Cost Accounting

Mid-Term Revision
Content:
• Chapter 1 Revision
• Chapter 2 Revision
• Chapter 3 Revision
• Questions on Ch 1, 2, and 3
• Mid-term Exam 2017
• Questions on Ch 1,2 & 3 from Final Exam 2018

2018/2019
 Chapter "1"
• Major Differences between Management Accounting and Financial Accounting:
Point of
Managerial Accounting Financial Accounting
Comparison
Help managers take decisions to Communicate financial position to
Purpose
achieve organization goals outsiders
Internal managers External users such as investors, banks,
Primary Users
(Managers of the organization) and suppliers
Focus and Future-oriented Past-oriented (Reports on 2016
Emphasis (budget for 2018 prepared in 2017) performance prepared in 2017)
Rules of Financial statement must be prepared in
Do not have to follow GAAP, but are
Measurement accordance with GAAP and be certified
based on cost-benefit analysis
and Reporting by external auditors
Very short information (hourly) to
Time span and very long information ( 15-20 years)
Annual and quarterly financial reports,
type of Reports include financial and
primarily on the company as a whole
reports nonfinancial information on products,
departments and strategies
Indirect effect on managers behaviors
Behavioral Designed to influence the behavior of
because managers’ compensation is
Issues managers and other employees
often based on financial results
1) Cost Accounting:
- Cost accounting measures, analyzes, and reports financial and nonfinancial information
relating to the cost of acquiring or using resources.
Cost: is a sacrificed resource (used resources) to achieve a specific objective (to get a benefit(s). A
cost is usually measured as a monetary amount.

▪ Strategy and Management Accounting

Strategy: specifies how an organization matches its own capabilities with the opportunities in the
marketplace to accomplish its objectives.
- There are two broad strategies:
1- Cost Leadership. 2- Product Differentiation.

▪ Management Accounting and Value chain:

- Value is the usefulness a customer gains from a company’s product or service.
- Value Chain is the sequence of business functions in which customer usefulness is added to
products or services.

The Value-Chain consists of:

Research & Generating and experimenting with ideas related to new products, services and
Development processes.
Design Detailed planning engineering and testing of products, services and processes.
Production Acquiring, coordinating and assembling resources to produce a product or deliver
a service.
Marketing Promoting and selling products or services to customers or prospective customers.
Distribution Delivering products or services to customers.
Customer Providing after- sale support to customers.
Service
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• Cost Management: The approaches and activities of managers to use resources to increase
value to customers and to achieve organizational goals.

A Supply Chain Implementation:

The term supply chain describes the flow of goods, services and information from the initial
sources of materials and services to the delivery of products to consumers, regardless of whether
those activities occur in the same organization or in other organizations.
Therefore, enhancing supply chain may lead to implement strategy, cut costs, and create value.

Supplier Business Wholesaler Retailer Customer

Production and Distribution are the parts of the value chain associated with producing and
delivering a product or service. These are the two functions involved in the Supply-Chain.

Key Success Factors:

The dimensions of performance that customers expect, and that are key to the success of a
company include:
1. Cost and efficiency 2. Quality
3. Time 4. Innovation
5. Sustainability

▪ A Five-Step Decision Making Process in Planning and Control:

1. Identify the problem and uncertainties.
2. Obtain information.
3. Make predictions about the future.
4. Make decisions by choosing between alternatives.
5. Implement the decision, evaluate performance, and learn.

Planning and Control Systems:

• Planning: selects goals and strategies, predicts results, decides how to attain goals, and
communicates this to the organization. (Step 1 through step 4)
Budget —the most important planning tool— is the quantitative expression of a plan of activity
by management and is an aid to coordinating what needs to be done to execute that plan.
• Control: takes actions that implement the planning decision, evaluates performance, and
provides feedback and learning to the organization. (Step 5)

▪ Management Accounting Guidelines:

Three guidelines help management accountants provide the most value to the strategic and
operational decision-making of their companies:
1- Cost–benefit approach: benefits of an action/purchase generally must exceed costs as a
basic decision rule.
2- Behavioral and technical considerations: people are involved in decisions, not just dollars
and cents.
3- Different Costs for Different Purposes: Managers use alternative ways to compute costs in
different decision-making situations.

▪ Professional Ethics:
1- Competence 3- Confidentiality
2- Integrity 4- Credibility (Objectivity)
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 Chapter "2"
nd
2 Classification:
Costs can be classified according to its nature into:

Material Labor Service / Expenses

Physical items Employee efforts Others

3rd Classification (Direct/Indirect):

Cost can be classified according to its relation with cost object into direct and indirect cost.

Direct Cost Indirect Cost / Overhead

Can be easily and economically traced to Cannot be easily and economically traced to
cost object. cost object.
Cost object:
Cost object is the purpose for which costs are being measured. In other words, anything for which
a measurement of cost is desired.

4th Classification: (Variable/Fixed Classification):

Cost can be classified according to its behavior into:

Variable Costs Fixed Costs

- Variable cost changes in total in proportion - Fixed costs do not change in total due to
with changes in the activity level. changes in the activity level.
- Variable in total, fixed per unit. - Fixed in total, variable per unit.

• Mixed Costs: costs that have both fixed and variable elements.

• Cost Driver: is what causes a cost to be incurred. Stated another way there is a cause-and-effect
relationship between the level of activity of the cost driver and the cost incurred.
Examples:
Cost → Cost driver
- Labor wages → Labor hours
- supervisory salaries → No. of people supervised
- Maintenance wages → No. of machine hours
- Depreciation → No. of machine hours
- Energy → Kilowatt hours

• Relevant Range:
Relevant Range is the range of activity within which costs behave as predicted. Outside this level of
activity (range), costs behave differently.

