on the gross margin of each product. d. on the net profit of each product.

Correct answer: b Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

164. The split-off point is: a. the point at which the product is completed. *b. the first point at which joint products can be separately identified. c. the point at which joint production commences. d. the point at which joint costs are incurred.

Correct answer: b Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

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165. A company should always promote the product: a. with the highest per unit contribution margin. *b. that results in the highest total contribution margin. c. with the lowest variable cost per unit. d. with the highest sales price.

Correct answer: b Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

166. The shadow price of a slack variable in a linear programming solution that maximises the total contribution margin reflects: a. the amount of excess capacity available for the associated constraint. *b. the increase in contribution margin that would occur if another unit of the constrained resource were available. c. the contribution margin returned by the firm’s profitable product. d. the decrease in contribution margin that occurs if a unit of the associated product is produced.

Correct answer: b Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

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167. When resources are constrained, managers are most likely to use which of the following methods to develop decision-making information? a. Simple or multiple regression b. Standard costs *c. Linear programming d. High-low method Correct answer: c Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

168. In a linear programming problem, slack resources are the same as: *a. idle capacity. b. constraints. c. bottlenecks. d. mixed costs.

Correct answer: a Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

169. Managers relax constraints by: I II III

Using constrained resources more effectively Increasing available resources Reducing demand

a. I only. b. II only. *c. I and II only. d. I, II and III. Correct answer: c Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

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170. If an organisation cannot deliver goods or services quickly because of a constraint, managers might relax that constraint to: *a. maximise customer satisfaction. b. ensure optimal profitability. c. increase the selling price of the product. d. find the next bottleneck.

Correct answer: a Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

171. The possibility that existing customers will expect lower prices is a qualitative factor that managers should consider in: a. product line keep and drop decisions. *b. special order decisions. c. cost prediction decisions. d. make or buy decisions.

Correct answer: b Learning objective 13.6 ~ Describe the qualitative factors important to non-routine operating decisions

172. Whether product quality will be maintained is a key consideration in: a. capacity constraints. b. special order decisions. c. cost prediction decisions. *d. make or buy decisions.

Correct answer: d Learning objective 13.6 ~ Describe the qualitative factors important to non-routine operating decisions

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173. There are likely to be customer rather than an existing customer.

uncertainties in a special order from a new

a. fewer *b. greater c. zero d. cannot be determined Correct answer: b Learning objective 13.6 ~ Describe the qualitative factors important to non-routine operating decisions

174. Which of the following is a relevant qualitative factor in a keep or drop decision? a. The cost of constrained resources *b. The effect on staff morale c. The effect of production processes on the legal environment d. How easily customers might share price information Correct answer: b Learning objective 13.6 ~ Describe the qualitative factors important to non-routine operating decisions

175. What does information timeliness refer to? a. The source of the data *b. Using up to date information to make quality decisions c. The time constraints in production processes d. An important assumption underlying regression analysis Correct answer: b Learning objective 13.6 ~ Describe the qualitative factors important to non-routine operating decisions

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176. The analytical method that does not rely on assumptions is: a. regression analysis. b. cost–volume–profit analysis. c. cost allocation. *d. none of the options listed.

Correct answer: d Learning objective 13.6 ~ Describe the qualitative factors important to non-routine operating decisions

177. Accuracy of cost estimates is one of the uncertainties in which type of decision?

I II III

Make or buy Special order Product emphasis

a. I and II only b. I and III only c. II and III only *d. I, II and III Correct answer: d Learning objective 13.6 ~ Describe the qualitative factors important to non-routine operating decisions

178. Aspects of the decision process that affect the quality of non-routine operating decisions are: a. decision-maker bias. b. sensitivity analysis. *c. all of the options listed. d. none of the options listed.

Correct answer: c Learning objective 13.6 ~ Describe the qualitative factors important to non-routine operating decisions

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179. Factors that affect the quality of the decision process in non-routine operating decisions include: I II III IV

Uncertainties Timeliness Analysis technique assumptions Overall cost structure

a. I, III and IV only. b. II, III and IV only. c. I, II and IV only. *d. none of the options listed.

Correct answer: d Learning objective 13.6 ~ Describe the qualitative factors important to non-routine operating decisions

180. Future revenues and costs are often a source of uncertainty for non-routine operating decisions. Future revenues and costs can be affected by: I II III

Economic environment changes Customer demand Raw material shortages

a. I and III only. b. II and III only. *c. I, II and III. d. I, II only.

Correct answer: c Learning objective 13.6 ~ Describe the qualitative factors important to non-routine operating decisions

181. General decision rules associated with outsourcing decisions assume the organisation’s goal is to: *a. maximise short-term profits. b. minimise constraints. c. capture market share. d. minimise taxation.

Correct answer: a Learning objective 13.6 ~ Describe the qualitative factors important to non-routine operating decisions

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182. Depreciation on existing equipment is special order analysis is considered to be: *a. a sunk cost. b. an opportunity cost. c. an avoidable cost. d. an incremental cost.

Correct answer: a Learning objective 13.6 ~ Describe the qualitative factors important to non-routine operating decisions

183. A cost that has been incurred in the past and cannot be changed is a(n): a. fixed cost. b. opportunity cost. *c. sunk cost. d. variable cost.

Correct answer: c Learning objective 13.6 ~ Describe the qualitative factors important to non-routine operating decisions

184. Jane is employed at an annual salary of $55 000. She plans to start her own business as a private investigator. If she chooses to open the new business, Jane’s foregone salary is a(n): a. irrelevant cost. b. sunk cost. *c. opportunity cost. d. incremental cost.

Correct answer: c Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

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185. Citrus Ltd produces 2 products A and B, each requiring direct material and labour.

Total labour available is 200 hours and 300 pounds of material. Each unit of A sells for $10 and B sells for $15. Given the following linear programming information: Maximise: Subject to:

$4A + $5Y 3A + 1B ? 200 2A + 2B ? 300

What are the variable costs per unit for A and B? a. $4 and $15 b. $14 and $19 c. $7 and $14 *d. $6 and $10 Correct answer: d Learning objective 13.5 ~ Explain the decision-making process for product emphasis and constrained resources

186. Jasper Joints has 1000 obsolete joints on hand. These units were produced a year ago at a cost of $10 000. The units could be scrapped for $1000 or reworked for $2000 and sold for $5000. Which alternative is desirable and why? a. Scrap, profit of $1000 is higher than the other option b. Rework, incremental loss $7000 *c. Rework, profit of $3000 is higher than the other option d. Scrap, incremental loss $9000 Correct answer: c Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

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187. Vident Ltd has 1000 commercial frozen ice machines in inventory produced at a cost of $4000 each (60% variable and 40% fixed). The machines were to have been sold for $10 000 each. However, the machines currently contain a minor malfunction, reducing their selling price to $1500 each. The company could correct the malfunction at a variable cost of $2500 each and then sell the machines for $5500 each.

For purposes of determining whether the machines should be reworked, what is the opportunity cost per unit? *a. $1500 b. $2500 c. $2400 d. $4000 Correct answer: a Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

188. Vident Ltd has 1000 commercial frozen ice machines in inventory produced at a cost of $4000 each (60% variable and 40% fixed). The machines were to have been sold for $10 000 each. However, the machines currently contain a minor malfunction, reducing their selling price to $1500 each. The company could correct the malfunction at a variable cost of $2500 each and then sell the machines for $5500 each.

If the games are reworked, what will be the contribution per unit from doing so? a. $3500 *b. $3000 c. $1500 d. $1000 Correct answer: b Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

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189. The physical output method allocates joint costs to products: a. on a physical characteristic of the products. *b. on the total sales value of the final products less any separable costs. c. on the gross margin of each product. d. on the net profit of each product.

Correct answer: b Learning objective 13.7 ~ Demonstrate an understanding of joint costing issues

Testbank to accompany

Management accounting 5th edition by Eldenburg et al.

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Not for distribution. Instructors may assign selected questions in their LMS

© John Wiley & Sons Australia, Ltd 2024

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Chapter 14: Strategy and control True/false questions

1. Rather than having a backward focus strategic management accounting looks to the future. *a. True b. False Correct answer: a Learning objective 14.1 ~ Understand the changing management accounting and control environment

2. Prior to the 1980s, accounting for internal control did not have a strategic component. *a. True b. False Correct answer: a Learning objective 14.1 ~ Understand the changing management accounting and control environment 3. Friedman’s view of the ‘Flat World’ involves moving back to embrace the best of the past features of management accounting. a. True *b. False Correct answer: b Learning objective 14.1 ~ Understand the changing management accounting and control environment

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4. Early writers on strategic management believed that better control would occur within an organisation if the management accounting function was more closely aligned to the financial accounting. a. True *b. False Correct answer: b Learning objective 14.1 ~ Understand the changing management accounting and control environment

5. Management accounting is not only a technical and practical craft, it is also involved in radical social, environmental and technical change. *a. True b. False Correct answer: a Learning objective 14.1 ~ Understand the changing management accounting and control environment

6. Management accounting is now seen as a useful vehicle by which to implement economic theory and social and environmental change. *a. True b. False Correct answer: a Learning objective 14.1 ~ Understand the changing management accounting and control environment

7. At the organisational or corporate level, the organisation makes decisions about what industries or types of businesses it chooses to be in.

*a. True b. False Correct answer: a Learning objective 14.1 ~ Understand the changing management accounting and control environment

8. From the 1980s onwards, management accounting broadened to include strategic management accounting control concepts largely influenced by Friedman.

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a. True *b. False Correct answer: b Learning objective 14.1 ~ Understand the changing management accounting and control environment 9. ‘Control’ in the text, is commonly used as a short-form term for managerial control and/or managerial control system tools. *a. True b. False Correct answer: a Learning objective 14.2 ~ Distinguish between strategy and control

10. Porter classifies strategy into either cost leadership or product differentiation. *a. True b. False Correct answer: a Learning objective 14.2 ~ Distinguish between strategy and control

11. Management control systems have one main role; to facilitate decisions by providing relevant and timely information to support decision making. a. True *b. False Correct answer: b Learning objective 14.2 ~ Distinguish between strategy and control

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12. The value-based management (VBM) technique takes a holistic approach to the management of an organisation and focuses on the underlying ‘drivers’ of value. *a. True b. False Correct answer: a Learning objective 14.3 ~ Communicate the key components of the important strategic management accounting frameworks

13. The value-based management (VBM) technique was proposed by Kaplan and Norton. a. True *b. False Correct answer: b Learning objective 14.3 ~ Communicate the key components of the important strategic management accounting frameworks

14. Overproduction is a non-value added activity. *a. True b. False Correct answer: a Learning objective 14.3 ~ Communicate the key components of the important strategic management accounting frameworks

15. Lean accounting initiatives are based on the belief that only a small fraction of the total time and effort in an organisation actually adds value for the end customer. *a. True b. False Correct answer: a Learning objective 14.3 ~ Communicate the key components of the important strategic management accounting frameworks

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16. Good internal control systems should aim to eliminate risk. a. True *b. False Correct answer: b Learning objective 14.3 ~ Communicate the key components of the important strategic management accounting frameworks

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Multiple-choice questions 17. In management accounting, designing and managing global networks, controlling them through techniques such as empowerment and creating value through integration is known as: *a. network orchestration. b. management control. c. flat earth theory. d. inter-globalisation.

Correct answer: a Learning objective 14.1 ~ Understand the changing management accounting and control environment 18. A Friedman’s ‘flattener’ in his discussion of ‘flat world’ theory is: a. the development of the internet. b. outsourcing. c. the rise of the personal computer. *d. all of the options listed are ‘flatteners’.

Correct answer: d Learning objective 14.1 ~ Understand the changing management accounting and control environment

19. Which of these are is not included within the scope of current management accounting? a. Consideration of environmental issues b. Consideration of intangible assets *c. Compliance with international accounting standards d. None of the options listed (i.e. all are included within the scope of current management accounting) Correct answer: c Learning objective 14.1 ~ Understand the changing management accounting and control environment

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20. The author of many works that attempt to define strategy is: a. Thomas Friedman. b. John Marsden. *c. Michael Porter. d. Tim Winton.

Correct answer: c Learning objective 14.2 ~ Distinguish between strategy and control 21. A future direction which enables the focusing of an organisation’s resources and decision making around a common theme, is a definition of: a. budgeting. b. control. c. planning. *d. strategy.

Correct answer: d Learning objective 14.2 ~ Distinguish between strategy and control 22. In Porter’s competitive forces model, which of the following is a decision-influencing control tool rather than a decision-facilitating control tool? a. Cost data for pricing purposes b. Discounted cash flow analysis *c. Budget targets d. All are decision-influencing control tools Correct answer: c Learning objective 14.2 ~ Distinguish between strategy and control

23. Strategy can be viewed at which level? c. Corporate level a. Business unit level *c. All of the options listed d. None of the options listed Correct answer: c Learning objective 14.2 ~ Distinguish between strategy and control

24. Which of these is an informal control mechanism as opposed to a formal mechanism?

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a. Social work settings b. One-on-one consultations between senior managers c. The influence of the owner/founder *d. All of the options listed are informal control mechanisms Correct answer: d Learning objective 14.2 ~ Distinguish between strategy and control

25. A broad view of management control might encompass which of the following? a. Coordination b. Communication c. Planning *d. All of the options listed Correct answer: d Learning objective 14.2 ~ Distinguish between strategy and control

26. Under the Kaplan and Norton strategy map framework, preparing budgets comes under which stage? a. Translating the strategy *b. Planning operations c. Developing the strategy d. Monitoring and learning Correct answer: b Learning objective 14.3 ~ Communicate the key components of the important strategic management accounting frameworks 27. Flamholtz’s control system framework, refers to ‘culture’ to mean: *a. the organisational members’ beliefs, values and social norms. b. the core control system. c. the organisational structure. d. the organisation’s strategy.

Correct answer: a Learning objective 14.3 ~ Communicate the key components of the important strategic management accounting frameworks

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28. Under the Ittner and Larcker management framework, which of these is not a limitation of using economic value added (EVA) as a measure of value added by management? a. It is based on short-term performance *b. EVA can only be calculated for stock exchange listed companies c. It is a measure of the past d. None of the options listed (i.e. all are limitations) Correct answer: b Learning objective 14.3 ~ Communicate the key components of the important strategic management accounting frameworks

29. The value-based management framework was developed by: a. Michael Porter. *b. Ittner and Larcker. c. Flamholtz. d. Kaplan and Norton.

Correct answer: b Learning objective 14.3 ~ Communicate the key components of the important strategic management accounting frameworks 30. Which statement concerning the ‘StratEx’ (strategic expenditure) component under the Kaplan and Norton’s framework is incorrect? a. This type of expenditure should have its own line in the income statement. *b. This type of expenditure is generally given priority by the firm options listed more routine types of expenditure. c. This type of expenditure generally involves investment assets that require a different form of analysis to tangible assets (e.g. research and development, training). d. This type of expenditure does not always have a simple causal relationship with sales and operating levels.

Correct answer: b Learning objective 14.3 ~ Communicate the key components of the important strategic management accounting frameworks

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31. Which of these is a key influence on the nature of control systems in the Simons’ ‘levers of control’ framework? a. Boundary systems b. Diagnostic systems *c. All of the options listed d. None of the options listed Correct answer: c Learning objective 14.3 ~ Communicate the key components of the important strategic management accounting frameworks

32. Which of these is not a financial performance measure? *a. Share price b. Economic value added c. Return on investment d. None of the options listed (i.e. all are financial performance measures) Correct answer: a Learning objective 14.4 ~ Reflect on the importance of, and techniques associated with, management responsibility and accountability practices 33. The ‘lean’ accounting principle is: a. cost–volume–profit. b. capital budgeting. *c. just-in-time inventory management. d. all are lean accounting principles.

Correct answer: c Learning objective 14.4 ~ Reflect on the importance of, and techniques associated with, management responsibility and accountability practices

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34. Contemporary management accounting topics include all of these, except: a. sustainable accounting. *b. central planning versus an unplanned economy. c. risk management control. d. none of the options listed (i.e. all of these topics are covered by contemporary management accounting).

Correct answer: b Learning objective 14.4 ~ Reflect on the importance of, and techniques associated with, management responsibility and accountability practices

35. Managers consider a few general strategy types in their decision making processes, including: I II III

Cost leadership Product differentiation Target costing

a. II and III only. b. I and III only. *c. I and II only. d. I, II, and III. Learning objective 14.4 ~ Reflect on the importance of, and techniques associated with, management responsibility and accountability practices

Testbank to accompany

Management accounting 1.513

Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

5th edition by Eldenburg et al.

Not for distribution. Instructors may assign selected questions in their LMS.

© John Wiley & Sons Australia, Ltd 2024

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Chapter 15: Capital budgeting and strategic investment decisions True/false questions

1. Operational capital investment decisions usually require a large capital outlay. a. True *b. False Correct answer: b Learning objective 15.1 ~ Communicate the process of capital investment decisions

2. Capital budgeting is a process managers’ use when choosing investments with multi-year cash flows. *a. True b. False Correct answer: a Learning objective 15.1 ~ Communicate the process of capital investment decisions

3. Managers should consider qualitative information in making capital budgeting decisions. *a. True b. False Correct answer: a Learning objective 15.1 ~ Communicate the process of capital investment decisions

4. Sensitivity analysis is usually performed after applying quantitative analysis techniques in a capital budgeting decision. *a. True b. False Correct answer: a Learning objective 15.1 ~ Communicate the process of capital investment decisions

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5. Cash flows to be considered in capital budgeting decisions generally fall into three major groups: initial investment, incremental operating cash flows and terminal cash flows. *a. True b. False Correct answer: a Learning objective 15.2 ~ Recognise and apply the relevant cash flows in capital investment decisions

6. Cash flows must be estimated for the current period only that is affected by the potential capital investment. a. True *b. False Correct answer: b Learning objective 15.2 ~ Recognise and apply the relevant cash flows in capital investment decisions

7. Incremental operating cash flows can be associated with changes in capacity or product quality in capital budgeting decisions. *a. True b. False Correct answer: a Learning objective 15.2 ~ Recognise and apply the relevant cash flows in capital investment decisions

8. In general, the initial project investment does not require discounting in a net present value analysis. *a. True b. False Correct answer: a Learning objective 15.3 ~ Perform and interpret net present value (NPV) analysis

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9. Under the general quantitative rule, a project with a net present value less than zero should not be accepted. *a. True b. False Correct answer: a Learning objective 15.3 ~ Perform and interpret net present value (NPV) analysis

10. The net present value (NPV) is the total discounted cash inflows over a period of several years. a. True *b. False Correct answer: b Learning objective 15.3 ~ Perform and interpret net present value (NPV) analysis

11. A capital investment’s expected useful life is inversely correlated with the uncertainty of its cash flows. a. True *b. False Correct answer: b Learning objective 15.4 ~ Understand the uncertainties of NPV analysis

12. Sensitivity analysis evaluate how NPV results would change with variations in the input data. *a. True b. False Correct answer: a Learning objective 15.4 ~ Understand the uncertainties of NPV analysis

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13. Uncertainty is very often a factor when estimating a project’s terminal value for an NPV analysis. *a. True b. False Correct answer: a Learning objective 15.4 ~ Understand the uncertainties of NPV analysis

14. The internal rate of return method assumes that future cash flows can be reinvested to earn the same return generated by a capital investment project. *a. True b. False Correct answer: a Learning objective 15.5 ~ reflect on alternative methods (internal rate of return, payback, accrual accounting rate of return) used for capital investment decisions

15. The internal rate of return (IRR) determines the discount rate necessary for the present value of the discounted cash flows to be equal to investment. *a. True b. False Correct answer: a Learning objective 15.5 ~ reflect on alternative methods (internal rate of return, payback, accrual accounting rate of return) used for capital investment decisions

16. Because of its complex calculation, few managers rely on the payback period as a capital budgeting analysis tool. a. True *b. False Correct answer: b Learning objective 15.5 ~ reflect on alternative methods (internal rate of return, payback, accrual accounting rate of return) used for capital investment decisions

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17. The effect of a strategic investment decision on a company’s reputation is often difficult to quantify. *a. True b. False Correct answer: a Learning objective 15.6 ~ Discuss additional issues to be considered for strategic investment decisions

18. The moving baseline concept suggest that an investment need to be made simply to maintain the current operating performance. *a. True b. False Correct answer: a Learning objective 15.6 ~ Discuss additional issues to be considered for strategic investment decisions

19. In capital budgeting decisions, depreciation shields part of operating profit from the effect of income taxes. *a. True b. False Correct answer: a Learning objective 15.7 ~ Communicate how income taxes affect capital investment decision cash flows

20. Depreciation deductions are often referred to as tax shields that could reduce the income tax of a company. *a. True b. False Correct answer: a Learning objective 15.7 ~ Communicate how income taxes affect capital investment decision cash flows

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21. The nominal method of NPV analysis adjusts future cash flows for the impact of inflation. *a. True b. False Correct answer: a Learning objective 15.8 ~ Understand how real and nominal methods are used to address inflation in an NPV analysis

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Multiple-choice questions

22. The process that managers use when they evaluate multi-year investments is called: a. breakeven analysis. *b. capital budgeting. c. activity-based budgeting. d. short-term decision making.

