Decision Making and Control Practice Exam

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Decision Making and Control Practice Exam

 

  1. Question: What is the main purpose of cost-volume-profit (CVP) analysis in decision making?
  2. A) To determine the total cost of production
    B) To calculate the profit margin of each product
    C) To understand the relationship between cost, volume, and profit for a business
    D) To prepare financial statements

Answer: C) To understand the relationship between cost, volume, and profit for a business.

Explanation: CVP analysis helps managers understand how changes in cost structures, sales volume, and product prices affect a company’s profit. This information is vital for making decisions related to pricing, product lines, and production levels.

  1. Question: What type of cost remains constant per unit but varies in total as production volume changes?
  2. A) Fixed cost
    B) Variable cost
    C) Mixed cost
    D) Step cost

Answer: B) Variable cost.

Explanation: Variable costs, such as direct materials and direct labor, remain consistent on a per-unit basis but change in total as production volume increases or decreases.

  1. Question: Which of the following statements is true regarding a flexible budget?
  2. A) It remains fixed regardless of changes in activity levels.
    B) It is adjusted to reflect the actual activity levels and provides a more accurate comparison of budgeted to actual results.
    C) It is only used for long-term strategic planning.
    D) It cannot be used for variance analysis.

Answer: B) It is adjusted to reflect the actual activity levels and provides a more accurate comparison of budgeted to actual results.

Explanation: A flexible budget is designed to change based on different levels of activity, making it useful for comparing actual results to expected results under varying conditions.

  1. Question: What is a relevant cost for decision-making purposes?
  2. A) A cost that has already been incurred and cannot be changed.
    B) A cost that is not affected by the decision at hand.
    C) A future cost that will differ between alternatives.
    D) A fixed cost that stays the same no matter what decision is made.

Answer: C) A future cost that will differ between alternatives.

Explanation: Relevant costs are future costs that vary between different alternatives and are crucial for decision-making because they help identify the financial impact of different choices.

  1. Question: When is it most appropriate to use activity-based costing (ABC)?
  2. A) When products are homogeneous and production costs are simple.
    B) When a company wants to allocate overhead costs based on the activities that drive those costs.
    C) When calculating fixed costs for pricing purposes.
    D) When preparing financial statements for external reporting.

Answer: B) When a company wants to allocate overhead costs based on the activities that drive those costs.

Explanation: ABC is ideal for companies that have complex operations with varying levels of overhead costs. It assigns costs to products based on the activities that contribute to those costs, leading to more accurate product costing.

  1. Question: What is the break-even point?
  2. A) The point at which total revenue equals total variable cost.
    B) The level of sales at which total revenue equals total fixed costs.
    C) The level of sales at which total revenue equals total costs (both fixed and variable).
    D) The point at which a company achieves its desired profit margin.

Answer: C) The level of sales at which total revenue equals total costs (both fixed and variable).

Explanation: The break-even point is the sales volume at which a company’s total revenue equals its total expenses, resulting in zero profit. It is crucial for assessing risk and profitability thresholds.

  1. Question: Which of the following is NOT a characteristic of a good performance measurement system?
  2. A) Provides feedback that can be used to adjust and improve performance.
    B) Focuses solely on financial performance measures.
    C) Is aligned with the company’s strategic objectives.
    D) Encourages employee accountability and motivation.

Answer: B) Focuses solely on financial performance measures.

Explanation: A good performance measurement system should include both financial and non-financial measures, such as customer satisfaction and process efficiency, to align with the company’s strategic objectives and encourage holistic performance.

  1. Question: If a company’s total fixed costs are $50,000, the unit sale price is $100, and the variable cost per unit is $60, what is the break-even point in units?
  2. A) 500 units
    B) 1,000 units
    C) 2,000 units
    D) 1,250 units

Answer: A) 500 units.

Explanation: The break-even point in units can be calculated using the formula:

Break-even units=Total Fixed CostsUnit Sale Price−Variable Cost per Unit\text{Break-even units} = \frac{\text{Total Fixed Costs}}{\text{Unit Sale Price} – \text{Variable Cost per Unit}}Break-even units=Unit Sale Price−Variable Cost per UnitTotal Fixed Costs​ Break-even units=50,000100−60=500 units\text{Break-even units} = \frac{50,000}{100 – 60} = 500 \text{ units}Break-even units=100−6050,000​=500 units

  1. Question: Which costing method allocates overhead based on the number of machine hours used?
  2. A) Job order costing
    B) Process costing
    C) Activity-based costing
    D) Traditional costing

Answer: D) Traditional costing.

Explanation: Traditional costing often uses volume-based allocation methods, such as machine hours or labor hours, to assign overhead costs.

  1. Question: Which of the following is an example of a discretionary fixed cost?
  2. A) Rent for a factory building
    B) Salaries of production workers
    C) Advertising expenses
    D) Depreciation on machinery

Answer: C) Advertising expenses.

Explanation: Discretionary fixed costs are those that can be altered or eliminated in the short term without significant impact on operations, such as advertising or training costs.

 

Question: What is a sunk cost?

  1. A) A cost that will be incurred in the future and can be avoided.
    B) A cost that has already been incurred and cannot be changed.
    C) A variable cost that fluctuates based on production volume.
    D) A fixed cost that remains constant regardless of activity level.

Answer: B) A cost that has already been incurred and cannot be changed.

Explanation: Sunk costs are past expenses that cannot be recovered, regardless of future actions. They should not be considered when making decisions because they do not impact future outcomes.

  1. Question: Which budget type is most effective for assessing an organization’s financial performance across different activity levels?
  2. A) Static budget
    B) Flexible budget
    C) Master budget
    D) Incremental budget

Answer: B) Flexible budget.

Explanation: A flexible budget can be adjusted to reflect various levels of activity, making it more suitable for performance evaluation, as it provides a realistic comparison between budgeted and actual results.