5th Classification (Unit/Total cost classification):

A unit cost (also called average cost) is computed by dividing total cost by the number of units.

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Manufacturing companies have three types of inventory:
1. Direct Materials Inventory
2. Work-In-Process Inventory
3. Finished Goods Inventory

Period Cost: all costs on the income statement other than COGS. → (Nonmanufacturing Costs)
Inventoriable Costs are direct materials, direct labor, and factory overhead. (Manufacturing Costs)
Prime Cost = Direct Material + Direct Labor
Conversion Cost = Direct Labor + Manufacturing Overhead

Direct Materials Used:

Beginning inventory of direct material xx
+ Purchasing of direct material during the period xx
= Direct material available for use during the period XX
- Ending inventory of direct material xx
= Cost of inventory of direct material used during XX

Total Manufacturing Costs:

Direct material used xx
+ Direct manufacturing labor xx
+ Manufacturing overhead costs xx
= Total manufacturing costs incurred XX

Cost of Goods Manufactured:

Beginning work-in process inventory xx
+ Total manufacturing cost incurred during the period xx
= Total manufacturing costs to account for XX
- Ending work-in process inventory xx
= Cost of goods manufactured during the period XX

𝐂𝐨𝐬𝐭 𝐨𝐟 𝐠𝐨𝐨𝐝𝐬 𝐦𝐚𝐧𝐮𝐟𝐚𝐜𝐭𝐮𝐫𝐞𝐝 (𝐂𝐎𝐆𝐌)

Production cost per unit =
𝐔𝐧𝐢𝐭𝐬 𝐏𝐫𝐨𝐝𝐮𝐜𝐞𝐝

Cost of Goods Sold:

Beginning inventory of finished goods xx
+ Cost of goods manufactured during the period xx
= Cost of Goods Available for Sale (COGAS) XX
- Ending inventory of finished goods (xx)
= Cost of goods sold in the period XX

Income Statement:
Sales Revenues xx
- Cost of goods sold (xx)
= Gross Profit (Gross Margin) XX
- Operating Expenses (xx)
= Operating Income XX

Note: Overtime labor costs are considered part of overhead due to the inability to precisely know
the true cause of these costs.
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 Chapter "3"

Cost-volume-profit shows the relation among cost, revenues (volume) and profit.

Revenues – Variable Cost – Fixed Cost = Operating Income

Revenues = Selling Price (SP) x Quantity of Units Sold (Q)

Variable Cost = Variable Cost per Unit (VC/U) x Quantity of Units Sold (Q)

Contribution Margin

Contribution Margin per Unit Contribution Margin (Total)

It is the difference between selling price and It is the difference between total revenues and
variable cost per unit. total variable costs.
Contribution Margin = Selling – Variable cost Contribution = Total Sales – Total Variable
Per unit Price/unit Per Unit Margin Revenue Cost
Or
Contribution = Contribution x No. of
Margin Margin per Unit Units Sold

Contribution= Contribution Margin per Unit Contribution = Total Contribution Margin

Margin % Selling Price per Unit Margin % Total Sales Revenue

Note: CM % = 100% - VC %

Revenues – Variable Cost – Fixed Cost = Operating Income

(SP x Q) – (VCU x Q) – Fixed Cost = Operating Income
(SP – VCU) x Q – Fixed Cost = Operating Income
Contribution Margin per Unit x Q – Fixed Cost = Operating Income
Contribution Margin – Fixed Cost = Operating Income

Breakeven Point

Breakeven Point by Quantity Breakeven Point by Value ($)

(Breakeven Units) (Breakeven Revenue)

Breakeven = Total Fixed Cost Breakeven = Total Fixed Cost

(Units) (SP – VC/U) (Revenue) (SP – VCU)
SP
CM/U
CM%

or BEP (Rev) = BEP (Units) x SP

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Note:
The sale of one additional unit above the breakeven point will increase profit by CM/unit
At BEP: To lower BEP you can:
- Total revenue = Total cost - Increase SP/U
- No profit, No loss (net income=zero) - Decrease FC
- Total revenue = VC + FC - Decrease VC/U
- TCM = FC or TR – VC = FC

Breakeven Point and Target operating Income

by Quantity (Units) by Value ($) (Revenue)

Target operating = Total Fixed Cost + Target OI Target operating = Total Fixed Cost + Target OI
Income (Units) CM/U Income (Rev) CM%

or,
Target Income (Rev) = Target OI (units) x S.P

Operating Income = Net Income

(1 – Tax Rate)
Net Income
Fixed Cost +
Target Net Income (After Tax) = (1 – Tax Rate)
Units CM/u

Net Income
Fixed Cost +
Target Net Income (After Tax) = (1 – Tax Rate)
Revenues CM%

Target Net Income (After Tax) = Target net income (After tax) x Selling Price
Revenues Units

Margin of Safety (In Units) = Budgeted (Actual) Sales Units – Breakeven Units

Margin of Safety (In Value) = Budgeted Sales Revenues – Breakeven Revenues

OR = Marginal safety (in units) x Selling Price per unit

𝐌𝐚𝐫𝐠𝐢𝐧 𝐨𝐟 𝐒𝐚𝐟𝐞𝐭𝐲 (𝐈𝐧 𝐕𝐚𝐥𝐮𝐞) 𝐌𝐚𝐫𝐠𝐢𝐧 𝐨𝐟 𝐒𝐚𝐟𝐞𝐭𝐲 (𝐈𝐧 𝐮𝐧𝐢𝐭𝐬)