Correct answer: b Learning objective 15.1 ~ Communicate the process of capital investment decisions

23. What does the time value of money mean? a. The more you invest, the smaller your return is *b. A dollar received today will be worth more than a dollar received in the future c. A dollar received today will be worth less than a dollar received in the future d. Ignoring the profitability of a capital investment Correct answer: b Learning objective 15.1 ~ Communicate the process of capital investment decisions

24. Capital budgeting decisions typically fall into which of the following major categories?

I II III

Developing or expanding products or services Allocating costs to products or services Replacing or reorganising assets or services

a. I, II and III b. I and II only c. II and III only *d. I and III only Correct answer: d Learning objective 15.1 ~ Communicate the process of capital investment decisions

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25. Which of the following is not a step in the process for addressing capital budgeting decisions? a. Perform sensitivity analysis b. Identify decision alternatives *c. Identify financial statement effects d. Apply quantitative analysis techniques Correct answer: c Learning objective 15.1 ~ Communicate the process of capital investment decisions

26. Which of the following is the best example of a capital budgeting decision? a. Deciding which product to emphasise when there are constrained resources b. Deciding the price of a product for the next six months c. Forecasting accrual basis profits for the next five years *d. Purchasing a piece of equipment with an expected life of eight years Correct answer: d Learning objective 15.1 ~ Communicate the process of capital investment decisions

27. Which of the following is not a quantitative technique commonly used in capital budgeting decisions? a. Payback b. Net present value *c. Activity-based budgeting d. Internal rate of return Correct answer: c Learning objective 15.1 ~ Communicate the process of capital investment decisions

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28. Some of the steps in the process for addressing capital budgeting decisions are listed below. Which lettered choice puts the steps in the proper order?

1 Identify relevant cash flows.

2 Perform sensitivity analysis.

3 Apply quantitative techniques. *a. 1, 3, 2 b. 1, 2, 3 c. 2, 3, 1 d. 3, 1, 2 Correct answer: a Learning objective 15.1 ~ Communicate the process of capital investment decisions

29. A firm’s required rate of return is the rate which makes the: a. determination of the NPV possible. *b. net present value equal to zero. c. internal rate of return equal to the average rate of return. d. profitability index greater than zero.

Correct answer: b Learning objective 15.2 ~ Recognise and apply the relevant cash flows in capital investment decisions

30. Richard borrows $10 000 from his mother. He will repay her $2000 at the end of each of the next four years and the balance at the end of the fifth year. If the interest rate is 12%, what is the amount to be paid at the end of the fifth year? a. $2000.00 b. $3926.00 *c. $6924.16 d. $5869.65 Correct answer: c Learning objective 15.3 ~ Perform and interpret net present value (NPV) analysis

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31. Last semester a class gave a teacher $810 to fly to Bali. However, he decided not to go until he had enough money to fly back, an additional $690. If he invests the $810 at 8%, when can he make the trip, assuming no change in ticket prices? a. 2 years *b. 8 years c. 6 years d. 4 years Correct answer: b Learning objective 15.3 ~ Perform and interpret net present value (NPV) analysis

32. You are currently entering university and you want to buy your uncle’s car when you graduate. He has promised to sell it to you for $18 000. How much will you have to deposit now, in an account earning 8%, to have enough money buy the car in 4 years? a. $3060 b. $6122 c. $4500 *d. $13 230 Correct answer: d Learning objective 15.3 ~ Perform and interpret net present value (NPV) analysis

33. Erwin Ltd is considering an investment in equipment for a new product line with a cost of $48 625, a terminal value of $6283 and a useful life of 5 years. The project will provide an annual contribution margin of $12 500. The required rate of return is 12%. Ignore income taxes. This project is: *a. acceptable, because it earns exactly 12%. b. unacceptable, because it earns a rate below 12%. c. acceptable, because it has a positive NPV. d. unacceptable, because it has a 0 NPV. Correct answer: a Learning objective 15.3 ~ Perform and interpret net present value (NPV) analysis

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34. Robertson is considering automating its production line at a cost of $40 000 to acquire the necessary equipment. The annual cost savings are expected to be $8000 for 14 years.

The firm requires a 20% rate of return. Ignore income taxes. What is the net present value for this investment? a. NPV cannot be determined b. Positive c. Zero *d. Negative Correct answer: d Learning objective 15.3 ~ Perform and interpret net present value (NPV) analysis

35. The local school board is considering the purchase of a new computer system. It will cost $100 000 and will be sold back to the dealer at the end of 6 years for $8000. If the required rate of return is 14%, what is the minimal annual cost saving required to justify the purchase? Ignore income taxes. a. $23 656 b. $25 714 c. $23 142 *d. $24 776 Correct answer: d Learning objective 15.3 ~ Perform and interpret net present value (NPV) analysis

36. Hewitt Ltd has chosen four potential investment projects. Listed below are some relevant data on these projects.

Project 1 2 3 4

Investment Net present value $125 000 62 500 150 000 45 000 75 000 52 500 112 500 45 000

Use the profitability index to rank these investments in terms of preference. *a. 3, 1, 4, 2 b. 1, 3, 2, 4 c. 2, 1, 4, 3 d. 1, 2, 3, 4 Correct answer: a Learning objective 15.3 ~ Perform and interpret net present value (NPV) analysis

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37. Hay Ltd is considering the purchase of a new truck which costs $14 340. The truck is expected to save $3600 in operating costs annually for the next 7 years. How low can the annual cost savings be and still provide a 15% return? Ignore income taxes. *a. $3441 b. $5967 c. $475 d. $7458 Correct answer: a Learning objective 15.3 ~ Perform and interpret net present value (NPV) analysis

38. Philipp would like to automate its calligraphy operation. The equipment will cost $150 000 plus freight, installation and testing costs of $5500. The expected life of the project is 8 years, with annual cost savings of $20 000. The minimum rate of return is 12% and estimated terminal value is $3000. Ignore income taxes. What is the profitability index of the project? *a. 0.65 b. 1.55 c. 1.57 d. 0.67 Correct answer: a Learning objective 15.3 ~ Perform and interpret net present value (NPV) analysis

39. For a particular investment project, the present value of the benefits is exactly equal to the present value of the investment. Given this, which of the following statements is true? *a. The project is acceptable. b. The net present value is positive. c. The internal rate of return is less than the required rate of return. d. The profitability index is less than one.

Correct answer: a Learning objective 15.3 ~ Perform and interpret net present value (NPV) analysis

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40. What is the net present value method? *a. The sum of the projected cash inflows and outflows valued in today’s dollars. b. Used to appraise a capital project’s qualitative factors. c. Used to show how long the initial investment will be at risk. d. The sum of the cash inflows, discounted to time zero.

Correct answer: a Learning objective 15.3 ~ Perform and interpret net present value (NPV) analysis

41. Uniform cash flows from a capital project are necessary for which of the following calculations?

I II III

Net present value Internal rate of return Profitability index

a. I and II only b. II and III only c. I and III only *d. None of the above (not I, II or III) Correct answer: d Learning objective 15.3 ~ Perform and interpret net present value (NPV) analysis

42. Which of the following factors are subject to uncertainty in an NPV analysis?

I II III

Project life Appropriate discount rate Terminal value

*a. I, II and III b. I and II only c. II and III only d. I and III only Correct answer: a Learning objective 15.3 ~ Perform and interpret net present value (NPV) analysis

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43. Which of the following statements regarding NPV analysis is true? a. The timing of incremental revenues and costs is irrelevant in NPV analysis. b. Uncertainties increase as the dollar value of an investment increases. c. The discount rate can be calculated with certainty if it is based on the weighted average cost of capital. *d. Managers should generally accept projects with an NPV greater than zero.

Correct answer: d Learning objective 15.3 ~ Perform and interpret net present value (NPV) analysis

44. Acebeck Pty Ltd is considering a project that would provide a single cash inflow eight years from now of $80 000. What is the most that Acebeck would be willing to spend on this project if the discount rate is 16%? a. $22 191 b. $262 295 *c. $24 400 d. $288 400 Correct answer: c Learning objective 15.3 ~ Perform and interpret net present value (NPV) analysis

45. Meinhardt (Qld) Ltd invested in a 3-year project and expects a 15% rate of return.

Annual cash inflows from the project are: year 1 $8000; year 2 $8500; and year 3 $9500.

The net present value is $4000. What was the amount of the original investment? Ignore income taxes. a. $23 637 b. $17 637 *c. $15 637 d. $19 637 Correct answer: c Learning objective 15.3 ~ Perform and interpret net present value (NPV) analysis

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46. Grant Ltd has the following equity structure.

Long-term debt Preference shares Ordinary shares

Market value $700 000 $50 000 $250 000

Cost 15% 5% 15%

What is the weighted average cost of capital? a. 10.3% *b. 14.5% c. 8.2% d. 8.7% Correct answer: b Learning objective 15.3 ~ Perform and interpret net present value (NPV) analysis

47. Grant Ltd invested in a machine that has a 3-year useful life. The company’s discount rate is 12% and the net present value of the investment is $(573). Annual cost savings are: year 1 $3000; year 2 $4000; and year 3 $5000. Determine the original cost of the machine.

Ignore income taxes. a. $9500 b. $12 000 c. $8500 *d. $10 000 Correct answer: d Learning objective 15.3 ~ Perform and interpret net present value (NPV) analysis

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48. Melvin Ltd has the following equity structure.

Long-term debt Preference shares Ordinary shares

Market value $300 000 $500 000 $200 000

Pre-tax cost 10% 10% 15%

After-tax cost 6% 10% 15%

What is Melvin Ltd’s weighted average cost of capital? a. 12.5% *b. 9.8% c. 10.3% d. 11.0% Correct answer: b Learning objective 15.3 ~ Perform and interpret net present value (NPV) analysis

49. What is the net present value of a capital project to buy new equipment for replacing old equipment, given the following data and a minimum return of 12%? Ignore income taxes.

Purchase price Accumulated depreciation Remaining useful life (years) Current salvage value Salvage value in 8 years Annual operating costs

Old equipment New equipment $21 600 $36 000 7 200 0 8 8 12 000 0 1 000 2 000 14 000 8 000

a. $7020 *b. $6616 c. $(5788) d. $4596 Correct answer: b Learning objective 15.3 ~ Perform and interpret net present value (NPV) analysis

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50. A negative net present value means that the: a. company chose the wrong discount rate. *b. internal rate of return is less than the required rate of return. c. project is acceptable. d. present value of the inflows exceeds the present value of the outflows.

Correct answer: b Learning objective 15.3 ~ Perform and interpret net present value (NPV) analysis

51. In completing a sensitivity analysis for a capital budgeting project, which of the following would typically be varied?

I II III

Discount rate Future cash flows Future accrual-basis revenues and expenses

a. I, II and III b. I and III only c. II and III only *d. I and II only Correct answer: d Learning objective 15.4 ~ Understand the uncertainties of NPV analysis

52. Paul is presenting a capital budgeting project to Karl, his division manager. Which one of the following is likely to have the least amount of bias when evaluating this project? *a. Cannot be determined b. Sebastian c. Tamara d. The company’s accountant Correct answer: a Learning objective 15.4 ~ Understand the uncertainties of NPV analysis

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53. Philipp is considering automating its production line. It will cost $40 000 to acquire the necessary equipment. The annual cost savings are expected to be $8000 per year for 14 years. The firm requires a 20% return. Ignoring income taxes, what is the payback period? a. 6 years b. 3 years c. 4.2 years *d. 5 years Correct answer: d Learning objective 15.5 ~ reflect on alternative methods (internal rate of return, payback, accrual accounting rate of return) used for capital investment decisions

54. Sapient Ltd is contemplating the purchase of a piece of equipment with the following cash flow data.

Year 0 1 2 3 4

Initial cost $84 000

Incremental contribution Terminal value $30 000 25 000 20 000 15 000

$9 000

Ignoring income taxes, what is the payback period? a. 3.50 years b. 3.00 years c. 3.33 years *d. 3.60 years Correct answer: d Learning objective 15.5 ~ reflect on alternative methods (internal rate of return, payback, accrual accounting rate of return) used for capital investment decisions

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55. Protiviti is considering automating its production line at a cost of $40 000 to acquire the necessary equipment. The annual cost savings are expected to be $8000 for 14 years. The firm requires a 20% rate of return. Ignore income taxes. What is the internal rate of return on this investment? a. Cannot be determined *b. Less than 20% c. Equal to 20% d. More than 20% Correct answer: b Learning objective 15.5 ~ reflect on alternative methods (internal rate of return, payback, accrual accounting rate of return) used for capital investment decisions

56. Wingbury Ltd has invested in a project with a cost of $36 504, annual net cash flows of $12 000, a terminal value of $4000 and a 5-year useful life. The firm uses a 16% discount rate. Compute the internal rate of return to the nearest tenth of a percent. Ignore income taxes. a. 18.8% b. 19.2% *c. 20.8% d. 19.8% Correct answer: c Learning objective 15.5 ~ reflect on alternative methods (internal rate of return, payback, accrual accounting rate of return) used for capital investment decisions

57. Christoph wants to purchase a machine for a new product line that costs $138 750. The company’s engineering department estimates the machine will last 10 years and provide an annual contribution margin of $25 000. Ignore income taxes. What is the internal rate of return to the nearest tenth of a percent? a. 12.64% *b. 12.4% c. 11.6% d. 13.46% Correct answer: b Learning objective 15.5 ~ reflect on alternative methods (internal rate of return, payback, accrual accounting rate of return) used for capital investment decisions

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58. If the internal rate of return exceeds the discount rate, the net present value is: a. negative. b. zero. c. less than one. *d. positive.

Correct answer: d Learning objective 15.5 ~ reflect on alternative methods (internal rate of return, payback, accrual accounting rate of return) used for capital investment decisions

59. The rate of return that results in a zero net present value for a project is called the: a. discount rate of return. b. average rate of return. *c. internal rate of return. d. required rate of return.

Correct answer: c Learning objective 15.5 ~ reflect on alternative methods (internal rate of return, payback, accrual accounting rate of return) used for capital investment decisions

60. Which of the following capital budgeting methods ignores the time value of money? *a. Payback period b. Internal rate of return c. Net present value d. Profitability index Correct answer: a Learning objective 15.5 ~ reflect on alternative methods (internal rate of return, payback, accrual accounting rate of return) used for capital investment decisions

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61. The payback period is deficient as a decision criterion for capital projects because it: I II III

disregards relative profitability ignores income beyond the payback period does not take into account the time value of money

*a. I, II and III. b. I only. c. II only. d. III only.

Correct answer: a Learning objective 15.5 ~ reflect on alternative methods (internal rate of return, payback, accrual accounting rate of return) used for capital investment decisions

62. Acroe Trading Pty Ltd has $100 000 available for long-term investment. Which projects should be selected from the list below?

Project 1 2 3 4 5

Cost IRR NPV Profitability index $60 000 16% $3 413 1.057 40 000 20% 7 563 1.190 40 000 24% 8 036 1.201 20 000 14% 1 313 1.066 60 000 18% 14 583 1.243

a. 2 and 5 b. 4 and 5 c. 2, 3 and 4 *d. 3 and 5 Correct answer: d Learning objective 15.5 ~ reflect on alternative methods (internal rate of return, payback, accrual accounting rate of return) used for capital investment decisions

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63. Lockhart Hospital is considering the purchase of new medical equipment for $25 000.

The old equipment has zero salvage value. The costs associated with operating the equipment are as follows.

Labour Maintenance Miscellaneous Depreciation

Old equipment New equipment $9000 $4500 2000 1200 1500 1300 8000 4750

If the new machine is purchased and ignoring income taxes, what is the payback period? *a. 4.55 years b. 3.57 years c. 2.13 years d. 2.86 years Correct answer: a Learning objective 15.5 ~ reflect on alternative methods (internal rate of return, payback, accrual accounting rate of return) used for capital investment decisions

64. McKinsey & Co. invested in a project that was to last for 2 years. The project has an internal rate of return of 12%. The project is expected to produce cash inflows of $70 000 in the first year and $80 000 in the second year. What is the project cost? *a. $126 270 b. $143 760 c. $142 510 d. $150 000 Correct answer: a Learning objective 15.5 ~ reflect on alternative methods (internal rate of return, payback, accrual accounting rate of return) used for capital investment decisions

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65. An organisation that provides housing for abused women has limited housing, so it pays rent for several families. The director is considering expanding the housing facilities by purchasing a duplex that has a useful life of 10 years. The estimated cost is $100 000.

Using a discount rate of 15%, the present value of the future savings on rent is $120 000.

To yield an internal rate of return that is at least 15%, the actual cost cannot exceed the estimated cost of $100 000 by more than: a. $2000. b. $10 038. c. $3985. *d. $20 000.

Correct answer: d Learning objective 15.5 ~ reflect on alternative methods (internal rate of return, payback, accrual accounting rate of return) used for capital investment decisions

66. A company is currently buying a part at a cost of $12 each. It is considering buying a machine that will produce the part at a variable cost of $8. Each unit of input produces the part plus a by-product, which is sold for $1. The machine will cost $40 000 and will have a useful life of 5 years. The company requires an 8% return. What annual volume is necessary to justify making the investment? Ignore income taxes. a. 8000 units *b. 2558 units c. 3198 units d. 12 792 units Correct answer: b Learning objective 15.5 ~ reflect on alternative methods (internal rate of return, payback, accrual accounting rate of return) used for capital investment decisions

67. In January, Thomas Ltd purchased a new machine for $80 000 that has a useful life of 10 years and a terminal value of $5000. Annual cash operating savings from the machine are $20 000. The income tax rate is 40%. What is the after-tax payback period? *a. 6.67 years b. 4.00 years c. 5.26 years d. 4.85 years Correct answer: a Learning objective 15.5 ~ reflect on alternative methods (internal rate of return, payback, accrual accounting rate of return) used for capital investment decisions

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68. Teddy & Sons invested in a project that cost $100 000. It had a net present value of $15 975 and a useful life of 8 years. The firm uses a 14% discount rate and the project has an internal rate of return of 16%. What are the annual cost savings provided by the project? a. $8600 *b. $25 000 c. $26 698 d. $9263 Correct answer: b Learning objective 15.5 ~ reflect on alternative methods (internal rate of return, payback, accrual accounting rate of return) used for capital investment decisions

69. Leopold Ltd has invested in a machine with a cost of $37 164 and annual cost savings of $6000. The discount rate is 8% and the machine’s internal rate of return is 12%. Ignore income taxes. What is the estimated life of the machine? *a. 12 years b. 8 years c. 6.2 years d. Cannot be determined Correct answer: a Learning objective 15.5 ~ reflect on alternative methods (internal rate of return, payback, accrual accounting rate of return) used for capital investment decisions

70. AGL is considering the purchase and implementation of an enterprise-wide information system. Which of the following would be the least biased source of qualitative information about the project? a. Employees who would use the system b. Information technology staff who would implement the system c. The software vendor *d. Other companies that have implemented the same system Correct answer: d Learning objective 15.6 ~ Discuss additional issues to be considered for strategic investment decisions

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71. Qualitative factors often influence strategic investment decisions. Which of the following is the best example of such a factor? a. Discount rate estimates b. Changes in product prices based on consumer demand c. Changes in consumer demand based on product prices *d. Increased ability to ship product in a timely manner Correct answer: d Learning objective 15.6 ~ Discuss additional issues to be considered for strategic investment decisions

72. Bruno is acquiring a new machine with a life of 5 years for use on its production line.

The following data relate to this purchase.

Cost of new machine Annual cost savings in cash expenses Terminal value Maintenance required in the 4th year Book value of the old machine

$100 000 45 000 8 000 5 000 20 000

The new machine would replace an old fully-depreciated machine. The old machine can be sold for $15 000 at the time the new equipment is acquired. The income tax rate is 30% and the discount rate is 12%. Arnold uses the straight-line method for depreciation on all machines (ignore the half-year convention).

What is the present value of the maintenance cost in year 4? a. $420 b. $2226 *c. $3180 d. $954 Correct answer: c Learning objective 15.7 ~ Communicate how income taxes affect capital investment decision cash flows

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73. Bruno is acquiring a new machine with a life of 5 years for use on its production line.

The following data relate to this purchase.

Cost of new machine Annual cost savings in cash expenses Terminal value Maintenance required in the 4th year Book value of the old machine

$100 000 45 000 8 000 5 000 20 000

The new machine would replace an old fully-depreciated machine. The old machine can be sold for $15 000 at the time the new equipment is acquired. The income tax rate is 30% and the discount rate is 12%. Arnold uses the straight-line method for depreciation on all machines (ignore the half-year convention).

What is the present value of the total savings (excluding the maintenance in year 4) in annual cash operating costs? a. $50 167.50 b. $48 667.50 *c. $162 225.00 d. $113 557.50 Correct answer: c Learning objective 15.7 ~ Communicate how income taxes affect capital investment decision cash flows

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74. Bruno is acquiring a new machine with a life of 5 years for use on its production line.

The following data relate to this purchase.

Cost of new machine Annual cost savings in cash expenses Terminal value Maintenance required in the 4th year Book value of the old machine

$100 000 45 000 8 000 5 000 20 000

The new machine would replace an old fully-depreciated machine. The old machine can be sold for $15 000 at the time the new equipment is acquired. The income tax rate is 30% and the discount rate is 12%. Bruno uses the straight-line method for depreciation on all machines (ignore the half-year convention).