  1. Question: What is the primary advantage of using a segmented reporting approach?
  2. A) It simplifies financial reporting to a single summary report.
    B) It helps managers assess the performance of different business segments separately.
    C) It ensures that overhead costs are uniformly distributed across departments.
    D) It focuses only on fixed costs and ignores variable costs.

Answer: B) It helps managers assess the performance of different business segments separately.

Explanation: Segmented reporting allows companies to evaluate the performance of individual business units or segments, helping identify strengths, weaknesses, and areas needing improvement.

  1. Question: Which of the following best describes “contribution margin”?
  2. A) Total revenue minus total fixed costs.
    B) Sales price per unit minus variable cost per unit.
    C) Total revenue minus total variable costs.
    D) Gross profit minus operating expenses.

Answer: B) Sales price per unit minus variable cost per unit.

Explanation: The contribution margin represents the amount per unit that contributes to covering fixed costs and generating profit. It is calculated as sales price minus variable cost per unit.

  1. Question: When a company’s fixed costs are $100,000, the variable cost per unit is $30, and the selling price per unit is $50, what is the contribution margin ratio?
  2. A) 30%
    B) 40%
    C) 50%
    D) 60%

Answer: B) 40%.

Explanation: The contribution margin ratio is calculated as:

Contribution Margin Ratio=Selling Price per Unit−Variable Cost per UnitSelling Price per Unit×100\text{Contribution Margin Ratio} = \frac{\text{Selling Price per Unit} – \text{Variable Cost per Unit}}{\text{Selling Price per Unit}} \times 100Contribution Margin Ratio=Selling Price per UnitSelling Price per Unit−Variable Cost per Unit​×100 Contribution Margin Ratio=50−3050×100=40%\text{Contribution Margin Ratio} = \frac{50 – 30}{50} \times 100 = 40\%Contribution Margin Ratio=5050−30​×100=40%

  1. Question: Which of the following best describes “activity-based costing” (ABC)?
  2. A) A method that assigns overhead costs based only on direct labor hours.
    B) A method that allocates costs based on the specific activities that drive overhead.
    C) A method that uses a single cost driver for all overhead costs.
    D) A method that assigns costs based only on machine hours.

Answer: B) A method that allocates costs based on the specific activities that drive overhead.

Explanation: ABC assigns costs to products based on the activities that are required to produce them, leading to more precise cost allocation and better decision-making.

  1. Question: What is the main difference between absorption costing and variable costing?
  2. A) Absorption costing includes only variable costs in the cost of goods sold.
    B) Absorption costing allocates all manufacturing costs to products, while variable costing assigns only variable manufacturing costs.
    C) Variable costing is used for external financial reporting, while absorption costing is used for internal reporting.
    D) Absorption costing ignores fixed manufacturing costs.

Answer: B) Absorption costing allocates all manufacturing costs to products, while variable costing assigns only variable manufacturing costs.

Explanation: Absorption costing includes both variable and fixed manufacturing costs in the cost of goods sold, while variable costing only includes variable costs. This distinction affects financial reporting and profit calculations.

  1. Question: If a company has a total of $120,000 in fixed costs, sells each unit for $40, and has variable costs of $25 per unit, how many units must be sold to break even?
  2. A) 2,400 units
    B) 3,000 units
    C) 4,800 units
    D) 5,000 units

Answer: A) 2,400 units.

Explanation: The break-even point in units is calculated as:

Break-even units=Total Fixed CostsSelling Price per Unit−Variable Cost per Unit\text{Break-even units} = \frac{\text{Total Fixed Costs}}{\text{Selling Price per Unit} – \text{Variable Cost per Unit}}Break-even units=Selling Price per Unit−Variable Cost per UnitTotal Fixed Costs​ Break-even units=120,00040−25=2,400 units\text{Break-even units} = \frac{120,000}{40 – 25} = 2,400 \text{ units}Break-even units=40−25120,000​=2,400 units

  1. Question: Which of the following would be classified as a controllable cost?
  2. A) Property taxes on a building
    B) Direct labor costs incurred by a department manager
    C) Depreciation of company-owned vehicles
    D) Rent on leased office space

Answer: B) Direct labor costs incurred by a department manager.

Explanation: Controllable costs are expenses that a manager can influence or adjust within a given time period, such as direct labor costs. Other examples might include discretionary expenses like advertising.

  1. Question: What is a common disadvantage of using a budget based on historical data?
  2. A) It focuses solely on current economic trends.
    B) It may lead to a “use-it-or-lose-it” mentality, where managers spend up to their budget limits regardless of need.
    C) It includes projected figures rather than actual figures.
    D) It requires constant adjustments and is more complex to maintain.

Answer: B) It may lead to a “use-it-or-lose-it” mentality, where managers spend up to their budget limits regardless of need.

Explanation: Using historical data for budgeting can result in managers spending their entire budget to avoid having a smaller budget the following period. This approach may not always align with the actual needs of the business.

 

 

Question: Which of the following best describes a “contingent liability”?

  1. A) A liability that will be paid when the company decides to sell an asset.
    B) A potential liability that may arise based on the outcome of a future event.
    C) A liability that has already been recognized on the balance sheet.
    D) A long-term debt that is due within a year.

Answer: B) A potential liability that may arise based on the outcome of a future event.

Explanation: A contingent liability is a possible obligation that depends on the outcome of a future event, such as a pending lawsuit. It is not recorded on the balance sheet unless it is probable and the amount can be reasonably estimated.

22. Question: What is a “relevant range” in cost analysis?

  1. A) The range of prices at which a product can be sold profitably.
    B) The range of activity levels within which cost behavior remains consistent.
    C) The range of potential profit margins for different products.
    D) The range of interest rates that a company can pay on its debts.

Answer: B) The range of activity levels within which cost behavior remains consistent.

Explanation: The relevant range is the range of activity levels over which a company’s fixed costs remain unchanged and variable costs behave as expected. Outside this range, the behavior of costs may change.