Margin of Safety % = OR =
𝐁𝐮𝐝𝐠𝐞𝐭𝐞𝐝 (𝐀𝐜𝐭𝐮𝐚𝐥)𝐒𝐚𝐥𝐞𝐬𝐑𝐞𝐯𝐞𝐧𝐮𝐞𝐬 𝐁𝐮𝐝𝐠𝐞𝐭𝐞𝐝 (𝐀𝐜𝐭𝐮𝐚𝐥)𝐒𝐚𝐥𝐞𝐬 𝐔𝐧𝐢𝐭𝐬

Change in Profits if Sales Units Change = Change in Sales Units × CM per unit

Change in Profits if Sales Revenues Change = Change in Sales Revenue × CM %

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Q 1 (True or False):

1) Assigning direct costs poses more problems than assigning indirect costs.
2) The distinction between direct and indirect costs is clearly set forth in Generally Accepted Accounting
Principles (GAAP).
3) Fixed costs in total will NOT change in the short run, but may change in the long run.
4) Variable costs per unit vary with the level of production or sales volume.
5) Fixed costs depend on the resources used, not the resources acquired.
6) Depreciation can be classified as either an inventoriable cost or a period cost, depending on what is
being depreciated.
7) Direct materials purchases equal production needs of direct materials minus beginning inventory of
direct materials plus desired ending inventory of direct materials.
8) Breakeven is the point where revenues equal total manufacturing costs.
9) If the selling price per unit is $50 and the contribution margin percentage is 40%, then the variable
cost per unit must be $20.
10) A company with sales of $50,000, variable costs of $35,000, and fixed costs of $25,000 will reach its
breakeven point if sales are increased by $10,000.
11) A planned decrease in selling price would be expected to cause an increase in the quantity sold.
12) If a company's breakeven revenue is $1,000 and its budgeted revenue is $1,250, then its margin of
safety percentage is 25%.

13) Period costs are those costs that benefit future periods.
14) Cost of goods sold refers to the products brought to completion, whether they were started before or
during the current accounting period.
15) The difference between sales quantity and total variable costs is commonly called “Contribution
Margin”.
16) Contribution margin = Contribution margin percentage * Revenues (in dollars)
17) It is assumed in CVP analysis that the unit selling price, unit variable costs, and unit fixed costs are
known and constant.
18) In CVP analysis, variable costs include direct variable costs, but do NOT include indirect variable costs.
19) The selling price per unit is $25, variable cost per unit $15, and fixed cost per unit is $4. When this
company operates above the breakeven point, the sale of one more unit will increase net income by
$6.
20) An increase in the tax rate will increase the breakeven point.
21) The margin of safety in units is calculated as the difference between budgeted sales revenue and
breakeven quantity.
22) If variable selling cost per unit increases, then the quantity needed to achieve break-even will
decrease.
23) Gross Margin will always be greater than contribution margin.

Q 2 (MCQs):

1) Production is one of the value-chain functions. Which one of the following is NOT an example of a
cost driver for production costs:
a. Labor hours b. Number of people supervised
c. Sales dollars d. Machine hours

2) Which of the following is a mixed cost?

a. monthly rent payment. b. manager's salary.
c. monthly electric bill . d. direct materials.

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3) Cost behavior refers to:
a. How costs react to a change in the level of activity.
b. whether a cost is incurred in a manufacturing, merchandising, or service company.
c. Classifying costs as either inventoriable or period costs.
d. Whether a particular expense has been ethically incurred.

4) The most likely cost driver of distribution costs is the:

a. Number of parts within the product. b. Number of miles driven.
c. Number of products manufactured. d. Number of production hours.

5) When the activity level is expected to decline within the relevant range, what effects will be
anticipated with respect to each of the following:
Fixed costs per unit Variable costs per unit
a. Increase Increase
b. Increase No change
c. No change No change
d. No change Increase

6) When 20,000 units are produced, fixed costs are $16 per unit. Therefore, when 40,000 units are
produced fixed costs will:
a. Increase to $32 per unit. b. Remain at $16 per unit.
c. Decrease to $8 per unit. d. Total $640,000.

7) When 10,000 units are produced, variable costs are $6 per unit. Therefore, when 20,000 units are
produced:
a. variable costs will total $120,000.
b. variable costs will total $60,000.
c. variable unit costs will increase to $12 per unit.
d. variable unit costs will decrease to $3 per unit.

8) Amber Manufacturing provided the following information for last month:

Sales $20,000
Variable costs 6,000
Fixed costs 9,000
Operating income $5,000
If sales double next month, what is the projected operating income?
a. $10,000. b. $25,000. c. $19,000. d. $12,000.

9) Wheel and Tire Manufacturing currently produces 1,000 tires per month. The following per unit
data apply for sales to regular customers:
Direct materials $20
Direct manufacturing labor 3
Variable manufacturing overhead 6
Fixed manufacturing overhead 10
Total manufacturing costs $39
The plant has capacity for 3,000 tires and is considering expanding production to 2,000 tires. What
is the total cost of producing 2,000 tires?
a. $39,000. b. $78,000. c. $68,000. d. $62,000.