What is the present value of the cash flows from the sale of the old machine? a. $17 860 *b. $15 000 c. $13 395 d. $16 340 Correct answer: b Learning objective 15.7 ~ Communicate how income taxes affect capital investment decision cash flows

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75. Bruno is acquiring a new machine with a life of 5 years for use on its production line.

The following data relate to this purchase.

Cost of new machine Annual cost savings in cash expenses Terminal value Maintenance required in the 4th year Book value of the old machine

$100 000 45 000 8 000 5 000 20 000

The new machine would replace an old fully-depreciated machine. The old machine can be sold for $15 000 at the time the new equipment is acquired. The income tax rate is 30% and the discount rate is 12%. Bruno uses the straight-line method for depreciation on all machines (ignore the half-year convention).

What is the present value of the total tax savings from the depreciation tax shield? *a. $19 899.60 b. $21 630.00 c. $46 432.40 d. $50 470.00 Correct answer: a Learning objective 15.7 ~ Communicate how income taxes affect capital investment decision cash flows

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76. Bruno is acquiring a new machine with a life of 5 years for use on its production line.

The following data relate to this purchase.

Cost of new machine Annual cost savings in cash expenses Terminal value Maintenance required in the 4th year Book value of the old machine

$100 000 45 000 8 000 5 000 20 000

The new machine would replace an old fully-depreciated machine. The old machine can be sold for $15 000 at the time the new equipment is acquired. The income tax rate is 30% and the discount rate is 12%. Bruno uses the straight-line method for depreciation on all machines (ignore the half-year convention).

What is the present value of the cash flows for year 4? a. $21 624 b. $21 319 *c. $28 951 d. $23 545 Correct answer: c Learning objective 15.7 ~ Communicate how income taxes affect capital investment decision cash flows

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77. Bruno is acquiring a new machine with a life of 5 years for use on its production line.

The following data relate to this purchase.

Cost of new machine Annual cost savings in cash expenses Terminal value Maintenance required in the 4th year Book value of the old machine

$100 000 45 000 8 000 5 000 20 000

The new machine would replace an old fully-depreciated machine. The old machine can be sold for $15 000 at the time the new equipment is acquired. The income tax rate is 30% and the discount rate is 12%. Bruno uses the straight-line method for depreciation on all machines (ignore the half-year convention).

What is the present value of the terminal cash flows? a. $3175 b. $8000 *c. $4536 d. $1361 Correct answer: c Learning objective 15.7 ~ Communicate how income taxes affect capital investment decision cash flows

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78. Marie Pty Ltd is considering modernising its production by purchasing a new machine and selling an old machine. The following data have been collected on this investment.

Old machine Cost Accumulated depreciation Remaining life Current salvage value Salvage value in 4 years Annual cash operating costs

$40 000 $20 000 4 years $5000 $0 $18 000

New machine Cost Estimated useful life Salvage value in 4 years Annual cash operating costs

$19 000 4 years $5000 $14 000

The income tax rate is 40% and the required rate of return is 16%. Depreciation is $5000 per year for the old machine. The new machine would be depreciated $7600 in 2018, $5700 in 2022, $3800 in 2023 and $1900 in 2024. Assume Marie would purchase the new machine in December 2024 and dispose of the old machine in January 2021.

What would the net cash flow associated with selling the old machine in January 2021 (i.e. the value of the sale and any tax consequences) be? *a. $11 000 b. $5000 c. $15 000 d. $20 000 Correct answer: a Learning objective 15.7 ~ Communicate how income taxes affect capital investment decision cash flows

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79. Marie Pty Ltd is considering modernising its production by purchasing a new machine and selling an old machine. The following data have been collected on this investment.

Old machine Cost Accumulated depreciation Remaining life Current salvage value Salvage value in 4 years Annual cash operating costs

$40 000 $20 000 4 years $5000 $0 $18 000

New machine Cost Estimated useful life Salvage value in 4 years Annual cash operating costs

$19 000 4 years $5000 $14 000

The income tax rate is 40% and the required rate of return is 16%. Depreciation is $5000 per year for the old machine. The new machine would be depreciated $7600 in 2018, $5700 in 2022, $3800 in 2023 and $1900 in 2024. Assume Marie would purchase the new machine in December 2024 and dispose of the old machine in January 2021.

What is Marie’s 2024 depreciation tax shield for the old machine? a. $2000 b. $5000 c. $4000 *d. $3000 Correct answer: d Learning objective 15.7 ~ Communicate how income taxes affect capital investment decision cash flows

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80. Marie Pty Ltd is considering modernising its production by purchasing a new machine and selling an old machine. The following data have been collected on this investment.

Old machine Cost Accumulated depreciation Remaining life Current salvage value Salvage value in 4 years Annual cash operating costs

$40 000 $20 000 4 years $5000 $0 $18 000

New machine Cost Estimated useful life Salvage value in 4 years Annual cash operating costs

$19 000 4 years $5000 $14 000

The income tax rate is 40% and the required rate of return is 16%. Depreciation is $5000 per year for the old machine. The new machine would be depreciated $7600 in 2018, $5700 in 2022, $3800 in 2023 and $1900 in 2024. Assume Marie would purchase the new machine in December 2024 and dispose of the old machine in January 2021.

What would be the tax effect of selling the new machine in 2024? *a. $0 b. $5000 c. $3000 d. $2000 Correct answer: a Learning objective 15.7 ~ Communicate how income taxes affect capital investment decision cash flows

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81. Marie Pty Ltd is considering modernising its production by purchasing a new machine and selling an old machine. The following data have been collected on this investment.

Old machine Cost Accumulated depreciation Remaining life Current salvage value Salvage value in 4 years Annual cash operating costs

$40 000 $20 000 4 years $5000 $0 $18 000

New machine Cost Estimated useful life Salvage value in 4 years Annual cash operating costs

$19 000 4 years $5000 $14 000

The income tax rate is 40% and the required rate of return is 16%. Depreciation is $5000 per year for the old machine. The new machine would be depreciated $7600 in 2018, $5700 in 2022, $3800 in 2023 and $1900 in 2024. Assume Marie would purchase the new machine in December 2024 and dispose of the old machine in January 2021.

What will the relevant annual pre-tax cash operating cost associated with Marie’s decision be? a. $2400 *b. $4000 c. $14000 d. $18000 Correct answer: b Learning objective 15.7 ~ Communicate how income taxes affect capital investment decision cash flows

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82. Jay Ltd Invested $100 000 in new equipment. The estimated cash flow over 10 years is $12 000 annually. The equipment is depreciated using the straight line method at 5% p.a.

The company pays tax at 30% on income. What is the company’s income tax expense per year on the new equipment? *a. $2100 b. $3600 c. $1500 d. $5000 Correct answer: a Learning objective 15.7 ~ Communicate how income taxes affect capital investment decision cash flows

83. The incremental cash tax flow for a capital budgeting project is calculated using which of the following formulas? a. Operating cash flow × Marginal income tax rate b. Annual depreciation × Marginal income tax rate c. Annual depreciation × (1 – Marginal income tax rate) *d. (Operating cash flow + Annual depreciation) × Marginal income tax rate Correct answer: d Learning objective 15.7 ~ Communicate how income taxes affect capital investment decision cash flows

84. Which of the following is the best example of a tax shield for an asset? a. Its trade-in value *b. Its periodic depreciation c. Its cost basis d. Its disposal cost Correct answer: b Learning objective 15.7 ~ Communicate how income taxes affect capital investment decision cash flows

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85. Axios is a software manufacturer. Managers are considering a new equipment proposal.

The income tax rate is 40% and the discount rate is 10%. The following data are available.

Purchase cost Annual depreciation Remaining useful life (years) Current selling price Selling price in 8 years Annual operating costs

Old equipment New equipment $12 000 $36 000 1 500 4 500 8 8 14 400 Not applicable 1 000 2 000 14 000 8 000

What are the after-tax cash flows from selling the old equipment? a. $11 040 b. $12 000 *c. $13 440 d. $12 960 Correct answer: c Learning objective 15.7 ~ Communicate how income taxes affect capital investment decision cash flows

86. Axios is a software manufacturer. Managers are considering a new equipment proposal.

The income tax rate is 40% and the discount rate is 10%. The following data are available.

Purchase cost Annual depreciation Remaining useful life (years) Current selling price Selling price in 8 years Annual operating costs

Old equipment New equipment $12 000 $36 000 1 500 4 500 8 8 14 400 Not applicable 1 000 2 000 14 000 8 000

What is the relevant after-tax cash flow associated with disposing of the new equipment at its salvage value in 8 years? a. $800 b. $2000 *c. $1200 d. $0 Correct answer: c Learning objective 15.7 ~ Communicate how income taxes affect capital investment decision cash flows

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87. Axios is a software manufacturer. Managers are considering a new equipment proposal.

The income tax rate is 40% and the discount rate is 10%. The following data are available.

Purchase cost Annual depreciation Remaining useful life (years) Current selling price Selling price in 8 years Annual operating costs

Old equipment New equipment $12 000 $36 000 1 500 4 500 8 8 14 400 Not applicable 1 000 2 000 14 000 8 000

What is the relevant after-tax annual cash operating cost associated with this decision? a. $2400 b. $8000 c. $6000 *d. $3600 Correct answer: d Learning objective 15.7 ~ Communicate how income taxes affect capital investment decision cash flows

88. Nominal interest rates is the rate of return that is required when: a. a risk free rate is present. b. inflation is not taken into account. *c. inflation is taken into account. d. when deflation is taken into account.

Correct answer: c Learning objective 15.8 ~ Understand how real and nominal methods are used to address inflation in an NPV analysis

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89. Which of the following NPV analysis methods requires adjustment of a project’s terminal value for inflation?

a. b. c. d.

Real Yes No Yes No

Nominal Yes No No Yes

*a. No/Yes b. Yes/No c. No/No d. Yes/No Correct answer: a Learning objective 15.8 ~ Understand how real and nominal methods are used to address inflation in an NPV analysis

90. In a capital budgeting analysis, nominal cash flow is generally calculated as: a. (1 + Inflation rate) × t × Real cash flow *b. Real cash flow × (1 + Inflation rate)t c. Real cash flow / (1 + Inflation rate)t d. Real cash flow (1 + Inflation rate) × t Correct answer: b Learning objective 15.8 ~ Understand how real and nominal methods are used to address inflation in an NPV analysis

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91. The tax savings cash flows are treated differently under the nominal and real methods.

Which of the following reflects this treatment?

a. b. c. d.

Real Inflated Deflated Used as is Deflated

Nominal Deflated Used as is Deflated Inflated

a. Deflated/Inflated b. Inflated/Deflated *c. Deflated/Used as is d. Used as is/Deflated Correct answer: c Learning objective 15.8 ~ Understand how real and nominal methods are used to address inflation in an NPV analysis

92. If nominal cash flow is calculated as Real cash flow × (1 + i)t in an NPV analysis, i denotes the: *a. rate of inflation. b. weighted average cost of capital. c. risk-free interest rate. d. discount rate.

Correct answer: a Learning objective 15.8 ~ Understand how real and nominal methods are used to address inflation in an NPV analysis

93. The real and nominal methods are most closely associated with: a. cost of capital. b. internal rate of return. c. payback. *d. net present value.

Correct answer: d Learning objective 15.8 ~ Understand how real and nominal methods are used to address inflation in an NPV analysis

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Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

Testbank to accompany

Management accounting 5th edition by Eldenburg et al.

Not for distribution. Instructors may assign selected questions in their LMS.

© John Wiley & Sons Australia, Ltd 2024

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Chapter 16: The strategic management of costs and revenues True/false questions

1. The supply chain involves suppliers, but not customers. a. True *b. False Correct answer: b

Learning objective 16.1 ~ Explain the value chain activities that provide for continuous cost improvement

2. A value chain is the sequence of business processes in which value is added to a product or a service. *a. True b. False Correct answer: a

Learning objective 16.1 ~ Explain the value chain activities that provide for continuous cost improvement

3. Companies committed to managing the environmental impacts of their supply chains can commit to green supply chain management (GSCM) principles. *a. True b. False Correct answer: a

Learning objective 16.1 ~ Explain the value chain activities that provide for continuous cost improvement

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4. If an organisation is able to charge extra to a customer who consumes greater company resources then the fact that they require extra servicing is not a problem. *a. True b. False Correct answer: a

Learning objective 16.2 ~ Explain the concept of customer profitability analysis and suggest qualitative factors for inclusion in a strategic customer analysis model

5. Focusing on the customers or clients as the cost object may reveal useful insights for improving organisational performance. *a. True b. False Correct answer: a

Learning objective 16.2 ~ Explain the concept of customer profitability analysis and suggest qualitative factors for inclusion in a strategic customer analysis model

6. Less profitable customers are more likely to place a lot of small orders. *a. True b. False Correct answer: a

Learning objective 16.2 ~ Explain the concept of customer profitability analysis and suggest qualitative factors for inclusion in a strategic customer analysis model

7. A target cost is the minimum cost a company should strive for to obtain its desired profit margin. a. True *b. False Correct answer: b

Learning objective 16.3 ~ Understand target costing principles and techniques

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8. Target costing is a technique to improve long-term profitability by considering product costs at the design phase. *a. True b. False Correct answer: a Learning objective 16.3 ~ Understand target costing principles and techniques

9. Target costing involves not only cost, but also product quality and functionality. *a. True b. False Correct answer: a

Learning objective 16.3 ~ Understand target costing principles and techniques

10. The decisions made during the design phase affect a large portion of product and manufacturing process costs. Therefore, target costing focuses on the design phase. *a. True b. False Correct answer: a

Learning objective 16.3 ~ Understand target costing principles and techniques

11. After a competitive price is determined for specific levels of product quality and functionality, the required profit margin is subtracted from the price to arrive at the target profit. *a. True b. False Correct answer: a

Learning objective 16.3 ~ Understand target costing principles and techniques

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12. Kaizen costing and target costing are two names for the same thing. a. True *b. False Correct answer: b

Learning objective 16.4 ~ Communicate the concept of kaizen costing and explain how it compares to target costing

13. Kaizen costing is a technique aimed at improvement of short-term profitability. a. True *b. False Correct answer: b

Learning objective 16.4 ~ Communicate the concept of kaizen costing and explain how it compares to target costing

14. Kaizen costing relies on price forecasts. *a. True b. False Correct answer: a

Learning objective 16.4 ~ Communicate the concept of kaizen costing and explain how it compares to target costing

15. In kaizen costing, after targeted cost reduction goals are set, each department is assigned responsibility for specific cost-reduction amounts. *a. True b. False Correct answer: a

Learning objective 16.4 ~ Communicate the concept of kaizen costing and explain how it compares to target costing

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16. Kaizen costing occurs at the beginning of the product life cycle. a. True *b. False Correct answer: b Learning objective 16.4 ~ Communicate the concept of kaizen costing and explain how it compares to target costing

17. Life cycle costing is an alternative to job order and process costing. a. True *b. False Correct answer: b

Learning objective 16.5 ~ Describe the characteristics of life cycle costing

18. Life cycle costing considers cash flows over the entire life of products that have high development or decommissioning costs. *a. True b. False Correct answer: a

Learning objective 16.5 ~ Describe the characteristics of life cycle costing

19. Life cycle costing focuses on costs incurred in production, but not on those incurred when an operation is closed down and requires costly clean-up activities. a. True *b. False Correct answer: b

Learning objective 16.5 ~ Describe the characteristics of life cycle costing

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20. Life cycle costing is used when a product is initially sold at a high profit. a. True *b. False Correct answer: b

Learning objective 16.5 ~ Describe the characteristics of life cycle costing

21. An example of life cycle costing is the manufacture of printers and ink cartridges when printers are sold at a profit and ink cartridges at a loss. a. True *b. False Correct answer: b

Learning objective 16.5 ~ Describe the characteristics of life cycle costing

22. To establish a cost-based price, managers need data on consumer demand. a. True *b. False Correct answer: b

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

23. In cost-based pricing, mark-up percentages often originate from general industry practice. *a. True b. False Correct answer: a

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

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24. In cost-based pricing, managers must use only variable costs in the cost base. a. True *b. False Correct answer: b

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

25. Market-based prices are typically based on some measure of customer demand. *a. True b. False Correct answer: a

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

26. In an economic downturn, a problem with cost-based pricing is a potential death spiral. *a. True b. False Correct answer: a

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

27. Market-based prices are influenced by product differentiation and competition. *a. True b. False Correct answer: a

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

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28. Peak load pricing refers to the illegal practice of charging different prices at different times to reduce capacity constraints. a. True *b. False Correct answer: b

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

29. Not-for-profit organisations price products in the same manner as for-profit organisations. a. True *b. False Correct answer: b

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

30. A penetration price is the price charged for transactions that take place within a single organisation. a. True *b. False Correct answer: b

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

31. Price discrimination is the practice of setting the same price for all customers. a. True *b. False Correct answer: b

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

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32. Under Australian law, dumping occurs when a foreign-based entity sells products in Australia at prices below the market value in the country where the product is produced, and the price could harm the global economy. a. True *b. False Correct answer: b

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

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Multiple-choice questions

33. Which of these activities is not typically considered to be part of a manufacturing organisation’s value chain? a. Handling customer complaints b. Designing and engineering new products *c. Making journal entries d. Manufacturing products Correct answer: c

Learning objective 16.1 ~ Explain the value chain activities that provide for continuous cost improvement

34. Implementing a computer application to reduce non-value-added paperwork and improve inventory tracking would result most directly from: a. kaizen costing. *b. value chain analysis. c. target costing. d. life cycle budgeting.

Correct answer: b

Learning objective 16.1 ~ Explain the value chain activities that provide for continuous cost improvement

35. Which of the following immediately follows product and process design in the typical manufacturing value chain? *a. Supplier and raw material management b. Distribution management c. Research and development d. Marketing and sales Correct answer: a

Learning objective 16.1 ~ Explain the value chain activities that provide for continuous cost improvement

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36. The internet can often give suppliers information about their customers’ inventory levels. Suppliers can then use this information to: I II III

time deliveries to their customers improve their own production planning prepare financial statements

a. II and III. b. I and III. *c. I and II. d. I, II and III. Correct answer: c

Learning objective 16.1 ~ Explain the value chain activities that provide for continuous cost improvement

37. The principles of green supply chain management (GSCM) recognise the importance of: a. ensuring suppliers use fossil fuel when supplying materials. *b. green manufacturing and materials management. c. purchasing materials that is at least 5% recyclable. d. ensure that suppliers carbon emissions is unlimited.

Correct answer: b

Learning objective 16.1 ~ Explain the value chain activities that provide for continuous cost improvement

38. Which statement concerning customer profitability analysis is not true? a. The customer or customer groupings become the cost object. *b. There is not normally a connection between more profitable products or services and more profitable customers. c. To conduct this analysis it is necessary to identify the resources consumed and the associated costs of servicing customers. d. None of the options listed (i.e. all the statements are true).

Correct answer: b

Learning objective 16.2 ~ Explain the concept of customer profitability analysis and suggest qualitative factors for inclusion in a strategic customer analysis model

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39. More profitable customers are more likely to: *a. pay on time. b. demand discounts. c. place more small orders. d. return goods more frequently.

Correct answer: a

Learning objective 16.2 ~ Explain the concept of customer profitability analysis and suggest qualitative factors for inclusion in a strategic customer analysis model

40. When evaluating and managing customers, besides a quantitative customer profitability analysis, a firm should also consider: a. the life cycle stage of each customer. b. bargaining power of the firm. *c. all of the options listed. d. none of the options listed.

Correct answer: c

Learning objective 16.2 ~ Explain the concept of customer profitability analysis and suggest qualitative factors for inclusion in a strategic customer analysis model 41. PLM’s managers are attempting to build a new product, a better mousetrap. They began by determining the features customers wanted and what they would pay for those features.

PLM’s engineers then reverse-engineered a competitor’s product to understand its design and related production processes. Their analysis indicated that customers would pay $10.00 for a better mousetrap.

If PLM’s required profit margin is 25%, what is the target cost of a better mousetrap? *a. $7.50 b. $12.50 c. $2.50 d. None of the options listed Correct answer: a

Learning objective 16.3 ~ Understand target costing principles and techniques

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42. PLM’s managers are attempting to build a new product, a better mousetrap. They began by determining the features customers wanted and what they would pay for those features.

PLM’s engineers then reverse-engineered a competitor’s product to understand its design and related production processes. Their analysis indicated that customers would pay $10.00 for a better mousetrap.

What process did PLM use according to the preceding scenario? a. Value chain costing *b. Target costing c. Kaizen costing d. Life cycle costing Correct answer: b

Learning objective 16.3 ~ Understand target costing principles and techniques

43. Which of the following steps occurs first in a target costing design cycle? a. Make product design choices to achieve the target cost. b. Determine the target cost. c. Evaluate feasibility using a pilot project. *d. Determine product target price, quality and functionality.

Correct answer: d

Learning objective 16.3 ~ Understand target costing principles and techniques 44. PLM’s managers are attempting to build a new product, a better mousetrap. They began by determining the features customers wanted and what they would pay for those features.

PLM’s engineers then reverse-engineered a competitor’s product to understand its design and related production processes. Their analysis indicated that customers would pay $10.00 for a better mousetrap.