23. Question: Which of the following statements is true about “target costing”?

  1. A) It focuses on maximizing product features regardless of costs.
    B) It starts with the desired profit margin and works backward to determine the cost allowed.
    C) It is only used for financial reporting purposes.
    D) It sets costs based on historical data without considering competition.

Answer: B) It starts with the desired profit margin and works backward to determine the cost allowed.

Explanation: Target costing is a pricing strategy in which a company determines the price that customers are willing to pay and works backward to determine the maximum cost that would allow the company to achieve a desired profit margin.

24. Question: Which type of variance is calculated by comparing actual cost with the flexible budget cost?

  1. A) Sales volume variance
    B) Price variance
    C) Spending variance
    D) Quantity variance

Answer: C) Spending variance.

Explanation: The spending variance (or price variance) is the difference between the actual cost incurred and the cost that would have been incurred according to the flexible budget at the actual level of activity.

25. Question: What is the primary purpose of variance analysis?

  1. A) To simplify the process of calculating total production costs.
    B) To identify the reason for deviations between budgeted and actual performance.
    C) To ensure that all costs are distributed equally across departments.
    D) To calculate the total contribution margin.

Answer: B) To identify the reason for deviations between budgeted and actual performance.

Explanation: Variance analysis helps managers understand why performance did not match the budget, enabling them to take corrective action or adjust future budgets as needed.

26. Question: In decision-making, what is a “sunk cost fallacy”?

  1. A) Ignoring costs that are relevant to future decisions.
    B) Making decisions based on the amount already spent rather than future benefits.
    C) Only considering variable costs in financial calculations.
    D) Using past data to predict future financial trends.

Answer: B) Making decisions based on the amount already spent rather than future benefits.

Explanation: The sunk cost fallacy occurs when decisions are influenced by costs that have already been incurred and cannot be recovered, instead of focusing on potential future outcomes.

27. Question: Which of the following is considered an indirect cost in manufacturing?

  1. A) Direct materials
    B) Direct labor
    C) Factory utilities
    D) Product-specific packaging

Answer: C) Factory utilities.

Explanation: Indirect costs are expenses that cannot be traced directly to a specific product, such as factory utilities or administrative salaries, as opposed to direct costs like direct materials and labor.

28. Question: What is the purpose of a “master budget”?

  1. A) To plan for a company’s financial needs for the next 5-10 years.
    B) To create a comprehensive budget that covers all areas of an organization for a specific period.
    C) To calculate profit margins for each individual product.
    D) To evaluate the performance of individual employees.

Answer: B) To create a comprehensive budget that covers all areas of an organization for a specific period.

Explanation: A master budget is a complete set of budgets that includes various sub-budgets like sales, production, and cash budgets. It helps organizations plan their financial activities comprehensively for a given time period.

29. Question: In a make-or-buy decision, which of the following would be considered a relevant cost?

  1. A) Depreciation on machinery already purchased.
    B) The cost of materials needed for production.
    C) Fixed costs that will not change regardless of the decision.
    D) Sunk costs from previous investments.

Answer: B) The cost of materials needed for production.

Explanation: Relevant costs are those that will change depending on the decision made. The cost of materials needed for production is relevant if the company is deciding between making or buying the product.

30. Question: What is a common use of the “balanced scorecard” in performance management?

  1. A) To focus solely on financial performance metrics.
    B) To integrate both financial and non-financial performance measures to provide a holistic view.
    C) To eliminate non-financial metrics from the performance review.
    D) To track only customer-related performance.

Answer: B) To integrate both financial and non-financial performance measures to provide a holistic view.

Explanation: The balanced scorecard is a strategic planning and performance management tool that considers financial and non-financial metrics, such as customer satisfaction, internal business processes, and learning and growth, to provide a comprehensive overview of organizational performance.

 

Question: Which of the following is true about “cost allocation”?

  1. A) It is used to determine the value of inventory only.
    B) It involves distributing indirect costs to different cost objects based on a rational basis.
    C) It is the same as cost tracing.
    D) It ignores the relationship between cost drivers and indirect costs.

Answer: B) It involves distributing indirect costs to different cost objects based on a rational basis.

Explanation: Cost allocation assigns indirect costs, such as overhead, to cost objects (e.g., products, departments) using a fair and systematic method. This helps in determining the true cost of production or service.

32. Question: What does the term “break-even analysis” primarily help a company determine?

  1. A) The amount of profit to be earned after all costs are paid.
    B) The minimum sales volume needed to avoid losses.
    C) The maximum number of units a company can produce.
    D) The total cost per unit of production.

Answer: B) The minimum sales volume needed to avoid losses.

Explanation: Break-even analysis determines the level of sales needed for a company to cover its costs, which is essential for setting sales targets and assessing the risk of a business.

33. Question: What is a “contribution margin”?

  1. A) The difference between total revenue and total costs.
    B) The revenue remaining after subtracting fixed and variable costs.
    C) The amount remaining from sales after subtracting only variable costs.
    D) The profit generated from the sale of a fixed asset.

Answer: C) The amount remaining from sales after subtracting only variable costs.

Explanation: The contribution margin is calculated by subtracting variable costs from sales revenue. It indicates how much revenue is available to cover fixed costs and contribute to profit.

34. Question: In a “make-or-buy” decision, which of the following should be considered a relevant cost?

  1. A) Depreciation of existing equipment used for production.
    B) Future cost savings if production is outsourced.
    C) The initial cost of machinery that was bought years ago.
    D) Fixed overhead costs that will not change regardless of the decision.

Answer: B) Future cost savings if production is outsourced.

Explanation: Relevant costs for make-or-buy decisions include future costs that will change based on the decision. Future cost savings are important when evaluating whether to produce in-house or purchase from an external supplier.

35. Question: Which type of variance is used to assess how much of a price difference is due to the actual price being higher or lower than the expected price?