10) When selling price per unit is $1,000, variable costs per unit are $400, fixed costs are $90,000. How
many units must be sold to yield after-tax net income of $18,000, assuming the tax rate is 40%?
A) 170 units B) 150 units C) 145 units D) 200 units

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11) Hardwood, Inc., produces and sells the finest quality office desks. The company expects the
following sales and costs for 2018 in its tables:
Revenues $500,000 (1,000 tables sold @ $500 per table), Variable costs $200,000, Fixed costs
$60,000. How many tables must be sold in order for Hardwood, Inc., to breakeven?
A) 100 units B) 200 units C) 300 units D) 400 units

12) XIAN Manufacturing produces a unique valve, and has the capacity to produce 50,000 valves
annually. Currently XIAN produces 40,000 valves and is thinking about increasing production to
45,000 valves next year. What is the most likely behavior of total manufacturing costs and unit
manufacturing costs given this change?
a. Total manufacturing costs will increase and unit manufacturing costs will stay the same.
b. Total manufacturing costs will increase and unit manufacturing costs will decrease.
c. Total manufacturing costs will stay the same and unit manufacturing costs will stay the same.
d. Total manufacturing costs will stay the same and unit manufacturing costs will decrease.

13) If the contribution margin ratio is 0.40, targeted operating income is $40,000, and fixed costs are
$60,000, then variable costs are:
A) $400,000. B) $150,000. C) $210,000. D) $320,000.

14) West Co. produces a product which sells for $40. Variable manufacturing costs are $18 per unit.
Fixed manufacturing costs are $5 per unit based on the current level of activity, and fixed selling
and administrative costs are $4 per unit. A selling commission of 15% of the selling price is paid on
each unit sold. The contribution margin per unit is:
A) $7 B) $17 C) $22 D) $16

15) East Company manufactures and sells a single product with a positive contribution margin. If the
selling price and the variable expense per unit both increase 5% and fixed expense do not change,
what is the effect on the contribution margin per unit and the contribution margin ratio.
Contribution margin per unit Contribution margin ratio
A) No change No change
B) Increase No change
C) No change Increase
D) Increase Decrease

16) Fixed costs equal $12,000, unit contribution margin equals $20, and the number of units sold equal
1,600. Operating income is:
A) $12,000. B) $20,000. C) $32,000. D) $40,000.

17) If selling price per unit is $30, variable costs per unit are $20, total fixed costs are $10,000, the tax
rate is 30%, and the company sells 5,000 units, net income is:
A) $12,000. B) $14,000. C) $28,000. D) $40,000.

18) At the breakeven point of 2,000 units, variable costs total $4,000 and fixed costs total $6,000. The
2,001st unit sold will contribute ________ to profits.
A) $1. B) $2. C) $3. D) $5.

19) Sales total $200,000 when variable costs total $150,000 and fixed costs total $30,000. The
breakeven point in sales dollars is:
A) $200,000. B) $120,000. C) $ 40,000. D) $ 30,000.

20) When fixed costs are $40,000 and variable costs are 20% of the selling price, then breakeven sales
are:
A) $40,000. B) $50,000. C) $200,000. D) indeterminable.
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Q 3 (MCQs):

1) If Bel Air Realtor plans an operating income of $210,000 and the tax rate is 30%, then Bel Air's
planned net income should be:
A) $63,000. B) $147,000. C) $273,000. D) $357,000.

2) The Marietta Company has fixed costs of $40,000 and variable costs are 75% of the selling price. To
realize profits of $10,000 from sales of 50,000 units, the selling price per unit:
A) must be $1.00. B) must be $1.33. C) must be $4.00. D) is indeterminable.

Answer questions (3-4) using the information below:

Sherry's Custom Jewelry sells a single product. 700 units were sold resulting in $7,000 of sales
revenue, $2,800 of variable costs, and $1,200 of fixed costs.

3) Contribution margin per unit is:

A) $4.00. B) $4.29. C) $6.00. D) None of these answers are correct.

4) If sales increase by $25,000, operating income will increase by:

A) $10,000. B) $15,000. C) $22,200. D) None of these answers are correct.

5) Assume only the specified parameters change in a cost-volume-profit analysis. If the contribution
margin increases by $6 per unit, then operating profits will:
A) also increase by $6 per unit. B) increase by less than $6 per unit.
C) decrease by $6 per unit. D) be indeterminable.

6) Bassman Company operates on a contribution margin of 30% and currently has fixed costs of
$400,000. Next year, sales are projected to be $2,000,000. An advertising campaign is being
evaluated that costs an additional $60,000. How much would sales have to increase to justify the
additional expenditure?
A) $120,000. B) $180,000. C) $200,000. D) $600,000.

Answer questions (7-8) using the information below:

Martha Manufacturing produces a single product that sells for $80. Variable costs per unit equal
$32. The company expects total fixed costs to be $72,000 for the next month at the projected sales
level of 2,000 units. In an attempt to improve performance, management is considering a number
of alternative actions. Each situation is to be evaluated separately.
7) Suppose management believes that a $16,000 increase in the monthly advertising expense will
result in a considerable increase in sales. Sales must increase by how much to justify this additional
expenditure?
A) 200 units. B) 334 units.
C) 500 units. D) None of these answers are correct.

8) Suppose that management believes that a 10% reduction in the selling price will result in a 10%
increase in sales. If this proposed reduction in selling price is implemented:
A) operating income will decrease by $8,000. B) operating income will increase by $8,000.
C) operating income will decrease by $16,000. D) operating income will increase by $16,000.

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Answer questions (9-11) using the information below:
Nancy's Niche sells a single product. 8,000 units were sold resulting in $80,000 of sales revenue,
$20,000 of variable costs, and $10,000 of fixed costs.
9) If variable costs decrease by $1 per unit, the new breakeven point is:
A) 1,539 units. B) 492 units.
C) $11,765 in total sales dollars. D) None of these answers are correct.