Why was it important for PLM’s engineers to understand the product design and production processes of its competitor? a. They needed to explain them to customers to justify the better mousetrap’s cost. b. The better mousetrap will only succeed if it is identical to their competitor’s product. *c. Most of the mousetrap’s product costs are committed by that point in the value chain. d. Understanding product design and production processes is not typically important; the engineers just wanted to better understand the process.

Correct answer: c

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45. Consumer surveys, focus groups and market research are: *a. information sources for target costing projects. b. always part of a company’s value chain. c. value-added activities. d. information sources for cost-based pricing.

Correct answer: a Learning objective 16.3 ~ Understand target costing principles and techniques

46. Emily is an accountant for CLC. Her boss has asked her to participate in a target costing project for a pen that will write upside down. Which of the following information sources would Emily use to determine a competitive price? a. Reverse-engineering reports b. Life cycle costing analyses *c. Consumer surveys d. Emily does not need to determine a competitive price because the project is focused on a target cost Correct answer: c

Learning objective 16.3 ~ Understand target costing principles and techniques

47. Target costing is most likely to be successful when the: a. product is a commodity. *b. production process is complex. c. manufacturer is solely responsible for managing costs. d. managers and accountants make all of the decisions.

Correct answer: b Learning objective 16.3 ~ Understand target costing principles and techniques

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48. After establishing a target cost for a product or service, managers assemble a product design team. The product design team usually comprises: I II III

product engineers marketing personnel accountants

a. I and III. b. II and III. c. I and II. *d. I, II and III. Correct answer: d Learning objective 16.3 ~ Understand target costing principles and techniques

49. Which of the following industries is least likely to implement target costing? a. Heavy equipment manufacturers b. Car manufacturers *c. Food products and beverages d. Bicycle manufacturers Correct answer: c

Learning objective 16.3 ~ Understand target costing principles and techniques

50. In target costing, managers can: *a. push some cost reductions to suppliers. b. try to establish their product as a commodity. c. focus on motivating customers to pay a higher price. d. justify higher costs by making production processes more complex.

Correct answer: a

Learning objective 16.3 ~ Understand target costing principles and techniques

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51. When does kaizen costing typically occur? *a. After the product has been designed, but before the first production cycle is complete b. After the product has been designed and after the first production cycle is complete c. Before the product has been designed d. After the first production cycle is complete, but before the product has been designed Correct answer: a

Learning objective 16.4 ~ Communicate the concept of kaizen costing and explain how it compares to target costing

52. Kaizen costing is: a. focused only on cost reduction. *b. continuous improvement in cost, quality and functionality. c. another name for target costing. d. a method for budgeting.

Correct answer: b

Learning objective 16.4 ~ Communicate the concept of kaizen costing and explain how it compares to target costing

53. Kaizen costing is similar to a budget except that kaizen costing: a. cannot be implemented in service organisations. b. requires the use of the high-low method to forecast revenues. c. does not use dollar amounts. *d. provides for explicit cost reductions.

Correct answer: d

Learning objective 16.4 ~ Communicate the concept of kaizen costing and explain how it compares to target costing

54. Kaizen costing relies on: a. commodity markets. b. zero-based budgeting processes. *c. sales forecasts of prices and volumes. d. classification based on cost behaviour.

Correct answer: c

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Learning objective 16.4 ~ Communicate the concept of kaizen costing and explain how it compares to target costing

55. Under kaizen costing, accountants forecast: a. cost reduction goals and desired profit margins, then adjust prices accordingly. b. declining profit margins and establish revenue and cost goals to meet them. *c. declining prices and establish cost reduction goals to maintain a desired profit margin. d. increasing profit margins and establish revenue and cost goals to meet them.

Correct answer: c

Learning objective 16.4 ~ Communicate the concept of kaizen costing and explain how it compares to target costing

56. Kaizen costing concepts can be applied to: a. fixed costs only. *b. both variable and fixed costs. c. variable costs only. d. mixed costs only.

Correct answer: b

Learning objective 16.4 ~ Communicate the concept of kaizen costing and explain how it compares to target costing

57. PNY currently sells its primary product for $85 per unit, with a profit margin of 30%.

Cost of goods sold totals 40% of the product’s total cost. PNY’s managers are considering implementing a kaizen costing system.

What is PNY’s current product cost (direct costs and manufacturing overhead) per unit? a. $59.50 *b. $23.80 c. $25.50 d. $15.30 Correct answer: b

Learning objective 16.4 ~ Communicate the concept of kaizen costing and explain how it compares to target costing

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58. Managers can achieve planned cost reductions in a kaizen costing system through: I II III

value chain analysis gain-sharing programs with employees supply chain analysis

a. I and III. b. II and III. c. I and II. *d. I, II and III. Correct answer: d

Learning objective 16.4 ~ Communicate the concept of kaizen costing and explain how it compares to target costing

59. PNY currently sells its primary product for $85 per unit, with a profit margin of 30%.

Cost of goods sold totals 40% of the product’s total cost. PNY’s managers are considering implementing a kaizen costing system.

If PNY is successful in achieving its kaizen goal, what will the reduced non-manufacturing cost (i.e. the cost excluding the product cost) per unit be? a. $28.56 *b. $19.04 c. $47.60 d. $20.40 Correct answer: b

Learning objective 16.4 ~ Communicate the concept of kaizen costing and explain how it compares to target costing

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60. PNY currently sells its primary product for $85 per unit, with a profit margin of 30%.

Cost of goods sold totals 40% of the product’s total cost. PNY’s managers are considering implementing a kaizen costing system.

As part of its kaizen costing project, PNY’s accountants estimate the price of the product will decline by 20% next year. To maintain the same profit margin, the total cost per unit will have to be reduced by: a. exactly 20%. *b. more than 20%. c. less than 20%. d. a percentage unable to be determined.

Correct answer: b

Learning objective 16.4 ~ Communicate the concept of kaizen costing and explain how it compares to target costing 61. PLM’s managers have recently introduced new, more efficient equipment for feeding chickens. Under which of the following assumptions would life cycle costing be best applied? a. The product is being sold at a small profit *b. The product is being sold at a loss, but expected to add to profits over time c. The product is being sold at a loss d. The product is being sold at a small profit, which is expected to decline over time Correct answer: b

Learning objective 16.5 ~ Describe the characteristics of life cycle costing

62. Life-cycle costing is a: a. decision-making method that considers a target cost. b. decision-making method that considers improvements in cost and quality over a product’s life. *c. decision-making method that considers costs from the time the product is introduced through a number of years. d. pricing method based on demand.

Correct answer: c

Learning objective 16.5 ~ Describe the characteristics of life cycle costing

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63. Life cycle costing can be used to identify unprofitable products due to high costs at the end of a product’s life. Which of the following is the best example of such a product? a. Cherry orchards b. Accounting firms *c. Nuclear reactors d. Universities Correct answer: c Learning objective 16.5 ~ Describe the characteristics of life cycle costing

64. Although products are initially sold at a loss, under life cycle costing managers usually expect: I II III

sales volume increases for the product or related products over time a shift to a commodity market over time cost reductions over time

a. II and III. b. I and III. *c. I and II. d. I, II and III. Correct answer: c

Learning objective 16.5 ~ Describe the characteristics of life cycle costing 65. Life cycle costing can be used to focus managers’ attention on: I II III

development costs decommissioning costs marketing costs

a. I and III. b. II and III. *c. I and II. d. I, II and III. Correct answer: c

Learning objective 16.5 ~ Describe the characteristics of life cycle costing

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66. TMG produces and sells yachts for wealthy customers. TMG’s accountants produced the data shown below as a basis for client negotiations for the coming year.

Basic yacht Customisation costs Marketing costs Total costs

Big Winner Sport Star CEO $600 $600 $600 300 500 200 100 400 300 1000 1500 1100

Assume that all the preceding costs are avoidable. The company will incur an additional $800 in unavoidable costs during the coming year. TMG’s managers want to achieve a profit margin of 80% based on total costs. If unavoidable costs are allocated as a percentage of avoidable costs, what will the total cost of Sport Star’s yacht be? a. $2300 *b. $1833 c. $1500 d. $1167 Correct answer: b

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

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67. TMG produces and sells yachts for wealthy customers. TMG’s accountants produced the data shown below as a basis for client negotiations for the coming year.

Basic yacht Customisation costs Marketing costs Total costs

Big Winner Sport Star CEO $600 $600 $600 300 500 200 100 400 300 1000 1500 1100

Assume that all the preceding costs are avoidable. The company will incur an additional $800 in unavoidable costs during the coming year. TMG’s managers want to achieve a profit margin of 80% based on total costs. TMG’s system is best described as: a. life cycle costing. *b. cost-based pricing. c. market-based pricing. d. kaizen costing.

Correct answer: b

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

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68. TMG produces and sells yachts for wealthy customers. TMG’s accountants produced the data shown below as a basis for client negotiations for the coming year.

Basic yacht Customisation costs Marketing costs Total costs

Big Winner Sport Star CEO $600 $600 $600 300 500 200 100 400 300 1000 1500 1100

Assume that all the preceding costs are avoidable. The company will incur an additional $800 in unavoidable costs during the coming year. TMG’s managers want to achieve a profit margin of 80% based on total costs.

Suppose TMG allocates unavoidable corporate costs based on total avoidable costs. What will be the selling price of Sport Star’s yacht? a. $3300 *b. $1467 c. $1833 d. $2200 Correct answer: b

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

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69. TMG produces and sells yachts for wealthy customers. TMG’s accountants produced the data shown below as a basis for client negotiations for the coming year.

Basic yacht Customisation costs Marketing costs Total costs

Big Winner Sport Star CEO $600 $600 $600 300 500 200 100 400 300 1000 1500 1100

Assume that all the preceding costs are avoidable. The company will incur an additional $800 in unavoidable costs during the coming year. TMG’s managers want to achieve a profit margin of 80% based on total costs. Which customer’s yacht will have the lowest total cost if unavoidable costs are allocated based on the cost of a basic yacht? a. Sport Star b. CEO *c. Big Winner d. Costs will be equal for all three customers Correct answer: c

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

70. Which of the following is a formal method for incorporating demand into prices? a. Market-based pricing *b. Price elasticity of demand c. Cost-based pricing d. Price elasticity of supply Correct answer: b

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

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71. Market-based prices are least likely to be influenced by: a. competition. b. whether or not the product is a commodity. c. the degree of product differentiation. *d. the cost to produce the product.

Correct answer: d

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

72. Which of the following formulas calculates the profit-maximising price? a. (Total variable cost + Total fixed cost) / Price elasticity of demand *b. Variable cost × [Elasticity / (Elasticity + 1)] c. Total variable cost + Total fixed cost d. Total cost × [Elasticity / (Elasticity + 1)] Correct answer: b

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

73. Which of the following formulas calculates price elasticity of demand? a. (1 + % change in quantity sold) / (1 + % change in price) b. % change in quantity sold / % change in price *c. ln (1 + % change in quantity sold) / ln (1 + % change in price) d. ln (1 – % change in quantity sold) / ln (1 – % change in price) Correct answer: c

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

74. Market-based prices are normally determined using some measure of: a. supplier demand. *b. customer demand. c. supplier prices. d. degree of governmental regulation.

Correct answer: b

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

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75. Which of these factors affect a product’s profit-maximising price?

I II III

Fixed costs Price elasticity of demand Variable costs

a. II and III *b. I and II c. I and III d. I, II and III Correct answer: b

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

76. Market-based prices are influenced by all of the following except: a. product differentiation. b. competition. c. customer demand. *d. allocated costs.

Correct answer: d

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

77. Managers determine what a customer is willing to pay for a product or service under which one of these pricing methods? a. Cost-based b. Activity-based *c. Market-based d. Life cycle Correct answer: c

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

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78. The internet is likely to: a. have no impact on price elasticity of demand because few people do business on the internet. *b. increase price elasticity of demand because of the availability of substitute products. c. decrease price elasticity of demand because transactions are numerous and quick. d. decrease price elasticity of demand because of the availability of complementary products.

Correct answer: b

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

79. When an organisation using market-based prices cannot differentiate its product due to extensive competition, the product: a. is considered a regulated price. b. involves more non-value-added activities than value-added activities. *c. is considered a commodity. d. cannot be sold at a profit.

Correct answer: c

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed 80. PNG’s managers estimate that a 50% increase in price would cause an 80% reduction in the quantity of product sold. Total fixed costs for the product are $5000 and total variable costs are $4000 based on production of 400 units. The following values may be useful.

1n (0.2) = –1.609 1n (0.5) = –0.693 1n (0.8) = –0.223

1n (1.5) = 0.405 1n (4000) = 8.294 1n (5000) = 8.517

What is PNG’s profit-maximising price? a. $3.37 b. $7.57 c. $2.44 *d. $13.36 Correct answer: d

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

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81. PNG’s managers estimate that a 50% increase in price would cause an 80% reduction in the quantity of product sold. Total fixed costs for the product are $5000 and total variable costs are $4000, based on production of 400 units. The following values may be useful.

1n (0.2) = –1.609 1n (0.5) = –0.693 1n (0.8) = –0.223

1n (1.5) = 0.405 1n (4000) = 8.294 1n (5000) = 8.517

What is PNG’s price elasticity of demand? a. –0.252 b. +0.322 *c. –3.973 d. +3.108 Correct answer: c

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed 82. The ‘death spiral’ may be a problem when managers use: *a. cost-based prices. b. profit-maximising prices. c. market-based prices. d. regulated prices.

Correct answer: a

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

83. A major drawback of cost-based pricing is that it: *a. ignores the relationship between customer demand and price. b. ignores variable costs and includes only fixed costs. c. ignores the full cost of a product. d. can be used only when all costs have been incurred.

Correct answer: a

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

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84. What is charging different prices at different times to reduce capacity constraints called? a. Transfer pricing *b. Peak load pricing c. Penetration pricing d. Price skimming Correct answer: b

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

85. Which of these is the main disadvantage of market-based pricing? a. Subjectivity of market demand b. Inability to operate profitably *c. Difficulty in estimating market demand and prices d. Tendency to make poor decisions relative to cost-based pricing Correct answer: c

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

86. Which pricing method is used to capture market share by charging low introductory prices? a. Price gouging b. Price skimming *c. Penetration pricing d. Peak load pricing Correct answer: c

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed 87. The practice of charging higher prices for products or services when they are first introduced is known as: *a. price skimming. b. peak load pricing. c. transfer pricing. d. price gouging.

Correct answer: a

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Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

88. Setting prices low to drive competitors out of the market and then raising prices is called: a. market-based pricing. b. price dumping. *c. predatory pricing. d. collusive pricing.

Correct answer: c

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

89. When managers take advantage of an unusual event by charging prices that consumers believe are too high, they are practising: *a. price gouging. b. cost-based pricing. c. predatory pricing. d. illegal pricing.

Correct answer: a

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed 90. Low prices are not considered predatory if:

a. They are collusive b. Customers do not complain about them *c. They can be justified by cost differences d. Price elasticity of demand is above 1.00 Correct answer: c

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

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91. When two or more organisations conspire to set prices above a competitive price, they are engaging in: a. price gouging. *b. collusive pricing. c. predatory pricing. d. price discrimination.

Correct answer: b

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

92. Because of grants, donations and interest from endowed funds, not-for-profit organisations generally: a. must use market-based pricing. *b. do not expect to recover all their costs from the fees they charge. c. operate at a profit. d. are not allowed to use market-based pricing.

Correct answer: b

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed 93. The price does not need to cover costs for what kinds of organisations?

a. For profit retail sales organisations *b. Not-for-profit organisations c. All types of for-profit organisations d. For profit manufacturing organisations Correct answer: b

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

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94. Australian regulations prohibit a for profit business to charge some customers a higher price for the same product if: a. it creates competition in the market. b. if the business is the only seller of the product. c. the customer has complained. *d. the intent is to lessen or prevent competition for competitors.

Correct answer: d

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

95. Collusive pricing occurs when: a. a business sets a price low to drive competitors away. b. a business sets different prices for different customers. *c. when two or more businesses conspire to set prices above a competitive price d. a foreign business sells below the market value of where the product is manufactured.

Correct answer: c

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

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Essay questions 96. Explain how value chain analysis helps managers identify value-added and non-valueadded activities.

Answer: Value chain analysis involves studying each step in the business process to determine whether some activities can be eliminated because they do not add value. The analysis begins with identification of the various activities involved in the value chain. For a manufacturer, broad categories for these activities include research and development, product and process design, supplier and raw material management, product manufacture, marketing and sales, distribution management and customer service. Individual activities within the value chain are then analysed to determine whether they are value-added (i.e. whether they increase the worth of goods or service to customers). Some organisations use a classification system to identify non-value-added activities that can be eliminated quickly, versus those that can be eliminated over time or that require process changes.

Learning objective 16.1 ~ Explain the value chain activities that provide for continuous cost improvement

97. List the three product characteristics that a target costing design team would choose to enhance or minimise as they make trade-offs to achieve the target cost. Describe two of the types of trade-offs they may consider.

Answer: The design team considers trade-offs that can be made among three characteristics: price, quality and functionality. Higher quality could lead to a higher price, as could higher functionality. On the other hand, if compromises in quality need to be made to reduce costs, the team needs to consider how price or demand would be affected. Price is higher for higher quality and more functions, but lower for lower quality and fewer functions. The team needs to identify appropriate levels of price considering the quality and functionality that will be achieved.

Learning objective 16.3 ~ Understand target costing principles and techniques

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98. Give a complete but concise explanation of the target costing cycle.

Answer: The target costing cycle begins with a market survey to determine the price for a product, considering the level of quality and functionality desired. Once the price is determined, a contribution margin is subtracted from the price to determine the target cost. A team of people from accounting, marketing, engineering and production design the product and the manufacturing or service delivery process. The goal is to develop a product and process that meets the target cost. If the goal is met, a pilot project will be undertaken to determine whether the design plans result in a product that meets the target cost goal. If so, a full manufacturing or service delivery process is set up. If the target cost cannot be met by the team in the first iteration, the team will further consider the interactions among price, quality and functionality, or redesign the product and process to meet the target cost. If the target cost cannot be met, the plans are dropped. Similarly, if the results of the pilot project are not favourable, the design phase is reiterated until either the target cost is met or the product is dropped.

Learning objective 16.3 ~ Understand target costing principles and techniques

99. List one advantage and one disadvantage for using target and kaizen costing.

Answer: A common advantage for both target and kaizen costing is that goal setting usually leads to stronger performance. Common disadvantages include the stressful work environment that can develop if the goals are set too stringently and some product decisions are made that eliminate products that might have long-term profit potential.

Learning objective 16.3 ~ Understand target costing principles and techniques and Learning objective 16.4 ~ Communicate the concept of kaizen costing and explain how it compares to target costing

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100. Compare and contrast target costing with kaizen costing.

Answer: The following are similarities between target and kaizen costing: - both rely on goals and goal setting to achieve cost reductions - both focus on product and manufacturing or service delivery design - both focus on relationship with suppliers to achieve cost reductions - both encourage active employee participation - both consider trade-offs between price, quality and functionality - both focus on continuous improvements.

The differences between the two methods are: - target costing occurs only at the beginning of the production cycle — at the design phase, kaizen occurs after the product has been sold for a while - target costing sets a single target cost goal per product, whereas kaizen sets cost-reduction goals and then continues to set them over time.

Learning objective 16.3 ~ Understand target costing principles and techniques and Learning objective 16.4 ~ Communicate the concept of kaizen costing and explain how it compares to target costing 105. Paul’s Recycling accepts and recycles or disposes of hazardous waste for the city. It charges the city for waste disposal based on the amount of waste handled. Its contract specifies the sites that have been set up for waste drop-off will be cleaned up completely when the contract eventually expires. The owners of Paul’s Recycling has been contacted by the council to set up a similar service for people who live in the area. Paul’s Recycling’s accountant is preparing an analysis for the owners. Recommend an appropriate costing method. Describe the method and explain the reasons for your choice.

Answer: When products incur high start-up costs or have high decommissioning costs, life cycle costing is performed to determine the viability of the project. This type of costing takes into consideration losses at specific points in the product life cycle. Thus, it allows production of products that might be rejected under another system. If the revenues over time exceed total costs over time and the return is acceptable, the product is acceptable and will be developed and sold. If the costs outweigh the revenues, the product will not be developed.

Learning objective 16.5 ~ Describe the characteristics of life cycle costing

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101. Describe cost-based pricing and give an example of a product for which this pricing method would be appropriate Answer: Cost-based pricing is a mark-up of some level of cost, such as variable cost or variable cost plus some allocation of fixed costs. This price provides the company some measure of return (assuming that sales occur). A product that would be appropriately priced using costbased pricing would be a customised item such as hand-tailored clothing or home remodelling. Student answers will vary.

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

102. Describe market-based pricing and give an example of a product for which this pricing method would be appropriate.

Answer: Market-based pricing is the practice of setting prices using some measure of customer demand. There are many different ways to determine a market-based price, including observation of competitors’ prices, published market prices, findings from market research and use of a profit-maximising price formula. Market-based pricing may be used for many different types of products, so student answers to the second part of this question will vary.

An example of a product for which market-based pricing is appropriate is a commodity such as oranges or orange juice. Another example is retail items such as electronic goods.

