MBA105

MANAGERIAL ACCOUNTING
EXERCISES

Multiple Choice: Encircle the letter that corresponds to your answer.

1. Which formula gives unit sales required to earn a target profit? (P = selling price, V = variable cost per unit, F = total
fixed costs, T = target profit)
a. F/(P - V)
b. (F + T)/P
c. (F + T)/(P - V)
d. (F + T)/V
2. Over the relevant range, total revenues and total costs
a. increase, but at a decreasing rate.
b. decrease.
c. remain constant.
d. can be graphed as straight lines.
3. At the break-even point, total contribution margin is
a. zero.
b. equal to total fixed costs.
c. equal to total costs.
d. equal to total variable costs.
4. If a company is operating at a loss,
a. fixed costs are greater than sales.
b. selling price is lower than variable cost per unit.
c. selling price is less than average total cost per unit.
d. fixed cost per unit is greater than variable cost per unit.
5. As volume increases, average cost per unit
a. increases.
b. decreases.
c. remains constant.
d. increases in proportion to the change in volume.
6.If all goes according to plan except that unit variable cost falls,
a. total contribution margin will be lower than expected.
b. the contribution margin percentage will be lower than expected.
c. profit will be higher than expected.
d. per-unit contribution margin will be lower than expected.
7. If all goes according to plan except that total fixed costs rise,
a. income will be lower than expected.
b. total contribution margin will be lower than expected.
c. total sales will be lower than expected.
d. income will be higher than expected.
8. Which of the following decreases per-unit contribution margin the most for a company currently earning a profit?
a. A 10% decrease in selling price.
b. A 10% increase in variable cost per unit.
c. A 10% increase in fixed costs.
d. A 10% increase in fixed cost per unit.
9. If variable cost as a percentage of sales increases, the
a. contribution margin percentage increases.
b. selling price increases.
c. break-even point in dollars increases.
d. fixed costs decrease.
10. Which cost is most likely to be variable for a retailer?
a. Advertising.
b. Cost of goods sold.
c. Sales salaries.
d. Rent.
11. A cost-volume-profit graph reflects relationships
a. expected to hold over the relevant range.
b. of results over the past few years.
c. that the company's managers would like to have happen.
d. likely to prevail for the industry.
12. A multiproduct company
a. cannot use CVP analysis.
b. must use a separate CVP graph for each of its products.
c. can use CVP analysis only if the contribution margin percentages on each product are the same.
d. could earn a higher-than-expected profit even though the total number of units sold was less than expected.
13. If selling price, per-unit variable cost, and total fixed costs are constant,
a. the break-even point in units remains constant.
b. profit per unit remains constant for all levels of volume within the relevant range.
c. total variable costs equal total fixed costs.
d. total contribution margin equals total fixed costs.

14. TRS Company changed production methods, increasing fixed costs and decreasing its per-unit variable costs. The
change
a. increases risk and increases potential profit.
b. increases risk and decreases potential profit.
c. decreases risk and decreases potential profit.
d. decreases risk and increases potential profit.
15. Per-unit variable cost
a. remains constant within the relevant range.
b. increases as volume increases within the relevant range.
c. decreases as volume increases within the relevant range.
d. decreases if volume increases beyond the relevant range.
16. Contribution margin is
a. the same as gross margin.
b. revenue minus variable costs.
c. revenue minus variable costs and fixed costs.
d. the ratio of income to sales.
17. Critical to CVP analysis in a multiproduct company is that
a. the products be complementary.
b. the products be sold to the same kinds of customers.
c. all products have about the same contribution margin percentage.
d. the sales mix is relatively constant.
18. A fixed cost is the same percentage of sales in three different months. Which of the following is true?
a. The company had the same sales in each of those months.
b. The cost is both fixed and variable.
c. The company is operating at its break-even point.
d. The company is achieving its target level of profit.
19. If the sales mix shifts toward higher contribution margin products, the break-even point
a. decreases.
b. increases.
c. remains constant.
d. it is impossible to tell without more information.
20. Target costing is
a. a substitute for CVP analysis.
b. used by companies that cannot classify their costs by behavior.
c. inappropriate if a company has already established a target profit.
d. used in decisions to offer a new product or enter a new market.
21. The break-even point in units equals total fixed costs divided by
a. selling price per unit.
b. variable cost per unit.
c. contribution margin per unit.
d. contribution margin percentage.
22. Company A has a lower variable cost per unit and higher total fixed costs than Company B. The selling prices of their
products are the same. Sales fluctuate considerably for both companies. Therefore,
a. Company A has a lower break-even point than Company B.
b. Company A earns more profit than Company B.
c. Company A is more risky than Company B.
d. Company A has a lower contribution margin percentage than Company B.
23. The margin of safety is
a. the profit currently earned in excess of the target profit.
b. the difference between current sales and sales at break-even.
c. the ratio of contribution margin to variable cost.
d. the difference between contribution margin currently earned and contribution margin at break even.
24. The indifference point is the level of volume at which a company
a. earns the same profit under different operating schemes.
b. earns no profit.
c. earns its target profit.
d. any of the above.
25. A company prepares income statements using both absorption and variable
costing methods. During the year the income amounts under the two methods
are not equal. The difference in income figures could have been due to the
following except
a. A change in the finished goods inventory
b. A change in the selling price of the products
c. An excess of production volume over sales volume
d. An excess of sales volume over production volume
26. Net income computed using absorption costing can be reconciled to net income
computed using variable costing by computing the difference between
a. The gross profit under absorption costing and contribution margin
under variable costing
b. The product costs per unit under the two costing methods
c. Inventoried fixed factory overhead costs in the beginning and
ending finished goods inventories.

d. The selling price under the two costing methods

27. Income under absorption costing may differ from income under variable
costing. The difference in income between the two costing methods is equal
to the change in the quantity of all units
 a. Produced multiplied by the variable manufacturing costs per unit
b. Sold multiplied by the fixed factory overhead cost per unit
c. In inventory multiplied by the fixed factory overhead cost per unit
d. Sold multiplied by the selling price per unit.
28. A company prepares income statement using both absorption and variable
costing methods. At the end of the period, a comparison of actual and
budgeted results revealed that the actual net income was substantially above
the budgeted income, although actual sales, gross margin, and contribution
margin approximated the budgeted figures. There was no beginning or ending
inventories during the period. The most likely explanation of the increase
in net income is that, compared to budget, actual
a. Selling price is higher c.Fixed selling & admin costs were lower
b. Variable costs were lower d. Fixed factory overhead costs were lower
29. Which of the following statements is incorrect?
a. In a variable costing income statement, variable selling and
administrative expenses are used both in the computation of
contribution margin and operating income
b. When using a variable costing system, the contribution marging
discloses the excess of revenues over variable costs.
c. In an income statement prepared as an internal report using the
variable costing method, fixed overhead is used in the computation of
operating income and contribution margin.
d. Using absorption costing, fixed manufacturing overhead costs are best
described as indirect product cost.
30. Under variable costing, all fixed costs are expensed during the
current period because
a. Fixed costs are usually immaterial in amount
b. Fixed costs are non-controllable costs
c. Fixed costs are incurred whether or not there is production, so it is
not proper to allocate these costs to production and defer a current
cost of ding business
d. Allocation of fixed costs is usually done arbitrarily and could lead
to erroneous decision by management
31. Which of the following costing methods is not acceptable for both
internal and external reporting?
a. Activity-based costing c. Absorption costing
b. Variable costing d. Process costing
32. Which of the following would most likely decrease the product cost per
unit under variable costing?
a. A decrease in the commission paid to salesmen for each unit sold
b. An increase in the number of units sold
c. A decrease in the remaining useful life of a factory equipment
depreciated using the straight line method
d. An increase in the remaining useful life of a factory equipment
depreciated using the unit of production method
33. Which of the following statements is correct?
a. In variable costing income statement, sales revenue is typically
higher than in absorption costing income statement.
b. When production is not equal to sales, income under absorption costing
differs from income under variable costing due to the difference in
treatment (product cost and period cost) of the fixed overhead cost
under the two costing methods.
c. In a variable costing system, fixed overhead cost is included as part
of the cost of inventory.
d. In an absorption costing system, fixed overhead cost is treated as a
period cost.
34. Which of the following statements is true?
a. Depreciation expense is always a product cost.
b. Depreciation expense is always a period cost.
c. Selling and administrative costs, whether variable or fixed, is always
treated as period costs under both the absorption and variable costing
systems.
d. Income under absorption costing is always greater than income under
variable costing.
35. If production is less than sales (in units), then absorption costing
net income will generally be
a. Greater than variable costing net income
b. Less than variable costing net income
c. Equal to variable costing net income
d. Less than expected.
36. If a firm uses variable costing,
a. Its product costs include variable selling and administrative costs.
b. Its profits fluctuate with sales

c. It calculates an idle facility variation.

d. Its product cost per unit changes because of changes in the number of
units produced.
37. The inventory costing method that treat direct manufacturing costs and
indirect manufacturing costs, both variable and fixed, as inventoriable cost
is called
a. Variable costing c. Conversion costing
b. Absorption costing d. Perpetual inventory
38. Which of the following statements regarding absorption and variable
costing is correct?
a. Absorption costing results in higher income when finished goods
inventory increases.
b. Variable manufacturing costs are lower under absorption costing.
c. Overhead costs are treated in the same manner under both variable and
absorption costing methods.
d. Profits are always the same under the two costing methods.
39. Which of the following cost items is not correctly accounted for as a
product cost under absorption and variable costing?
VARIABLE ABSORPTION
a. Shipping costs NO NO
b. Straight line depreciation of factory equipment YES YES
c. Factory supplies YES YES
d. Direct materials YES YES
40. Which of the following statements is true?
a. If properly used, standard can help motivate employees
b. All variances, whether favourable or unfavourable, should be
investigated.
c. Standard costs should be attainable under conditions of efficient
operation.
d. A standard cost system may be used with a process costing system or a
job order costing system.
41. Standard costing is used to isolate the variances between standard
costs and actual costs. It allows management to measure performance and
correct inefficiencies, thereby helping to
a. Allocate costs accurately.
b. Determine the breakeven point
c. Control costs
d. Eliminate management’s need for subjective decisions
42. Both standard costs and budgeted costs are used for controlling costs.
However, the two terms are not the same. Standard costs differ from
budgeted costs in that standard costs
a. Are based on engineering while budgeted costs are historical costs.
b. Are costs that were incurred for actual production, while budgeted
cots are costs that should have been incurred for such production.
c. Are costs that were incurred for actual production, while budgeted
cots are costs that should have been incurred for budgeted or planned
production.
d. Are always expressed in total amounts, while budgeted costs are always
expressed in per unit amounts.
43. The difference between actual cost and standard cost is called
a. Favourable variance c. Variance
b. Unfavourable variance d. Variable
44. Which of the following statements is correct?
a. A standard cost system can never be used in both the job order and
process costing system.
b. Standard cost system can be used in job order but not in process
costing system.
c. Standard cost system can be used in either job order or process
costing system.
d. A standard cost system can be used in process costing system but not
in job order.
45. In a process costing system, equivalent units of production are
computed to determine the number of complete units that could have been
produced, given no beginning and ending work-in-process inventories. If a
company uses standard costing in its process costing system, the equivalent
units of production
a. Are multiplied by the standard cost per unit to compute the total
standard cost of units produced.
b. Are never used.
c. Are converted to standard equivalent units and then multiplied by the
actual cost per unit.
d. Are assumed to be zero
46. A variance shows a deviation of actual results from standard or
budgeted results. In deciding whether to investigate a variance or not,
management may consider the following factors except
a. The amount of the variance and the cost of investigation.
b. Whether the variance is favourable or unfavourable
c. The possibility that investigation will eliminate future occurrences
of the variance.
d. The trend of the variance over time.
47. The following describe ideal standards, except
 a. Currently attainable standards.
b. Theoretical or maximum-efficiency standards.
c. Make no allowance for waste, machine downtime, and spoilage.
d. Perfection standards.
48. Which of the following does not describe practical standards?
a. Currently attainable standards.
b. Can be used for product costing and cash budgeting.
c. Performance that is reasonably expected to be achieved with an
allowance for spoilage, waste, and downtime
d. Negate the need to adjust standards if working conditions change.
49. A standard cost is an estimate of what a cost should be under normal
operating conditions. In establishing standard costs, the following
organizational personnel may be involved, except
a. Top management c. Quality control personnel
b. Budgetary accountants d. Industrial engineers
50. Because of the impact of fixed costs in most businesses, standard
costing system is usually not effective unless the company also has a
flexible budgeting system. In flexible budgeting,
a. Standard costs are used to prepare budgets for multiple activity
levels.
b. Standard costs are never used.
c. Variable costs and fixed costs show the same behaviour as budgets for
different activity levels are prepared.
d. A budget for the expected activity level is prepared showing variable
and fixed costs separately.
51. In a standard costing system, actual costs are compared with standard
costs. The difference or variance is determined and responsibility for such
variance is assigned or identified to a particular person or department, in
order to
a. Determine who is at fault and render appropriate punishment.
b. Be able to set the correct selling price of the product.
c. Use the knowledge about the variances to promote learning and
continuous improvement in the manufacturing operations.
d. Trace the variances to the proper inventory accounts so that they may
be valued at actual costs.
52. The management practice involves giving significant attention only to
those areas in which material variances from expectations occur, that is,
giving less attention on areas operating as expected.
a. Responsibility accounting c. Management by exception
b. Management by objectives d. Materials control
53. The materials efficiency variance is the difference between actual and
standard quantities used in production, multiplied by the standard price.
This variance may be the responsibility of
a. Purchasing department c. Production department
b. Marketing department d. Human resource department
54. An unavoidable materials spending variance coupled with a favorable
material efficiency variance would most likely result from
a. The purchase and use of lower than standard quality materials.
b. The purchase and use of higher than standard quality materials.
c. Problems involving machine efficiency.
d. Changes in product mix.

True-False: Write T if the statement is TRUE and F if the statement is FALSE.

F 1. Target costing is a technique for classifying costs according to their

behavior.
T 2. "Gross profit" and "contribution margin" refer to different things.
F 3. A company that has no variable costs can never break even.
T 4. A company with no fixed costs has a break-even point of zero.
F 5. If a company's income statement shows a positive contribution margin but a
net loss, its fixed costs are too high.
T 6. As unit sales increase, both average total cost and fixed cost per unit
decrease.
T 7. An increase in contribution margin percentage reduces the break-even point.
F 8. Return on sales is another name for contribution margin percentage.
F 9. Contribution margin is total variable costs minus fixed costs.
T 10. The weighted-average contribution margin percentage changes with changes in
sales mix.