  1. A) Efficiency variance
    B) Sales volume variance
    C) Price variance
    D) Spending variance

Answer: C) Price variance.

Explanation: Price variance measures the difference between the actual price paid and the expected price, multiplied by the actual quantity. It helps identify the impact of price changes on costs.

36. Question: What is a key characteristic of a “variable cost”?

  1. A) It remains the same in total regardless of activity level.
    B) It varies in total as the level of production or sales changes.
    C) It includes only fixed manufacturing overheads.
    D) It is always a direct cost associated with production.

Answer: B) It varies in total as the level of production or sales changes.

Explanation: Variable costs, such as raw materials and direct labor, change in total with the level of production or sales, but they remain constant per unit.

37. Question: Which of the following statements best describes “budgetary control”?

  1. A) The process of estimating future cash flows.
    B) The method of monitoring budgeted performance against actual performance and taking corrective actions as necessary.
    C) The preparation of financial statements at the end of each fiscal year.
    D) The detailed process of preparing a sales forecast.

Answer: B) The method of monitoring budgeted performance against actual performance and taking corrective actions as necessary.

Explanation: Budgetary control ensures that actual spending aligns with the budget. It involves comparing actual performance to the budgeted figures and making adjustments to stay on track.

38. Question: What does a “favorable variance” indicate?

  1. A) Actual costs were higher than the budgeted amounts.
    B) Actual revenue exceeded the budgeted revenue.
    C) The actual results are better than budgeted, leading to increased profit.
    D) The company spent more on fixed costs than planned.

Answer: C) The actual results are better than budgeted, leading to increased profit.

Explanation: A favorable variance occurs when actual revenue is higher than budgeted or when actual costs are lower than budgeted, resulting in increased profit.

39. Question: Which of the following is true regarding “fixed costs”?

  1. A) They change with the level of production.
    B) They remain constant in total regardless of changes in production volume.
    C) They are always variable in nature.
    D) They include only direct materials costs.

Answer: B) They remain constant in total regardless of changes in production volume.

Explanation: Fixed costs, such as rent or salaries, do not change in total with the level of production or sales. However, the fixed cost per unit decreases as production volume increases.

40. Question: When a company sets its product price based on the market and works backward to determine its cost structure, it is using:

  1. A) Cost-plus pricing.
    B) Target costing.
    C) Penetration pricing.
    D) Break-even pricing.

Answer: B) Target costing.

Explanation: Target costing is a pricing strategy where a company determines the desired profit margin and works backward from the competitive market price to set its cost structure.

 

Question: What is “activity-based management” (ABM) used for?

  1. A) To maximize sales through aggressive marketing strategies.
    B) To reduce costs by identifying and eliminating non-value-added activities.
    C) To set prices for products based on the highest margin.
    D) To estimate future revenue streams.

Answer: B) To reduce costs by identifying and eliminating non-value-added activities.

Explanation: ABM focuses on improving the efficiency of operations by analyzing activities, determining which add value and which do not, and eliminating those that do not.

42. Question: When is it appropriate to use the “high-low method” to estimate variable and fixed costs?

  1. A) When analyzing investment options.
    B) When dealing with complex cost structures.
    C) When only two data points are available for analysis.
    D) When historical data is not reliable.

Answer: C) When only two data points are available for analysis.

Explanation: The high-low method uses the highest and lowest activity levels to estimate variable and fixed costs. It is a simple method best suited for situations where limited data is available.

43. Question: What is the primary goal of the “master budget”?

  1. A) To prepare for potential financial losses.
    B) To create a single summary report for financial performance.
    C) To align all financial plans of an organization into a comprehensive document.
    D) To minimize all business expenses.

Answer: C) To align all financial plans of an organization into a comprehensive document.

Explanation: A master budget consolidates all individual budgets, such as sales, production, and cash budgets, to create a comprehensive financial plan for the organization.

44. Question: What type of budget is most useful for evaluating a manager’s ability to control costs?

  1. A) Flexible budget.
    B) Static budget.
    C) Master budget.
    D) Incremental budget.

Answer: A) Flexible budget.

Explanation: A flexible budget adjusts based on actual levels of activity, making it ideal for evaluating how well a manager controlled costs relative to different activity levels.

45. Question: In what scenario would a company use “absorption costing” over “variable costing”?

  1. A) For internal decision-making purposes only.
    B) For external financial reporting as required by GAAP.
    C) When analyzing the impact of a change in production volume.
    D) To simplify cost allocation.

Answer: B) For external financial reporting as required by GAAP.

Explanation: Absorption costing is required for external financial reporting under GAAP, as it includes all manufacturing costs (both fixed and variable) in the cost of goods sold.

46. Question: What does the “contribution margin ratio” tell a company?

  1. A) The proportion of total revenue that covers fixed costs.
    B) The ratio of total variable costs to total sales.
    C) The percentage of each sales dollar that contributes to covering fixed costs and profit.
    D) The proportion of profit after taxes.

Answer: C) The percentage of each sales dollar that contributes to covering fixed costs and profit.

Explanation: The contribution margin ratio shows how much of each sales dollar contributes to covering fixed costs and generating profit after variable costs are covered.

47. Question: What is “sunk cost” fallacy?

  1. A) Choosing not to use cost data when making future decisions.
    B) Allowing past, non-recoverable costs to influence future financial decisions.
    C) Always prioritizing fixed costs over variable costs in decision-making.
    D) Treating all costs as variable.

Answer: B) Allowing past, non-recoverable costs to influence future financial decisions.

Explanation: The sunk cost fallacy refers to the irrational behavior of letting costs that have already been incurred and cannot be recovered impact current decision-making.

48. Question: Which of the following best describes “cost behavior”?

  1. A) The impact of production volume on total fixed costs.
    B) The relationship between cost levels and changes in production or activity levels.
    C) The nature of direct and indirect costs.
    D) The pattern of cash flow over time.