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

108. List one advantage and one disadvantage for each of the following pricing methods: market-based and cost-based.

Answer: An advantage of cost-based pricing is that it is relatively easy to perform. A mark-up is just added to the product’s cost, which is already tracked in the accounting system. A disadvantage is that if the price is too high, and demand declines, the price will need to be higher because there are fewer units to allocate costs to. This is called the death spiral.

Another disadvantage is that cost-based prices may be too low, causing foregone revenues.

An advantage of market-based pricing is that products are always competitively priced, and so there is a higher probability of sales. With enough data, a profit-maximising price can be set. A disadvantage is that it can be difficult estimate an appropriate market-based price, and experimentation may be needed to evaluate price sensitivity.

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed.

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103. Explain why market-based pricing has increased in recent years.

Answer: Market-based pricing has increased for several reasons. First, it has become easier to collect data about price and demand. Optical character readers track inventory and price, and the data can be used to determine a profit-maximising price. Some software makers have developed pricing programs using this technique. In addition, competitive price information is more readily available, such as on the internet.

Learning objective 16.6 ~ Evaluate pricing methods and describe how cost-based prices and market-based prices are managed

Testbank to accompany

Management accounting 5th edition by Eldenburg et al.

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Not for distribution. Instructors may assign selected questions in their LMS.

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Chapter 17: Strategic management control: a lean perspective True/false questions

1. In implementing lean accounting concepts, the value chain is considered to end when the product or service is sold to the customer. a. True *b. False Correct answer: b

Learning objective 17.1 ~ Reflect on and communicate the lean thinking philosophy 2. ‘Value’ in lean accounting is defined through the eyes of the customer. *a. True b. False Correct answer: a

Learning objective 17.1 ~ Reflect on and communicate the lean thinking philosophy

3. Under a lean accounting approach the aim is to remove all non-value-added activities. *a. True b. False Correct answer: a

Learning objective 17.1 ~ Reflect on and communicate the lean thinking philosophy 4. The ‘lean’ accounting approach applies to manufacturing entities and is not appropriate for service entities. a. True *b. False Correct answer: b

Learning objective 17.1 ~ Reflect on and communicate the lean thinking philosophy

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5. Under a traditional accounting system any build-up of inventory will increase profit as it will include deferred fixed overheads. *a. True b. False Correct answer: a

Learning objective 17.1 ~ Reflect on and communicate the lean thinking philosophy

6. To implement the key strategy of unrelenting focus on a patient in a hospital, a common language and approach must be used by all. a. True *b. False Correct answer: b

Learning objective 17.1 ~ Reflect on and communicate the lean thinking philosophy 7. Under a lean accounting system it is possible to dispense with supplier’s invoices. *a. True b. False Correct answer: a

Learning objective 17.1 ~ Reflect on and communicate the lean thinking philosophy

8. Lean accounting refocuses performance measurement systems to emphasise social controls such as training. *a. True b. False Correct answer: a

Learning objective 17.1 ~ Reflect on and communicate the lean thinking philosophy

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9. The theory of constraints (TOC) involves imposing strict controls and standards on all aspects of the value chain in order to improve efficiency. a. True *b. False Correct answer: b

Learning objective 17.2 ~ Describe the theory of constraints (TOC) and throughput costing

10. Throughput costing is a modified form of activity-based costing. a. True *b. False Correct answer: b

Learning objective 17.2 ~ Describe the theory of constraints (TOC) and throughput costing

11. The theory of constraints (TOC) is concerned with constraints on the supply side, not those on the demand side. a. True *b. False Correct answer: b Learning objective 17.2 ~ Describe the theory of constraints (TOC) and throughput costing

12. The philosophy of just-in-time processing results in finished goods being completed just in time to be offered for sale. a. True *b. False Correct answer: b

Learning objective 17.3 ~ Explain the concept of just-in-time (JIT) manufacturing

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13. The economic order quantity formula is used to ensure that a business has the ideal inventory quantity to keep the overall holding and costing costs to a minimum. *a. True b. False Correct answer: a

Learning objective 17.3 ~ Explain the concept of just-in-time (JIT) manufacturing

14. The originator of the total quality management (TQM) approach was an American, W Edwards Deming. *a. True b. False Correct answer: a

Learning objective 17.4 ~ Understand and apply the concepts of total quality management (TQM) and the cost of quality

15. Under a total quality management approach, entities that seek only to match the quality of their competitors should reposition themselves as high-quality producers to maximise their profitability. a. True *b. False Correct answer: b

Learning objective 17.4 ~ Understand and apply the concepts of total quality management (TQM) and the cost of quality

16. There are four categories of quality activities: prevention, appraisal, inspection and external activities. a. True *b. False Correct answer: b

Learning objective 17.4 ~ Understand and apply the concepts of total quality management (TQM) and the cost of quality

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17. The philosophy of TQM is to cut costs while increasing quality. *a. True b. False Correct answer: a

Learning objective 17.4 ~ Understand and apply the concepts of total quality management (TQM) and the cost of quality

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Multiple-choice questions

18. Lean accounting incorporates which of the following? a. Total quality management b. The theory of constraints c. Just-in-time manufacturing *d. All of the options listed Correct answer: d

Learning objective 17.1 ~ Reflect on and communicate the lean thinking philosophy

19. An approach to accounting that aims to eliminate all sources of organisational waste from the value chain is known as: a. strategic management. *b. lean accounting. c. just-in-time manufacturing. d. value chain management.

Correct answer: b

Learning objective 17.1 ~ Reflect on and communicate the lean thinking philosophy

20. What is the first stage in the lean accounting model? a. Identify the relevant value-chain processes and activities *b. Identify and define value in organisational offerings c. Learning and growth within the organisation to strive for continual perfection d. Implement a pull system in sync with customer demand Correct answer: b

Learning objective 17.1 ~ Reflect on and communicate the lean thinking philosophy

21. Lean accounting is based on the philosophy: a. that there should be a complete shareholder-focused approach in the organisation. *b. that there should be a complete customer-focused approach in the organisation. c. that there should be a complete employee-focused approach in the organisation. d. that there should be a complete management-focused approach in the organisation.

Correct answer: b

Learning objective 17.1 ~ Reflect on and communicate the lean thinking philosophy

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22. Which of the following is a practice associated with lean accounting? a. Vertical reporting b. Accounting information provided to managers and supervisors only c. Producing to forecast *d. Producing in teams Correct answer: d

Learning objective 17.1 ~ Reflect on and communicate the lean thinking philosophy

23. Which of these is not associated with the lean accounting philosophy? a. Refocusing the performance measurement system to emphasise social controls such as training *b. Centralising the organisational structure c. Reducing transaction processing steps d. All are associated with the lean accounting philosophy Correct answer: b

Learning objective 17.1 ~ Reflect on and communicate the lean thinking philosophy

24. Lean accounting may involve cutting: a. the workload. b. paperwork. c. inventory levels. *d. all of the options listed.

Correct answer: d

Learning objective 17.1 ~ Reflect on and communicate the lean thinking philosophy

25. Lean accounting activities in lean thinking organisations may include: a. invoices from suppliers still being required. *b. purchase orders being converted to annual blanket purchase orders in order to reduce transaction processing costs. c. labour being considered a variable cost. d. using full absorption costing to value inventory.

Correct answer: b

Learning objective 17.1 ~ Reflect on and communicate the lean thinking philosophy

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26. Under TOC, a constraint that is a demand side rather a supply side constraint is: a. lack of the necessary knowledge or skills. b. a shortage of raw materials. c. insufficient processing time available. *d. none of the options listed are demand side constraints; all are supply side constraints.

Correct answer: d

Learning objective 17.2 ~ Describe the theory of constraints (TOC) and throughput costing

27. Which statement concerning the theory of constraints (TOC) is not true? a. It centres on identifying bottlenecks in the organisation b. Constraints can be on the demand or supply side *c. The theory is only relevant to a small number of businesses d. None of the statements listed (i.e. all are true statements) Correct answer: c

Learning objective 17.2 ~ Describe the theory of constraints (TOC) and throughput costing

28. In throughput costing the throughput of a product refers to its: a. selling price minus its total fixed costs. *b. selling price minus its totally variable costs. c. selling price minus its fixed and variable costs. d. variable costs.

Correct answer: b

Learning objective 17.2 ~ Describe the theory of constraints (TOC) and throughput costing

29. In throughput costing, which of the following is untrue? a. The throughput of a product is its selling price minus its totally variable costs b. Investment is also called inventory c. Profit is defined as throughput less operating expenses *d. Operating expenses are classified and thought of as direct costs Correct answer: d

Learning objective 17.2 ~ Describe the theory of constraints (TOC) and throughput costing

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30. In relation to the drum-buffer-rope concept that is used to maximise flow through an organisational bottleneck, which statement is correct? a. The ‘buffer’ is the activity of only maintaining a small amount of work in process. b. The ‘rope’ involves calculating the demand for materials according to specified lead times. c. The ‘drum’ relates to the activity associated with only inserting materials into the constraint when needed. *d. All the statements are correct.

Correct answer: d

Learning objective 17.2 ~ Describe the theory of constraints (TOC) and throughput costing

31. Just-in-time manufacturing is dedicated to: *a. having the right amount of materials at the time they are needed. b. having no materials on hand at any time. c. having excessive amounts of materials on hand at all times. d. having to order materials when the factory runs out.

Correct answer: a

Learning objective 17.3 ~ Explain the concept of just-in-time (JIT) manufacturing

32. A limitation of the theory of constraints and throughput costing is that: *a. labour and overhead costs may be built up to excessive levels. b. any product mix changes would not generate immediate cash flow effects. c. management’s attention is too focused on long-term results. d. none of the options listed.

Correct answer: a

Learning objective 17.2 ~ Describe the theory of constraints (TOC) and throughput costing

33. Which of these is not typically associated with successful implementation of just-intime (JIT) systems? a. Locating suppliers with short transit times *b. Using as many suppliers as possible to minimise the risk of non-delivery c. Finding high quality suppliers d. Developing management commitment to the JIT process Correct answer: b

Learning objective 17.3 ~ Explain the concept of just-in-time (JIT) manufacturing

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34. Which of the following terms is typically associated with just-in-time systems? *a. Manufacturing cells b. Non-value-added activities c. Demand-push system d. Linear regression Correct answer: a

Learning objective 17.3 ~ Explain the concept of just-in-time (JIT) manufacturing

35. It is correct that under a successful just-in-time production and inventory control system: a. distance from the supplier is not an issue as long as the supplier is reliable. *b. suppliers will normally make frequent deliveries of small lots of materials. c. there must be only one supplier. d. all of the options listed are correct.

Correct answer: b

Learning objective 17.3 ~ Explain the concept of just-in-time (JIT) manufacturing

36. Which of these is not a benefit of the just-in-time system? a. It reduces inventory obsolescence b. It reduces raw material handling costs *c. It guarantees that inventory will always be available from the supplier d. None of the options listed (i.e. all are benefits of the just-in-time system) Correct answer: c

Learning objective 17.3 ~ Explain the concept of just-in-time (JIT) manufacturing

37. The major disadvantage of the just-in-time system is: a. the number of inspections that must occur. *b. unforeseen, external events disrupting the delivery schedule. c. the number of small deliveries that must occur. d. all of the options listed are major disadvantages.

Correct answer: b

Learning objective 17.3 ~ Explain the concept of just-in-time (JIT) manufacturing

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38. The just-in-time inventory system is considered a: a. demand-push system. b. supply-push system. c. supply-pull system. *d. demand-pull system.

Correct answer: d Learning objective 17.3 ~ Explain the concept of just-in-time (JIT) manufacturing

39. A just-in-time system reduces costs in all of these ways, except: a. reducing defect rates. *b. reducing the range of products produced. c. maximising the use of space. d. enhancing manufacturing flexibility.

Correct answer: b

Learning objective 17.3 ~ Explain the concept of just-in-time (JIT) manufacturing

40. Advantages of just-in time inventory management are all of the following, except: *a. it makes the firm more independent of external suppliers. b. it minimises inventory insurance costs. c. it decreases the space needed for inventory storage. d. it increases manufacturing flexibility.

Correct answer: a

Learning objective 17.3 ~ Explain the concept of just-in-time (JIT) manufacturing

41. Under a value chain approach to quality management, product inspections are an example of which category of quality costs? a. Internal activities b. Prevention activities *c. Appraisal activities d. External activities Correct answer: c

Learning objective 17.4 ~ Understand and apply the concepts of total quality management (TQM) and the cost of quality

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42. Activities performed under a value chain approach to quality management, to insure defect-free production, such as routine equipment maintenance or quality training, represent which category of quality costs? a. Internal activities *b. Prevention activities c. External activities d. Appraisal activities Correct answer: b

Learning objective 17.4 ~ Understand and apply the concepts of total quality management (TQM) and the cost of quality

43. Which statement concerning total quality management (TQM) is not true? a. It promotes an organisation-wide philosophy. *b. The units cost of the product or service generally increase slightly as quality is improved. c. TQM is an important part of lean accounting. d. None of the options listed (i.e. all are true statements).

Correct answer: b

Learning objective 17.4 ~ Understand and apply the concepts of total quality management (TQM) and the cost of quality 44. MNL’s accounting information system reported warranty repair and product replacement costs totalling $120 000 in a recent accounting period. These costs are an example of which type of quality costs? *a. External activity costs b. Appraisal activity costs c. Internal activity costs d. Prevention activity costs Correct answer: a

Learning objective 17.4 ~ Understand and apply the concepts of total quality management (TQM) and the cost of quality

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45. Which statement concerning total quality management is incorrect? a. There is an emphasis on process management. b. There is extensive employee participation and training. c. There is a strong customer focus. *d. None of the statements listed (i.e. all are correct statements).

Correct answer: d

Learning objective 17.4 ~ Understand and apply the concepts of total quality management (TQM) and the cost of quality

46. The total quality management (TQM) approach originated in: a. Germany. b. USA. *c. Japan. d. South Korea.

Correct answer: c

Learning objective 17.4 ~ Understand and apply the concepts of total quality management (TQM) and the cost of quality

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Management accounting 5th edition by 1.605

Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

Eldenburg et al.

Not for distribution. Instructors may assign selected questions in their LMS.

© John Wiley & Sons Australia, Ltd 2024

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Chapter 18: Responsibility accounting, performance evaluation and transfer pricing True/false questions

1. Technical details about complex manufacturing processes are examples of specific knowledge. *a. True b. False Correct answer: a

Learning objectives 18.1 ~ Explain how decision-making responsibility and authority relate to performance evaluation

2. When decision making is centralised, the rights and responsibilities for decision making permeate all levels of the organisation. a. True *b. False Correct answer: b

Learning objectives 18.1 ~ Explain how decision-making responsibility and authority relate to performance evaluation

3. Cost centre managers cannot be held responsible services provided by a support department. *a. True b. False Correct answer: a

Learning objectives 18.2 ~ Identify appropriate responsibility centres and explain how responsibility centres are used to measure, monitor and motivate performance

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4. Responsibility accounting is the process of using financial information to justify pay increases and promotions for managers. a. True *b. False Correct answer: b

Learning objectives 18.2 ~ Identify appropriate responsibility centres and explain how responsibility centres are used to measure, monitor and motivate performance 5. In a profit centre, managers’ primary goal is to maximise revenues. a. True *b. False Correct answer: b

Learning objectives 18.2 ~ Identify appropriate responsibility centres and explain how responsibility centres are used to measure, monitor and motivate performance

6. Investment centre managers are held responsible only for their costs. a. True *b. False Correct answer: b

Learning objectives 18.2 ~ Identify appropriate responsibility centres and explain how responsibility centres are used to measure, monitor and motivate performance

7. One disadvantage of using return on investment is that it does not incorporate measures of risk. *a. True b. False Correct answer: a

Learning objectives 18.3 ~ Calculate and outline the uses and limitations of return on investment, residual income and economic value added for monitoring performance

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8. Return on investment can be decomposed into two ratios: investment turnover and return on sales. *a. True b. False Correct answer: a

Learning objectives 18.3 ~ Calculate and outline the uses and limitations of return on investment, residual income and economic value added for monitoring performance

9. Return on investment cannot be used effectively to evaluate profit centres because it motivates managers to make suboptimal decisions from the viewpoint of the organisations’ owners. *a. True b. False Correct answer: a

Learning objectives 18.3 ~ Calculate and outline the uses and limitations of return on investment, residual income and economic value added for monitoring performance

10. Economic value added can be measured so that it reduces most of the problems that arise under residual income. *a. True b. False Correct answer: a

Learning objectives 18.3 ~ Calculate and outline the uses and limitations of return on investment, residual income and economic value added for monitoring performance 11. Residual income measures a company’s profits given a required rate of return. *a. True b. False Correct answer: a

Learning objectives 18.3 ~ Calculate and outline the uses and limitations of return on investment, residual income and economic value added for monitoring performance

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12. An ideal transfer price would be the opportunity cost of internal transfers. *a. True b. False Correct answer: a

Learning objectives 18.4 ~ Communicate alternative prices used for transferring goods and services within an entity

13. A transfer price is required only when goods or services are transferred between cost centres in the same organisation. a. True *b. False Correct answer: b

Learning objectives 18.4 ~ Communicate alternative prices used for transferring goods and services within an entity

14. If a product has an external market and divisions are treated as profit centres, cost-based transfer prices can often lead to suboptimal decisions. *a. True b. False Correct answer: a

Learning objectives 18.4 ~ Communicate alternative prices used for transferring goods and services within an entity 15. If a supplying division has excess capacity, the best transfer price is the product’s variable cost. *a. True b. False Correct answer: a

Learning objectives 18.4 ~ Communicate alternative prices used for transferring goods and services within an entity

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16. Several methods are used to set transfer prices, amongst others, the market based method, the cost based method and the dual rate method. *a. True b. False Correct answer: a

Learning objectives 18.4 ~ Communicate alternative prices used for transferring goods and services within an entity 17. Transfer pricing policies can affect a company’s tax liability, particularly if it does business internationally. *a. True b. False Correct answer: a

Learning objectives 18.5 ~ Calculate transfer prices and outline the issues associated with transfer pricing

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Multiple-choice questions 18. Which of the following best describes ‘general knowledge’ in a decision-making context? a. Customer lists and preferences kept by individual departments in retail sales *b. Knowledge that is easily transferred between employees c. Detailed information about manufacturing processes d. Knowledge that can be obtained only outside the organisation Correct answer: b

Learning objectives 18.1 ~ Explain how decision-making responsibility and authority relate to performance evaluation

19. When decision making is decentralised: *a. decision-making authority is delegated throughout the organisation. b. the important information in an organisation is very general. c. upper management does not make decisions. d. organisations are less likely to experience agency costs concerning goal congruence.

Correct answer: a

Learning objectives 18.1 ~ Explain how decision-making responsibility and authority relate to performance evaluation

20. Which type of knowledge is most costly to transfer within an organisation? a. Decentralised b. Financial c. Centralised *d. Specific Correct answer: d

Learning objectives 18.1 ~ Explain how decision-making responsibility and authority relate to performance evaluation

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21. Decision-making based on general knowledge is more likely to occur in which type of organisation? a. Decentralised b. Effective *c. Centralised d. Ineffective Correct answer: c

Learning objectives 18.1 ~ Explain how decision-making responsibility and authority relate to performance evaluation

22. An advantage of centralised decision making is: a. more rapid decision making in all contexts. b. greater effectiveness in volatile environments. c. more motivated employees. *d. less monitoring of decisions.

Correct answer: d

Learning objectives 18.1 ~ Explain how decision-making responsibility and authority relate to performance evaluation

23. Specific knowledge is: I II III

more detailed than general knowledge more costly to transfer than general knowledge an example of an agency cost

a. I and III only. b. II and III only. *c. I and II only. d. I, II and III. Correct answer: c

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24. Budgets can be used to evaluate managerial performance in: I II III

cost centres profit centres investment centres

a. II only. b. I and II only. c. II and III only. *d. I, II and III. Correct answer: d

Learning objectives 18.2 ~ Identify appropriate responsibility centres and explain how responsibility centres are used to measure, monitor and motivate performance

25. Responsibility accounting includes: I II III

monitoring primarily for mistakes assigning authority to divisional managers measuring the performance of divisional managers

a. I and III only. *b. II and III only. c. I and II only. d. I, II and III. Correct answer: b

Learning objectives 18.2 ~ Identify appropriate responsibility centres and explain how responsibility centres are used to measure, monitor and motivate performance

26. Managers are held responsible for revenues in: I II III

revenue centres profit centres investment centres

a. II and III only. b. I only. c. I and III only. *d. I, II and III. Correct answer: d

Learning objectives 18.2 ~ Identify appropriate responsibility centres and explain how responsibility centres are used to measure, monitor and motivate performance

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27. Among the responsibility centres listed, which type of responsibility centre is most likely to use growth in sales as a performance measure? a. Profit *b. Revenue c. Cost d. Investment Correct answer: b

Learning objectives 18.2 ~ Identify appropriate responsibility centres and explain how responsibility centres are used to measure, monitor and motivate performance

28. Efficiency measures, such as number of new products developed, may be more useful than financial measures in: *a. discretionary cost centres. b. revenue centres. c. profit centres. d. investment centres.