10) If the contribution margin ratio is 0.40, targeted operating income is $80,000, and targeted sales
volume in dollars is $500,000, then total fixed costs are:
A) $80,000. B) $100,000. C) $120,000. D) $200,000.

11) If the contribution margin ratio is 0.40, targeted operating income is $50,000, and fixed costs are
$75,000, then sales volume in dollars is:
A) $250,000. B) $312,500. C) $275,000. D) $350,000.

Answer questions (12-14) using the information below:

Beginning finished goods, 1/1/20X3 $ 90,000.
Ending finished goods, 12/31/20X3 77,000.
Cost of goods sold 270,000.
Sales revenue 500,000.
Operating expenses 155,000.

12) What is cost of goods manufactured for 20X3?

a. $230,000. b. $257,000. c. $283,000. d. $355,000.

13) What is gross margin for 20X3?

a. $283,000. b. $355,000. c. $230,000. d. $257,000.

14) What is operating income for 20X3?

a. $75,000. b. $112,000. c. $62,000. d. $230,000.

Answer questions (15-17) using the information below:

The Singer Company manufactures several different products. Unit costs associated with Product
ICT101 are as follows:
Direct materials $ 60
Direct manufacturing labor 10
Variable manufacturing overhead 18
Fixed manufacturing overhead 32
Sales commissions (2% of sales) 4
Administrative salaries 16
Total $140
15) What are the inventoriable costs per unit associated with Product ICT101?
a. $120. b. $140. c. $50. d. $88.

16) What are the period costs per unit associated with Product ICT101?
a. $4. b. $16. c. $20. d. $52.

17) What is the selling price per unit associated with Product ICT101?
a. $140. b. $160. c. $200. d. $150.

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Q 4 (MCQs):

1) Which of the following statements is FALSE?

a. There is a cause-and-effect relationship between the cost driver and the amount of cost.
b. Fixed costs have cost drivers over the short run.
c. Over the long run all costs have cost drivers.
d. Volume of production is a cost driver of direct manufacturing costs.

2) Within the relevant range, if there is a change in the level of the cost driver, then:
a. total fixed costs and total variable costs will change.
b. total fixed costs and total variable costs will remain the same.
c. total fixed costs will remain the same and total variable costs will change.
d. total fixed costs will change and total variable costs will remain the same.

Answer questions (3-4) using the information below:

The Singer Company manufactures several different products. Unit costs associated with Product
ICT101 are as follows:
Direct materials $ 60
Direct manufacturing labor 10
Variable manufacturing overhead 18
Fixed manufacturing overhead 32
Sales commissions (2% of sales) 4
Administrative salaries 16
Total $140

3) What are the variable costs per unit associated with Product ICT101?
a. $18. b. $22. c. $88. d. $92.

4) What are the fixed costs per unit associated with Product ICT101?
a. $102. b. $48. c $52. d. $32.

5) In the cost classification system used by manufacturing firms, assembly workers' wages would be
included in all of the following EXCEPT:
a. Product cost. b. Prime cost. c. Conversion cost. d. Period cost.

Answer questions (6-7) using the information below:

Pederson Company reported the following:
Manufacturing costs $2,000,000
Units manufactured 50,000
Units sold 47,000 units sold for $75 per unit
Beginning inventory 0 units

6) What is the average manufacturing cost per unit?

a. $40.00. b.$42.55. c.$0.025. d.$75.00.

7) What is the amount of ending finished goods inventory?

a. $1,880,000. b.$120,000. c. $225,000. d.$105,000.

8) Direct materials inventory would normally include:

a. Direct materials in stock and awaiting use in the manufacturing process.
b. Goods partially worked on but not yet fully completed.
c. Goods fully completed but not yet sold.
d. Products in their original form intended to be sold without changing their basic form.
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 9) Work-in-process inventory would normally include:
a. Direct materials in stock and awaiting use in the manufacturing process.
b. Goods partially worked on but not yet fully completed.
c. goods fully completed but not yet sold.
d. products in their original form intended to be sold without changing their basic form.

10) Finished goods inventory would normally include:

a. Direct materials in stock and awaiting use in the manufacturing process.
b. Goods partially worked on but not yet fully completed.
c. Goods fully completed but not yet sold.
d. products in their original form intended to be sold without changing their basic form.

11) Kenefic Company sells its only product for $9 per unit, variable production costs are $3 per unit,
and selling costs are $1.50 per unit. Fixed costs for 10,000 units are $5,000. The contribution margin
is:
A) $6 per unit. B) $4.50 per unit. C) $5.50 per unit. D) $4 per unit.

Answer questions (12-13) using the information below:

Nancy's Niche sells a single product. 8,000 units were sold resulting in $80,000 of sales revenue,
$20,000 of variable costs, and $10,000 of fixed costs.

12) The contribution margin percentage is:

A) 12.5%. B) 25.0%. C) 37.5%. D) 75.0%.

13) To achieve $100,000 in operating income, sales must total:

A) $440,000 B) $160,000 C) $130,000 D) None of these answers are correct.

Answer questions (14-15) using the information below:

Sherry's Custom Jewelry sells a single product. 700 units were sold resulting in $7,000 of sales
revenue, $2,800 of variable costs, and $1,200 of fixed costs.

14) Breakeven point in units is:

A) 200 units. B) 300 units.
C) 500 units. D) None of these answers are correct.

15) The number of units that must be sold to achieve $6,000 of operating income is:
A) 1,000 units. B) 1,166 units.
C) 1,200 units. D) None of these answers are correct.