Answer: B) The relationship between cost levels and changes in production or activity levels.

Explanation: Cost behavior describes how different types of costs react to changes in production or activity levels, helping in budgeting and decision-making.

49. Question: What does a “favorable sales volume variance” indicate?

  1. A) Sales revenue is lower than expected.
    B) The actual number of units sold was greater than the budgeted amount.
    C) Fixed costs were higher than planned.
    D) The actual contribution margin was less than planned.

Answer: B) The actual number of units sold was greater than the budgeted amount.

Explanation: A favorable sales volume variance occurs when the actual number of units sold is higher than budgeted, which leads to more revenue than expected.

50. Question: What is the difference between “direct costs” and “indirect costs”?

  1. A) Direct costs are only fixed, while indirect costs are variable.
    B) Direct costs can be traced to a specific product, while indirect costs cannot.
    C) Indirect costs can be traced to a specific product, while direct costs cannot.
    D) Direct costs are always more significant than indirect costs.

Answer: B) Direct costs can be traced to a specific product, while indirect costs cannot.

Explanation: Direct costs, such as direct materials and labor, can be traced directly to a product or cost object, while indirect costs, like utilities and overhead, cannot be traced to a specific product.

51. Question: What does “management by exception” mean?

  1. A) Managers make decisions based only on actual results.
    B) Managers focus on deviations from the budget to identify significant issues that need attention.
    C) Managers only work when performance is perfect.
    D) Managers rely solely on historical data for decision-making.

Answer: B) Managers focus on deviations from the budget to identify significant issues that need attention.

Explanation: Management by exception allows managers to focus their attention on significant variances from the budget, which helps in identifying and addressing the root causes of performance issues.

52. Question: In cost-volume-profit (CVP) analysis, what does the “break-even point” represent?

  1. A) The level of sales needed to achieve a target profit.
    B) The point where total revenue equals total variable costs.
    C) The level of sales where total revenue equals total costs, resulting in no profit or loss.
    D) The maximum production capacity of the company.

Answer: C) The level of sales where total revenue equals total costs, resulting in no profit or loss.

Explanation: The break-even point is the sales level at which a company’s total revenue equals its total costs, meaning there is no profit or loss.

53. Question: What is a “budgeted cost”?

  1. A) The actual cost incurred during the budget period.
    B) The estimated cost calculated during the budgeting process.
    C) The amount that is paid to vendors for goods and services.
    D) The cost of production for finished goods.

Answer: B) The estimated cost calculated during the budgeting process.

Explanation: Budgeted costs are planned or estimated expenses that an organization expects to incur during a specific period. They are used for comparison with actual costs to monitor performance.

54. Question: What type of analysis helps a company determine the effect of a change in price or cost on its profitability?

  1. A) Trend analysis
    B) Sensitivity analysis
    C) Ratio analysis
    D) Regression analysis

Answer: B) Sensitivity analysis.

Explanation: Sensitivity analysis evaluates how the variation in one or more independent variables affects the dependent variable, helping a company understand the impact of changes in price or cost on profitability.

55. Question: What does “lean accounting” focus on?

  1. A) Reducing fixed costs to improve profitability.
    B) Streamlining the cost accounting process to enhance value for the customer.
    C) Increasing product variety to maximize customer satisfaction.
    D) Emphasizing cost control through departmental budgeting.

Answer: B) Streamlining the cost accounting process to enhance value for the customer.

Explanation: Lean accounting focuses on simplifying and streamlining cost accounting to provide more relevant and timely information, supporting value-added activities and reducing waste.

56. Question: How do you calculate the “profit margin ratio”?

  1. A) Total revenue minus total costs.
    B) (Net income / Total assets) × 100.
    C) (Net income / Total sales) × 100.
    D) (Operating income / Total equity) × 100.

Answer: C) (Net income / Total sales) × 100.

Explanation: The profit margin ratio indicates how much profit is generated from total sales, showing the percentage of sales revenue that remains after all expenses are deducted.

57. Question: Which of the following is an example of a “non-controllable cost”?

  1. A) Salaries of the production staff.
    B) Costs of raw materials.
    C) Property taxes for the manufacturing facility.
    D) Cost of direct labor.

Answer: C) Property taxes for the manufacturing facility.

Explanation: Non-controllable costs are those that managers cannot influence or change in the short term, such as property taxes and rent.

58. Question: What does “contribution margin per unit” help a company determine?

  1. A) The cost of producing one unit.
    B) The total revenue from selling one unit.
    C) The amount of money generated by each unit sale after covering variable costs.
    D) The total profit from selling all units.

Answer: C) The amount of money generated by each unit sale after covering variable costs.

Explanation: The contribution margin per unit is the sales price per unit minus the variable cost per unit. It shows how much revenue from each unit contributes to covering fixed costs and generating profit.

59. Question: What is the main purpose of an “internal audit”?

  1. A) To prepare financial statements for external reporting.
    B) To assess the effectiveness of internal controls and ensure compliance with company policies.
    C) To calculate the company’s tax obligations.
    D) To prepare the company’s budget for the next fiscal year.

Answer: B) To assess the effectiveness of internal controls and ensure compliance with company policies.

Explanation: An internal audit is conducted to evaluate the reliability of financial reporting, adherence to laws and policies, and the effectiveness of operations.

60. Question: What is the purpose of “cost tracing” in managerial accounting?

  1. A) To allocate indirect costs to products.
    B) To identify the relationship between costs and revenue.
    C) To assign direct costs to a specific cost object or product.
    D) To calculate the average cost per unit.

Answer: C) To assign direct costs to a specific cost object or product.

Explanation: Cost tracing involves identifying and assigning direct costs, like direct labor and direct materials, to a specific product or cost object.

Question: What is a “relevant cost”?