Correct answer: a

Learning objectives 18.2 ~ Identify appropriate responsibility centres and explain how responsibility centres are used to measure, monitor and motivate performance

29. Which of the following responsibility centres can be evaluated using residual income? a. Profit centres b. Revenue centres c. Cost centres *d. Investment centres Correct answer: d

Learning objectives 18.2 ~ Identify appropriate responsibility centres and explain how responsibility centres are used to measure, monitor and motivate performance

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30. A corporate accounting department would most often be considered a: a. cost centre, because its costs can be controlled by upper management. b. revenue centre, if accountants have input in pricing decisions. c. cost centre, because it is typically a high cost operation. *d. cost centre, because it is a support service.

Correct answer: d

Learning objectives 18.2 ~ Identify appropriate responsibility centres and explain how responsibility centres are used to measure, monitor and motivate performance

31. PNY Pty Ltd reported operating profit of $80 000 and average operating assets of $120 000 in a recent accounting period. Which of the following transactions would definitely increase PNY’s return on investment? a. Switching suppliers for raw materials b. Collecting accounts receivable c. Increasing product prices *d. Decreasing research and development expense Correct answer: d

Learning objectives 18.3 ~ Calculate and outline the uses and limitations of return on investment, residual income and economic value added for monitoring performance

32. PNY Pty Ltd reported operating profit of $30 000, revenue of $50 000 and average operating assets of $40 000 for a recent year. Which of the following is true? a. PNY’s return on sales was 1.67 *b. PNY’s return on investment was 75% c. PNY has an adequate return on investment d. PNY’s return on sales was 80% Correct answer: b

Learning objectives 18.3 ~ Calculate and outline the uses and limitations of return on investment, residual income and economic value added for monitoring performance

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33. The Herbert Division of PNY reported net profit of $2500, operating profit of $4000, average equity of $24 000 and average operating assets of $30 000 in a recent accounting period. If Herbert’s required rate of return is 12%, what is its residual income? a. $(380) *b. $400 c. $380 d. $1100 Correct answer: b

Learning objectives 18.3 ~ Calculate and outline the uses and limitations of return on investment, residual income and economic value added for monitoring performance

34. How is residual income calculated? a. Net profit – (Required rate of return × Average operating assets) b. Operating profit – (Required rate of return × Average equity) *c. Operating profit – (Required rate of return × Average operating assets) d. Net profit – (Required rate of return × Average equity) Correct answer: c

Learning objectives 18.3 ~ Calculate and outline the uses and limitations of return on investment, residual income and economic value added for monitoring performance

35. How are research and development costs treated for financial reporting and for economic value added (EVA) calculations?

a. b. c. d.

Financial reporting Capitalised Expensed Capitalised Expensed

EVA Capitalised Expensed Expensed Capitalised

a. Expensed/Expensed b. Capitalised/Expensed c. Capitalised/Capitalised *d. Expensed/Capitalised Correct answer: d

Learning objectives 18.3 ~ Calculate and outline the uses and limitations of return on investment, residual income and economic value added for monitoring performance 36. Economic value added uses ‘adjusted after-tax operating profit’ as one of its inputs.

One purpose of using after-tax profit, rather than operating profit, is to: 1.617

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a. encourage managers to minimise taxes. *b. improve information reported to the ASIC. c. encourage managers to file tax reports. d. remove bias from the EVA calculation.

Correct answer: b

Learning objectives 18.3 ~ Calculate and outline the uses and limitations of return on investment, residual income and economic value added for monitoring performance

37. Herbert Feigl Ltd had the following results during the most recent year: Sales $500 000; Residual income $5000; investment turnover 2.5; and a required rate of return of 15%.

What was the capital investment? a. $75 000 b. $170 000 c. $1 250 000 *d. $200 000 Correct answer: d

Learning objectives 18.3 ~ Calculate and outline the uses and limitations of return on investment, residual income and economic value added for monitoring performance 38. A segment with an ROI of 30% has a profit of $84 000. The company’s required rate of return on segment investments is 18%. What is the segment’s residual income? a. $25 200 b. $26 712 c. $50 400 *d. $33 600 Correct answer: d

Learning objectives 18.3 ~ Calculate and outline the uses and limitations of return on investment, residual income and economic value added for monitoring performance

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39. Herbert Feigl Ltd had the following results during the most recent year: Sales $500 000; Residual income $5000; investment turnover 2.5; and a required rate of return of 15%.

What was the operating (pre-tax) profit? a. $192 500 *b. $35 000 c. $30 500 d. $16 250 Correct answer: b

Learning objectives 18.3 ~ Calculate and outline the uses and limitations of return on investment, residual income and economic value added for monitoring performance

40. The Bright Division of the Wingbury Pty Ltd requires a 12% rate of return. During a recent year Grant had a net profit of $400 000 and a residual income of $250 000. What was its ROI? a. 15% b. 12% *c. 32% d. 26% Correct answer: c

Learning objectives 18.3 ~ Calculate and outline the uses and limitations of return on investment, residual income and economic value added for monitoring performance

41. Herbert Feigl Ltd had the following results during the most recent year: Sales $500 000; Residual income $5000; investment turnover 2.5; and a required rate of return of 15%.

What was the return on sales? a. 6.1% b. 38.5% *c. 7% d. 3.25% Correct answer: c

Learning objectives 18.3 ~ Calculate and outline the uses and limitations of return on investment, residual income and economic value added for monitoring performance

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42. Herbert Feigl Ltd had the following results during the most recent year: Sales $500 000; Residual income $5000; investment turnover 2.5; and a required rate of return of 15%.

What was the return on investment? a. 21.67% b. 15.25% c. 15.4% *d. 17.5% Correct answer: d

Learning objectives 18.3 ~ Calculate and outline the uses and limitations of return on investment, residual income and economic value added for monitoring performance

43. Division A of a firm produces a single product, which is sold only to Division B. Division A has a total investment of $1 000 000, while Division B has a total investment of $2 000 000. Division A annually sells 100 000 units of its product to Division B for $5 per unit and earns $150 000 in operating profit. Division B currently earns $250 000. If Division A raises its selling price to $6 per unit and nothing else changes: a. the firm’s overall ROI will rise. b. the firm’s overall ROI will fall. c. division A’s ROI will increase to 20%. *d. the firm’s overall ROI will remain unchanged.

Correct answer: d

Learning objectives 18.3 ~ Calculate and outline the uses and limitations of return on investment, residual income and economic value added for monitoring performance

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44. The Sliver Coast Division of Harvey Ltd produces and sells a product to outside and internal customers. Per-unit data collected from its operations include the following.

Outside sales price Direct materials Direct labour Fixed overhead

$640 105 250 180

If the Silver Coast Division has excess capacity available to meet an internal order, what transfer price should be set? a. $355 *b. $430 c. $625 d. $285 Correct answer: b

Learning objectives 18.4 ~ Communicate alternative prices used for transferring goods and services within an entity

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45. The Silver Coast Division of Harvey Ltd produces and sells a product to outside and internal customers. Per-unit data collected from its operations include the following.

Outside sales price Direct materials Direct labour Fixed overhead

$640 105 250 180

If the Silver Coast division is operating at full capacity and selling solely to outside customers, what price should another division pay for Silver Coast’s product? a. $625 *b. $640 c. $285 d. $480 Correct answer: b

Learning objectives 18.4 ~ Communicate alternative prices used for transferring goods and services within an entity

46. The Venus Division of Saxophone Ltd produces dilithium crystals. One-third of its output is sold to the Bruno Division and the remainder is sold externally. Venus’s estimated sales and cost data for the coming year are as follows.

Units Sales Variable costs Fixed costs

Antari division External sales 12 500 25 000 $18 750 $50 000 $12 500 $25 000 $ 3 750 $ 7 500

Assume that Venus cannot sell any additional crystals externally. If the Bruno Division has an opportunity to buy from an outside supplier at $1.40 per crystal and Venus refuses to meet this price, the company as a whole will be: a. $3750 worse off. b. $6250 better off. c. $1250 better off. *d. $5000 worse off.

Correct answer: d

Learning objectives 18.4 ~ Communicate alternative prices used for transferring goods and services within an entity

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47. Winzel Ltd has 2 divisions, Diodes and Boards. The diode can be sold internally or externally. If sold externally, the sales price is $15 per diode. The Boards division needs 3 diodes for each electronic board it produces. The external sales prices and costs are as follows.

Sales price per unit Variable costs (direct) per unit Fixed costs per unit

Diodes Boards $15.00 $16.50 6.00 9.00 3.00 6.00

If Diodes can sell all of its production externally, what is the minimum price at which it would be willing to sell internally and what is the maximum price the Board Division would be willing to pay?

a. b. c. d.

Diodes willing to sell $15 $15 $15 $27

Boards willing to pay $2.50 $7.50 $15.00 $27.00

a. $15/$7.50 *b. $15/$15 c. $15/$2.50 d. $15/$27 Correct answer: b

Learning objectives 18.4 ~ Communicate alternative prices used for transferring goods and services within an entity

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48. The national division of RedBubble Ltd is buying 10 000 widgets from an outside supplier at $30 per unit. RedBubble’s overseas division, which is producing and selling at full capacity (12 000 units), has the following sales and cost structure.

Sales price per unit Variable cost per unit Fixed cost (at capacity) per unit

$45.00 22.50 15.00

If the overseas division meets the outside supplier’s price and sells the 10 000 widgets to the national division, what will be the effect on overall company profits? *a. $150 000 lower b. $300 000 higher c. $ 75 000 higher d. $225.000 lower Correct answer: a

Learning objectives 18.4 ~ Communicate alternative prices used for transferring goods and services within an entity

49. The national division of RedBubble Ltd is buying 10 000 widgets from an outside supplier at $30 per unit. RedBubble’s overseas division, which is producing and selling at full capacity (12 000 units), has the following sales and cost structure.

Sales price per unit Variable cost per unit Fixed cost (at capacity) per unit

$45.00 22.50 15.00

If the national division buys its 10 000 widgets from the overseas division, what should the transfer price be? a. $30.00 *b. $22.50 c. $45.00 d. $37.50 Correct answer: b

Learning objectives 18.4 ~ Communicate alternative prices used for transferring goods and services within an entity

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50. Division A of Flutes Ltd has operating data as follows.

Capacity Selling price Variable costs Fixed costs

20 000 units $80 per unit $45 per unit $20 per unit

B wants to purchase units from Division A. If Division A agrees to sell units to Division B, A’s variable costs will be $5 less per unit.

If Division A has capacity available to meet B’s requirements, what is the minimum price it should charge? a. $75 b. $20 *c. $40 d. $60 Correct answer: c

Learning objectives 18.4 ~ Communicate alternative prices used for transferring goods and services within an entity

51. Division A of Flutes Ltd has operating data as follows.

Capacity Selling price Variable costs Fixed costs

20 000 units $80 per unit $45 per unit $20 per unit

Division B wants to purchase units from Division A. If Division A agrees to sell units to Division B, A’s variable costs will be $5 less per unit.

If Division A is operating at capacity, what is the minimum price it should charge? a. $75 b. $20 *c. $40 d. $60 Correct answer: c

Learning objectives 18.4 ~ Communicate alternative prices used for transferring goods and services within an entity 52. Division A produces a component for Red Ltd’s main product: motor vehicles. The division operates as a profit centre. It also sells to outsiders. The present selling price is $75 1.625

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per component. The company buys 600 000 units of a similar component per year from outside sources. The external purchase price is $73 as a result of a quantity discount.

Division A has adequate capacity to supply the needs of the assembly division. The following data are for Division A. Direct material Direct labour Variable overhead Fixed overhead (based on a capacity of 5000 units)

$30 per unit $25 per unit $10 per unit $6 per unit

What is the price range within which A would sell components to the assembly division? *a. $65 to $73 b. $71 to $75 c. $71 to $73 d. $65 to $75 Correct answer: a

Learning objectives 18.4 ~ Communicate alternative prices used for transferring goods and services within an entity

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53. Division A produces a component for Red Ltd’s main product: motor vehicles. The division operates as a profit centre. It also sells to outsiders. The present selling price is $75 per component. The company buys 600 000 units of a similar component per year from outside sources. The external purchase price is $73 as a result of a quantity discount.

Division A has adequate capacity to supply the needs of the assembly division. The following data are for Division A. Direct material Direct labour Variable overhead Fixed overhead (based on a capacity of 5000 units)

$30 per unit $25 per unit $10 per unit $6 per unit

What would be the minimum price at which A would sell components internally? a. $73 b. $75 c. $71 *d. $65 Correct answer: d

Learning objectives 18.4 ~ Communicate alternative prices used for transferring goods and services within an entity

54. What is the price used to record exchanges of goods and services inside an organisation? a. Exchange price b. Full price *c. Transfer price d. Suboptimal price Correct answer: c

Learning objectives 18.4 ~ Communicate alternative prices used for transferring goods and services within an entity

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55. A transfer pricing policy based on market price: a. is best because the market price is always objective and easily obtainable. *b. may result in suboptimal decision making for the company as a whole. c. maximises total organisational profit. d. is the only alternative accepted by the Australian Taxation Office.

Correct answer: b

Learning objectives 18.4 ~ Communicate alternative prices used for transferring goods and services within an entity

56. Setting transfer prices can be especially problematic when: *a. compensation is tied to the financial performance of responsibility centres. b. centralised decision making is the organisational norm. c. managers are evaluated based on non-financial factors. d. compensation is tied to the financial performance of the organisation as a whole.

Correct answer: a

Learning objectives 18.4 ~ Communicate alternative prices used for transferring goods and services within an entity

57. When a company uses activity-based transfer prices: a. the internal buyer is motivated to understate the number of units to buy internally. *b. capacity is usually reserved for products or services that are transferred internally. c. the internal buyer is motivated to overstate the number of units to buy internally. d. batch-level costs are excluded from the computation.

Correct answer: b

Learning objectives 18.4 ~ Communicate alternative prices used for transferring goods and services within an entity

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58. Which of the following is an advantage of cost-based transfer prices?

I II III

Managers do not have much incentive to reduce fixed costs Managers may be motivated to purchase goods and services from outside the company Contribution margins may be split between buying and selling divisions

a. I only b. II only *c. III only d. None of the above (I, II and III are all disadvantages) Correct answer: c

Learning objectives 18.4 ~ Communicate alternative prices used for transferring goods and services within an entity

59. Which prices are recorded by departments under a dual-rate transfer pricing system?

a. b. c. d.

Selling department Variable cost Variable cost Market price Market price

Purchasing department Variable cost Market price Full cost Variable cost

a. Variable cost; market price b. Market price; full cost c. Variable cost; variable cost *d. Market price; variable cost Correct answer: d

Learning objectives 18.4 ~ Communicate alternative prices used for transferring goods and services within an entity

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60. Problems with market-based transfer prices include:

a. lack of objectivity. b. their impact on corporate profitability. *c. lack of knowledge about underlying costs. d. their lack of reliance on supply-and-demand relationships.

Correct answer: c

Learning objectives 18.4 ~ Communicate alternative prices used for transferring goods and services within an entity

61. Which of the following transfer pricing systems potentially takes the most time to establish? a. Dual-rate *b. Negotiated c. Market-based d. Full-cost Correct answer: b

Learning objectives 18.4 ~ Communicate alternative prices used for transferring goods and services within an entity

62. The process whereby an organisation with foreign subsidiaries, charge a high transfer price in low-tax countries is often referred to as: *a. income shifting. b. tax evasion. c. tax avoidance. d. profit evasion.

Correct answer: a

Learning objectives 18.5 ~ Calculate transfer prices and outline the issues associated with transfer pricing

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63. Division S sold a part to both Division P and outside customers last year. The revenues from these sales were $30 000 (1000 units) and $35 000 (1000 units), respectively. Next year, S plans to increase the unit sales price to $42 and wants a proportionate increase in the sales price to Division P. The unit costs are $9 variable and $15 fixed. If Division P does not agree to the price increase, 50% of Division S’s fixed costs will be eliminated.

What is the highest price Division P would be willing to pay for external purchases? *a. $36.00 b. $16.50 c. $30.00 d. $28.50 Correct answer: a Learning objectives 18.4 ~ Communicate alternative prices used for transferring goods and services within an entity

Testbank to accompany

Management accounting 5th edition by Eldenburg et al.

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Not for distribution. Instructors may assign selected questions in their LMS.

© John Wiley & Sons Australia, Ltd 2024

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Chapter 19: The balanced scorecard and strategy maps True/false questions

1. Part of strategic decision making is periodically clarifying organisational vision and core competencies. *a. True b. False Correct answer: a

Learning objective 19.1 ~ Understand how financial and non-financial measures are used to evaluate organisational performance

2. A low-cost supplier may result in a positive direct material price variance but may be in conflict with a non-financial measure such as customer complaints. *a. True b. False Correct answer: a

Learning objective 19.1 ~ Understand how financial and non-financial measures are used to evaluate organisational performance 3. The nature of an organisation’s strategies influences the types of performance objectives managers establish. *a. True b. False Correct answer: a

Learning objective 19.2 ~ Communicate the role of strategy maps in the balanced scorecard process

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4. Well-run organisations evaluate performance based mainly on financial measures because they are more objective than non-financial measures. a. True *b. False Correct answer: b

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

5. Non-financial measures are typically not objective enough to serve as effective performance measures. a. True *b. False Correct answer: b

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard 6. Managers should focus on finding the ‘one best measure’ of performance based on the type of responsibility centre they manage. a. True *b. False Correct answer: b

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

7. A balanced scorecard usually contains four perspectives: customer, financial, internal business process, and learning and growth. *a. True b. False Correct answer: a

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

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8. The purpose of a balanced scorecard is to translate organisational vision and strategies into performance objectives that can be monitored over time. *a. True b. False Correct answer: a

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard 9. The balanced scorecard’s financial perspective is focused primarily on measures of economic and accounting profits. a. True *b. False Correct answer: b

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

10. Learning and growth measures, if incorporated in a balanced scorecard, cannot focus on employees. a. True *b. False Correct answer: b

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

11. The basis of a balanced scorecard is continuous strategic analysis from as many perspectives as possible. a. True *b. False Correct answer: b

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

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12. The internal business process perspective in a balanced scorecard concentrates principally on employees. a. True *b. False Correct answer: b

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

13. Internet and social media data on customer reviews can be used as a performance measure. *a. True b. False Correct answer: a

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

14. In implementing a balanced scorecard, managers should establish performance targets after analysing the first set of scorecard data. a. True *b. False Correct answer: b

Learning objective 19.4 ~ Explain how a balanced scorecard is implemented

15. Once balanced scorecard measures have been chosen, they should not be changed for at least five years. a. True *b. False Correct answer: b

Learning objective 19.4 ~ Explain how a balanced scorecard is implemented

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16. Successful organisations communicate their vision, strategies, goals and objectives to upper-level employees. *a. True b. False Correct answer: a

Learning objective 19.4 ~ Explain how a balanced scorecard is implemented 17. An organisation’s core competencies can include productivity, reputation and regulatory advantages. *a. True b. False Correct answer: a

Learning objective 19.4 ~ Explain how a balanced scorecard is implemented 18. After evaluating their balanced scorecard a business will make revisions to their vision, core competencies and operating plans. *a. True b. False Correct answer: a

Learning objective 19.4 ~ Explain how a balanced scorecard is implemented 19. One of the balanced scorecard’s biggest advantages is the small amount of time and money involved in its implementation. a. True *b. False Correct answer: b

Learning objective 19.5 ~ Identify and communicate the strengths and weaknesses of the balanced scorecard

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20. Balanced scorecard initiatives are sometimes seen as temporary fads by employees. *a. True b. False Correct answer: a

Learning objective 19.5 ~ Identify and communicate the strengths and weaknesses of the balanced scorecard

21. Balanced scorecards, when properly implemented, can guide managers in making more effective decisions. *a. True b. False Correct answer: a

Learning objective 19.5 ~ Identify and communicate the strengths and weaknesses of the balanced scorecard

22. Lack of senior management support is one of the major causes for failed balanced scorecard initiatives. *a. True b. False Correct answer: a

Learning objective 19.5 ~ Identify and communicate the strengths and weaknesses of the balanced scorecard

23. Although the balanced scorecard has perceived weaknesses, it should not be viewed as a static formulaic approach but instead enable managers to be more through, less biased, more focused, and more strategic, visionary and creative. *a. True b. False Correct answer: a

Learning objective 19.5 ~ Identify and communicate the strengths and weaknesses of the balanced scorecard

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Multiple-choice questions 24. A representation that provides a visual view of an organisation’s strategy with a singlepage view of how objectives in the four balanced scorecard perspectives integrate and combine to guide strategy is known as a: *a. strategy map. b. mission statement. c. core competencies. d. value chain.

Correct answer: a

Learning objective 19.2 ~ Communicate the role of strategy maps in the balanced scorecard process

25. Lead indicators are: a. a summary of the outcomes of the firm’s past performance. *b. drivers of performance and enable us to anticipate the firm’s future performance. c. a firm’s net profit or gross profit ratios. d. a firm’s return on equity.

Correct answer: b

Learning objective 19.1 ~ Understand how financial and non-financial measures are used to evaluate organisational performance

26. A strategy map should: a. provide a link between the organisation’s strategy and the balanced scorecard. b. convey key strategic themes developed from the organisation’s strategy. c. convey the organisation’s strategic objectives in the four balanced scorecard. *d. all of the options listed.