16) If unit outputs exceed the breakeven point:

A) There is a loss.
B) Total sales revenue exceeds total costs.
C) There is a profit.
D) Both total sales revenue exceeds total costs and there is a profit.

17) If the breakeven point is 1,000 units and each unit sells for $50, then:
A) Selling 1,250 units will result in a profit. B) Sales of $40,000 will result in a loss.
C) Sales of $50,000 will result in zero profit. D) All of these answers are correct.

18) If breakeven point is 1,000 units, each unit sells for $30, and fixed costs are $10,000, then on a
graph the:
A) Total revenue line and the total cost line will intersect at $30,000 of revenue.

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 B) total cost line will be zero at zero units sold.
C) revenue line will start at $10,000.
D) All of these answers are correct.

Answer questions (19-22) using the information below:

Ruben intends to sell his customers a special round-trip airline ticket package. He is able to
purchase the package from the airline carrier for $150 each. The round-trip tickets will be sold for
$200 each and the airline intends to reimburse Ruben for any unsold ticket packages. Fixed costs
include $5,000 in advertising costs.

19) What is the contribution margin per ticket package?

A) $50. B) $100. C) $150. D) $200.

20) How many ticket packages will Ruben need to sell to break even?
A) 34 packages. B) 50 packages. C) 100 packages. D) 150 packages.

21) How many ticket packages will Ruben need to sell in order to achieve $60,000 of operating income?
A) 367 packages. B) 434 packages. C) 1,100 packages. D) 1,300 packages.

22) For every $25,000 of ticket packages sold, operating income will increase by:
A) $6,250. B) $12,500.
C) $18,750. D) an indeterminable amount.

Answer questions (23-24) using the information below:

The following information is for Nichols Company:
Selling price $50 per unit.
Variable costs $30 per unit.
Total fixed costs $100,000.
23) The number of units that Nichols Company must sell to reach targeted operating income of $30,000
is:
A) 5,000 units. B) 6,500 units. C) 3,334 units. D) 4,334 units.

24) If targeted operating income is $40,000, then targeted sales revenue is:
A) $350,000. B) $233,333. C) $166,667. D) $250,000.

Answer questions (25-26) using the information below:

Assume the following cost information for Fernandez Company:
Selling price $120 per unit.
Variable costs $80 per unit.
Total fixed costs $80,000.
Tax rate 40%

25) What minimum volume of sales dollars is required to earn an aftertax net income of $30,000?
A) $465,000. B) $330,000. C) $390,000. D) $165,000.

26) What is the number of units that must be sold to earn an after-tax net income of $42,000?
A) 3,750 units. B) 4,625 units. C) 3,050 units. D) 1,875 units.

27) If selling price per unit $30, variable cost per unit $20, and fixed cost per unit $3. When this
company operate above breakeven point, the sale of one more unit will increase net profit by:
A) $7 B) $17 C) $10 D) $3

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 28) When 20,000 units are produced, fixed costs are $16 per unit. Therefore when 8,000 units are
produced fixed costs per unit will…………………
A) increase to $80 B)decrease to $8 C) decrease to $10 D) increase to $40

29) The breakeven point decreases if………………………

A) The total fixed costs decrease B) the variable cost per unit increases
C) the contribution margin per unit decreases D) the selling price per unit decreases

Q 5: Answer question (1-16) using the following information:

The ABC Co. produces product (X). The following information is available for October:
Wages of production workers $ 50,000
Salaries of factory supervisors 15,000
Salary of factory manager 10,000
Salaries of salesmen 17,000
Sales commission (3% of sales) 12,000
Purchases of direct materials 134,500
Freight-in for direct materials 500
Purchases of factory supplies 8,000
Purchases of office supplies 3,000
Factory rent 9,500
Office rent 6,000
Factory depreciation 25,000
Advertising expense 7,000
General and administrative expense 18,100
Freight-out 400

Inventories:
October 1 October 31
Direct materials $4,000 $5,000
Factory supplies $3,000 $2,500
Office supplies $1,500 $1,000
Work in process $13,000 $15,000
Finished goods units 0 2,000 units
Sales units are 8,000 units

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| P a g e 17
Q 6:

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Q 7:
Given the following information for unit costs:
- Direct materials $40
- Direct manufacturing labor $ 8
- Variable manufacturing overhead $12
- Fixed manufacturing overhead $23
- Sales commission (2% of sales) $ 6
- Fixed administrative salaries $ 9
- Total $ 98
Required: compute the following per unit
1. Variable cost 2. Fixed cost
3. Inventoriable cost 4. Period cost
5. Prime cost 6. Conversion cost
7. Operating income

Q 8:

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Q 9:

Q 10:
Answer questions (1-15) using the following information:
Rotana Company produces and sells product (X). The following information is available:
Production and sales units 1,000
Direct labor cost $40,000
Marketing and administrative cost $160,000
Sales revenue $866,000

Additional information:
a) Direct labor cost represents 20% of the prime cost and 10% of conversion costs.
b) 65% of the factory overhead costs are fixed costs.
c) 25% of the marketing and administrative costs are variable costs.

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Q 11:
Given the following information for product (A):
- Selling price / unit $10
- Total variable cost per unit $7
- Total fixed cost $12,000
- Current sales units 5000 units
Required:
1- If the selling price is reduced to $8.5 per unit and sales units are increased to 6,500 unit. What is
expected change in operating income?
2- If it is desired to achieve net income after tax 3,000 and the tax rate 20% and the same current
sales units are maintained. How much should be the selling price per unit assuming that variable
cost per unit will be the same.
3- If an additional advertising will cost 2,500 and will increase sales units to 5,500 unit. Should
advertising be done or not?