  1. A) A cost that has already been incurred and cannot be changed.
    B) A cost that will not change regardless of the decision made.
    C) A cost that is pertinent to a specific decision and varies with the decision outcome.
    D) A cost that is fixed and does not vary with production.

Answer: C) A cost that is pertinent to a specific decision and varies with the decision outcome.

Explanation: Relevant costs are future costs that will be affected by a specific decision. They are essential for decision-making as they vary depending on the choice made.

62. Question: What is “theory of constraints” used for in cost management?

  1. A) To allocate indirect costs more accurately.
    B) To identify and eliminate bottlenecks in the production process.
    C) To establish the budget for non-production expenses.
    D) To control variable costs in the budget.

Answer: B) To identify and eliminate bottlenecks in the production process.

Explanation: The theory of constraints is a methodology that helps identify the most significant limitations or bottlenecks in a process and improve them to enhance the overall performance of the organization.

63. Question: Which type of budget is adjusted throughout the year to reflect actual activity levels?

  1. A) Static budget.
    B) Flexible budget.
    C) Master budget.
    D) Incremental budget.

Answer: B) Flexible budget.

Explanation: A flexible budget is adjusted for changes in activity levels, making it a useful tool for comparing actual performance to what should have been expected at the actual level of activity.

64. Question: What does a “sales mix variance” indicate?

  1. A) The difference between total revenue and total costs.
    B) The impact of the change in the proportion of different products sold on total profit.
    C) The difference between budgeted and actual production levels.
    D) The effect of changes in the price of a product on overall sales revenue.

Answer: B) The impact of the change in the proportion of different products sold on total profit.

Explanation: A sales mix variance measures how changes in the proportion of products sold impact total profitability. It shows the effect of shifts in the sales of different products on overall contribution margin.

65. Question: What is “target costing”?

  1. A) Setting prices based on the cost of production plus a standard profit margin.
    B) Setting the desired cost of a product based on competitive market prices and desired profit.
    C) Estimating future cash flows to evaluate a project.
    D) Setting prices according to historical cost data.

Answer: B) Setting the desired cost of a product based on competitive market prices and desired profit.

Explanation: Target costing is a pricing strategy in which a company determines the desired profit margin and competitive price to set a target cost for its product. The goal is to reduce costs to meet the target.

66. Question: What does “economic order quantity” (EOQ) help a company determine?

  1. A) The maximum number of units to produce.
    B) The optimal quantity of inventory to order that minimizes total inventory costs.
    C) The price at which to sell products for maximum profit.
    D) The cost of production per unit.

Answer: B) The optimal quantity of inventory to order that minimizes total inventory costs.

Explanation: EOQ is a formula used to find the most cost-effective quantity of inventory to order, balancing the cost of ordering with the cost of holding inventory.

67. Question: Which type of costs are included in “product costing”?

  1. A) Only direct labor and direct materials.
    B) Direct and indirect costs related to the production of goods.
    C) Only variable costs.
    D) All fixed costs, regardless of the production.

Answer: B) Direct and indirect costs related to the production of goods.

Explanation: Product costing includes both direct costs (e.g., direct labor, direct materials) and a portion of indirect costs (e.g., manufacturing overhead) associated with producing a product.

68. Question: Which cost would be considered a “committed fixed cost”?

  1. A) Rent for a building leased for five years.
    B) Utility expenses for production.
    C) Raw material costs.
    D) Hourly wages for temporary workers.

Answer: A) Rent for a building leased for five years.

Explanation: Committed fixed costs are long-term, cannot be changed in the short term, and often involve contractual obligations, such as lease agreements.

69. Question: What is the “payback period” used to evaluate?

  1. A) The time required to generate enough revenue to cover total production costs.
    B) The amount of time required to recover an investment from its cash inflows.
    C) The time taken to sell a unit of a product.
    D) The time to break even after starting a business.

Answer: B) The amount of time required to recover an investment from its cash inflows.

Explanation: The payback period measures how long it will take for an investment to pay for itself, using cash inflows generated by the investment.

70. Question: What does “absorption costing” include in the cost of goods sold?

  1. A) Only variable manufacturing costs.
    B) Both variable and fixed manufacturing costs.
    C) Only direct labor costs.
    D) Direct labor and direct materials costs only.

Answer: B) Both variable and fixed manufacturing costs.

Explanation: Absorption costing assigns all manufacturing costs, both variable and fixed, to the cost of goods sold, providing a comprehensive view of product costs.

71. Question: What does “contribution margin analysis” help a company determine?

  1. A) The total cost of producing goods.
    B) The portion of sales revenue that covers fixed costs and contributes to profit.
    C) The amount of profit generated after all costs are subtracted.
    D) The budget for administrative expenses.

Answer: B) The portion of sales revenue that covers fixed costs and contributes to profit.

Explanation: Contribution margin analysis helps determine how much revenue from sales contributes to covering fixed costs and generating profit after variable costs are accounted for.

72. Question: Which method of inventory valuation is most consistent with “matching principle” in accounting?

  1. A) FIFO (First-In, First-Out).
    B) LIFO (Last-In, First-Out).
    C) Weighted average cost.
    D) Specific identification.

Answer: A) FIFO (First-In, First-Out).

Explanation: FIFO matches the oldest costs with current revenue, aligning with the matching principle by matching costs with revenues when they are incurred.

73. Question: In which type of budget do all expenses start from zero, regardless of previous budget amounts?

  1. A) Incremental budget.
    B) Zero-based budget.
    C) Flexible budget.
    D) Rolling budget.

Answer: B) Zero-based budget.

Explanation: A zero-based budget starts from scratch each period, requiring justification for each expense rather than using the previous budget as a baseline.

74. Question: What is the “margin of safety” in cost-volume-profit analysis?

  1. A) The amount of profit that a company needs to earn to reach break-even.
    B) The difference between actual sales and break-even sales.
    C) The additional cost that can be incurred before a company reaches break-even.
    D) The portion of fixed costs that do not vary with production.

Answer: B) The difference between actual sales and break-even sales.

Explanation: The margin of safety shows how much sales can fall before the company incurs a loss. It represents the cushion a company has before sales drop below the break-even point.

75. Question: What does “variance analysis” focus on?

  1. A) Comparing budgeted figures to actual figures to understand the reason for differences.
    B) Determining the optimal sales mix for maximum profit.
    C) Setting sales targets based on market trends.
    D) Allocating indirect costs to cost centers.

Answer: A) Comparing budgeted figures to actual figures to understand the reason for differences.

Explanation: Variance analysis helps organizations understand why actual performance differs from the budget, highlighting areas where performance is better or worse than expected.

76. Question: What is a “profit center” in a business?

  1. A) A department that generates revenue and incurs direct costs.
    B) A location where products are made.
    C) A unit that handles administrative functions.
    D) A sales channel that only handles discounts.

Answer: A) A department that generates revenue and incurs direct costs.

Explanation: A profit center is a part of the business responsible for generating income and has its own direct expenses. It is evaluated based on its profitability.

77. Question: Which of the following best defines “allocating joint costs” in joint product costing?

  1. A) Determining the specific cost for each joint product after production.
    B) Assigning a portion of total production costs to each product that shares the production process.
    C) Calculating the net profit for the entire production process.
    D) Accounting for only variable production costs.

Answer: B) Assigning a portion of total production costs to each product that shares the production process.

Explanation: Allocating joint costs involves distributing shared costs among different products that are produced from the same initial process.

78. Question: In “budgeting,” what does “top-down” mean?

  1. A) Managers at all levels create their budgets.
    B) The budget is created by upper management and passed down to lower levels.
    C) Budget allocation is based solely on past expenditures.
    D) Budget creation depends on sales forecasts alone.

Answer: B) The budget is created by upper management and passed down to lower levels.

Explanation: A top-down budget approach involves senior management setting the budget and distributing it down to various departments for implementation.

79. Question: What is “break-even analysis” used for?

  1. A) To determine the price at which a product should be sold for maximum profit.
    B) To estimate the point at which total revenues equal total costs, resulting in no profit or loss.
    C) To calculate net profit margins.
    D) To evaluate the return on investment (ROI).

Answer: B) To estimate the point at which total revenues equal total costs, resulting in no profit or loss.

Explanation: Break-even analysis helps businesses determine the level of sales needed to cover all fixed and variable costs, marking the point of no profit or loss.

80. Question: Which of the following would be considered a “fixed cost”?

  1. A) Direct materials used in production.
    B) Sales commissions based on sales volume.
    C) Salaries of office staff.
    D) Utility costs that vary with usage.

Answer: C) Salaries of office staff.

Explanation: Fixed costs remain constant regardless of the level of production or sales volume. Salaries of office staff are considered fixed because they do not change based on output.

 

 

Question: What is the primary focus of “activity-based costing” (ABC)?

  1. A) Allocating overhead costs based on the number of units produced.
    B) Assigning overhead costs based on activities that drive costs.
    C) Determining the fixed cost per unit.
    D) Calculating the total profit margin for a product.

Answer: B) Assigning overhead costs based on activities that drive costs.

Explanation: ABC allocates overhead costs based on the activities that generate costs, providing a more accurate distribution of overhead to products or services.

82. Question: In “variance analysis,” what does a “favorable variance” indicate?

  1. A) Actual costs were higher than budgeted.
    B) Actual costs were lower than budgeted, leading to higher profits.
    C) Budgeted revenue was higher than actual revenue.
    D) There was no change between budgeted and actual figures.

Answer: B) Actual costs were lower than budgeted, leading to higher profits.

Explanation: A favorable variance means that the actual costs are less than budgeted, or actual revenue is higher than expected, leading to a positive impact on profitability.

83. Question: Which of the following best describes “cost-volume-profit analysis” (CVP)?

  1. A) A method to determine how fixed costs change over time.
    B) A technique to assess the relationship between costs, volume, and profit.
    C) A method to set prices based on market competition.
    D) An approach to calculate gross profit margins.

Answer: B) A technique to assess the relationship between costs, volume, and profit.

Explanation: CVP analysis helps businesses understand how changes in cost, sales volume, and price affect profit levels.

84. Question: What type of cost is a “sunk cost”?

  1. A) A cost that can be altered by current decisions.
    B) A cost that has already been incurred and cannot be recovered.
    C) A variable cost that depends on the production level.
    D) A future cost that will be incurred as part of a decision.

Answer: B) A cost that has already been incurred and cannot be recovered.

Explanation: Sunk costs should not affect decision-making because they cannot be changed or recovered once incurred.

85. Question: What is a “contribution margin ratio”?

  1. A) The total profit divided by total sales.
    B) The ratio of variable costs to total costs.
    C) The percentage of sales revenue remaining after variable costs are subtracted.
    D) The total fixed cost as a percentage of total sales.

Answer: C) The percentage of sales revenue remaining after variable costs are subtracted.

Explanation: The contribution margin ratio is calculated as (Sales – Variable Costs) / Sales, showing how much revenue contributes to covering fixed costs and profit.

86. Question: Which of the following is an example of a “period cost”?

  1. A) Direct materials used in production.
    B) Salaries of production workers.
    C) Advertising expenses.
    D) Factory rent.

Answer: C) Advertising expenses.

Explanation: Period costs are not tied directly to production and are expensed in the period in which they are incurred, such as marketing and administrative expenses.

87. Question: What is the primary goal of “budgetary control”?

  1. A) To ensure compliance with tax laws.
    B) To monitor actual performance against budgeted performance and take corrective action as needed.
    C) To maximize production efficiency.
    D) To calculate profits for shareholders.

Answer: B) To monitor actual performance against budgeted performance and take corrective action as needed.

Explanation: Budgetary control involves comparing actual financial performance to budgeted performance and making adjustments to align operations with financial goals.

88. Question: In decision-making, what is “relevant range”?

  1. A) The range of cost behaviors at which costs remain constant.
    B) The range of production output where fixed costs remain fixed and variable costs change proportionally.
    C) The total output of products that a company expects to sell.
    D) The range in which a company’s revenue meets its production costs.

Answer: B) The range of production output where fixed costs remain fixed and variable costs change proportionally.

Explanation: The relevant range refers to the levels of production or activity over which cost behaviors remain predictable, with fixed costs staying constant and variable costs changing with the level of output.

89. Question: What does the “operating leverage” of a business measure?

  1. A) The percentage of operating expenses relative to revenue.
    B) The degree to which a company can increase its profit by increasing sales.
    C) The percentage of fixed costs in total costs.
    D) The proportion of direct labor in total production costs.

Answer: B) The degree to which a company can increase its profit by increasing sales.

Explanation: Operating leverage measures how a company’s fixed costs impact its profitability. High operating leverage means that a small increase in sales can lead to a significant increase in profits.

90. Question: Which of the following would be considered a “variable cost”?

  1. A) Monthly rent for office space.
    B) Depreciation on equipment.
    C) Direct labor costs.
    D) Salaries of permanent management staff.

Answer: C) Direct labor costs.

Explanation: Variable costs change with the level of production or service, such as direct labor costs that increase when more units are produced.

91. Question: What is “theory of constraints” in production management?

  1. A) A method of tracking every cost incurred by a company.
    B) A system that identifies and alleviates bottlenecks in a production process.
    C) A strategy to maximize profit by focusing on cost-cutting.
    D) A way to calculate ROI for capital investments.

Answer: B) A system that identifies and alleviates bottlenecks in a production process.

Explanation: The theory of constraints focuses on identifying and improving the most significant limitations in the production process to increase overall efficiency and throughput.

92. Question: What is a “segmented income statement”?

  1. A) An income statement that shows total company-wide income without breaking down segments.
    B) An income statement that divides income and expenses by specific business units or segments.
    C) An income statement that shows only fixed costs.
    D) An income statement that focuses on non-operating revenues and expenses.

Answer: B) An income statement that divides income and expenses by specific business units or segments.

Explanation: A segmented income statement provides detailed financial information about the profit or loss of different parts of a business, which helps management make better decisions.

93. Question: Which financial metric indicates a company’s ability to cover its short-term liabilities with its short-term assets?

  1. A) Quick ratio.
    B) Debt-to-equity ratio.
    C) Inventory turnover ratio.
    D) Return on assets.

Answer: A) Quick ratio.

Explanation: The quick ratio measures a company’s ability to meet its short-term obligations using its most liquid assets. It excludes inventory, which may not be as quickly convertible to cash.

94. Question: What does a “master budget” encompass?

  1. A) Only the cost of producing goods.
    B) Only sales forecasts and revenue projections.
    C) A comprehensive financial plan that includes all individual budgets for a company.
    D) Only variable costs for each department.

Answer: C) A comprehensive financial plan that includes all individual budgets for a company.

Explanation: A master budget consolidates all departmental budgets, including sales, production, and operating expenses, to create an overall financial plan for the company.

95. Question: In the context of capital budgeting, what is a “net present value” (NPV) analysis?

  1. A) The process of estimating future cash flows without considering the time value of money.
    B) A method that compares the present value of cash inflows and outflows to evaluate a project’s profitability.
    C) A financial model used to determine break-even sales volume.
    D) A ratio comparing net profit to total investment.

Answer: B) A method that compares the present value of cash inflows and outflows to evaluate a project’s profitability.

Explanation: NPV analysis discounts future cash flows to their present value, helping determine whether a project is profitable by comparing the value of inflows to outflows.

96. Question: What is the main purpose of “job order costing”?

  1. A) To allocate indirect costs evenly across all products.
    B) To track the cost of production for each individual job or batch.
    C) To calculate the average cost of all products produced.
    D) To record sales revenue from each job separately.

Answer: B) To track the cost of production for each individual job or batch.

Explanation: Job order costing assigns costs to individual jobs or batches, making it ideal for companies that produce unique products or customized services.

97. Question: What is the “primary advantage” of using “standard costing”?

  1. A) It eliminates the need for variance analysis.
    B) It allows for easier identification of performance deviations and corrective actions.
    C) It provides real-time cost tracking.
    D) It reduces all fixed costs.

Answer: B) It allows for easier identification of performance deviations and corrective actions.

Explanation: Standard costing sets predefined cost expectations, enabling managers to quickly identify variances and implement corrective actions.

98. Question: Which cost behavior pattern is shown by “semi-variable costs”?

  1. A) Costs that remain fixed regardless of activity level.
    B) Costs that change with the level of production and have a fixed component.
    C) Costs that vary directly with production volume.
    D) Costs that are incurred only at specific production thresholds.

Answer: B) Costs that change with the level of production and have a fixed component.

Explanation: Semi-variable costs have a base level that remains constant and a variable portion that changes with production levels.

99. Question: What does “marginal costing” focus on?

  1. A) Total costs, including both fixed and variable expenses.
    B) The incremental cost of producing an additional unit of product.
    C) The fixed cost per unit.
    D) Allocating all overhead expenses to units produced.

Answer: B) The incremental cost of producing an additional unit of product.

Explanation: Marginal costing focuses on the additional cost incurred to produce one more unit, which helps in decision-making for short-term production changes.

100. Question: In cost control, what does a “control chart” visually represent?

  1. A) The total cost of production over time.
    B) The variance between budgeted and actual figures over a period.
    C) The range of acceptable costs for a given period.
    D) The trend of variable costs over multiple accounting periods.

Answer: B) The variance between budgeted and actual figures over a period.

Explanation: A control chart helps monitor whether a process is within acceptable limits by plotting actual performance against predefined control limits over time.

 

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