Correct answer: d

Learning objective 19.2 ~ Communicate the role of strategy maps in the balanced scorecard process

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27. Non-financial measures include which of the following?

I II III

Cost variances Defect rates Customer satisfaction surveys

*a. II and III only b. I and III only c. I and II only d. I, II and III Correct answer: a

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

28. Managers have traditionally relied on which of the following measures to evaluate performance? *a. Financial measures b. Non-financial measures c. Qualitative factors d. Core competencies Correct answer: a

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

29. Financial measures used for organisational evaluation can pertain to which of the following?

I II III

Divisions Product lines Departments

a. II and III only b. I and III only c. I and II only *d. I, II and III Correct answer: d

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

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30. Financial and non-financial indicators are used to assess organisational performance and effectiveness under which of the following approaches? *a. Balanced scorecard b. Variance analysis c. Balanced budget d. Pro forma financial statement Correct answer: a

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

31. Which of the following statements about performance evaluation is true? a. Financial measures are less useful than non-financial measures because they are biased. *b. A combination of financial and non-financial measures gives a more useful picture of organisational performance than either one alone. c. Non-financial measures are less useful than financial measures because they are not as objective. d. Only one or two non-financial performance measures should be used.

Correct answer: b

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

32. The balanced scorecard approach to performance evaluation: I II III

is less time consuming and expensive than other approaches helps managers integrate strategies across divisions and functions assists managers in predicting possible future problems

a. I and II only. *b. II and III only. c. I and III only. d. I, II and III. Correct answer: b

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

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33. The primary aim of the balanced scorecard is to: a. use performance indicators that are highly objective. *b. translate elements of a company’s strategic plan into measurable performance indicators. c. put less emphasis on financial measures because they are too narrowly focused. d. provide a truthful basis for evaluating managers’ performance.

Correct answer: b

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

34. The perspectives in a balanced scorecard: a. cannot be changed because of copyright restrictions. b. include qualitative and quantitative. *c. can be adapted to an individual organisation’s priorities. d. are externally focused only in for-profit organisations.

Correct answer: c

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

35. The perspectives in a typical balanced scorecard include all of the following except: a. financial. b. customer. *c. qualitative. d. learning and growth.

Correct answer: c

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard 36. The balanced scorecard’s perspectives: a. are not linked in any meaningful way. b. are a relatively unimportant part of the scorecard. *c. are linked through careful managerial analysis. d. are exclusively focused on internal measures in not-for-profit organisations.

Correct answer: c

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

37. Which of the following measures would be most likely to be found in the learning and growth perspective of the balanced scorecard?

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*a. Training days per employee b. Residual income c. Change in market share d. Percent capacity utilisation Correct answer: a

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

38. Which of the following measures would be most likely to be found in the financial perspective of the balanced scorecard? a. Training days per employee *b. Residual income c. Change in market share d. Percent capacity utilisation Correct answer: b

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

39. Which of the following measures would be most likely to be found in the internal business process perspective of the balanced scorecard? a. Training days per employee b. Residual income c. Change in market share *d. Percent capacity utilisation Correct answer: d

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

40. Which of the measures below would be most likely to be found in the customer perspective of the balanced scorecard? a. Training days per employee b. Residual income *c. Change in market share d. Percent capacity utilisation Correct answer: c

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

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41. Which of the following measures would be least likely to be included in a balanced scorecard’s customer perspective? a. Revenue growth by product line *b. Total operating income by product line c. Customer-satisfaction rating d. Percent of repeat sales Correct answer: b

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

42. Which of the following measures would be least likely to be included in a balanced scorecard’s financial perspective? a. Percent of sales from return customers b. Average revenue per customer *c. Customer-satisfaction rating d. Increase in sales by geographic region Correct answer: c

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

43. Which of the following measures would be least likely to be included in a balanced scorecard’s learning and growth perspective? a. Average training cost per employee b. Percent of revenue from new products c. Number of patent applications for new products *d. Rank in customer surveys Correct answer: d

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

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44. Which of the following measures would be least likely to be included in a balanced scorecard’s internal business process perspective? *a. Customer-satisfaction rating b. Percent capacity utilisation c. Percent change in throughput time d. Average waiting time per customer Correct answer: a

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

45. Steps in the innovation cycle of the value chain include: *a. Designing products and services b. Building products and services c. Delivering products and services d. Providing customer service Correct answer: a

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

46. The internal business process perspective in a balanced scorecard is often broken down into its value chain components. Those components include all of the following except the: a. operations cycle. b. post-sales service cycle. c. innovation cycle. *d. budget cycle.

Correct answer: d

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

47. Steps in the post-sales service cycle of the value chain include: a. designing products and services. b. building products and services. c. identifying customer preferences. *d. providing customer service.

Correct answer: d

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

48. Steps in the operations cycle of the value chain include:

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a. designing products and services. *b. building products and services. c. identifying customer preferences. d. providing customer service.

Correct answer: b

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

49. Which of the following statements is true?

I II III

Traditionally, internal operations were monitored to improve financial performance In the balanced scorecard approach, monitoring for improvement is not valued Managers believe that monitoring performance measures related to an organisations’ learning and growth should lead to improvements in financial performance

a. II and III only *b. I and III only c. I and II only d. I, II and III Correct answer: b

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

50. The steps and cycles in the value chain are most closely associated with which balanced scorecard perspective? a. Customer *b. Internal business process c. Financial d. Learning and growth Correct answer: b

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

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51. Bank Corp is a large commercial bank in Australia. Bank Corp’s assets total $46.1 billion, loans of $26 billion and total deposits of $35.5 billion. It provides online, telephone and traditional banking and investment services to both individuals and businesses in Australia. Bank Corp’s mission is to create an exceptional customer experience internationally by providing solutions through leading technologies, offering a wide selection of financial products and services and leveraging experience to meet customers’ needs. Which of the following measures is least likely to be included in the financial perspective of Bank Corp’s balanced scorecard? a. Total loans outstanding b. Profit margin *c. Prime interest rate offered d. Total demand for deposits Correct answer: c

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard 52. Bank Corp is a large commercial bank in Australia. Bank Corp’s assets total $46.1 billion, loans of $26 billion and total deposits of $35.5 billion. It provides online, telephone and traditional banking and investment services to both individuals and businesses in Australia. Bank Corp’s mission is to create an exceptional customer experience internationally by providing solutions through leading technologies, offering a wide selection of financial products and services and leveraging experience to meet customers’ needs. ‘Percent change in dollars spent on information technology’ is most likely used in which balanced scorecard perspective? a. Financial b. Customer c. Information technology *d. Internal business process Correct answer: d

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

53. The measures in a balanced scorecard are guided by: a. budget plans. b. shareholders. *c. vision and strategy. d. the board of directors.

Correct answer: c

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

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54. An organisation’s core competencies are related to its strengths relative to competitors.

Those strengths can include which of the following?

I II III

Productivity and skills Reputation and legal rights Mission and core purpose

a. II and III only b. I and III only *c. I and II only d. I, II and III Correct answer: c

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard

55. The Internet of Things (IoT) processes: *a. connect to the internet using smart devices and capturing data through sensors. b. are a new internet service by the Australian government. c. are also referred to as ‘Big Data’. d. none of the options listed.

Correct answer: a

Learning objective 19.3 ~ Evaluate and develop a balanced scorecard 56. FPM’s strategic plan includes the following statement: ‘We deliver high-quality and timely service to our internal and external customers.’ That statement is best described as a(n): a. specific performance objective. b. operating plan. *c. mission statement. d. strategy.

Correct answer: c

Learning objective 19.4 ~ Explain how a balanced scorecard is implemented

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57. An organisational vision is concerned with creating value for stakeholders, including which of the following?

I II III

The community and society Employees and suppliers Customers and owners

a. II and III only b. I and III only c. I and II only *d. I, II and III Correct answer: d

Learning objective 19.4 ~ Explain how a balanced scorecard is implemented

58. Which of the following best describes the relationship between strategies and operating plans? a. Operating plans are the same as strategies. *b. Strategies lead to operating plans. c. Operating plans form the basis for strategies. d. Strategies and operating plans are unrelated to one another.

Correct answer: b

Learning objective 19.4 ~ Explain how a balanced scorecard is implemented

59. Which of the following are inputs to the development of organisational strategy? a. Operating plans and core competencies b. Actual operations and operating plans c. Organisational vision and operating plans *d. Organisational vision and core competencies Correct answer: d

Learning objective 19.4 ~ Explain how a balanced scorecard is implemented

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60. Analysis of the gaps between actual operations and performance objectives can be used for which of the following?

I II III

To compensate employees To prepare financial statements To improve future strategies

*a. I and III only b. II and III only c. I and II only d. I, II and III Correct answer: a

Learning objective 19.4 ~ Explain how a balanced scorecard is implemented 61. Bank Corp is a large commercial bank in Australia. Bank Corp’s assets total $46.1 billion, loans of $26 billion and total deposits of $35.5 billion. It provides online, telephone and traditional banking and investment services to both individuals and businesses in Australia. Bank Corp’s mission is to create an exceptional customer experience internationally by providing solutions through leading technologies, offering a wide selection of financial products and services and leveraging experience to meet customers’ needs. Internal business process measures on Bank Corp’s balanced scorecard would likely include which of the following?

I II III

Average wait time per customer Training and development costs per internal employee Cost per customer served

*a. I and III only b. II and III only c. I and II only d. I, II and III Correct answer: a

Learning objective 19.4 ~ Explain how a balanced scorecard is implemented

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62. Bank Corp is a large commercial bank in Australia. Bank Corp’s assets total $46.1 billion, loans of $26 billion and total deposits of $35.5 billion. It provides online, telephone and traditional banking and investment services to both individuals and businesses in Australia. Bank Corp’s mission is to create an exceptional customer experience internationally by providing solutions through leading technologies, offering a wide selection of financial products and services and leveraging experience to meet customers’ needs. Bank Corp could develop a balanced scorecard for which of the following?

I II III IV

The organisation as a whole Individual branches Domestic branches only International branches only

a. II, III and IV only b. I, II and IV only c. I, II and III only *d. I, II, III and IV Correct answer: d

Learning objective 19.4 ~ Explain how a balanced scorecard is implemented 63. Bank Corp is a large commercial bank in Australia. Bank Corp’s assets total $46.1 billion, loans of $26 billion and total deposits of $35.5 billion. It provides online, telephone and traditional banking and investment services to both individuals and businesses in Australia. Bank Corp’s mission is to create an exceptional customer experience internationally by providing solutions through leading technologies, offering a wide selection of financial products and services and leveraging experience to meet customers’ needs. All of the following measures could be included in a balanced scorecard for Bank Corp. Which is the most subjective? a. Employee turnover *b. Leadership competence c. Revenue growth d. Quality improvement costs incurred Correct answer: b

Learning objective 19.4 ~ Explain how a balanced scorecard is implemented

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64. The balanced scorecard implementation process begins with: a. developing measures for each perspective. b. hiring an outside consultant. c. selecting an implementation team. *d. clarifying organisational vision.

Correct answer: d

Learning objective 19.4 ~ Explain how a balanced scorecard is implemented

65. The steps for implementing a balanced scorecard: *a. should be customised for individual organisations. b. should not vary if the implementation is to be effective. c. are different in for-profit and not-for-profit organisations. d. begin with developing measures in each perspective.

Correct answer: a

Learning objective 19.4 ~ Explain how a balanced scorecard is implemented

66. In which order should the following steps be taken in implementing a balanced scorecard?

1 Develop links among the objectives of the organisation, divisions, departments and individuals.

2 Provide feedback to employees and others.

3 Establish action plans and specific performance targets. a. 2, 1, 3 b. 3, 2, 1 c. 1, 2, 3 *d. 1, 3, 2 Correct answer: d

Learning objective 19.4 ~ Explain how a balanced scorecard is implemented

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67. Following are some of the steps in implementing a balanced scorecard. Which one of these steps would be performed before the others? a. Communicate and refine measures. b. Establish performance targets and action plans. c. Collect and analyse scorecard data. *d. Develop performance measures and objectives.

Correct answer: d

Learning objective 19.4 ~ Explain how a balanced scorecard is implemented

68. The first step in implementing a balanced scorecard is to clarify organisational vision, core competencies and strategies. The vision: a. is another name for the organisation’s strengths and weaknesses. b. provides an explicit plan for daily operations. *c. provides an overall direction for the organisation. d. should explicitly incorporate all core competencies.

Correct answer: c

Learning objective 19.4 ~ Explain how a balanced scorecard is implemented

69. Following are some of the steps in implementing a balanced scorecard. Which one of these steps would be performed last? a. Collect and analyse scorecard data to monitor performance. b. Clarify organisational vision and strategies. *c. Investigate variances and reward employees. d. Establish action plans.

Correct answer: c

Learning objective 19.4 ~ Explain how a balanced scorecard is implemented

70. Each perspective of the balanced scorecard normally contains: a. the same number of measures as the other perspectives. *b. four to seven performance measures. c. a single, comprehensive measure to limit information overload. d. either input measures or outcome measures, but not both.

Correct answer: b

Learning objective 19.4 ~ Explain how a balanced scorecard is implemented

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71. When managers analyse the results from the balanced scorecard they may decide to: a. retrench 50% of their employees. *b. drop or change or add new measures. c. file for bankruptcy d. restrict all information to the board of directors only.

Correct answer: b

Learning objective 19.4 ~ Explain how a balanced scorecard is implemented

72. Strengths of the balanced scorecard can typically be summarised in three groups. Which of the following is not one of them? a. Guidance for improvements b. Motivation c. Communication and linkages *d. Cost Correct answer: d

Learning objective 19.5 ~ Identify and communicate the strengths and weaknesses of the balanced scorecard

73. Balanced scorecard projects can motivate which of the following?

I Employee effort II Achievement of organisational strategies III Managers to ignore biases and uncertainties a. II and III only *b. I and II only c. I and III only d. I, II and III Correct answer: b

Learning objective 19.5 ~ Identify and communicate the strengths and weaknesses of the balanced scorecard

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74. Strengths of the balanced scorecard related to communication and linkages include which of the following?

I II III

Encouraging clarification of vision and strategies Improving organisational consensus Selecting measures that reflect the only strengths of the organisation

a. I and III only b. II and III only *c. I and II only d. I, II and III Correct answer: c

Learning objective 19.5 ~ Identify and communicate the strengths and weaknesses of the balanced scorecard 75. In terms of motivation, one of the balanced scorecard’s strengths is: *a. aligning individual goals with organisational strategies. b. convincing managers that the scorecard is more than a temporary fad. c. improved financial performance. d. having generally-defined objectives to increase motivation.

Correct answer: a

Learning objective 19.5 ~ Identify and communicate the strengths and weaknesses of the balanced scorecard

76. One of the strengths of the balanced scorecard is its ability to provide guidance for improvements. Those improvements can be related to which of the following?

I II III

Cost reductions Employee morale Decision making

a. I and III only b. II and III only c. I and II only *d. I, II and III Correct answer: d

Learning objective 19.5 ~ Identify and communicate the strengths and weaknesses of the balanced scorecard

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77. The balanced scorecard may be inappropriate for: a. motivating employees. b. generating improved financial performance. *c. compensating employees. d. improving communication.

Correct answer: c

Learning objective 19.5 ~ Identify and communicate the strengths and weaknesses of the balanced scorecard

78. Weaknesses of the balanced scorecard include all of the following except:

*a. inability to clarify vision and strategies. b. lack of employee support. c. expensive and time-consuming implementation. d. doubt about links among the perspectives.

Correct answer: a

Learning objective 19.5 ~ Identify and communicate the strengths and weaknesses of the balanced scorecard

79. Common biases associated with balanced scorecard projects include which of the following?

I II III

Resistance to change from individuals The balanced scorecard process being viewed as a temporary fad Periodic performance reviews

a. I and III only b. II and III only *c. I and II only d. I, II and III Correct answer: c

Learning objective 19.5 ~ Identify and communicate the strengths and weaknesses of the balanced scorecard

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80. Sometimes managers select performance measures they are familiar with but that may not impact on a behaviour change. Which of the following best describes this occurrence? a. Uncertainties *b. Biases c. Mistakes in implementation d. Weighting measures Correct answer: b

Learning objective 19.5 ~ Identify and communicate the strengths and weaknesses of the balanced scorecard 81. The balanced scorecard approach has been criticised for not capturing core values related to:

a. customer satisfaction. b. shareholder returns. *c. relations with regulators or approaches to the environment. d. employee attitudes.

Correct answer: c

Learning objective 19.5 ~ Identify and communicate the strengths and weaknesses of the balanced scorecard

82. How is organisational learning related to the balanced scorecard? a. Only learning organisations can be successful in scorecard implementation *b. The balanced scorecard can improve organisational learning c. Organisational learning is only important in the learning and growth perspective d. Both are important, but they are unrelated Correct answer: b

Learning objective 19.5 ~ Identify and communicate the strengths and weaknesses of the balanced scorecard

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83. Formulaic approaches for using balanced scorecard results: *a. can lead to suboptimal decisions. b. are aligned with the overall purpose of the balanced scorecard. c. are an excellent idea because of their objectivity. d. ensure that all employees are treated fairly.

Correct answer: a

Learning objective 19.5 ~ Identify and communicate the strengths and weaknesses of the balanced scorecard

Testbank to accompany

Management accounting 5th edition by Eldenburg et al.

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Not for distribution. Instructors may assign selected questions in their LMS.

© John Wiley & Sons Australia, Ltd 2024

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Chapter 20: Rewards, incentives and risk management True/false questions

1. Agency theory is related to accounting because organisations incur costs, including the costs to produce accounting information, to solve conflicts that might arise between managers and owners. *a. True b. False Correct answer: a

Learning objective 20.1 ~ Explain agency theory and the link between agency costs and reward system design

2. Agency theory is an analytical framework that tells managers how to solve potential conflicts with shareholders. a. True *b. False Correct answer: b

Learning objective 20.1 ~ Explain agency theory and the link between agency costs and reward system design

3. Decentralisation typically eliminates agency costs from for-profit organisations. a. True *b. False Correct answer: b

Learning objective 20.1 ~ Explain agency theory and the link between agency costs and reward system design

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4. An organisation’s chief executive officer can be both a principal and an agent. *a. True b. False Correct answer: a

Learning objective 20.1 ~ Explain agency theory and the link between agency costs and reward system design

5. Businesses prefer to pay cash incentives to employees instead of equity incentives. a. True *b. False Correct answer: b

Learning objective 20.1 ~ Explain agency theory and the link between agency costs and reward system design

6. Extrinsic rewards relates to the personal satisfaction one gets from doing a job. a. True *b. False Correct answer: b

Learning objective 20.2 ~ Communicate the key components of reward systems

7. Reward systems at top management level are most commonly fixed payment packages. a. True *b. False Correct answer: b

Learning objective 20.2 ~ Communicate the key components of reward systems

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8. Over the last 10–15 years there has been a decline in the use of share options as a component of executive remuneration.

a. True *b. False Correct answer: b

Learning objective 20.3 ~ Explain the advantages and disadvantages of cash and equity as key components of incentive plans 9. Research has found that in Australia in the last 10 years CEOs’ salaries have increased at 10 times the rate of shareholder’s returns. a. True *b. False Correct answer: b

Learning objective 20.4 ~ Demonstrate an understanding of different reward system structures 10. When executive pay is linked closely to the firm’s performance it is not possible for executives’ pay to increase when the company’s share price is falling. a. True *b. False Correct answer: b

Learning objective 20.4 ~ Demonstrate an understanding of different reward system structures

11. Equity-based rewards have a more lasting effect since the executive employee of the company who holds the equity will take actions to ensure a positive impact of the shares in the long term. *a. True b. False Correct answer: a

Learning objective 20.4 ~ Demonstrate an understanding of different reward system structures

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12. It is not possible to overcome the problem of remuneration bonuses having an upside bias. a. True *b. False Correct answer: b

Learning objective 20.5 ~ Demonstrate an understanding of current themes and trends in reward systems

13. The main thrust of Australian government regulations concerning the payment of senior executives has been to ensure that payment is kept at a reasonable level. a. True *b. False Correct answer: b

Learning objective 20.5 ~ Demonstrate an understanding of current themes and trends in reward systems

14. Identifying suitable and relevant performance metrics within an organisation is a straightforward and simple task. a. True *b. False Correct answer: b

Learning objective 20.5 ~ Demonstrate an understanding of current themes and trends in reward systems

15. Management accountants now need to integrate the impact of external reporting rules on their risk management and internal control policies. *a. True b. False Correct answer: a

Learning objective 20.6 ~ Identify and communicate the attributes of different types of risk and how they might be managed

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16. Successful companies need to carefully balance management control and risk taking. *a. True b. False Correct answer: a

Learning objective 20.6 ~ Identify and communicate the attributes of different types of risk and how they might be managed

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Multiple-choice questions

17. Which of these is correct concerning agency theory? Normally the: a. chief executive officer (CEO) is a principal only. b. chief executive officer (CEO) is an agent only. *c. chief executive officer (CEO) is a principal and an agent. d. none of the options listed is correct.

Correct answer: c

Learning objective 20.1 ~ Explain agency theory and the link between agency costs and reward system design

18. What type of theory provides an analytical framework for the conflicts that arise between owners and managers? a. Life cycle theory *b. Agency theory c. Decision making theory d. Evaluation theory Correct answer: b

Learning objective 20.1 ~ Explain agency theory and the link between agency costs and reward system design

19. To reduce agency costs, organisations implement various systems and controls to monitor behaviour, including which of the following?

I II III

Publishing audited financial statements Filing income tax returns Tying financial rewards to reported results

a. I and II only b. II and III only *c. I and III only d. I, II and III Correct answer: c

Learning objective 20.1 ~ Explain agency theory and the link between agency costs and reward system design

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20. Agency theory recognises two kinds of information consumers. Which of the following describes the relationship between them? a. Agents hire principals to hold them accountable for decisions. b. Principals and agents work together in the best interest of the organisation. *c. Principals hire agents to make decisions for them. d. Principals are government employees, while agents work in the private sector.

Correct answer: c

Learning objective 20.1 ~ Explain agency theory and the link between agency costs and reward system design 21. From a business owner’s perspective, which of the following is an agency cost? *a. Costs to provide appropriate incentive contracts for top management b. General supplier price increases c. Losses from poor economic conditions d. Insufficient executive pay Correct answer: a

Learning objective 20.1 ~ Explain agency theory and the link between agency costs and reward system design

22. According to agency theory, under what circumstances could companies eliminate agency costs? a. If bonuses are based on financial performance b. If they publish audited financial statements c. If their shares are not traded on the stock exchange *d. Organisations cannot eliminate agency costs Learning objective 20.1 ~ Explain agency theory and the link between agency costs and reward system design

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23. Costs for producing and analysing internal performance reports are an example of which type of agency costs? a. Losses from poor decisions *b. Monitoring costs c. Goal alignment costs d. Contracting costs Correct answer: b

Learning objective 20.1 ~ Explain agency theory and the link between agency costs and reward system design

24. Because agents may not set the same goals and objectives as principals, organisations may experience which of the following general agency costs?

I II III

Goal alignment costs costs caused by exchange rate movements Monitoring costs

a. II and III only b. III only *c. I and III only d. I, II and III Correct answer: c

Learning objective 20.1 ~ Explain agency theory and the link between agency costs and reward system design 25. ‘Reduce costs by 5%’ is an example of a(n): a. agency cost. *b. benchmark. c. measurement. d. reward.

Correct answer: b

Learning objective 20.1 ~ Explain agency theory and the link between agency costs and reward system design

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26. A manager underinvesting in projects that are in shareholder’s best interests but which may reduce the manager’s own bonus payment is classed as which type of agency cost? a. Monitoring cost *b. Loss from incongruent goals c. Loss from a poor decision d. Contracting cost Correct answer: b

Learning objective 20.1 ~ Explain agency theory and the link between agency costs and reward system design

27. Managers can best reduce agency costs by: *a. holding agents responsible for the results of their decisions and rewarding them for good performance. b. constantly monitoring agents’ actions to ensure goal congruence. c. giving agents less decision-making authority. d. reporting residual income in their ASIC reports.

Correct answer: a

Learning objective 20.1 ~ Explain agency theory and the link between agency costs and reward system design

28. It is more likely that the performance of a top executive will be measured at which of these levels? a. Department b. Product c. Individual *d. Corporate Correct answer: d

Learning objective 20.2 ~ Communicate the key components of reward systems

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29. Which statement concerning intrinsic and extrinsic rewards is correct? *a. A holiday paid for by the company for an executive is an extrinsic reward. b. Extrinsic rewards are non-cash incentives. c. A cash bonus paid to an executive by the company is an intrinsic reward. d. All of the statements are true.

Correct answer: a

Learning objective 20.2 ~ Communicate the key components of reward systems

30. Which of these is an advantage of rewarding senior executives with cash rather than with non-cash payments? *a. It is likely to be preferred by a risk-averse executive b. The lasting nature of cash c. It helps to overcome the agency problem d. All of the options listed are advantages Correct answer: a

Learning objective 20.2 ~ Communicate the key components of reward systems

31. Equity payments: a. encourage a longer term view of performance by recipients of rewards. b. may overcome agency problem. c. may involve no cash outflow. *d. all of the options listed Correct answer: d

Learning objective 20.3 ~ Explain the advantages and disadvantages of cash and equity as key components of incentive plans

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32. Compensation contracts that provide incentives for agents to increase organisational value might include which of the following?

I II III

Cash-based bonuses Share options Cash bonuses based on share price increases or targets

a. II and III only b. I and III only c. I and II only *d. I, II and III Correct answer: d

Learning objective 20.3 ~ Explain the advantages and disadvantages of cash and equity as key components of incentive plans 33. It is common in accounting to define a ‘long-term’ view as: a. 2–3 years. b. 2–4 years. c. 1–2 years. *d. 3–5 years.

Correct answer: d

Learning objective 20.4 ~ Demonstrate an understanding of different reward system structures

34. Share-based compensation rather than cash payments is used to encourage: a. a focus on short-term results. b. higher compensation for executives. *c. a focus on long-range results. d. lower compensation for executives.

Correct answer: c

Learning objective 20.4 ~ Demonstrate an understanding of different reward system structures

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35. In the largest Australian companies, bonuses typically make up what percentage of the total compensation package for top executives? *a. 40% b. 60% c. 20% d. 80% Correct answer: a

Learning objective 20.4 ~ Demonstrate an understanding of different reward system structures

36. To protect shareholders from excessive compensation practices, executive compensation packages are best set by: *a. a committee of primarily outside members of the board of directors. b. a committee of top management employees. c. the managing director. d. the complete board of directors.

Correct answer: a

Learning objective 20.5 ~ Demonstrate an understanding of current themes and trends in reward systems

37. The use of a bonus bank in improving the pay-for-performance link means: a. that bonuses can be paid by direct bank transfer. b. that bonuses can paid immediately. *c. that bonuses can be negative as well as positive. d. none of the options listed.

Correct answer: c

Learning objective 20.5 ~ Demonstrate an understanding of current themes and trends in reward systems

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38. In Australia, subsequent to the global financial crisis, the government commissioned an investigation into the compensation of senior executives to be carried out by: *a. the Productivity Commission. b. the AASB. c. the ASX. d. ASIC. Correct answer: a

Learning objective 20.5 ~ Demonstrate an understanding of current themes and trends in reward systems

39. Which of the following is a current theme in rewarding senior staff? a. Pay-for-performance b. The place of government regulation c. Relative performance evaluation *d. All of the options listed are current themes in rewarding senior staff Correct answer: d

Learning objective 20.5 ~ Demonstrate an understanding of current themes and trends in reward systems

40. Regulation in Australia with respect to reward systems for senior executives is: a. found in the Corporations Act. b. found in the ASX Listing Rules. *c. all of the options listed. d. none of the options listed.

Correct answer: c

Learning objective 20.6 ~ Identify and communicate the attributes of different types of risk and how they might be managed

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41. Which of these is not a framework available to Australian top management when considering risk management?

a. AS/NZS ISO 31000: 2009 Risk management principles and guidelines b. The COSO Enterprise risk management framework *c. The Australian assurance standards: AAS 340–900 d. All of the options listed are frameworks that are available Correct answer: c

Learning objective 20.6 ~ Identify and communicate the attributes of different types of risk and how they might be managed

42. Which of these is a not a policy in a banking group that would help reduce company risk?

a. Requiring all employees to take regular holidays b. Ensuring that incentive systems don’t encourage excessive risk taking *c. Requiring more scrutiny of less successful traders and less of the more successful d. None of the options listed (i.e. all are policies that would help reduce company risk) Correct answer: c

Learning objective 20.6 ~ Identify and communicate the attributes of different types of risk and how they might be managed

Testbank to accompany

Management accounting 5th edition 1.673

Test Bank For Management Accounting, 5th Edition by Leslie G. Eldenburg, Albie Brooks, Gillian Vesty, Nicolas Pawsey All Chapter 1-21

by Eldenburg et al.

Not for distribution. Instructors may assign selected questions in their LMS.

© John Wiley & Sons Australia, Ltd 2024

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Chapter 21: Sustainability management accounting True/false questions

1. Currently many organisations are well on their way to being sustainable. a. True *b. False Correct answer: b

Learning objective 21.1 ~ Discuss how the concepts of sustainability and sustainability management apply to corporate practice

2. An issue for management accounting is how to integrate specific environmental or social management systems for financial regulation with the general management system of the entity. *a. True b. False Correct answer: a

Learning objective 21.1 ~ Discuss how the concepts of sustainability and sustainability management apply to corporate practice

3. The three sustainability management goals of economic, environmental and social sustainability are generally in harmony. a. True *b. False Correct answer: b

Learning objective 21.1 ~ Discuss how the concepts of sustainability and sustainability management apply to corporate practice

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4. There is a view amongst certain ethical investors that the voluntary nature of sustainability disclosure can increase reporting bias. *a. True b. False Correct answer: a

Learning objective 21.1 ~ Discuss how the concepts of sustainability and sustainability management apply to corporate practice 5. The installation of a ‘defeat device’ in Volkswagen(VW) diesel engines to ‘cheat’ the emissions test is an example of an ethical and social issue faced by VW. *a. True b. False Correct answer: a

Learning objective 21.2 ~ Recognise why it is essential for management accountants to take an integrated thinking approach to sustainability

6. Indexes like the Global Reporting Initiative are not important for management accountants but are only used by financial accountants for external financial reporting. a. True *b. False Correct answer: b

Learning objective 21.2 ~ Recognise why it is essential for management accountants to take an integrated thinking approach to sustainability

7. Sustainability management accounting is a dual process of reporting information for decision making. *a. True b. False Correct answer: a

Learning objective 21.3 ~ Outline the scope and benefits resulting from sustainability management accounting practices

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8. Ethical behaviour is an individual obligation, not an organisational obligation. a. True *b. False Correct answer: b

Learning objective 21.3 ~ Outline the scope and benefits resulting from sustainability management accounting practices

9. Employees will always make ethical decisions if they act in the best interests of their shareholders. a. True *b. False Correct answer: b

Learning objective 21.3 ~ Outline the scope and benefits resulting from sustainability management accounting practices

10. Carbon accounting can be interpreted as a vehicle for internalising previously ignored externalities. *a. True b. False Correct answer: a

Learning objective 21.4 ~ Demonstrate an understanding of key sustainability management accounting tools

11. Many organisations tend to keep sustainability costs separately rather than include it as overheads. a. True *b. False Correct answer: b

Learning objective 21.4 ~ Demonstrate an understanding of key sustainability management accounting tools

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12. The balanced scorecard is seen more as a strategy communication tool rather than a tool useful for sustainability performance evaluation. a. True *b. False Correct answer: b

Learning objective 21.5 ~ Communicate the issues faced by managers when trying to implement sustainability change processes within their entities

13. Life cycle analysis ends with the sale of the product. a. True *b. False Correct answer: b

Learning objective 21.5 ~ Communicate the issues faced by managers when trying to implement sustainability change processes within their entities

14. Currently, in many organisations, sustainability costs tend not to be treated as separate costs within the accounting system. *a. True b. False Correct answer: a

Learning objective 21.5 ~ Communicate the issues faced by managers when trying to implement sustainability change processes within their entities

15. Research has shown that in the long run, if an organisation pursues sustainability, its profitability will drop. a. True *b. False Correct answer: b

Learning objective 21.5 ~ Communicate the issues faced by managers when trying to implement sustainability change processes within their entities

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16. Under activity based costing, as it is currently practised, sustainability costs are generally grouped into the one cost pool. a. True *b. False Correct answer: b

Learning objective 21.5 ~ Communicate the issues faced by managers when trying to implement sustainability change processes within their entities

17. Managers need to recognise that sustainability management practices that are economically sound should not necessarily be practised when operations are successful but also in times of crisis (e.g. during downsizing). *a. True b. False Correct answer: a

Learning objective 21.5 ~ Communicate the issues faced by managers when trying to implement sustainability change processes within their entities

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Multiple-choice questions

18. Progress on sustainability is most likely to be achieved by: *a. individual champions. b. employees. c. multidisciplinary teams. d. management accountants.

Correct answer: a

Learning objective 21.1 ~ Discuss how the concepts of sustainability and sustainability management apply to corporate practice

19. A key goal relating to sustainability and sustainable development is to: a. achieve social justice. b. foster economic and social progress. c. live within our environmental resource limits. *d. all of the options listed are key goals.

Correct answer: d

Learning objective 21.1 ~ Discuss how the concepts of sustainability and sustainability management apply to corporate practice

20. The process of implementing sustainability: *a. requires new thinking. b. can be copied from another organisation. c. is generally well understood. d. is similar for most industries.

Correct answer: a

Learning objective 21.1 ~ Discuss how the concepts of sustainability and sustainability management apply to corporate practice

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21. The fundamental reason for making an organisation sustainable is: a. to pre-empt government legislation. b. to ensure that the organisation grows. *c. to meet the needs of the present without compromising the ability of future generations to meet their own needs. d. all of the options listed.

Correct answer: c

Learning objective 21.1 ~ Discuss how the concepts of sustainability and sustainability management apply to corporate practice

22. The environmental or sustainable accounting package includes: a. auditing and assurance services. b. management accounting techniques. c. financial accounting. *d. all of the options listed.

Correct answer: d

Learning objective 21.1 ~ Discuss how the concepts of sustainability and sustainability management apply to corporate practice

23. The process of measuring, monitoring and simultaneously controlling the economic, environmental and social dimensions of an entity is known as: *a. sustainability management. b. sustainability accounting. c. sustainability. d. none of the options listed.

Correct answer: a

Learning objective 21.1 ~ Discuss how the concepts of sustainability and sustainability management apply to corporate practice

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24. Which statement concerning incorporating sustainability into an organisation is incorrect? *a. There is general agreement worldwide on what is meant by sustainability. b. It requires a long-term focus. c. It requires a change in corporate culture. d. Participation of multiple stakeholders along the value chain is a key factor for success.

Correct answer: a

Learning objective 21.1 ~ Discuss how the concepts of sustainability and sustainability management apply to corporate practice

25. Identify the set of guidelines that it is compulsory for all Australian companies to follow when reporting on sustainability. a. Balanced scorecard b. Global Reporting Initiative (GRI) c. ASX Corporate Governance Principles and Recommendations *d. There is not a set of sustainability reporting guidelines that it is compulsory to follow Correct answer: d

Learning objective 21.1 ~ Discuss how the concepts of sustainability and sustainability management apply to corporate practice

26. The most effective way for an entity to take into account the external environmental and the sustainability costs of its activities is: a. to follow guidelines provided by external parties. b. by voluntary disclosure. c. for the government to issue fines and penalties for breaches. *d. for the entity to internalise the external costs.

Correct answer: d

Learning objective 21.1 ~ Discuss how the concepts of sustainability and sustainability management apply to corporate practice

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27. What is the index for ranking companies on their sustainability practices? a. The Australian SAM Sustainability Index (AuSSI) b. The Global 100 Most Sustainable Corporations in the World c. The Dow Jones Sustainability Index (DJSI) *d. All of the options are sustainability benchmarking indexes Correct answer: d

Learning objective 21.1 ~ Discuss how the concepts of sustainability and sustainability management apply to corporate practice

28. Which statement concerning the ASX Corporate governance principles and recommendations is not correct? a. If a listed company does not follow the principles it must explain why in its annual report. *b. It requires companies to prepare separate annual reports on their sustainability. c. Its focus is on the society and the environment as risk management concerns. d. It contains eight principles.

Correct answer: b

Learning objective 21.1 ~ Discuss how the concepts of sustainability and sustainability management apply to corporate practice

29. Manufactured capital includes: a. capital available from debt and equity. *b. infrastructure, buildings and equipment used in value-generating activities. c. people’s abilities, experience and motivation. d. tacit knowledge, systems procedures and protocols.

Correct answer: b

Learning objective 21.2 ~ Recognise why it is essential for management accountants to take an integrated thinking approach to sustainability

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30. Which of these will tend not to support performance and sustainability business governance? a. Tailoring information on sustainability to the industry and organisation *b. Having a CEO who is dominant over the board c. Aligning the key drivers of sustainability with information reported externally d. Balancing the need for investors’ returns with the wider needs of society Correct answer: b

Learning objective 21.2 ~ Recognise why it is essential for management accountants to take an integrated thinking approach to sustainability

31. Rewards for ethical behaviour can include which of the following?

I Integrity II Reputation III Higher profits a. I and III only b. I and II only *c. I, II and III d. II only Correct answer: c

Learning objective 21.3 ~ Outline the scope and benefits resulting from sustainability management accounting practices

32. When is the most appropriate time to identify ethical problems in organisations? *a. As they arise b. After they arise c. When they are discovered by legal authorities d. When they are discovered by shareholders Correct answer: a

Learning objective 21.3 ~ Outline the scope and benefits resulting from sustainability management accounting practices

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33. These steps in ethical decision making occur in which order?

1 2 3 4

Objectively considering the well-being of others and society Working towards ongoing improvement of personal and organisational ethics Clarifying and applying ethical values when choosing a course of action Identifying ethical problems as they arise *a. 4, 1, 3, 2 b. 1, 2, 3, 4 c. 4, 3, 2, 1 d. 2, 3, 1, 4

Correct answer: a

Learning objective 21.3 ~ Outline the scope and benefits resulting from sustainability management accounting practices

34. Risk that emerges in the form of a breakdown in internal processes is known as: *a. operational risk. b. reputation risk. c. competitive risk. d. asset impairment risk.

Correct answer: a

Learning objective 21.3 ~ Outline the scope and benefits resulting from sustainability management accounting practices

35. Research has found that ethical considerations are reported by what percentage of respondents as a reason for increasing their corporate social reporting? a. 36% *b. 53% c. 21% d. 62% Correct answer: b

Learning objective 21.3 ~ Outline the scope and benefits resulting from sustainability management accounting practices

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36. Costs that an entity imposes upon others as a result of its operations but which the entity typically ignores are called: a. contingent costs. b. externalities. *c. all of the options listed. d. none of the options listed.

Correct answer: c

Learning objective 21.4 ~ Demonstrate an understanding of key sustainability management accounting tools

37. Which of these types of costs is not a private cost to an entity? a. Contingent costs b. Hidden costs c. Conventional costs *d. Societal costs Correct answer: d

Learning objective 21.4 ~ Demonstrate an understanding of key sustainability management accounting tools

38. Which of these environmental costs is the easiest to measure? *a. Societal costs b. Contingent costs such as lawsuits relating to environmental failures c. Upfront costs such as initial design costs d. Image costs which may affect brand names and goodwill Correct answer: a

Learning objective 21.4 ~ Demonstrate an understanding of key sustainability management accounting tools

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39. A principle of sustainable operations is ‘what goes in must come out’. Which input doesn’t match its output? a. Oranges in a juice factory; orange peel that is turned into stock feed b. Packaging; recyclable waste *c. External produced electricity from coal fired power stations; municipal waste d. Gold production; arsenic and heavy metals Correct answer: c

Learning objective 21.5 ~ Communicate the issues faced by managers when trying to implement sustainability change processes within their entities

40. A management accounting tool that can be used to achieve sustainability is: a. capital budgeting. b. life cycle analysis. c. value chain analysis. *d. all are management accounting tools that can be used to achieve sustainability.

Correct answer: d

Learning objective 21.5 ~ Communicate the issues faced by managers when trying to implement sustainability change processes within their entities

41. To best highlight sustainable costs and benefits sustainability costs should be: a. allocated to their own cost pools. b. traced directly to cost objects. *c. all of the options listed. d. none of the options listed.

Correct answer: c

Learning objective 21.5 ~ Communicate the issues faced by managers when trying to implement sustainability change processes within their entities

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42. The way that the balanced scorecard should be adapted as a tool for monitoring sustainability, which is generally considered to be the most useful approach, is: a. adding an additional sustainability perspective. *b. developing a separate, individually derived, sustainability scorecard in conjunction with the existing scorecard. c. integrating environmental and social aspects into the four standard perspectives. d. there is no opinion as to which is the best option.

Correct answer: b

Learning objective 21.5 ~ Communicate the issues faced by managers when trying to implement sustainability change processes within their entities

43. In calculating a carbon footprint for an entity which of these is an indirect as opposed to a direct emission? a. Onsite waste *b. Emissions generated from purchased electricity c. Fuel usage for transporting inputs d. All of the options listed are indirect emissions Correct answer: b

Learning objective 21.5 ~ Communicate the issues faced by managers when trying to implement sustainability change processes within their entities

44. The issue that cannot be related to sustainability is: a. packaging. b. bribery and kickbacks. c. customer privacy. *d. none of the options listed (i.e. all can be related to sustainability).

Correct answer: d

Learning objective 21.5 ~ Communicate the issues faced by managers when trying to implement sustainability change processes within their entities

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45. Which of these is a behavioural issue as opposed to a technical issue when implementing sustainability change processes within an organisation? a. Identifying suitable social and environmental measures for performance evaluation *b. Creating ownership of projects by participants c. Arriving at suitable objectives in line with sustainability strategies d. All are behavioural issues Correct answer: b

Learning objective 21.5 ~ Communicate the issues faced by managers when trying to implement sustainability change processes within their entities

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