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Q 12:
Gilley, Inc., sells a single product. The company's most recent income statement is given below.
Sales (4,000 units) $120,000
Less variable expenses (68,000)
Contribution margin 52,000
Less fixed expenses (40,000)
Net income $ 12,000
Required:
a. Contribution margin per unit is $ ________ per unit
b. If sales are doubled to $240,000, total variable costs will equal $ ________
c. If sales are doubled to $240,000, total fixed costs will equal $ ________
d. If 10 more units are sold, profits will increase by $ ________
e. Compute how many units must be sold to break even. # ________
f. Compute how many units must be sold to achieve profits of $20,000. # ________

Q 13:
Black Pearl, Inc., sells a single product. The company's most recent income statement is given below.
Sales $50,000
Less variable expenses (30,000)
Contribution margin 20,000
Less fixed expenses (12,500)
Net income $ 7,500
Required:
a. Contribution margin ratio is ________ %
b. Breakeven point in total sales dollars is $ ________
c. To achieve $40,000 in net income, sales must total $ ________
d. If sales increase by $50,000, net income will increase by $ ________

Q 14:
The Brown Shoe Company produces its famous shoe, the Divine Loafer that sells for $70 per pair.
Operating income for 2011 is as follows:
Sales revenue ($70 per pair) $350,000
Variable cost ($30 per pair) 150,000
Contribution margin 200,000
Fixed cost 100,000
Operating income $100,000
Brown Shoe Company would like to increase its profitability over the next year by at least 25%. To do so,
the company is considering the following options:
1- Replace a portion of its variable labor with an automated machining process. This would result in a
20% decrease in variable cost per unit, but a 15% increase in fixed costs. Sales would remain the same.
2- Spend $25,000 on a new advertising campaign, which would increase sales by 10%.
3- Increase both selling price by $10 per unit and variable costs by $8 per unit by using a higher quality
leather material in the production of its shoes. The higher priced shoe would cause demand to drop by
approximately 20%.
4- Add a second manufacturing facility which would double Brown’s fixed costs, but would increase sales
by 60%.
Required:
Evaluate each of the alternatives considered by Brown Shoes. Do any of the options meet or exceed
Brown’s targeted increase in income of 25%? What should Brown do?

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Q 15:
Compaq Computers incurs the following costs:
A. Electricity cost for the plant assembling the Presario computer line of products.
B. Transportation costs for shipping the Presario line of products to retail chain.
C. Payment to David Kelley Designer for design of the Armada Notebook.
D. Salary of computer scientist working on the next generation of minicomputers.
E. Cost of Compaq employees’ visit to a major customer to demonstrate Compaq’s ability to
interconnect with other computers.
F. Purchases of competitors’ products for testing against potential Compaq products.
G. Payment to television network for running Compaq advertisements.
H. Costs of Cables purchased from outside to be used with Compaq printers.
Required:
1- Classify each of the cost items (A-H) as one of the business functions of the value chain.

Q 16 (True or False):

1) Management accounting information focuses on external reporting.

2) Financial accounting is broader in scope than management accounting.
3) Cost accounting measures and reports short-term, long-term, financial, and non-financial
information.
4) The key to a company's success is always to be the low cost producer in a particular industry.
5) Companies can decide on an appropriate strategy based strictly on internally available information.
6) The supply chain refers to the sequence of business functions in which customer usefulness is
added to products or services.
7) An effective way to cut costs is to eliminate activities that do NOT improve the product attributes
that customers value
8) Control includes deciding what feedback to provide that will help with future decision making.
9) It is generally easy to quantify expected benefits and costs when applying the cost-benefit
approach.
10) A managerial accountant should NOT disclose confidential information to an outside party (such as
a newspaper) unless legally obligated to do so.
11) If a managerial accountant were NOT keeping up with current developments in managerial
accounting, that behavior might violate a competence standard of professional ethical behavior.

Q 17 (MCQs):

1) Management accounting:
A) Focuses on estimating future revenues, costs, and other measures to forecast activities and
their results.
B) Provides information about the company as a whole.
C) Reports information that has occurred in the past that is verifiable and reliable.
D) Provides information that is generally available only on a quarterly or annual basis.

2) Financial accounting:
A) Focuses on the future and includes activities such as preparing next year's operating budget.
B) Must comply with GAAP (generally accepted accounting principles).
C) Reports include detailed information on the various operating segments of the business such as
product lines or departments.
D) Is prepared for the use of department heads and other employees.

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 3) Which of the following descriptors refers to management accounting information?
A) It is verifiable and reliable. B) It is driven by rules.
C) It is prepared for shareholders. D) It provides reasonable and timely estimates.

4) Cost accounting:
A) Provides information on the efficiency of factory labor.
B) Provides information on the cost of servicing commercial customers.
C) Provides information on the performance of an operating division.
D) All of these answers are correct.

5) Which of the following statements concerning an organization's strategy is NOT true?

A) Strategy specifies how an organization matches its own capabilities with the opportunities in
the marketplace to accomplish its objectives.
B) Management accountants provide input to help managers formulate strategy.
C) A good strategy will always overcome poor implementation.
D) Businesses usually follow one of two broad strategies: offering a quality product at a low price,
or offering a unique product or service priced higher than the competition.

6) ________ describe(s) the flow of goods, services, and information from the purchase of materials
to the delivery of products to consumers, regardless of whether those activities occur in the same
organization or with other organizations.
A) Supply chain. B) Key success factors.
C) Continuous improvement. D) Customer focus.

7) Customers are demanding improved performance related to:

A) Reduced costs.
B) Both reduced costs and increased quality.
C) Lower costs, improved quality, and improved customer service.
D) All of these answers are correct.

8) Planning includes all of the following EXCEPT:

E) Identifying the problem and uncertainties.
F) obtaining information.
G) providing feedback to help with future decision making.
H) making predictions about the future.

ANSWERS
Q 1:
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
F F T F F T T F F F T F F F F T F F F F

21 22 23
F F F

Q 2:
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
C C A B B C A C C D B B B D B B C C B B

Q 3:
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
B C C B A C B A C C B B C A A C C
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Q 4:
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
B C D B D A B A B C B D D A C D D A A C

21 22 23 24 25 26 27 28 29
D A B A C A C D A

Q 5:
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
A C B C D D B C B B C D B A D C

Q 6:
11 12 13 14 15 16 17 18 19 20 21 22 23
B C A B A D B A A B B C C

Q 7:
1. Variable cost per unit = 40+8+12+6=$66
2. Fixed cost per unit = 23+9 =32
3. Inventoriable costs= 40+8+12+23=$83
4. Period costs= 6+9 = $15
5. Prime cost =40+8=$48
6. Conversion cost =8+12+23=$43
7. Operating income= (6/2%) - 98 = $202

Q 8:
Variable Cost Fixed Cost
Cost item Amount Cost item Amount
Carpenter wages $15,000 Supervision Cost $6,000
Glue for assembly 500 Equipment Depreciation 12,000
Supervision cost 4,000 Equipment maintenance 2,500
Equipment maintenance 2,500 Office supplies 4,000
Lumber 10,000
Metal brackets for drawers 2,000
Total $34,000 Total $24,500

Q 9:

Q 10:
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
B A A C B D A C D A C B D B A

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Q 11:
a. Contribution margin ratio is $20,000 / $50,000 = 40%
b. Fixed costs $12,500 / 0.40 CM% = $31,250 in sales
c. [Fixed costs $12,500 + Net income $40,000] / 0.40 CM% = $131,250 in sales
d. $50,000 × 0.40 CM% = $20,000 increase in net income

Q 12:
1. Old contribution margin = 10 – 7 = $3
Total contribution margin for old sales units = 3 × 5,000 = $15,000
New contribution margin = 8.5 – 7 = $1.5
Total contribution margin for new sales units = 1.5 × 6,500 = $9,750
Then, the change in operating income $5,250 decrease

3. Increase in units as a result of advertising = 5,500 – 5,000 = 500 units

Increase in profits = 500 × 3 = 1500
While the cost of advertising = 2500
Therefore, advertising should be rejected as its costs exceeds its benefits by $1,000.

Q 13:
a. Contribution margin per unit is $30 - $17 = $13
b. $68,000 × 2 = $136,000
c. $40,000
d. Contribution margin of $13 × 10 units = $130
e. Fixed costs of $40,000 / Contribution margin per unit $13 = 3,077 units
f. (Fixed costs of $40,000 + Profits $20,000) / CM per unit $13 = 4,616 units

Q 14:
Contribution margin per pair of shoes = $70 – $30 = $40
Fixed costs = $100,000
Units sold = Total sales ÷ Selling price = $350,000 ÷ $70 per pair = 5,000 pairs of shoes
1. Variable costs decrease by 20%; Fixed costs increase by 15%
Sales revenues 5,000 × $70 $350,000
Variable costs 5,000 × $30 × (1 – 0.20) 120,000
Contribution margin 230,000
Fixed costs $100,000 × 1.15 115,000
Operating income $115,000
2. Increase advertising (fixed costs) by $25,000; Increase sales 10%
Sales revenues 5,000 × 1.10 × $70.00 $385,000
Variable costs 5,000 × 1.10 × $30.00 165,000
Contribution margin 220,000
Fixed costs ($100,000 + $25,000) 125,000
Operating income $ 95,000

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 3. Increase selling price by $10.00; Sales decrease 20%; Variable costs increase by $8
Sales revenues 5,000 × 0.80 × ($70 + $10) $320,000
Variable costs 5,000 × 0.80 × ($30 + $8) 152,000
Contribution margin 168,000
Fixed costs 100,000
Operating income $ 68,000
4. Double fixed costs; Increase sales by 60%
Sales revenues 5,000 × 1.60 × $70 $560,000
Variable costs 5,000 × 1.60 × $30 240,000
Contribution margin 320,000
Fixed costs $100,000 × 2 200,000
Operating income $120,000
- Alternative 4 yields the highest operating income. Choosing alternative 4 will give Derby a 20%
increase in operating income [($120,000 – $100,000)/$100,000 = 20%], which is less than the
company’s 25% targeted increase.

Q 15:
A Production
B Distribution
C Design of products and processes
D Research and development
E Customer service or marketing
F Research and development or Design of products and processes
G Marketing
H Production

Q 16:
1 2 3 4 5 6 7 8 9 10 11
F F T F F F T T F T T

Q 17:
1 2 3 4 5 6 7 8
A B D D C A D C

Answer Mid-Term 2017:

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
C B B A A C C A C B A A D D C C D C D B

21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
D D A B B A C A C B B C C A D B C D C D

Answer Final Exam 2018:

1 2 3 8 9 10 11 13 14 15 16 17 20 21 22
C B D A D A C C B A B C B C A

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 Final Exam 2018
Questions on Ch 1, 2 & 3: